Cadwallader v Bajco Pty Ltd - [2001] NSWSC 1193

CITATION: Cadwallader v Bajco [2001] NSWSC 1193 revised - 5/03/2002

CURRENT JURISDICTION: Equity

FILE NUMBER(S): SC 1347/98

HEARING DATE(S): 1, 5-7, 12 December 2000, 4-7, 25 June 2001

JUDGMENT DATE:
24 December 2001

PARTIES :

Alan Norman Cadwallader (P)
Bajco Pty Ltd (D)
Keith William Skinner and David John Frank Lombe (D2)
David Ewart Cadwallader and Marilyn Alice Wintzloff (D3)

JUDGMENT OF: Austin J

COUNSEL : J B Whittle SC (P)
DJ Hammerschlag SC (D1, D2)
J W Stevenson (D3)

SOLICITORS: A R Connolly & Co (P)
Tress Cocks & Maddox (D1, D2)
Watson & Watson (D3)

CATCHWORDS: CORPORATIONS - voluntary administration - whether requisitioned meeting of members to replace directors should be abandoned if administration intervenes - directors resolve to appoint administrators for improper purpose of stopping meeting of members - whether member has standing to complain of breach of directors' duty - whether general law right to sue on behalf of company was abolished retrospectively by s 236(3) - whether appointment of administrators should be set aside - whether company was solvent - admissibility of expert evidence of solvency - whether directors adopted resolution about insolvency in bad faith - effect of failure to comply with notice and time requirements of s 439A - effect of failure to provide details of proposed deed of company arrangement - administrators' report materially false and misleading - whether deed should be terminated under s 445D - whether defendants abused Part 5.3A so that order should be made under s 447A

LEGISLATION CITED: Corporations Act 2001 (Cth), ss 236, 237, 435C, 436, 439A, 445D, 446A, 447A, 1322, 1401
Corporations Law ss 1472
Supreme Court Rules Pt 8 r 11(3), Pt 20 r 4A

CASES CITED: Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464
Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529
Arthur Yates & Co Pty Ltd v Vegetable Seeds Committee (1945) 72 CLR 37
Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 and (1998) 29 ACSR 344 (Court of Appeal of New South Wales)
Cawthorne v Kiera Constructions Pty Ltd (1994) 13 ACSR 337
Darvall v North Sydney Brick & Tile & Co Ltd (1989) 16 NSWLR 260
Deputy Commissioner of Taxation v Portinex Pty Ltd (1999) 156 FLR 453
Foss v Harbottle (1843) 2 Hare 461 [67 ER 189]
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd (1985) 9 ACSR 593
Karam v Australia and New Zealand Banking Group Ltd (2000) 34 ACSR 545
Kazar v Duus (1998) 29 ACSR 321
Luxton v Vines (1952) 85 CLR 352
Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128
Powell & Duncan v Fryer, Tonkin & Perry (2000) 18 ACLC 480
Quick v Stoland Pty Ltd (1998) 29 ACSR 130
Re Movitor Pty Ltd (1996) 14 ACLC 587
Re Tosich Constructions Pty Ltd (1997) 143 ALR 18
Re William Felton & Co Pty Ltd (1998) 16 ACLC 1294
Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569
Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766
Toskas Investments Pty Ltd v Thomas Toskas (Supreme Court of New South Wales, Master McCredie, unreported, 9 June 2000)
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Young v Sherman [2001] NSWSC 1020

DECISION: See under heading 'Conclusions'

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

FRIDAY 24 DECEMBER 2001

1347/98 - ALAN NORMAN CADWALLADER v BAJCO PTY LTD & ORS

HIS HONOUR: Introductory facts

1 This proceeding concerns the affairs of the first defendant, Bajco Pty Ltd, a company formed by Eric Cadwallader and his wife Jean, and owned since their deaths by their six children: Alan Cadwallader (the plaintiff), Bruce Cadwallader, Jeanine Hatton, David Cadwallader, Marilyn Wintzloff (David and Marilyn are together the third defendants) and Glyn Cadwallader. For convenience, I shall refer to the six children by their first names.

2 Sadly, the Cadwallader family has been riven by feuds for many years. Alan and Bruce have a long-standing dispute about the financial management of another company called Cadwallader Engineering (NSW) Pty Ltd. Alan has a long-standing dispute with David and Marilyn about the financial relationship between Bajco and Cadwallader Engineering (NSW), and in this dispute Bruce has at times sided with David and Marilyn and at times with Alan. Correspondence between the siblings, in evidence before me, and their oral evidence, show just how intense and bitter the feuding has been.

3 A "final resolution" of the feuding would be desirable, and since the subject matter of the feuds is essentially the control of economic assets, resolution ought to be possible. I do not believe that any resolution can be achieved by me in the present proceeding, as it is constituted. What is needed is a process of negotiation in which everyone puts their personal hurt and resentment to one side, with a view to reaching a rational commercially-driven settlement. But as the history of the feuding shows, that is much easier said than done.

The early development of the Cadwallader business

4 Bajco was formed by Eric and Jean Cadwallader to take over a business conducted by Eric. It was originally called Cadwallader Engineering Pty Ltd. It was incorporated on 19 September 1967.

5 Eric Cadwallader was governing director under the constitution of the company. Alan joined the business as a full-time employee in 1968 when he was about 21 years of age, and he has worked for the business ever since that time. Bruce commenced working for the business in 1965 when he was 17 years old, and still works for the business. Glyn has worked for the business from time to time, but not in a management role. Jeanine, David and Marilyn have not worked in the business.

6 The company conducted the business of making electrical transformers. In 1974 it acquired the premises at 3 King Street Concord West ("the Property"), which had been owned until then by Eric Cadwallader. The electrical transformer business had been conducted in those premises since about 1974.

7 Eric Cadwallader died on 19 May 1975. Thereafter the business of Cadwallader Engineering was conducted by Alan and Bruce. Alan had become manager of the business about a year before his father died. Alan and Bruce, and their mother Jean Cadwallader, constituted the board of directors and owned the majority of the shares in the company. Jean Cadwallader became governing director. The other shareholders were the remaining four Cadwallader children, namely David, Marilyn, Glyn and Jeanine.

Transfer of the business, and death of Jean Cadwallader (1979-1985)

8 In 1979 Jean Cadwallader decided as governing director that the business should be transferred into a separate company owned and operated by those who in fact worked for the business. In 1978 the company had been threatened with legal action following failure of some of its equipment in service, and although a lawsuit was averted, the vulnerability of the company was exposed. Mrs Cadwallader consulted Leith Cameron of Lean, Cameron & Co, the company's accountant as well as her personal friend, regarding the protection of the business and its assets. She decided to separate the business from the assets in order to protect the assets.

9 Thus in 1979 the business owned by Cadwallader Engineering, but not the Property, was transferred to a new company called Cadwallader Engineering (NSW) Pty Ltd, which was incorporated on 11 June 1979. Jean, Alan and Bruce each held two shares in the new company. On about 27 December 1979, Cadwallader Engineering changed its name to Bajco. Thereafter Cadwallader Engineering (NSW) owned and conducted the engineering business, and Bajco owned and managed the Property. That has remained the situation until the present time.

10 The 1979 transaction took the form of a sale from Bajco to Cadwallader Engineering (NSW) at a price determined by a valuation of plant, equipment, stock and goodwill made by Lean, Cameron & Co. The operating capital of the new company was borrowed from Bajco and a loan account was established between the companies. The new company acquired the business assets of Bajco, other than the Property, and provided consideration by way of the obligations represented by its loan account with Bajco, but it did not provide any cash payment for the assets.

11 According to an outline of the transaction prepared by Lean, Cameron & Co on 9 May 1979, the purchase of the assets from the company which became Bajco was "to be settled by loans from shareholders leaving no loans between the new and old company". However, the transaction took its final form when Alan instructed Mr Cameron that the shareholders of the company should not be involved and his outline should be changed to read "to be settled by loans from [Bajco]".

12 David and Marilyn have for many years been unhappy with the 1979 transaction. They believe that it was carried out without proper notice to the "minority" shareholders of Bajco (the children other than Alan and Bruce), and that no true or adequate consideration was provided to Bajco. They believe the business was unfairly taken away from the brothers and sisters as a whole and given to only two of them, Alan and Bruce. Alan denies that the 1979 transaction was implemented without notice to his brothers and sisters. Specifically, he says that prior to the transaction, his mother told him that she had told David and Marilyn of the proposed sale. He says his mother told him that when David expressed unhappiness, she said to him: "David, you had the opportunity to work for Dad in the business and you weren't interested".

13 It is unnecessary for me to adjudicate upon these contentions in the present proceeding. Indeed, it is undesirable for me to do so, because there is a separate proceeding about them, as I shall explain. The facts and contentions regarding the 1979 transaction are relevant only as part of the factual substratum of the present case.

14 Jean Cadwallader died on 8 May 1985. One of her two shares in Cadwallader Engineering (NSW) was transferred to Alan and the other was transferred to Bruce. Thereafter, Alan and Bruce each held three shares in Cadwallader Engineering (NSW) until February 2000, when Bruce sold and transferred his shares to Alan's wife, Roberta Cadwallader.

15 After the death of Jean Cadwallader, all of the shares in Bajco were held by the brothers and sisters. The shareholdings in Bajco were as follows:

· Alan Cadwallader 266 shares;

· Bruce Cadwallader 266 shares;

· Jeanine Hatton 100 shares;

· David Cadwallader 100 shares;

· Marilyn Wintzloff 100 shares;

· Glynn Cadwallader 100 shares.

Shareholdings, directorships and business management, 1985-2000

16 In September 1987 Jeanine Hatton sold her shares in Bajco to Alan Cadwallader, and the transfer to give effect to the sale was registered by Bajco. I can see nothing in the evidence to indicate any restriction on the transferability of Jeanine's shares. The constitution of Bajco is in evidence. It adopts Table A of the Fourth Schedule to the Companies Act 1961 (NSW), with some modifications, but does not purport to create any pre-emption rights or rights of first refusal over the issued shares in the company or otherwise restrict their transfer, except by conferring an absolute discretion in the directors to refuse registration. The children of Eric and Jean Cadwallader received their shares by will and there is no indication of any contractual restriction on transfer.

17 The circumstances of the transfer were explained by Jeanine in a letter she wrote to David on 28 March 1996 (later confirmed in her letter to the administrators dated 13 January 1998, and corroborated by Alan's letter to Mr Cardwell dated 22 January 1998). She needed money for the purchase of a property, and she approached Alan to offer her shares to him. He had helped her with financial matters previously and she felt he was the best person with whom to discuss the matter. Alan had the shares valued and found that they were worth $2,000. According to Jeanine, Alan was reluctant to buy the shares and offered to "pretend" to buy them and give her the money she needed. However, she said she wanted to be honest and fair and to relinquish her ownership. According to her letter, Alan reluctantly had the relevant documentation drawn up and she consequently transferred to her shares to him.

18 By his letter to Jeanine dated 26 May 1995, Alan said that as far as he was concerned the shares were still Jeanine's shares, and that he had left them to her in his will. He said there was a possibility of dividends in the future which he would fully pass on to her, and that he would give her a written proxy so that she would have full voting rights at a forthcoming shareholders' meeting. It is evident from her letters of 28 March 1996 and 13 January 1998 that Jeanine believed at those times that the arrangements set out in Alan's letter continued to apply. There is nothing in the evidence to indicate to the contrary.

19 Alan says that since the time of the transfer, he has regarded himself as holding the 100 shares in question on trust for Jeanine. Bajco and its administrators, the second defendants, say that they have not been put on notice of any such trust at any relevant time.

20 Subject to any beneficial interest Jeanine might have, the shareholdings in Bajco at the time of commencement of this proceeding were:

· Alan Cadwallader 366 shares;

· Bruce Cadwallader 266 shares;

· David Cadwallader 100 shares;

· Marilyn Wintzloff 100 shares;

· Glynn Cadwallader 100 shares.

21 In February 2000 Bruce Cadwallader sold his 266 shares to Alan’s wife Roberta. However, the transfer to give effect to that sale has not been registered by Bajco and there is a dispute between Alan, on the one hand, and David and Marilyn on the other, as to whether any transfer should be registered.

22 From the time Jean Cadwallader died until 10 April 1996, Alan and Bruce Cadwallader were the directors of Bajco. On that day Alan was replaced as a director by David, and on 10 March 1997 Marilyn replaced Bruce as a director. I shall return to the circumstances in which these replacements occurred.

23 Alan continued as the manager of the Concord West business until 1994. Following the acquisition by Cadwallader Engineering (NSW) of a business at Gosford, Alan took control of the Gosford operation and Bruce took over as manager of the business at Concord West.

The dispute between Alan and Bruce

24 At that time Alan was in dispute with Bruce. Bruce was complaining that Alan (assisted by his wife, Roberta, who had taken charge of the bookkeeping in 1983) had acted oppressively in the conduct of the business of Cadwallader Engineering (NSW), by not asking him to sign company accounts for many years, and by paying himself consulting fees of $24,689 without Bruce's consent. Bruce has given evidence that he felt powerless to do anything about the situation as Alan and Roberta had total control over company accounts, which they maintained on a computer at their home, and that he felt no longer able to trust Alan.

25 From early 1994 Alan and Roberta commuted to Gosford and ran the Gosford business, while Bruce and his wife Sharon ran the business at Concord West. According to the evidence of Bruce, there was a deterioration in their relationship due to past grievances, different styles of management and disagreements regarding expenditures. He claims that Alan and Roberta were in a position to oversee Bruce's activities at Concord West because they had control of the company's books and would debit his loan account if they disagreed with any expenditure he made, but Bruce had no control over their operations at Gosford. It is unnecessary for me to decide, in this case, the truth or falsity of Bruce's claims.

26 After Bruce proposed a system of the dual signatures on cheques and Alan refused, and there was a disagreement about the approval of company accounts, Bruce engaged solicitors in May 1995. He also engaged an accountant who, according to his evidence, discovered anomalies in the calculation of interest on loan accounts, and a "tangled web of transactions" between Cadwallader Engineering (NSW) and Bajco. This led to the commissioning of Horwath Services to conduct an investigation of the financial records of Bajco.

27 By letter dated 29 March 1996 Alan informed Bruce that he had repaid loan accounts in the sum of $105,416.98 owing to his service company and his wife Roberta out of moneys held on call deposit on behalf of Cadwallader Engineering (NSW). The letter is not entirely clear, but it appears that the debtor to Alan's service company and Roberta was treated as being Bajco. Prior to repayment of the loan accounts Cadwallader Engineering (NSW) owed Bajco $77,140.82, according to Alan's letter. Perhaps this debt, if it existed, arose out of the purchase of the business by Cadwallader Engineering (NSW) from Bajco. It appears that by the transaction implemented by Alan in March 1996, Cadwallader Engineering (NSW) was treated as repaying this amount and lending Bajco an additional $29,276.16 (although there seems to be a discrepancy of $1000 in the arithmetic), thereby providing Bajco with the funds to repay the loan accounts of Alan's service company and Roberta. Alan asserted that implementation of this transaction did not prejudice the operation of the business or Bruce's prospect of repayment of his and his company's loan account balances.

28 The evidence does not indicate Bruce's specific response to this transaction, but as I have said, Bruce generally objected to Alan's control of the financial affairs of the business. It is unnecessary for me to decide whether the transaction was implemented in the manner outlined in Alan's letter, and if it was, whether it was valid and effective.

29 David replaced Alan as a director of Bajco by virtue of resolutions passed at a meeting of members held on 10 April 1996, and from that time until March 1997 the directors were David and Bruce. Alan did not attend the meeting. Bruce wrote to Alan later on that day informing him that he had been removed as a director, and that the new directors had resolved to change all signatories on the company's bank accounts. The letter demanded that Alan and Roberta hand over all cheque books and other bank records and documents of the company.

30 The minutes of the meeting of members on 10 April 1996 indicate that Bruce stated he was not prepared to sign the company's accounts as a true and accurate record, and that he claimed that the 1995 accounting records were missing. According to Bruce, figures were given to the company's accountant, Mr Smyth, by Alan and Roberta, and Mr Smyth prepared a set of accounts on the basis of that information. The minutes assert that the company's computer containing its business records was held at Alan's residence. The minutes of the meeting of directors of Bajco on the same day indicate that, as well as resolving to change the signatories on bank accounts, the directors took steps to engage Horwath Services to investigate the company's accounts, and to appoint a valuer to assess the market rental value of the Property.

31 On 15 April 1996 Alan wrote a registered letter to Bruce enclosing a cheque for $3123 in favour of Bajco. The letter said "this sum represents repairs and maintenance claimed in the company accounts for the years ended 30 June 1990 and 30 June 1992 which I believe may have been my own personal expenses."

The Horwath Report

32 The financial report from Horwath Services was received (perhaps as a draft, for the final report was dated 1 July 1996) prior to the meeting of the directors of Bajco held on 28 June 1996. The directors decided to seek legal advice about the report before distributing it to the shareholders. They also resolved at that meeting that the rent for the Property would be increased to $3850, the value recommended by the real estate agents, Richardson & Wrench, in a facsimile dated 28 May 1996.

33 The Horwath Report is in evidence as part of Exhibit D2-13. It reviewed the balance sheets and accounts, and the general ledger reports, of Bajco for the 10 years ended 30 June 1995. The purpose of the review was to establish whether the company's income and expenses (particularly, the interest received and interest paid) for the 10 years were reasonable. The Report contained recommendations as to how appropriate adjustments should be brought into account in the books of the company.

34 The Report recommended adjustments to increase the company's profits before taxation for the 10 years from $29,448 to $198,381. The adjustments included an adjustment to increase rent based on Richardson & Wrench's recommendation, and an adjustment to increase the annual interest received from Cadwallader Engineering (NSW) to a fair rate based upon a published bank business indicator rate. The Report recommended adjustments to increase the interest charged on directors' and other loan accounts to the same rate.

35 The Report expressed the view that it was inappropriate for a company in the position of Bajco, whose entire premises were rented by a closely associated company with no external borrowings, to pay directors' or consultants' fees, because the duties of those responsible for managing the company were minimal. In fact, according to financial statements prepared by Mr Smyth, Bajco's accountant for the years ended 30 June 1994 to 30 June 1997, no provision was made for directors' fees until the financial year ending 30 June 1996. In that year directors' fees were $2,496. In the year ending 30 June 1997, directors' fees were $4,500.

36 The Report recommended that the increased interest payments on loan accounts be implemented by adjusting the loan accounts with the agreement of all relevant parties. The adjustment would debit Alan's loan account in the sum of $113,714, and Bruce's loan account by $150. All other loan accounts would be credited. David and Marilyn's loan accounts would each be credited by $18,126. By virtue of credits to other members of Alan's family and his service company, the net effect on Alan and his family would be a debit of $73,376. On 9 July 1996 David and Marilyn wrote to Alan enclosing a copy of the Horwath Report, saying that they would be available for joint discussion as to the means by which Alan would pay the net amount of $73,376, and asking for Alan's response within 14 days.

David’s and Marilyn's attempt to increase the rent for the Property, after the Horwath Report

37 The dispute between Alan and Bruce was not the only one disturbing the Cadwallader family. By 1996 David and Marilyn had several grievances with Alan and Bruce. One was their belief that the 1979 transaction for the transfer of the business had operated unfairly to the Cadwallader children other than Alan and Bruce. Another was their concern that Alan had increased his shareholding in Bajco by taking the transfer of Jeanine's shares, in circumstances regarded by them as open to challenge. Both of these matters were discussed above.

38 They were also concerned that the rent of $3,000 per month paid by Cadwallader Engineering (NSW) to Bajco was too low, and that Bajco should protect its interests by negotiating a formal lease. There has never been a written lease for the Property.

39 As I have said, Richardson & Wrench recommended a rental value for the Property of $3,850, on 28 May 1996. The Horwath Report recommended an adjustment to the accounts of the two companies to increase the rent consistently with Richardson & Wrench's advice. David endeavoured to implement the Horwath recommendation on rental. In mid-1996 he reached an agreement in principle with Bruce that a lease be executed for an increased rent. A draft lease was prepared, to commence on 1 July 1996 for rental of $3,400 per month. A letter dated 28 June 1996 from the directors of Bajco (by that time David and Bruce) to the directors of Cadwallader Engineering (NSW) (Alan and Bruce) proposed a rental increase.

40 Alan replied by letter to Bruce dated 10 July 1996, saying that he regarded the existing rent as fair, and that he would not agree to an increase in rent unless he was approached correctly. Alan's letter said that if Bruce had purported to agree to an increase in rent on behalf of Cadwallader Engineering (NSW) without Alan's consent, then Bruce had acted improperly and Alan would regard Bruce as personally responsible for the increase.

41 At about the same time Bajco made a demand against Cadwallader Engineering (NSW) for additional rent and interest, and against Alan for adjustment of interest on loan accounts and repayment of fees paid to him as a director and consultant.

42 In July 1996 David sought legal advice on behalf of Bajco as to whether Bajco had the right to insist upon a rental increase, and as to whether the increase could be forced upon Cadwallader Engineering (NSW) if Bruce agreed to it but Alan did not, in view of their equal shareholdings. It is not clear what advice David received, but it appears that the negotiations for an increased rent were stalled for some months.

43 Alan met with David and Marilyn on 27 September 1996 to discuss the Horwath recommendations. Alan says that at this meeting he agreed that the monthly rent for the Property be increased to $3,400 as from 1 October 1996, but did not agree to any backdating of the rent. Alan wrote to David on 6 November 1996, enclosing a proxy for a meeting (evidently a meeting of members) to be held on 8 November 1996, and saying he could not vote in favour of any of the proposed resolutions. The evidence does not indicate what those resolutions were or whether the meeting was held. However, Alan said that he was not in a position to agree to the increase of rent until he was informed of the attitude of Bruce. He objected to Bajco using the office facilities and equipment of Cadwallader Engineering (NSW) to send him a facsimile on the previous day.

44 A meeting of the members of Bajco was held on 9 or 10 December 1996. David, Marilyn and Bruce were in attendance. Alan did not attend but lodged a proxy. According to the minutes, the meeting resolved

· to agree to a proposal by Alan to pay the shareholders of Bajco money owing by him according to the Horwath Report;

· that the directors should offer the Property for sale;

· that Alan should give back to Jeanine the shares she had transferred to him;

· that legal action should be instituted regarding certain anomalies (presumably of a financial kind) about which Bajco had complained to Alan;

· that the directors were unable to accept accounts previously kept by Alan and Roberta as a true and accurate record and should await legal advice.

45 In letters to David and Bruce dated 16 December 1996, Alan was highly critical of these minutes. Apart from technical points, he claimed that he had never agreed that he personally owed Bajco the money claimed to be owing by him in the Horwath Report, and consequently the first resolution was misconceived. He claimed in his letter to David that Bruce would not have voted for the sale of the Property because that would be acting against the better interests of Cadwallader Engineering (NSW), and therefore (since his own proxy vote was against the sale proposal) the proposed resolution cannot have been carried. He claimed in his letter to Bruce that as a shareholder and director of Cadwallader Engineering (NSW), it would be necessary for Bruce to vote against, or abstain from the vote on, the proposal that the Property be put up for sale. He said that as the minutes stated that the resolution was carried, Bruce must have voted in its favour in obvious dereliction of his duty as a director of Cadwallader Engineering (NSW).

46 In his letter to Bruce, Alan also raised the question of the proposed lease. It appears that a draft lease was pushed into Alan's letter box at some time shortly before 16 December 1996. Alan was not happy with the draft lease, his main concern being that there was no option to renew. He wrote separately to David on 16 December to say so. In his letter to Bruce he demanded to be told why Bruce had not insisted on an option to renew, and whether Bruce intended to continue the business in some other premises after the expiry of the lease, or otherwise to exclude Alan from his rightful position in the business.

47 On 18 February 1997 Alan wrote to David (with a copy to Bruce) saying that before he would sign a new lease, he required current information about Bajco's financial position, details of all actions sought against the company, and information as to the sale of the Property. As to the Horwath Report, he said he had no argument with the interest adjustments, although a debt owed by Marilyn should bear the same interest rate, but he disagreed with the proposal that directors' and consultants' fees paid to himself and Bruce and their family companies, totalling $15,800 over the ten-year period, be repaid. He also disagreed with the proposal that increased rent be charged to Cadwallader Engineering (NSW) over the ten-year period. He said that his attempts to settle the matter had been unsuccessful. He claimed that he had agreed with David and Marilyn for an additional payment of $82,482 to Bajco to settle the claim, but he asserted that this agreement was later reneged upon by David and Marilyn, and Bruce had not attempted to join in any such settlement.

48 In about March 1997 David sought advice on his concerns about the predicament of Bajco, from Madgwick Partners. They arranged a conference with Mr Garth Blake of counsel, which was held on 12 March 1997. Mr Blake advised on the commencement of proceedings by Bajco to assert that it was the beneficial owner of the business transferred to Cadwallader Engineering (NSW) in 1979, and that Alan and Bruce had breached their fiduciary duties in resolving as directors that Bajco should enter into that transaction.

49 The prospect of Bajco taking legal action placed Bruce in a difficult position. He was in a bitter dispute with Alan but as Alan's co-director in Cadwallader Engineering (NSW) he was likely to be a defendant. He says that when he was informed that Bajco would be commencing action against Cadwallader Engineering (NSW), of which he was a director, he realised that his remaining as a director of Bajco would have resulted in a conflict of interest, and so he resigned. Marilyn replaced him as a director of Bajco on 10 March 1997.

50 A meeting of the directors of Bajco was held on 10 March 1997. David and Marilyn were in attendance, and the resignation of Bruce was "read". The directors resolved to pay legal expenses to Madgwick Partners, and to retain that firm to deal with the dispute between Bajco and Cadwallader Engineering (NSW) up to "Stage I", and then to review the situation, including the financial position of Bajco. The minutes of the meeting record the following further decision:

"Seek appointment of a ‘Receiver’ for Cadwallader Engineering (NSW) Pty Ltd on Tuesday 11 March 1979 [presumably intended to mean 1997] to protect the assets of Bajco Pty Ltd, as Alan Cadwallader and Bruce Cadwallader, as directors of Cadwallader Engineering (NSW) Pty Ltd are in the process of having an ‘Administrator’ installed through the court on Wednesday 12 March 1997."

51 It is hard to give any precise meaning to this resolution, but it provides some evidence that as early as March 1997 David and Marilyn had become acquainted rather imperfectly, with concepts relevant to the external administration of the affairs of a company. It also shows that as early as March 1997, the dispute between Bajco (represented by David and Marilyn) and Cadwallader Engineering (NSW) (represented by Alan, and perhaps Bruce) had escalated to the point that litigation was seriously in contemplation.

David and Marilyn seek Mr Cardwell's advice

52 Shortly after Marilyn replaced Bruce as a director of Bajco, David and Marilyn decided that they needed some financial advice on the company's situation. Bruce's wife Sharon contacted them, inviting them to lunch to discuss the Bajco situation. During the lunch Sharon mentioned that she and Bruce had a friend who could give advice about the company's situation. She identified the friend as Ronald Cardwell, a senior insolvency manager of Deloitte Touche Tohmatsu. David and Marilyn's evidence was that there was specific discussion about voluntary administration, but it seems to me that this is unlikely. Other evidence, in particular the minutes of their meeting of 10 March 1997, suggests that at the time, David and Marilyn did not have any clear understanding of what was involved in voluntary administration, as opposed to other external administrations such as receivership.

53 David and Marilyn subsequently discussed the matter and agreed that they should obtain Mr Cardwell’s advice. On about 26 March 1997 David made contact with Mr Cardwell and arranged a meeting. The meeting took place on 2 April 1997. It was attended by David and Alan, Tracey Case (Marilyn's daughter) and Annette Cadwallader (David's wife). Tracey Case made notes.

54 The notes recorded that several "choices" were identified at the meeting, including an application to appoint receivers of both companies, the liquidation of both companies, and voluntary administration of both companies. According to the notes, voluntary administration would lead to a deed of company arrangement in which "you are able to realise assets and money taken - end result may be a pot of money". The notes do not specify who said these things, but David has given evidence that the speaker was Mr Cardwell, and I accept that was so.

55 After the meeting David and Marilyn did not directly pursue any of the three choices outlined by Mr Cardwell. However, they decided that Bajco should commence proceedings against Alan, Bruce and Cadwallader Engineering (NSW).

56 On 2 April 1997 David and Marilyn on behalf of Bajco wrote to Alan as a director of Cadwallader Engineering (NSW) informing him that they proposed to auction the Property on 3 May 1997. They asked him for "confirmation" whether the lease signing would vary in any way. Alan responded by letter to David dated 3 April 1997, saying that if David could arrange for the lease document to be delivered to Alan's home, he would arrange to have it signed before a witness and returned forthwith. On about 7 April 1997 David telephoned Alan and said that he had received advice that if the lease was signed, the sale price of the Property would be devalued by up to 90% at the proposed auction, and therefore David did not want the lease to be signed. Again, therefore, negotiations for an increased rent stalled. It seems that the auction proposed for 3 May 1997 did not take place.

The 1997 proceeding by Bajco

57 On 29 April 1997 (after a resolution to do so was passed by David and Marilyn as its directors on 8 April 1997), Bajco commenced a proceeding by summons in the Equity Division of this Court, No 2230 of 1997, naming Alan and Bruce Cadwallader and Cadwallader Engineering (NSW) as defendants. Bajco contends in that proceeding that the 1979 transfer of the business from Bajco to Cadwallader Engineering (NSW) was made in breach of the fiduciary duties of Alan and Bruce. On about 25 September 1997 an order was made that the proceeding continue on pleadings. The 1997 proceeding has been stood over pending the outcome of the present proceeding.

58 Settlement negotiations instigated by Alan's solicitor were conducted during May 1997, but they were stalled on about 27 May when it appeared to Madgwicks (acting for Bajco) that Bruce no longer wished to participate. Alan's solicitor then advised Madgwicks that Alan would support a move to appoint a receiver to the business of Cadwallader Engineering (NSW), on the ground that the business was deadlocked to the detriment of its operation and profitability. A few days later, however, Madgwicks became aware that the solicitors for Alan and Bruce were negotiating and that Alan no longer intended to apply for the appointment of a receiver. Alan's solicitor said that his client would make a settlement offer, but by mid-July 1997 no offer had been made, and Madgwicks recommended that the directors of Bajco instruct them to continue with the 1997 proceeding. At a meeting on 17 July 1997 David and Marilyn as directors of Bajco resolved to continue the litigation. They also resolved to offer the Property for sale and approach real estate agents for advice.

Negotiations for settlement of the dispute between Alan and Bruce; the requisitioned meeting

59 The dispute between Alan and Bruce with respect to management of the business continued during 1997. However, they had a common interest in defending themselves in the 1997 proceeding. It appears that they took the view that David and Marilyn, in prosecuting the 1997 proceeding as the directors of Bajco, were representing a minority interest in the company. They were advised that because they together held a majority of the shares in Bajco, they could requisition a meeting of the members of Bajco to replace the board, and then, as the new directors of Bajco, take advice as to whether the 1997 proceeding should be continued.

60 On 21 May 1997 Alan's solicitor submitted a draft Deed of Agreement to Bruce's solicitor. The draft is not in evidence but, according to Alan's solicitor's covering letter of that day, it dealt with the sale of the assets of the business and the appointment of an agent to do so. There was a meeting between Alan and his solicitor, and Bruce and his solicitor, on 29 May 1997. According to a letter written by Bruce's solicitor on 2 June 1997, arrangements were agreed for the appointment of a reviewing accountant and for settlement of disputes between Alan and Bruce on the basis of that accountant's review, the appointment of a bookkeeper pending sale of the business, and for Alan's solicitor to approach Madgwicks to attempt to negotiate a settlement with Bajco. Under the proposed settlement, the six siblings would receive equal 1/6 shares of the proceeds of sale of the Property, control and ownership of Bajco would be given to Alan and Bruce, and the other siblings would have no claims against Alan, Bruce, Bajco or Cadwallader Engineering (NSW). One infers that the approach (if any) to Madgwicks was unsuccessful.

61 By 1 September 1997, it appeared to Alan's solicitor, according to a letter he wrote to Bruce's solicitor on that day, that neither Alan nor Bruce was in a position to buy the business, and therefore the business should be sold to an outsider. Alan believed that the Gosford operation should be sold separately from the Concord West operation, though he was prepared to take expert advice. The letter of 1 September 1997 sets out other aspects of the proposed settlement of all disputes, including some tentative ideas for sale of the Property and distribution of the proceeds in equal 1/6 shares to each sibling.

62 According to a letter dated 4 September 1997 from Bruce's solicitor to Alan's solicitor, there was another meeting of Alan and Bruce and their solicitors on 28 August 1997, in which it was agreed that Alan's solicitor would make an offer of settlement to Madgwicks, and that each sibling would receive a 1/6 share of the Property as per a valuation. It was agreed that if Madgwicks did not accept the offer, an extraordinary general meeting of the shareholders of Bajco would be called and Bruce and Alan would be appointed as directors; Madgwicks' instructions would be withdrawn; and a demand would be made on David and Marilyn to refund to Bajco the money it spent on the 1997 proceeding. It was also agreed that an agent be instructed to value and sell the business, and that the business would be sold as a whole unit rather than as separate operations. Again, one infers that the approach (if any) to Madgwicks was unsuccessful.

63 On 18 September 1997 Alan's solicitor wrote to Madgwicks communicating a request by Alan and Bruce that the current board of Bajco call a general meeting of shareholders for the removal of the current directors and their replacement by Alan and Bruce. The letter said: "we also advise that it is the intention of the new Board, if elected, to consider at its first meeting discontinuance of the action of the Plaintiff". A draft of this letter, submitted by Alan's solicitor to Bruce's solicitor on the previous day, had contained a different version of this sentence, thus: "we also advise you that it is the intent of the new Board to dismiss your firm as solicitors for the Plaintiff [in the 1997 proceeding] and to discontinue the action of the Plaintiff". The letter noted that the minority shareholders could commence a proceeding in their own names.

64 At about this time David and Marilyn changed Bajco's solicitors from Madgwicks to McCabes. According to David's evidence, Madgwicks informed him that they could no longer act because they had given advice to Bruce in his capacity as a director of Bajco some years earlier.

65 On 18 September 1997 the new solicitors for Bajco, McCabes, wrote to Alan's solicitor asking as a matter of urgency whether Alan's intention was to discontinue the 1997 proceeding if he was appointed a director at the meeting of members scheduled for 11 December 1997. Alan's solicitor replied on 25 November, saying that Alan's intention, if he were to be appointed to the board of Bajco, was to seek legal advice regarding the 1997 proceeding and his duty to administer the company, and to act in accordance with that advice.

66 By 20 October 1997 David and Marilyn knew it was likely that they would receive a requisition to convene a meeting of the members of Bajco, to vote on a proposal to remove them from office. At their board meeting on that day, they resolved to pay themselves directors’ fees of $2,000 per quarter (equivalent to $153 per week for each director), backdated to July 1997, on the advice of McCabes. The directors' fees were substantially in excess of the amounts paid as directors' fees for the years ended 30 June 1996 and 30 June 1997. Apart from activities associated with the 1997 proceeding, the directorships of Bajco involved very little work, as only about 10 cheques per annum were drawn and the only business of the company was to receive rental income and some interest. In my view, the new fees were excessive, even allowing for the work involved in conducting the 1997 proceeding.

67 The minutes of the meeting of 20 October 1997 also record a resolution to accept a loan from Marilyn of $10,000, to be paid back with interest at the current rate plus 2%, as soon as possible.

68 In October 1997 Bruce obtained a valuation of the business. He wrote to his solicitor on 13 October 1997 setting out a strategy under which he would offer to buy the business, and he said "while I do not particularly want to stay on in the business, it would be a good commercial decision and would stop Alan in his tracks". Clearly there was still bad blood between Alan and Bruce, though they were co-operating to an extent vis-a-vis Bajco.

69 On 14 October 1997 Alan's solicitor submitted a further draft Deed of Agreement to Bruce's solicitor. The parties to the Deed of Agreement were to be Alan and Bruce and Cadwallader Engineering (NSW). The draft provided for the sale of the business, to be conducted by an agent. It also provided (in clause 6) for Alan and Bruce to serve a requisition on the directors of Bajco under s 246 of the Corporations Law for the convening of a meeting of members to remove David and Marilyn as directors and replace them with Alan and Bruce. According to the draft, in the event that Alan and Bruce were appointed directors, they would consider discontinuance of the 1997 proceeding, on the strict basis of what was fair and proper for all the shareholders of Bajco, including the minority shareholders. The draft also provided for the sale of the Property after Alan and Bruce became directors of Bajco, and for the distribution of the net proceeds of sale (apparently sale of the Property was intended, although the draft refers to sale of the business) in equal 1/6 shares amongst the six siblings.

70 The draft Deed of Agreement was returned by Bruce's solicitor to Alan's solicitor, unsigned, by facsimile of 22 October 1997, with some handwritten amendments not material for present purposes. It was accompanied by a form of notice of requisition for a meeting of members, dated 15 October 1997 and signed by Bruce’s solicitor on his behalf.

71 Later a further copy of the notice of requisition was signed personally by Alan and Bruce. Although the notice was dated 15 October 1997, it was served on Bajco on about 24 October 1997. David and Marilyn sought advice from McCabes, who briefed Mr Gullotta of counsel. On 29 October 1997 Mr Gullotta advised that the directors of Bajco were required to convene the requisitioned meeting, and that if Alan and Bruce succeeded in obtaining control of Bajco and having it discontinue the 1997 proceeding, David and Marilyn would be given leave to continue the suit in the company's name.

72 On 31 October 1997 David, as a director and the secretary of Bajco, gave notice of an extraordinary general meeting of Bajco to be held in Goulburn at 9:30am on 11 December 1997, to consider, and if thought fit, pass resolutions as to the matters in the notice of requisition. The decision to hold the meeting in Goulburn was extraordinary and unjustifiable, in my opinion. The only connection with Goulburn was the fact that Marilyn lived there. Every other consideration pointed to holding the meeting in Sydney.

73 Although arrangements for the meeting of members had been made, Alan and Bruce still had not finalised their proposed Deed of Agreement. On 11 November 1997 Bruce wrote to his solicitor setting out some amendments he wanted to make to the draft Deed. One amendment was to delete clause 6. He said that since David and Marilyn as directors of Bajco had convened a meeting for 11 December 1997, "this (i.e. Bruce & Alan being appointed Directors) cannot happen", and he added that "this also means that subsequent clauses of this deed become invalid until after the 11th December meeting". He concluded by saying it would be in his best interests if the appointment of Ronald Cardwell as administrator for both Cadwallader Engineering (NSW) and Bajco formed an essential part of the final negotiations at the proposed round table meeting. This letter is not easy to interpret. David, Marilyn and Mr Cardwell have given some controverted evidence that Bruce changed his mind about replacing David and Marilyn as the directors of Bajco, and told David he would vote against the resolutions. I shall consider this question in detail later.

74 Early in November 1997 there were some negotiations between the solicitors for David and Marilyn, and Bruce's solicitor, with a view to settling their dispute. On 7 November 1997 David and Marilyn's solicitor wrote to Bruce's solicitor proposing a meeting of the family members to discuss settlement. The proposed meeting was arranged for 18 November 1997 at the offices of Deloittes. However, on 8 November 1997, David and Marilyn as directors of Bajco resolved to engage an estate agent and place the Property on the market, and to inform Alan and Bruce that they were doing so. According to David, he and Marilyn decided to place the property on the market again because finance was needed to fund the day-to-day operations of Bajco and also to fund the ongoing litigation. I shall deal with this evidence of intention later.

75 On 12 November David and Marilyn's solicitor wrote to Bruce's solicitor informing him of their decision to sell the Property. It appears that Bruce was upset by this decision. On 17 November 1997 his solicitor wrote to David and Marilyn's solicitor saying that the intention to sell "the business" (presumably meaning to refer to the Property) was "highly inflammatory", and threatening an application for injunctions unless action to sell the Property immediately ceased. Although the evidence is not entirely clear, it appears that the round table meeting proposed for the following day was cancelled.

76 Bruce's solicitor wrote to David and Marilyn's solicitor again on 18 November 1997, objecting to the proposed sale and asserting that David and Marilyn, being minority shareholders of Bajco, would be replaced as directors at the meeting to be held on 11 December 1997. The letter claimed that it would cost a minimum of $50,000 to move equipment out of the Property, and the sale would diminish the value of the goodwill of the business, which was at that time being valued for sale. The letter sought an undertaking not to proceed with the sale and threatened an application for injunctions. On 19 November David and Marilyn's solicitor replied, saying that Bajco would continue to market the Property.

77 Alan Cadwallader says he first became aware of the proposal to sell the Property on 17 November 1997. His solicitor wrote to Bajco's solicitor on 25 November 2001. Alan says that on 28 November 1997 he found out that signs advertising the sale had been erected on the building.

78 Progress in the negotiations between Alan and Bruce seems to have been inversely proportional to progress in the negotiations between Bruce and the directors of Bajco. On 17 November 1997 Bruce's solicitor wrote to Alan's solicitor proposing amendments to the draft Deed of Agreement, in accordance with Bruce's written instructions on 11 November. The letter required, without explanation, that clause 6 be deleted.

79 On 21 November 1997 David and Marilyn as directors of Bajco terminated the retainer of McCabes. David's notes say this was because "Bajco directors had agreed to enter into voluntary administration", although this explanation is questionable because the decision to appoint administrators was taken later, on 27 November, and David wrongly dates the decision to terminate McCabes' services as 29 November 1997. No solicitor appears to have been appointed in their place.

80 Alan contends that David and Marilyn terminated the retainer of McCabes with the intention and effect that there would be no legal practitioner representing Bajco to answer any requests for information as to Bajco's status made by him during the period leading up to the appointment of the administrators. I shall return to this contention later.

81 On the same date, Bruce's solicitor informed Mr Blake of counsel that all negotiations between Alan and Bruce had broken down, and instructed him to prepare the documents necessary to place Cadwallader Engineering (NSW) into the hands of an administrator or receiver. Referring to the proposed meeting of 11 December 1997, the letter anticipated that the current directors of Bajco would be replaced by Alan and Bruce, who would terminate the retainer of McCabes and place Bajco into administration.

82 On 25 November 1997 Alan's solicitor wrote to McCabes querying why the meeting of members had been convened to be held in Goulburn, given the inconvenience of that venue. The letter also questioned why the directors of Bajco had resolved to sell the Property, how the property would be sold, and whether a contract had been issued. The letter recorded that Alan's solicitor had been informed (prematurely, as it turned out) that the directors had resolved on the previous day to appoint an administrator, and queried how the directors could reach the view that the company was insolvent or likely to become so, given that the principal asset of the company was the Property which was worth about $400,000 and was unencumbered. McCabes replied simply by saying that their retainer had been terminated.

The appointment of voluntary administrators, and the first meeting of creditors

83 David's evidence is that until October 1997 Bajco had been able to pay its day-to-day running costs as well as the legal costs for the conduct of the 1997 proceeding. He says that during October 1997 he noticed that the cash in the bank was diminishing at a rapid rate. In November 1997, quarterly bills for rates and other outgoings arrived. He says that in about mid-November, he had a telephone conversation with Marilyn in which she expressed the opinion that the time had arrived to place the company into administration, because the company's income from rent was not enough to pay the incoming bills. David says he agreed and undertook to contact Mr Cardwell.

84 In the week commencing 17 November 1997 he telephoned Mr Cardwell, saying that the company would not be able to fund the ongoing litigation after the present week and that he and Marilyn wanted to discuss whether they should place the company into administration. Mr Cardwell told him that it would be necessary to have a meeting of directors to pass a resolution that the company was insolvent or likely to become insolvent and that an administrator should be appointed. David and Mr Cardwell arranged to meet on 27 November at the offices of Deloittes in Parramatta.

85 David had two discussions with Mr Cardwell on 27 November 1997. The first was at 9:15 am, to review the current position. According to Mr Cardwell's notes, they considered the dispute about the business and noted that Alan was not talking to Bruce and David. They reviewed the financial position of Bajco, noting its current creditors. David says he had assembled some documents relating to Bajco's financial viability (including various bank statements and his handwritten list which summarised the company's assets and liabilities), but that Mr Cardwell did not take the documentation. Instead, they discussed the company's position orally.

86 David said to Mr Cardwell:

"We are not able to meet our current debts as the current bank balance is $2,870. The major debts of the company are Madgwicks in the sum of $10,852, expenses incurred by myself and Marilyn for work done on the litigation, counsel's fees, a disputed debt in the sum of $29,276 to Cadwallader Engineering and costs involved with the sale of 3 King Street, Concord West. We are unable to fund the company's ongoing litigation. There has been a meeting called of Bajco shareholders requisitioned by Alan to be held on 11 December 1997."

87 Mr Cardwell explained the legal meaning of insolvency. David says Mr Cardwell expressed the opinion that the company was insolvent or likely to become insolvent in the near future. He explained the procedure for voluntary administration and for the appointment of a receiver by the Court, recommending voluntary administration as the quicker and cheaper alternative. He said two of the partners in Deloittes could act as administrators, and he would prepare an appointment document. He said the auction sale of the Property could go ahead as planned, depending upon the vote of the creditors, and the administrators would seek legal advice as to whether to proceed with the litigation.

88 At about 11 am David rang Marilyn, in Mr Cardwell's presence. David and Marilyn conducted a meeting of the directors of Bajco on the telephone. Subsequently some rather full minutes of the meeting were produced by Mr Cardwell. According to the minutes, which have about them the air of self-justification, the directors noted that there was only $2,700 in the company's bank account and expressed concern about the difficulty of funding the 1997 proceeding. Both directors said they did not have funds to lend to the company. The minutes say that "the issue of raising funds against the company's real estate was also considered, but it was felt that it would be unwise for the directors to do this as they should not be committing the company to any further liabilities," and they expressed some doubt as to whether Cadwallader Engineering (NSW) would remain as a tenant. David reported that he had discussed the financial position with Mr Cardwell, and said that it seemed that the company was insolvent or likely to become insolvent at some time in the future.

89 According to David's evidence, Mr Cardwell gave advice to him and Marilyn as follows:

"A company going into administration is a company that cannot afford to pay its ongoing costs. On the information that David has provided me about the outstanding debts of the company, the company is insolvent or likely to become insolvent in the very near future as it cannot meet the debts owing by it. Should the company continue to incur debts while it is insolvent, both David and yourself as directors may incur personal liability for those debts. It is therefore my opinion that an administrator should be put in place."

90 Marilyn gave evidence substantially to the same effect. She says she told Mr Cardwell she did not want to incur any further debts as a director of the company, because she believed that the company would not be able to meet those debts. She says she also wanted to protect the rights of the minority shareholders by taking steps that would, she hoped, ensure that the litigation would be pursued.

91 David's evidence is that he asked Mr Cardwell how entering into voluntary administration would affect the requisitioned meeting of 11 December 1997. He says Mr Cardwell replied:

"After the administrators have been appointed I will contact all of the Bajco shareholders to notify them that the meeting of 11 December 1997 would not be held as the company had been placed into voluntary administration on 28 November 1997."

Marilyn's evidence is substantially the same on this point.

92 Mr Cardwell gives a different version of this part of the conversation. He says the conversation took place between him and David before they contacted Marilyn, and was as follows:

93 It seems to me probable that Mr Cardwell replied to David's question in the way David and Marilyn say he did. There is other evidence (which I shall discuss shortly) that Mr Cardwell shared Mr Hilliard's view that once administrators were appointed, the meeting could not take place, and that he communicated that opinion to Alan's solicitor on 10 December 1997. It is probable that he also said it was necessary to act as soon as possible, and that they could only run with what they had, as this is consistent with Mr Cardwell's handwritten notes of the meeting.

94 David and Marilyn say they relied on Mr Cardwell's advice in resolving in favour of voluntary administration. They say that they believed the company had outstanding debts which it could not pay and was unlikely to be able to pay in the future, and that an administration would enable the company to pursue the 1997 proceeding which it otherwise could not afford to continue.

95 The directors of Bajco resolved that:

96 Marilyn made some notes of the telephone discussion. She recorded that Mr Cardwell went through all the reasons why and when a company should enter into voluntary administration, when the directors considered that the company might be insolvent or could become insolvent in the future. She referred to the company's assets and liabilities and said that she and David wished "to be seen as acting responsibly".

97 Marilyn wrote to Mr Cardwell on 29 March 1998, setting out what she called "a detailed diagram of what went on" in the two companies from 1979 to 1996. She did so, she explained, because she had formed the impression that Mr Cardwell and his lawyers did not understand the true picture of what had been done to the company over those years. Her letter also enclosed a statement of what she described as "the main events which also led David and I to reach the decision to put the company into administration".

98 The statement enclosed with the letter was headed "Reasons for Putting Bajco Pty Ltd into Administration". The statement is a catalogue of her complaints about Alan's conduct across a range of matters comprising the family dispute about the affairs of the two companies. Her list of reasons includes allegations as follows:

· Alan's refusal to the buy out the shares of other shareholders or settle on any agreement or proposal;

· illegal purchase of Jeanine Hatton's shares;

· Alan's refusal to allow an independent audit of Cadwallader Engineering (NSW)'s books to determine transfers of funds from Bajco;

· Alan's refusal to settle on an outcome in light of the Horwath Report;

· misappropriation by Alan due to lost income arising from the absence of a formal lease agreement;

· devaluation of shares in Bajco in the period from 1979 to 1998, from $3,000 to $20 per share;

· continuous oppression of minority shareholders by Alan preventing resolutions being put forward;

· unresolved conflict between Alan and Bruce as majority shareholders, and David and Marilyn as directors representing the minority shareholders;

· transfer of business assets in 1979 without proper and fair consideration being paid to Bajco, and without the informed consent of the shareholders;

· "morally and ethically incorrect" disclosure of information about the affairs of Bajco by its accountant, Mr Smyth, to Alan.

99 She reinforced and elaborated on these matters in cross-examination. Of course, when the question for the directors is whether the company should move into voluntary administration, considerations of these kinds are irrelevant considerations except to the extent that they bear on the question of solvency. At the end of the statement she asserts, relevantly, that the company was by November 1997 "no longer a viable concern", and had not been so for the previous three years. She briefly reviews the creditors of the company and notes that there was only about $2,000 in the bank. The statement concludes by urging Mr Cardwell and the administrators and their lawyers to take the matter very seriously because "we intend to win - losing isn't in the picture".

100 Alan attaches some significance to this evidence by Marilyn. He says that if David and Marilyn decided to appoint the administrators for the reasons given by Marilyn, they necessarily failed to exercise their power under s 436A of the Corporations Law in good faith for the purpose for which it was conferred, and in the interests of the shareholders as a whole. I shall return to this contention later.

101 Mr Skinner and Mr Lombe have given evidence that they would not have consented to be appointed as administrators, if they had been informed by David and Marilyn that they were motivated in appointing administrators by reasons other than belief on their part that Bajco was insolvent - for example, if David and Marilyn had told them that their intention (or one of their intentions) in appointing administrators was to stop their replacement as directors at the meeting scheduled for 11 December 1997. Mr Cardwell has given evidence that he would not have used the consents by Mr Skinner and Mr Lombe if he had been informed by David and Marilyn of such things.

102 On 28 November 1997 David and Marilyn, located in different places, signed a document and the common seal of Bajco was affixed to it. The document stated that it was agreed pursuant to s 436A of the Corporations Law that an administrator be appointed, and that any two of Mr Skinner, Mr Campbell and Mr Lombe, partners of Deloittes, were to be appointed as administrators provided they consented. A more formal document bearing the same date purported to appoint Mr Skinner and Mr Lombe to be the administrators of Bajco, and noted their consent. The common seal of Bajco was affixed to this document and David signed it. His signature was witnessed by Mr Cardwell.

103 Late in November 1997 Bruce changed his solicitor. The new solicitors, Hunt & Hunt, wrote to Alan's solicitor on 1 December 1997 re-stating Bruce's requirements for amendments to the draft Deed of Agreement. The letter reiterated that clause 6 should be deleted. The other changes to the draft would have given Deloittes the function of selling the business and valuing it.

104 The first meeting of creditors of Bajco was held on 3 December 1997. David and Marilyn both lodged claims for $15,000 each for services rendered. The meeting was attended by David and Bruce, and Marilyn appointed David her proxy. Alan did not attend, and says he was unaware of the meeting. He says the first time he or his solicitor became aware that administrators had been appointed to Bajco was on the morning of 10 December 1997, the day before the requisitioned meeting of members was due to take place.

105 The meeting resolved not to form a committee of creditors, and to confirm Mr Skinner and Mr Lombe as administrators.

Cancellation of the requisitioned meeting

106 The newly appointed administrators were advised by Derrick Hilliard of Tress Cocks & Maddox. Both Mr Cardwell and Mr Hilliard told Alan's solicitor that the meeting convened for 11 December 1997 could not go ahead, in view of the appointment of voluntary administrators. Alan nevertheless attended at the appointed time and place, but no one else appeared. The meeting did not proceed.

107 In my opinion Mr Hilliard and Mr Cardwell were wrong to advise that the meeting should not go ahead. In his letter to Alan's solicitors dated 10 December 1997, Mr Hilliard referred to ss 437C, 437D, 437F and 438B of the Corporations Law. Sections 437D and 437F are, however, strictly irrelevant, since the business of the meeting did not include any proposal to deal with the property of the company or the status of the members. Section 438B, which imposes an obligation on the directors to assist the administrator in various ways, assumes (as does s 437C (2)) that the office of director continues after the administrator has been appointed. The central provision is s 437C (1). This says that while a company is under administration, a person (other than the administrator) cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except with the administrator's written approval.

108 Mr Hilliard's reasoning was that a meeting of members of a company is organised by the secretary and presided over by the chairman of directors, and as the powers of both the secretary and the chairman of directors had been suspended under s 437C, there was in effect no power to conduct the meeting. He was mistaken with respect to both the secretary and the chairman.

109 The meeting had already been validly convened by the notice despatched by David on 31 October 1997. What remained to "organise" the meeting was not a special function of the secretary or any other officer. Anyone entitled to attend the meeting could gain access to the premises. Upon proof that an instrument of proxy had properly been submitted to the company in accordance with its constitution, a proxyholder would be entitled to vote, regardless of the presence or absence of the secretary.

110 There is some room for argument as to whether, in exercising the functions of a chairman of a meeting of members, a director is performing or purporting to perform a function as an officer of the company, given that the definition of "officer" in s 9 does not include a chairman as such. It is unnecessary to resolve that question here, because it is plain under the constitution of Bajco (which adopts in this respect article 49 of Table A of the Fourth Schedule to the Companies Act 1961 (NSW)) that the chairman of the meeting need not be a director, if the chairman of directors is unwilling to act (as may occur, for example, if he were advised that he may be prevented from doing so by s 437C (1)).

111 I see no reason of principle for holding that a properly requisitioned meeting of members to replace the board of a company should be abandoned if the incumbent board appoints an administrator after the meeting has been convened but before it has been held. Indeed, one can imagine circumstances where the policy underlying Part 5.3A would not be served unless the meeting could take place - for example, where the incumbent board has become unco-operative or the majority directors are driven by an unacceptable conflict of interest. My conclusion, therefore, is that if a meeting to consider motions to replace the directors has been validly convened before an administrator is appointed, the intervening administration does not require that the meeting be abandoned or adjourned.

112 Mr Cardwell communicated his view about the proposed meeting in a telephone conversation that he had with Alan's solicitor on 10 December 1997. Mr Cardwell began the conversation by saying that his call was "off the record", but it is clear that Alan's solicitor did not accept that condition of the call, whatever "off the record" might mean in this context. Mr Cardwell proceeded to say that he had been appointed administrator by the directors of Bajco and that the purpose of his call was to say that the shareholders' meeting was not proceeding. According to a letter by Alan's solicitor to Mr Cardwell on 10 December 1997, Mr Cardwell said in the telephone conversation that he was not aware that the proceeding instituted by Bajco was currently before the Court and had been adjourned until after the shareholders' meeting, that he had not seen the agenda for the shareholders' meeting, that he was not aware of the purpose of the meeting, and that he had not seen the letter from Alan's solicitor to McCabes dated 25 November 1997, to which no response had been received. It seems to me likely that Mr Cardwell said all of these things to the solicitor. I find the claims made in these statements about his state of mind to be implausible, except for the last one.

The notice of the second creditors' meeting, and the administrators' report

113 By written notice dated 19 December 1997, the administrators gave notice convening a meeting of the creditors of Bajco on 29 December 1997. The notice attached their Report to Creditors. The evidence indicates that the Report was in fact prepared by Mr Cardwell.

114 The Report made, inter alia, the following points:

· for a considerable period of time the directors had been concerned about the failure of Cadwallader Engineering (NSW) to account to Bajco for money claimed to be due, and about the legal costs and expenses in proceeding No 2230 of 1997, and about the inability of Bajco to conclude a formal lease with the directors of Cadwallader Engineering (NSW);

· the net assets of the company, according to the Report as to Affairs signed and lodged by David on 11 December 1997, had an estimated realisable value of $375,129, plus a contingent asset of $500,000 claimed to be owing to Bajco by Cadwallader Engineering (NSW);

· the company's creditors comprised Madgwick Partners ($10,852), counsel ($1,250), the directors ($30,000) and another creditor ($5,000), and the Report noted that Alan's solicitors had informed the administrators that Cadwallader Engineering (NSW) was a creditor for $29,136;

· the administrators' initial investigation indicated that the company did not trade whilst insolvent, and it was clear that further investigation was not required on this point;

· a preliminary review of the books and records of the company indicated that there were no remittances to creditors which might be recoverable by a liquidator under Part 5.7B of the Corporations Law.

115 Except as noted above, the Report to Creditors does not address the question of solvency of the company. The figures presented, however, make it clear that the company was not insolvent on a balance sheet test. It would be possible, consistently with the figures presented in the Report, for the company to be insolvent on a cash flow test, but the Report does not go into the question of cash flow insolvency.

116 Having presented the company's circumstances in the manner outlined above, the Report turned to the question whether a deed of company arrangement should be entered into, or the administration should be terminated, or the company should proceed into liquidation. The relevant part of the Report, which I now set out in full, is strikingly brief:

"At the present time the property owned by the company has been listed with real estate agents Gilmour Real Estate, 819 Victoria Road, Ryde, NSW for sale by way of auction. This arrangement had been entered into prior to the administrators being appointed and at this point of time the administrators can see no valid reason why that sale should not proceed.

"Accordingly the sale will continue with the auction taking place in mid February 1998. It is proposed that, as this is the major asset, the proceeds be distributed amongst those creditors who prove their debts and that any surpluses that arise be distributed to those shareholders of the company who are legally entitled to receive a distribution in accordance with the shareholdings that they maintain.

"The other significant issues that needs [sic] to be explored are the proceedings that have been commenced in the Supreme Court of New South Wales Equity Division between Bajco Pty Ltd against Alan Norman Cadwallader, Bruce Eric Cadwallader and Cadwallader Engineering (NSW) Pty Ltd. The allegations set out in the Statement of Claim are significant to the extent that should they be proven significant funds would be available to the administrators for distribution to the shareholders of the company.

"It is not possible at this point of time to indicate to creditors and shareholders the likelihood of success until further enquiries have been made and an opinion sought from Counsel.

"We believe that the sale of the company's assets in this manner is best dealt with by a Deed of Company Arrangement as it will expedite a distribution to creditors and shareholders. We are also of the opinion that there have not been any transactions which would benefit the creditors should the company be placed into liquidation.

The second meeting of creditors

117 By the time of the second creditors' meeting, claims had been made by creditors as follows:

· Madgwick Law Offices $11,472.95

· David Cadwallader $15,000

· Marilyn Wintzloff $15,000

· Bruce Cadwallader $4,000

· Cadwallader Engineering (NSW) $29,136

118 I should note that in the witness box, Marilyn admitted that her claim for $15,000 was false and she was not entitled to make it. She said that in doing so, she followed a suggestion by Mr Cardwell. Her admission casts doubt not only on her own claim, but on David's claim for the same amount.

119 The meeting of creditors was held on 29 December 1997. Present were Mr Skinner (as chairman), Mr Cardwell, David and Bruce claiming as creditors (David holding a proxy from Marilyn, who also claimed as a creditor), Alan (as proxy for Cadwallader Engineering (NSW)), and Alan's solicitor Mr Christopher Price. Although the meeting was formally chaired by Mr Skinner, he had a sore throat and effectively relinquished the conduct of the meeting to Mr Cardwell.

120 The minutes of the meeting are in evidence, and Mr Price has given an account of the meeting. There was discussion about whether the transfer of shares from Jeanine Hatton to Alan had been properly carried out in accordance with the constitution of Bajco, Mr Cardwell contending that the transfer did not comply with the constitution. There was also discussion about whether Bajco was insolvent at the time of the appointment of the administrators, or likely to become insolvent at a future time. Mr Cardwell said that the proceeding by Bajco against Cadwallader Engineering (NSW) was of concern to the directors, that the company had run out of money, and that the resources of the directors were not sufficient to continue the litigation. There was also discussion about whether Bajco owed Cadwallader Engineering (NSW) the debt of $29,136 that had been alleged, and Mr Price asked for further information about debts said to be owed to Bruce, and to David and Marilyn. There was discussion about the proposal to sell the Property, and Alan said Cadwallader Engineering (NSW) would need three to four months to relocate the business. There was also discussion about the costs of the administration, especially if Bajco in administration were to pursue the Supreme Court litigation.

121 Mr Cardwell handed out a document which comprised the recitals but not the substantive part of a draft deed of company arrangement. The recitals asserted that the company got into financial difficulties when Cadwallader Engineering (NSW) failed to account for rent due to Bajco and Bajco became unable to meet the legal costs associated with the proceeding in the Supreme Court. Obviously that statement is controversial and is disputed by Alan, who says that Cadwallader Engineering (NSW) has not defaulted in payment of rent, which (he says) has remained at $3000 per month at all relevant times. They recited that the administrators had decided to proceed with the sale of Property and that creditors would be paid in full from the deed fund established upon sale of the property. They recited that the balance of the deed fund would be retained and invested by the administrators pending resolution of the Supreme Court proceeding and would then be distributed to the members of Bajco, subject in the case of Alan and Bruce to a set-off of any amounts found to be due and owing by them in the proceeding. Mr Cardwell said that the claim by Cadwallader Engineering (NSW) would be marked under Corporations Regulation 5.6.26, so that the company could vote as a creditor but its vote might be discounted.

122 The meeting was adjourned at the request of Mr Price, and he then had a conversation with Alan and Bruce. Bruce informed Mr Price that he wanted Cadwallader Engineering (NSW) to vote in favour of the deed of company arrangement. Mr Price then asked Alan what he wanted to do, and Alan said "I want to proceed with the administration".

123 When the meeting was resumed, it was unanimously resolved that Bajco should enter into a deed of company arrangement and that the administrators should be appointed administrators of the deed. Alan's attitude to the resolution appears, on its face, to be odd. His evidence is that he agreed to vote in favour of the administration because he thought there was no other option. He thought that nothing would be achieved if he opposed the administration, given that it was supported by David, Marilyn and Bruce. He believed that he could not vote against the administration as the proxyholder for Cadwallader Engineering (NSW) if its other director, Bruce, took a different view. He also thought that if Cadwallader Engineering (NSW) voted against the administration, its vote would be ignored because its claim had been marked by Mr Cardwell.

The deed of company arrangement

124 On 12 January 1998 a deed of company arrangement was executed under the seal of the company by David (on behalf of Bajco) and by the two administrators. David's signature was witnessed by Mr Cardwell. The other director, Marilyn, did not sign.

125 The deed provides for the administrators to proceed with the sale of the Property and place the net proceeds of sale into a Deed Fund. The administrators are given various standard powers, including (in paragraph (j) of Schedule 1 to the deed) the power to bring, prosecute and defend in the name of and on behalf of the company or in the name of the administrators any actions, suits or proceedings (including, though it is not expressly identified, proceeding No 2230 of 1997). There is a procedure to establish a list of Admitted Creditors. After the payment of Exempt Creditors (being preferential creditors and employees), the Admitted Creditors are to be paid in full out of the Deed Fund. The balance of the Deed Fund is to be retained by the administrators and invested in an approved trustee investment, pending resolution of proceeding No 2230 of 1997, and thereafter the balance is to be distributed to the members of the company, subject in the case of Alan and Bruce to the deduction of any amount found to be due by them to the company in proceeding No 2230 of 1997.

234 I turn to the question whether the general law with respect to standing no longer applies, in light of Part 2F.1A of the Corporations Act, which began on 13 March 2000. Section 236 confers a statutory right on certain persons to bring proceedings on behalf of a company, or to intervene in proceedings in a certain way. Section 236 (3) says that "the right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished". If s 236 (3) applies in the present case, then considerations concerning the rule in Foss v Harbottle and the fifth exception to it are irrelevant, and the only way a proceeding such as the present one can be properly constituted to raise the issue of misuse of fiduciary power by directors is by following the new statutory procedure.

235 Section 236 (1) says that a person may bring proceedings on behalf of a company, or intervene in any proceedings to which a company is a party for the purpose of taking responsibility on behalf of the company for those proceedings or for a particular step in those proceedings, if two conditions are satisfied. The first condition (in s 236 (1) (a) (i)) is satisfied in the present case because Alan is a member of Bajco. The second condition (in s 236 (1) (b) (ii)) is that the person is acting with leave granted under s 237. Such leave has not been granted in the present case. Another requirement of s 236, not satisfied here, is that a proceeding brought on behalf of a company must be brought in the company's name: s 236 (2). Here the proceeding has been brought in Alan's name, and Bajco has been joined as a defendant.

236 It is possible that the two unsatisfied requirements laid down by s 236 could be satisfied even at this late stage in the present proceeding. It is arguable that leave may be granted under s 237 nunc pro tunc, given that a superior court invested with a power to grant leave is able to do so on that basis unless there is some express or implied provision to the contrary. There is some evidence to justify my being satisfied of the matters set out in s 237 (2), although procedural fairness would require that I hear submissions before making a determination of those matters. The other requirement, that the proceeding be brought in the company's name, was dealt with by Santow J in Karam v Australia and New Zealand Banking Group Ltd (2000) 34 ACSR 545. His Honour found that appropriate amendments to the pleadings, to comply with s 236 (2), could be made under Part 20 rule 4 of the Supreme Court Rules (there was a limitation problem in that case, not present here).

237 While problems with the application of Part 2F.1A might be capable of being overcome (I do not firmly decide the matter), to overcome those problems would involve further hearing time and costs. Therefore, in the present case considerations of justice favour the application of the general law rather than the statutory regime, notwithstanding the generally remedial purpose and effect of the reform: see Karam at 553. The question is, does s 236 (3) prevent the Court from dealing with the matter under the general law?

238 In my opinion it does not. Section 236 (3) abolishes the right of the person at general law to bring, or intervene in, proceedings on behalf of a company. The abolition of the right took effect on 13 March 2000. By that time Alan had exercised his right to bring proceedings under the fifth exception to the rule in Foss v Harbottle by commencing the present proceeding. He did so in 1998. On and after 13 March 2000, it was unnecessary for him to rely upon any general law right to bring a proceeding on behalf of the company, and therefore s 236 (3) did not apply to constrain him. It was necessary for him to assert his entitlement to continue the proceeding that he had brought under the general law, but s 236 (3) has nothing to say about the continuation of proceedings properly brought at a previous time.

239 In Karam the proceeding had been commenced in 1997 against a third party, without joinder of the company at all. If the company were to be joined at the time of the hearing, its action against the third party would be statute-barred having regard to Part 8 rule 11 (3) of the Supreme Court Rules. Santow J avoided the limitation problem by holding that as from 13 March 2000, the proceeding was governed by Part 2F.1A, and that an amendment could be made to the constitution of the proceeding under Part 20, operating retrospectively (according to Part 20 rule 4A). The plaintiff argued that s 236 (3) did not have a retrospective effect to take away his existing general law right, because the general law right to bring derivative proceedings was substantive rather than procedural, and a statute should not be construed as taking away accrued rights retrospectively. Santow J pointed out that the statutory reforms were seen as remedial and ameliorative, providing better rights than the general law allowed. He said (at 553):

"To deny its remedial effect to those whose rights had accrued prior to the introduction of the legislation would be to frustrate its remedial purpose".

240 It seems to me that Santow J's observations are directed to a case different from the present one. The proceeding before him had not been constituted properly as a derivative action under the general law, since the company was not a party to it. In effect, the plaintiff was asking him, after 13 March 2000, to constitute the proceeding as a derivative action for the first time. He granted the plaintiff relief, but in a manner that treated the derivative action as a statutory action, the legislation having commenced by that time. Here, the proceeding was properly constituted under the general law rules when it was commenced in 1998, in the sense that Bajco had been joined as a defendant and would be bound by the orders made by the Court. The question for me is whether s 236 (3) takes away the existing rights flowing from proper constitution of the proceeding under the general law, and substitutes a new regime which imposes additional hurdles for the plaintiff. To answer that question affirmatively would be to countermand the remedial and ameliorative legislative purpose. As a matter of plain construction, s 236 (3) does not lead to that result.

241 I do not regard s 1472 of the Corporations Law as of any particular assistance in solving the problem that confronts me. It permitted a person to apply for leave to intervene, and to intervene, in proceedings started before the commencement of the new Part. The section seems to have its own problems of construction, which (fortunately) I do not need to resolve: see Karam at 553; Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529.

242 My conclusion is that the present proceeding has properly been brought, and is before me for determination, as a general law action relying on the fifth exception to the rule in Foss v Harbottle, notwithstanding the introduction of Part 2F.1A on 13 March 2000. I should add that the replacement of the Corporations Law by the Corporations Act in July 2001, in substantially the same terms, does not affect my analysis: see s 1401.

Validity of the deed of appointment of administrators

243 Article 96 of Table A of the Fourth Schedule to the Companies Act 1961 (NSW), adopted as part of the constitution of Bajco, provided (so far as relevant) that the common seal of the company was to be used only by the authority of the directors, and every instrument to which the seal was affixed was to be signed by a director and countersigned by a second director.

244 The purported appointment of the administrators in the present case was based upon a rather amateurish combination, as follows:

245 Alan submits that these steps, considered together or in isolation, did not achieve what s 436A and the constitution of Bajco required for a valid corporate act. I regard this submission as unduly technical, and I disagree with it.

246 In my opinion the resolution that the company execute a notice under seal that it desired to appoint an administrator was intended, by the lay persons who adopted it, to express their intention that the seal be affixed to an instrument of appointment. That was sufficient to comply with the requirement of article 96 that the use of the seal must be authorised by the directors: cf JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd (1985) 9 ACSR 593, 616.

247 The seal was then affixed to the informal document, drafted in similar "lay" terms. If the informal instrument were to be construed strictly and in isolation, it would be regarded as no more than a memorandum of an agreement that administrators be appointed in future, setting out the means by which the appointees were to be identified, but not itself making the appointment. But in my view a strict construction of the words of the instrument in isolation is inappropriate, given the "lay" drafting and the context in which it was executed. David and Marilyn having passed the resolutions that they did on the previous day, what could the informal instrument be other than the appointment that they had resolved to make? The fact that it was executed by both of them under seal implies that they regarded it as an operative instrument, rather than merely a record of an intention to do something later. The instrument did not identify in terms which two of the three partners of Deloittes that it named were to be the administrators. But it provided a mechanism for answering that question. The administrators were to be the two partners who consented. The more formal instrument, though not properly executed in accordance with the corporate constitution, is confirmatory of the intention expressed in the operative informal instrument, by identifying two of the three partners who had been named and noting their consent.

248 Section 436A requires that the appointment be in writing. The informal instrument satisfied that requirement. Article 96 required that if the seal be affixed to an instrument, there must be authority to do so (present here, in the case of the informal instrument), and the instrument must be signed and countersigned by two directors, as the informal instrument was. There is therefore no formal defect in the appointment of the administrators. The defect in their appointment arises out of the improper purpose motivating David and Marilyn's resolution of 27 November 1997.

Validity of the convening of the second meeting of creditors

249 Alan has three criticisms of the procedure adopted for the convening of this meeting.

250 First, Alan contends that the time for convening the meeting expired on 18 December 1997 and therefore the notice was given at least one day late. Under ss 439A (1) and (5) (b), the administrators were required to convene the second meeting of creditors within the convening period of 21 days commencing on the day when the administrators were appointed, 28 November 1997. That day is counted for the purpose of calculating the 21 days: Cawthorne v Kiera Constructions Pty Ltd (1994) 13 ACSR 337, 338. It follows, according to Alan's submission, that the administration of Bajco came to an end on the expiration of the convening period, under s 435C (3) (b). In my opinion this contention is correct, subject to the curative effect of s 1322.

251 Secondly, Alan contends that the notice did not allow five business days between the date when the meeting was convened and the date when it was to be held, as required by s 439A (3) of the Corporations Law as then in force. According to the evidence, the only business days in the period from 19 to 29 December 1997, a holiday period, apart from 19 December, were 22, 23 and 24 December. Therefore, this contention is also correct, again subject to s 1322.

252 In my opinion these two deficiencies are cured by s 1322. The convening of the second meeting of creditors is a "proceeding under this Act" for the purposes of s 1322 (1) (a). The failure to comply with s 439A (1) by convening the second meeting of creditors within the 21 day period fixed by s 439A (5), and the failure to give the full five business days notice required by s 439A (3), are "procedural irregularities" under s 1322 (1) (b), because they are respectively a defect, irregularity or deficiency of time and a defect, irregularity or deficiency of notice.

253 Therefore under s 1322 (2) the convening of the second meeting of creditors is not invalidated by either of those irregularities unless the Court forms the opinion that they or either of them has caused or may cause substantial injustice that cannot be remedied by any order of the Court, and by order declares the proceeding to be invalid. Far from forming the view that either of the irregularities has caused or may cause substantial injustice, my view is that there is no evidence of any injustice or prejudice at all in this case by virtue of the irregularities. Giving notice on 19 December rather than 18 December can have had no prejudicial effect on any creditor, bearing in mind the small number of creditors concerned. Giving less than five business days notice can have had no prejudicial effect on any creditor, bearing in mind, in addition, that in fact the notice period was from 19 to 29 December and the problem arose only because of the unusually large number of holidays in the intervening period.

254 In my opinion s 1322 is available to cure irregularities of notice or time arising under s 439A, notwithstanding the presence in Part 5.3A of s 447A, although s 447A may also be used for this purpose: see Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 (High Court) and (1998) 29 ACSR 344 (Court of Appeal of New South Wales); see also the review of the case law in Deputy Commissioner of Taxation v Portinex Pty Ltd (1999) 156 FLR 453. It is unnecessary for the Court to make any order to cure irregularities of notice or time, since s 1322 (2) applies automatically unless the Court orders otherwise. That consideration makes it unnecessary in this case to choose between making an order under s 1322 (4) and an order under s 447A. However, it is appropriate for the Court to make a declaration as to the application of s 1322 (2), so that the relevant rights of the parties are addressed, and I shall make such a declaration in response to the amended cross-claim by the administrators.

255 Thirdly, Alan criticises the contents of the notice of meeting on the ground that it failed to set out matters required to be included under s 439A (4) (b) and (c). Those provisions required the notice to be accompanied by a copy of:

256 In part, this is a formal and technical objection to the fact that the relevant part of the administrators' Report, which I have set out in full, did not separately consider ending the administration and winding up the company, with separate reasons for the administrators' opinions on those options. In my opinion the drafting of the Report was loose, even sloppy, and expressed in very general terms, but I do not accept that it failed to comply with the requirements of s 439A (4) (b). If one reads the extracted passage, one can readily gain an impression of the administrators' views on the three options set out by s 439A (4), and generally the reasons for those views. The section does not require that the administrators' reasoning be elaborated in detail. The three choices are identified by the Report and the reasons given for favouring a deed of company arrangement involve a comparison between that option and the other two, with the implication that the reasons for not favouring the other two options have to do with the absence in them of the advantages of a deed of company arrangement.

257 I have concluded, however, that Alan's complaint is correct, as regards s 439A (4) (c). Whereas subparagraph (b) requires only that the "reasons" are given, in contrast subparagraph (c) requires "details". This is an important requirement, since it is fundamental to the creditors' decision-making process that they know specifically what it is that they are being asked to approve.

258 The material extracted from the Report, which is the only relevant part of it, can by no stretch of the imagination be described as "details" of the deed of company arrangement which the Report proposed. Nor was the deficiency cured (if it could be cured ex post facto at the meeting) by handing out draft recitals without a draft of the operative part of the deed. Among the omitted details were the power of the administrators to continue the 1997 proceeding, the circumstances in which the deed of company arrangement would come to an end, and the set-off of the entitlement of Alan and Bruce to distributions from the deed fund against any obligation they may have as a result of the 1997 proceeding.

259 According to Alan's submission, the administrators' failure to comply with s 439A (4) (c) means that the resolutions purportedly passed at the meeting, and the deed of company arrangement purportedly entered into after the meeting, are invalid unless an appropriate order is made. Consequently, he says, the administration of Bajco came to an end at the expiration of the convening period, because there had been no meeting convened in accordance with s 439A: see s 435C (3) (b). In my opinion that may well be correct if the Court did not intervene. Where an administration comes to an end under that subsection, s 446A and Regulation 5.3A.07 have no application, and so the company is not taken to have passed a special resolution for voluntary winding up.

260 Assuming that a curative order could be made for non-compliance with s 439A (4) (c) under either s 447A or s 1322 (4), this is not an appropriate case for such an order to be made. I have real doubt, having reviewed the evidence as carefully as I can, that any of the creditors who voted at the second meeting of creditors (and particularly Alan and Bruce) had anything like a proper understanding of the contents of the proposed deed of company arrangement and its effects. Not only was there a failure to provide a statement giving "details" of the proposed deed, but the administrators' Report was in my view misleading, for the reasons I shall give.

261 While, however, it is not appropriate to make a curative order, there is a question (which I shall consider below) as to whether I should make an order under s 447A dealing with the consequences of the statutory non-compliance so as to bring those consequences in alignment with s 445D.

Adequacy of disclosure in the administrators' report to creditors

262 Alan complains that the notice of meeting and the administrators' report are seriously and materially deficient in other ways, going to the heart of the matters that any meeting of creditors would objectively be required to consider. Alan contends that the Court should make an order terminating the deed of company arrangement under s 445D. He says that he has standing to invoke s 445D because he is an "other interested person" under s 445D (2) (c).

263 In my opinion the information given by the administrators in the notice of meeting and their Report was seriously deficient, both because the Report contained information about Bajco's financial circumstances that was false or misleading in a manner material to the creditors' decision, and because there were omissions from the Report of matters that were material to the creditors' decision. The most worrying part of the Report, in my view, was the extracted part in which a deed of company arrangement was recommended. A reasonably intelligent reader of the Report would conclude, in my opinion, that if the deed were entered into, there would be a very substantial distribution to creditors shortly after completion of the sale of the Property. The Report does not convey the idea that substantial funds would be retained for the purposes of the litigation and provides no guidance as to when the deed administration would be terminated. Indeed, it seems to imply that there was some real doubt about whether the litigation would proceed. Nor does the Report make clear why the deed administrators were needed if the principal purpose of the deed was to achieve the sale of the Property.

264 Additionally, the Report failed adequately to consider the question of Bajco's solvency. The financial figures presented in the Report implied clear solvency on a balance sheet test, but there is inadequate information to enable a reader to make any assessment of the company's cash flow position or the administrators' view of the cash flow position. There is no assessment of the claim by Cadwallader Engineering (NSW) to be a creditor for $29,136, although the Report implies that the administrators did not accept that this debt was owing. There is no critical assessment of the claims by Marilyn and David, although the circumstances would suggest to a reasonably intelligent person in the administrators' shoes that some investigation was required. No discount is applied to the estimated realisable value of the Property, suggesting the view that there would not be any problem with its realisation, and if that was so, it would be difficult to justify the view that the company was insolvent or likely to become so at some future time.

265 I concluded my discussion under the previous heading by saying that the administrators' failure to comply, in the serious way, with s 439A (4) (c) within the convening period meant that under s 435C (3) (b) the administration of the company came to an end at the end of the convening period (18 December 1997), and there was no basis for any curative order. My conclusions under the present heading have the consequence that, where it necessary to do so, I would make an order terminating the deed under s 445D, on the application of Alan as an interested person.

266 The position therefore is that there are grounds for making an order terminating the deed under s 445D, and also grounds for holding that the administration came to an end on 18 December 1997 because of contravention of s 439A (4) (c), and for holding that the resolution of the directors under s 436 A was voidable because of an improper purpose of David and Marilyn. The Court has a discretion to decide which is the most appropriate remedy, which it can exercise by using s 447A to remove invalidating consequences that might otherwise ensue. I shall return to this point shortly.

The appropriateness of making orders under s 447A

267 Paragraph 39 of the further amended statement of claim asserts that Bajco has at all material times been solvent, and that the provisions of Part 5.3A have been abused by the appointment of the administrators and the adoption of the deed of company arrangement. Further, it is said that the purpose of the deed of company arrangement is, in part, to effect a winding up of Bajco without complying with the provisions of the Corporations Act. Therefore it is said that the Court should make an order under s 447A bringing the administration of Bajco to an end.

268 It is unnecessary to deal with this claim, since I have concluded that the administration of Bajco came to an end on 18 December 1997, and therefore no order under s 447A is needed to confirm that outcome. I should note, however, that I dealt with a similar submission, admittedly in quite different circumstances, in Young v Sherman [2001] NSWSC 1020.

269 In my opinion, if creditors are properly informed and there is no unfair prejudice to any creditor or class of creditors, it is open to them to use the voluntary administration procedure to put in place arrangements for the conduct of litigation, of the kind proposed in that case (see paragraphs [110] to [128]). The principal vices in the present case are not that the concept of the deed is necessarily a misuse of Part 5.3A, but rather that the directors have launched the process by misusing their fiduciary power and there has been inadequate disclosure of material facts to creditors.

Remedies

270 The Court is faced with a dilemma in this case. I have found that the directors' resolution under s 436A, at the requisite level for the valid appointment of administrators, is voidable on general law grounds. I have also found that because of failure to comply with s 439A (4) (c), the administration came to an end on 18 December 1997 by virtue of s 435 C (3) (b) (or more precisely, that it came to an end subject to the possibility of an order made under s 447A). In either event, in the absence of judicial intervention those conclusions would mean that the administration of Bajco was invalid from the outset or near to it.

271 In my opinion, it would in principle be undesirable to produce an outcome of that kind, although in the present case the inconvenience of doing so may not be great, since the administrators have not been called upon to exercise significant powers in the course of administration. Although the remedies available to attack a deed of company arrangement under Part 5.3A may not strictly constitute an exclusive code, one can see lying behind them the policy that an administration which has commenced and operated for some time ought not to be treated as invalid except for the future: see, especially, s 445H. In my opinion the Court should exercise such discretion as it has to produce a result consistent with that policy.

272 Section 447A allows the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company, including that an administration should end because the company is solvent. I believe it would be appropriate for me, in the exercise of my discretion under that section, to order that, having regard to the solvency of the company and the directors' impropriety of purpose, the deed of company arrangement should come to an end. Section 447A does not permit an order to be made with retrospective effect (see the summary of the case law in Deputy Commissioner of Taxation v Portinex Pty Ltd (1999) 34 ACSR 371, 398-9). However, under s 445G (2) I am able to make an order, because of the doubt arising out of the impropriety of purpose as to whether the deed of company arrangement was validly entered into, declaring the deed of company arrangement to be void, in circumstances where the order does not affect the previous operation of the deed: s 445H. The general law remedy provided by an order setting aside a decision of directors vitiated by improper purpose, is a discretionary remedy. I believe it is appropriate for me to decline to make an order setting aside the resolution ab initio and thereby removing the jurisdictional pre-requisite for a valid administration, taking into account that the deed of company arrangement will come to an end now.

273 Under s 435C (3) (b) the administration of a company comes to an end if the convening period ends without a meeting being convened in accordance with s 439A. I have found that this occurred in the present case. It is striking, however, that this section does not prescribe that the company is taken to be in voluntary liquidation in such an event (compare s 446A and Regulation 5.3A .07). It would be undesirable for the law to achieve, ex post facto, a result which might put in peril the validity of transactions involving third parties, as would occur in many cases if the Court were to make orders having the effect contemplated by s 435C (3) (b). The solution, in my view, is that I should make an order under s 447A with future effect in respect of the past failure to comply with s 439A (4) (c), an outcome specifically contemplated by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. The order will be to the effect that the deed of company arrangement will be treated as having come to an end at the time of making the order.

274 For the reasons given, I shall make an order terminating the deed of company arrangement under s 445D.

275 It follows that I shall not make the declaratory orders proposed in the further amended statement of claim, paragraphs 1 to 7. I shall make orders analogous to those in paragraphs 8 and 9. In the circumstances, I do not regard orders under paragraphs 12 and 13 as necessary.

276 As to the question of sale of the property, the effect of my order under s 445D will be that the company will be treated as having moved into voluntary winding up under Regulation 5.3A.07, and the administrators are the liquidators accordingly. I see no plausible ground for restraining them in that capacity from taking steps to sell the Property if that is an appropriate measure in the administration of the affairs of the company in liquidation.

277 Since I do not propose to make an order setting aside the directors' resolution on general law grounds, it seems to be inappropriate that I should make any order against the administrators or David and Marilyn for the payment of damages or equitable compensation, indemnity, or for an account of profits, of the kind sought in paragraphs 14, 15, 16, 17 and 19. I prefer to provide statutory remedies fitting within Part 5.3 A, and having done so, I see no occasion for accounting or compensation attributable to the outcome of the case.

278 In their amended cross-claim the administrators seek a declaration that they have a lien over the assets of Bajco for the debts incurred in the performance of their functions as administrators, and a declaration that they are entitled to be indemnified out of Bajco's property for the debts and remuneration. They also seek a declaration of their entitlement to remuneration as liquidators and orders for remuneration and expenses. In my opinion the administrators are entitled to their remuneration and expenses purportedly incurred in that capacity up to the distribution of their Report on 19 December 1997. However, the Report and notice of meeting which they distributed on that date failed to comply with s 439A (4) (c) in a serious manner, and the Report was false and misleading, as I have held.

279 Sections 443D and 443F assume regularity in the conduct of the administration, and may not be available in this case. The administrators seek to invoke equitable principles which coexist with the statute: Weston v Carling Constructions Pty Ltd (2000) 175 ALR 200. However, a person otherwise entitled to an equitable lien may lose that entitlement by conduct: see generally Shirlaw v Taylor (1991) 9 ACLC 1235; Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622. In my opinion, in view of the serious inadequacies of the Report, the Court ought not to make an order recognising an equitable lien for remuneration and expenses incurred after 19 December 1997. The fact that some of those expenses were incurred purportedly as liquidators is immaterial to the present point.

280 It follows that the prayers for relief with respect to indemnity, lien and remuneration in the amended cross-claim had been made out in respect of the period from 27 November to 19 December 1997, but not later.

281 The defendants contended that Alan requisitioned the meeting of members to be held on 11 December 1997 with the intention that the new board would dismiss Bajco's solicitors and cause the 1997 proceeding to be discontinued. In my opinion, that contention is not supported by the evidence. The correspondence indicates on its face that Alan was prepared to act in accordance with legal advice in the event that he became a director. The defendants made much of the decision by Alan at the second meeting of creditors to vote in favour of the deed of company arrangement. In my view, however, that decision did not give rise to any waiver or election, estoppel, lack of clean hands or other equitable ground for denial of relief, even if I were otherwise disposed to grant relief under the general law. The reason is that Alan's decision, as he explained it, was taken on behalf of Cadwallader Engineering (NSW) and not in his private capacity, on the ground that he regarded it as pointless to take any other view. It was not a decision which bound him personally or operated on his conscience.

The second cross-claim

282 The second cross-claim applies because of my finding that Bajco was solvent on 27 November 1997 and that the directors acted for an improper purpose in resolving for the appointment of the administrators on that day. In my opinion it is established by the evidence that Deloittes were retained by David and Marilyn on behalf of Bajco to provide advice, through Mr Cardwell, as to whether Bajco was insolvent or likely to become insolvent at some future time, and as to whether they should appoint administrators. That is the role that Mr Cardwell in fact adopted, especially at the two meetings on 27 November 1997, which I have described in detail. He did so as an employee of Deloittes. Deloittes were subject to an implied contractual duty to exercise reasonable care and skill, and a duty of care in relation to their retainer.

283 In my view, however, Mr Cardwell did not fail to discharge those duties in the advice he gave to David and Marilyn on 27 November 1997. As I have explained, he relied very largely on information provided to him by them. If that information had been true, it would have been plausible to conclude that Bajco was insolvent in fact, on 27 November 1997. He was aware of the facts and circumstances constituting the impropriety, though he was not aware of David and Marilyn's bad faith. He did not advise them against passing the resolution on the ground of their improper purpose, but his retainer did not extend to providing legal advice as to the consequences of invoking s 436A for improper purposes.

284 My conclusion, therefore, is that there was no breach of duty by Deloittes and therefore no ground for recovery under the second cross-claim. I note that if there were a breach of duty, it is unlikely in view of the orders I propose to make that there would be any basis for a claim to damages.

The third cross-claim

285 In my opinion, the third cross-claim must fail because I have found that Mr Cardwell was aware of the facts and circumstances constituting David and Marilyn's improper purpose. The fact that he was not aware that they were acting in bad faith is beside the point, because that very conclusion prevents any legal consequences from flowing to Deloittes by virtue of their bad faith. In those circumstances, it is unnecessary to give further consideration to the rather novel cause of action alleged in the third cross-claim.

Conclusions

286 I have decided that it is appropriate to make orders having the effect that the deed of company arrangement is terminated, under ss 445D, 445G and 447A, with the consequence that upon the making of the orders, the company will move into voluntary liquidation with the administrators as the liquidators. I have decided not to make any order for compensation or accounting, or to restrain the administrators, in their new role as liquidators, from selling the Property. I shall make the orders sought in the amended cross-claim with respect to the administrators' indemnity, lien and remuneration for the period from 27 November to 19 December 1997 but not later.

287 To the extent that these orders are not reflected in the prayers for relief in the amended cross-claim, the amended cross-claim will be dismissed. The second and third cross-claims will also be dismissed.

288 I shall direct the plaintiff to prepare draft short minutes of orders and I shall stand the matter over to hear argument as to costs.

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Last Modified: 03/06/2002

CITATION:	Cadwallader v Bajco [2001] NSWSC 1193 revised - 5/03/2002
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 1347/98
HEARING DATE(S):	1, 5-7, 12 December 2000, 4-7, 25 June 2001
JUDGMENT DATE:	24 December 2001
PARTIES :	Alan Norman Cadwallader (P) Bajco Pty Ltd (D) Keith William Skinner and David John Frank Lombe (D2) David Ewart Cadwallader and Marilyn Alice Wintzloff (D3)
JUDGMENT OF:	Austin J

COUNSEL :	J B Whittle SC (P) DJ Hammerschlag SC (D1, D2) J W Stevenson (D3)
SOLICITORS:	A R Connolly & Co (P) Tress Cocks & Maddox (D1, D2) Watson & Watson (D3)
CATCHWORDS:	CORPORATIONS - voluntary administration - whether requisitioned meeting of members to replace directors should be abandoned if administration intervenes - directors resolve to appoint administrators for improper purpose of stopping meeting of members - whether member has standing to complain of breach of directors' duty - whether general law right to sue on behalf of company was abolished retrospectively by s 236(3) - whether appointment of administrators should be set aside - whether company was solvent - admissibility of expert evidence of solvency - whether directors adopted resolution about insolvency in bad faith - effect of failure to comply with notice and time requirements of s 439A - effect of failure to provide details of proposed deed of company arrangement - administrators' report materially false and misleading - whether deed should be terminated under s 445D - whether defendants abused Part 5.3A so that order should be made under s 447A
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss 236, 237, 435C, 436, 439A, 445D, 446A, 447A, 1322, 1401 Corporations Law ss 1472 Supreme Court Rules Pt 8 r 11(3), Pt 20 r 4A
CASES CITED:	Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529 Arthur Yates & Co Pty Ltd v Vegetable Seeds Committee (1945) 72 CLR 37 Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 and (1998) 29 ACSR 344 (Court of Appeal of New South Wales) Cawthorne v Kiera Constructions Pty Ltd (1994) 13 ACSR 337 Darvall v North Sydney Brick & Tile & Co Ltd (1989) 16 NSWLR 260 Deputy Commissioner of Taxation v Portinex Pty Ltd (1999) 156 FLR 453 Foss v Harbottle (1843) 2 Hare 461 [67 ER 189] Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd (1985) 9 ACSR 593 Karam v Australia and New Zealand Banking Group Ltd (2000) 34 ACSR 545 Kazar v Duus (1998) 29 ACSR 321 Luxton v Vines (1952) 85 CLR 352 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 Powell & Duncan v Fryer, Tonkin & Perry (2000) 18 ACLC 480 Quick v Stoland Pty Ltd (1998) 29 ACSR 130 Re Movitor Pty Ltd (1996) 14 ACLC 587 Re Tosich Constructions Pty Ltd (1997) 143 ALR 18 Re William Felton & Co Pty Ltd (1998) 16 ACLC 1294 Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569 Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766 Toskas Investments Pty Ltd v Thomas Toskas (Supreme Court of New South Wales, Master McCredie, unreported, 9 June 2000) Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 Young v Sherman [2001] NSWSC 1020
DECISION:	See under heading 'Conclusions'