Correa v Whittingham (No 3)

[2012] NSWSC 526

Supreme Court

New South Wales

Medium Neutral Citation:	Dolores Correa and The Spanish Club Limited (subject to Deed of Company Arrangement) v Kenneth Michael Whittingham (No 3) [2012] NSWSC 526
Hearing dates:	13-16, 20-23, 27-28 March 2012
Decision date:	21 May 2012
Jurisdiction:	Equity Division - Corporations List
Before:	Black J
Decision:	Parties to bring in Short Minutes of Order to give effect to judgment in agreed form within 7 days, or respective drafts if no agreement is reached. Parties to be heard as to costs.
Catchwords:	CORPORATIONS - External administration - Administration under deed of company arrangement - Validity of appointment of administrator - Whether appointment invalid by reason of lack of number of directors as required by articles of association - Whether appointment invalid by reason of lack of quorum for directors meeting - Indoor management rule - Whether appointment valid by reason of statutory assumptions under ss 128-129 of Corporations Act 2001 (Cth) - Whether appointment should be validated under s 447A and s 1322 of Corporations Act 2001 (Cth) - Factors relevant to validation application brought when administration largely complete - Relevance of delay on part of party challenging validity of administrator's appointment - Whether exposure to statutory regime for assessment of remuneration under s 449E of Corporations Act 2001 (Cth) amounts to substantial injustice.
Legislation Cited:	- Corporations Act 2001 (Cth) Pts 5.3, 5.3A, ss 128(1), 128(4), 128-129, 129, 129(1), 201A(2), 435C(1), 435C(3)(b)(i), 436A, 439A, 439A(1), 439A(5), 439A(6), 445A, 445C(b), 445C, 445CA, 445D, 445G, 447, 447A, 447C, 447E, 447E(1), 447G, 448A, 448C, 449E, 449E(2), 1308, 1322, 1322(4), 1322(4)(a) - Corporations Regulations 2001 (Cth) Sch 8 - Registered Clubs Act 1976 (NSW) ss 41, 41A, 41(a), 41J, 57F - Registered Clubs Regulation 1996 (NSW) reg 19, cl 471 - Supreme Court (Corporations) Rules 1999 (NSW) r 9.2 - Uniform Civil Procedure Rules 2005 (NSW) Pt 20, rr 14, 31.28
Cases Cited:	- Amautovic v Kukulovski [2009] NSWSC 1444 - Application of Kenneth Michael Whittingham; Re The Spanish Club Ltd (subject to deed of company arrangement) [2009] NSWSC 1426 - Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 17 ALD 658; 86 ALR 119; 7 ACLC 525 - Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 - Bank of New Zealand v Fiberi Pty Ltd (1993) 14 ACSR 736; 12 ACLC 48 - Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662 - Bell Resources Holdings Pty Ltd v Commissioner for ACT Revenue Collections (1990) 22 FCR 178; 2 ACSR 211 - Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649; 9 ACLC 324 - Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Limited [1992] VR 279; (1991) 6 ACSR 464; 10 ACLC 253 - Calabretta v Redpen Developments Pty Ltd (in liq) [2010] FCA 81; (2010) 183 FCR 47 - Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047 - Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53; 71 ACSR 250 - Commonwealth Bank of Australia v Hamilton [2012] NSWSC 242 - Correa v Spanish Club Ltd [2009] NSWSC 1225 - County of Gloucester Bank v Rudry Merthyr Steam and House Coal Colliery Co [1895] 1 Ch 629 - CSG Ltd v Fuiji Xerox Australia Pty Ltd [2011] NSWCA 335 - Deputy Commissioner of Taxation v Portinex Pty Ltd (No 2) [2000] NSWSC 557; (2000) 34 ACSR 422 - Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 - Galea v Bagtrans Pty Ltd [2010] NSWCA 350 - Gosford Christian School Ltd v Totonjian [2006] NSWSC 725; (2006) 201 FLR 424 - Gould v Companies Auditors and Liquidators Disciplinary Board [2009] FCA 475; (2009) 71 ACSR 648 - Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 234 ALR 765 - RCHPI Australia Pty Ltd [2008] NSWSC 1106 - John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63 - Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 - Kazaar v Duss [1998] FCA 1378; (1998) 88 FCR 218; 29 ACSR 321 - Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21 - Khoury v Zambena Pty Limited (1997) 23 ACSR 344 - Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 - Mentha v Colorbus Pty Ltd (in liq) [2004] VSC 486; (2004) 51 ACSR 677 - Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 63 FCR 391; 19 ACSR 160 - Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; 11 ACLR 637 - Morris v Kanssen [1946] AC 459 - Natarajan v ACIB Accumulus Pty Ltd [2006] VSC 22; (2006) 56 ACSR 356 - National Australia Bank Ltd v Horne [2011] VSCA 280; 253 FLR 205; 85 ACSR 639 - National Mutual Fire Insurance Co Ltd v Commonwealth of Australia [1981] 1 NSWLR 400 - Naumoski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332 - Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 170 CLR 146; 2 ACSR 161 - NZI Securities Australia Ltd v Poignand (1994) 51 FCR 584 - Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428; (2003) 21 ACLC 842 - Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) [1998] HCA 30; (1998) 195 CLR 1; 27 ACSR 535 - Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 - Re Australian Art Investment Pty Ltd [2012] VSC 18 - Re Australian Property Custodian Holdings Limited (admin apptd) (recs and mgrs apptd) [2010] VSC 492 - Re Bank of Syria [1900] 2 Ch 272 - Re Bank of Syria [1901] 1 Ch 115 - Re Chilia Properties Pty Ltd (1997) 73 FCR 171 - Re Clynton Court Pty Ltd [2005] FCA 543; (2005) 53 ACSR 432 - Re Colorbus Pty Ltd (In liq); Mentha v Colorbus Pty Ltd (in liq) [2004] VSC 486; (2004) 51 ACSR 677 - Re Darin (as administrators of Palamedia Ltd) [2010] NSWSC 451 - Re Ethan Minerals Ltd (admins apptd) [2011] NSWSC 899 - Re GIGA Investments Pty Ltd (in admin) (1995) 17 ACSR 472 - Re Pan Pharmaceuticals Ltd (admins apptd); Selim v McGrath [2003] FCA 855 - Re Pasdonnay Pty Ltd (admins apptd) (2005) 53 ACSR 717 - Re Scottish Petroleum Co (1883) 23 Ch D 413 - Re Sly, Spink & Co [1911] 2 Ch 430 - Re The Spanish Club Limited [2009] NSWSC 1426 - Re Vouris; Epromotions Australia Pty Ltd & Relectronic-Remech Pty Ltd (in liq) [2003] NSWSC 702; (2003) 47 ACSR 155 - Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257 - Sherred v McDonald [2004] QSC 332 - Sherred v McDonald [2005] QSC 153 - Shirlaw v Graham [2001] NSWSC 612 - Singh v Singh [2008] NSWSC 386 - Skafcorp Limited v Jarol Pty Limited [2002] NSWSC 1183; (2002) 44 ACSR 138 - Smolarek v McMaster [2006] WASCA 216 - Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722; 10 ACSR 699; 11 ACLC 629 - Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liq)) v Robert Bosch (Australia) Pty Ltd [2002] NSWSC 32; (2000) 33 ACSR 680 - Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201 - Wagner v International Health Promotions (admin apptd) (1994) 15 ACSR 419 - Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663; (2004) 51 ACSR 404 - Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139; (2005) 218 ALR 449 - Xie v Crisp [2011] VSC 154]
Texts Cited:	- Halsbury's Laws of Australia - Ford's Principles of Corporations Law
Category:	Principal judgment
Parties:	Dolores Correa (First Plaintiff) The Spanish Club Limited (subject to Deed of Company Arrangement) (Second Plaintiff) Kenneth Michael Whittingham (Defendant)
Representation:	Defendant: V.R.W. Gray/M. Stevens (Plaintiffs) S.D. Robb QC/N. Bearup (Defendants) Solicitors: Somerset Ryckmans (Plaintiffs) Norton Rose Group (Defendants)
File Number(s):	09/290732

Judgment

1. The Plaintiffs, Ms Dolores Correa ("Ms Correa") and The Spanish Club Limited (subject to Deed of Company Arrangement) ("Club") seek various orders under ss 447E(1), 449E(2) of the Corporations Act 2001 (Cth) and under the general law, by a Second Further Amended Originating Process and Amended Points of Claim filed pursuant to leave which I granted on the first day of the hearing.

1. The Defendant, Mr Kenneth Whittingham ("Mr Whittingham"), has brought separate proceedings under s 449E of the Corporations Act and r 9.2 of the Supreme Court (Corporations) Rules 1999 (NSW) seeking approval of his remuneration to 20 August 2010 in a specified amount and approval of further remuneration from 23 August 2010 to the conclusion of those proceedings. In the alternative to the orders sought under s 449E of the Corporations Act, Mr Whittingham seeks an order that he is entitled to be paid, out of the Club's assets, his reasonable remuneration and costs and expenses, including legal expenses, for work performed pursuant to his purported appointment as voluntary administrator and deed administrator of the Club under unjust enrichment principles and an order that the proceedings be referred to a registrar for determination of the amount payable to him on that basis.

1. It was common ground that those other proceedings will require an assessment of the specific amount to which Mr Whittingham was entitled by way of remuneration. That question is not raised for determination in these proceedings. However, the findings which I make in these proceedings as to the criticisms made of Mr Whittingham's conduct will have an impact on the categories of remuneration which are recoverable in those other proceedings, since both Mr Whittingham and the Club are party to both proceedings and are likely to be bound by a res judicata or issue estoppel arising from these proceedings.

1. It will be convenient to deal sequentially with the particular orders which are sought by the Plaintiffs and the matters which are relied upon in support of those orders, as identified in the Amended Points of Claim. It will also be necessary to address several matters raised by Mr Whittingham by way of Cross-Claim.

Witnesses called in the proceedings

1. Ms Correa did not give evidence in the proceedings and the Plaintiffs called no other members of the Club or other persons with involvement in the events of which they complain to give evidence of those events.

1. The Plaintiffs relied on the expert evidence of an insolvency practitioner, Mr Brian Silvia. The manner in which Mr Silvia's report was prepared was unhelpful in several respects. That report did not clearly set out assumptions of fact on which Mr Silvia relied. Much of Mr Silvia's evidence was directed to his practice and views rather than to the common practice of insolvency administrators, and his evidence as to what Mr Whittingham "should" have done often left it unclear whether he was making a normative judgment by reference to unstated principles. Mr Silvia was also not asked to update his report to have regard to the evidence given in Mr Whittingham's primary affidavit of September 2011 (T295, T305). Mr Silvia was provided with a copy of the report of Mr Grellman (the insolvency expert on whose report Mr Whittingham relied), which had been prepared having regard to assumptions reflecting Mr Whittingham's evidence but he was not asked to and did not prepare a supplementary report to address Mr Grellman's views. Mr Silvia first responded to those views in cross-examination, often in non-responsive answers. Mr Silvia's evidence in cross-examination also substantially extended the criticisms of Mr Whittingham's conduct made in his expert's report, again largely by non-responsive answers.

1. I did not permit a second expert report of a real estate agent and auctioneer, Mr Gavin Lloyd, to be read by the Plaintiffs for the reasons set out in my judgment delivered on 20 March 2012 ([2012] NSWSC 266), relating to the lateness of service of that report and the fact that I did not consider that exceptional circumstances existed which would warrant the grant of leave under r 31.28 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR").

1. Mr Whittingham filed a lengthy affidavit setting out his recollection of events and his reasoning process at the relevant times and exhibiting extensive contemporaneous documents, and was cross-examined vigorously and at length. Although I refer below to his evidence of one conversation which, in my view, involved a degree of reconstruction, I consider that Mr Whittingham was a generally reliable witness who did his best to provide honest evidence. Although Mr Whittingham had an obvious personal and economic interest in justifying his conduct, he directed his answers in cross-examination to the questions he was asked and made appropriate concessions as to matters which he could not now explain.

1. Mr Whittingham also relied on the evidence of Mr Kovacs, an estate agent with Colliers who had advised Mr Whittingham in respect of the sale campaign for the Club's properties to which I refer below. Mr Kovacs was plainly experienced and knowledgeable and, in my view, gave honest and persuasive evidence.

1. Mr Whittingham also relied on the expert evidence of Mr Richard Grellman. Mr Grellman's evidence focused on the range of actions which might reasonably have been taken by a competent insolvency practitioner, and he gave evidence by reference to detailed assumptions reflecting Mr Whittingham's evidence. Mr Grellman was cross-examined at considerable length and largely without objection. However, the questions which were put to him often invited him to express views as to matters which were outside the scope of his professional expertise and, to the extent that assumptions were identified in those questions, they were frequently not established by the evidence in the proceedings.

1. Mr Grellman had retired from his role as partner-in-charge of the Corporate Recovery Division of KPMG in March 2000 and it is likely that professional practice will have developed since that date, including in relation to questions such as the extent of inquiries which an administrator should make to investigate the validity of his appointment. The Plaintiffs submit that Mr Grellman conceded that, after he retired, he did not have occasion to keep up with what constituted evolving good practice in the profession. In my view, that submission overstated the evidence, in which it was put to Mr Grellman, and he properly conceded, that he had not had occasion since his retirement to keep up "as diligently" with such practice after his retirement as before and that he was not, since his retirement, "quite so familiar" with developments in particular areas as a result of court or disciplinary body decisions in connection with the validity of appointments. It was not put to Mr Grellman and he did not accept that the level of diligence which he had applied after his retirement was not sufficient to inform him as to current standards of professional practice. It does not follow, as the Plaintiffs contend, that Mr Grellman's evidence should be accepted only as evidence of good practice in March 2000.

Validity of Mr Whittingham's appointment

Compliance with constitutional requirements as to minimum number of directors

1. The Club was at all relevant times and is a company limited by guarantee and a registered club under the Registered Clubs Act 1976 (NSW). At some time between 14 November 2008 and 17 November 2008, Mr Whittingham was appointed, or purportedly appointed, as voluntary administrator of the Club by a resolution passed, or purportedly passed, by the Club's directors under s 436A of the Corporations Act. The date on which that appointment took effect and the validity of the appointment are in issue in these proceedings.

1. The Plaintiffs seek a declaration that Mr Whittingham was not validly appointed as voluntary administrator and consequently, was not validly appointed as deed administrator of the Club and was a trespasser to the Club's property and assets. That declaration was sought at general law and not under s 447G of the Corporations Act which confers power on the Court to make such declarations in respect of an administration. The Plaintiffs contend that Mr Whittingham should not be entitled to recover his fees and expenses of acting as administrator and deed administrator and should be required to disgorge the fees and expenses which have already been paid to him. The Plaintiffs' submissions indicate that the primary foundation for that claim is their contention that Mr Whittingham was not validly appointed and that any defect in his appointment should not be cured under s 447A or s 1322 of the Corporations Act.

1. It is necessary to identify the events surrounding Mr Whittingham's appointment and various criticisms made by the Plaintiffs of his conduct in respect of that appointment in order to deal with the challenge to the validity of his appointment. I will then address the specific grounds of challenge to that appointment below.

1. On 12 November 2008, Mr Whittingham attended a meeting with Ms Yolanda Sanchez, a director of the Club. Mr Whittingham made notes of that meeting (Ex KMW-5, 626-633). Ms Sanchez advised him that the Club was trading at a loss and that the Club's annual accounts had not been prepared since 2005. There was discussion as to the Club's two properties, 86 and 88 Liverpool Street; the level of its debt to a secured lender, Australian Unity; the fact that there were issues between members; that two proceedings had been brought against the Club in the Land and Environment Court for fire ordinance issues; that proceedings had also been brought against the Club by a member, Mr Martin, in relation to its failure to prepare accounts and conduct annual general meetings; and that claims of creditors of the Club were unpaid and they were demanding payment. Mr Whittingham recommended that the Club appoint a voluntary administrator (Whittingham [12], T69-70).

1. A company search obtained by Mr Whittingham on the same day disclosed that the Club had four directors, Ms Yolanda Sanchez, Ms Maria Sanchez, Mr Faustino Garcia and Mr Daniel Garcia (Whittingham [13], Ex KMW-5, 38-75). Mr Whittingham caused his assistant to prepare draft minutes of a directors meeting to appoint an administrator and a draft instrument of appointment (Ex KMW-5, 77-78), which would have been prepared by reference to that company search (T79-80). The draft minutes were provided to Ms Sanchez between 12 and 14 November 2008, and contemplated that Mr Faustino Garcia would be chairperson of the meeting at which the resolution for Mr Whittingham's appointment would be considered.

1. Ms Sanchez sent documents relating to the appointment of Mr Whittingham as administrator to Mr Whittingham by email at 4.52pm on 14 November 2008 (Ex KMW-5, 79-81). While Mr Whittingham gave evidence in his affidavit that he received the documents back on Friday 14 November 2008, he fairly acknowledged in cross-examination that that evidence was based on the date which the email bears (T80-81). It appears that Mr Whittingham read that email that afternoon or on Monday 17 November 2008 (Whittingham [16]). The form of resolution of directors appointing Mr Whittingham which was returned by Ms Sanchez to Mr Whittingham was signed by her as chairperson and did not state the names of those in attendance or the date, time and location of the relevant meeting. The instrument of appointment of Mr Whittingham as administrator was signed by Ms Sanchez and Ms Maria Sanchez as directors of the Club. Mr Whittingham raised a question as to the form of those minutes with Ms Sanchez on 17 November 2008 and asked her to advise who was present at the relevant directors meeting, and Ms Sanchez advised him that:

"I phoned the other two directors and they indicated that they were in agreement with the appointment. However they did not want their names associated with the appointment because they are frightened of recriminations from people within the Spanish Club" (Whittingham [17]; similar evidence was given in cross-examination at T92).

1. The Plaintiffs rely upon a letter which Mr Whittingham caused to be sent by facsimile to the Office of Liquor Gaming and Racing ("OLGR") at 9.26am on 17 November 2008 (Ex P3), which stated that:

"I was appointed Administrator of the [Club] on 17 November, 2008 pursuant to section 436A of the Corporations Act 2001".

The Plaintiffs submit that this letter demonstrates that Mr Whittingham must have given his consent to appointment as administrator and had been appointed as administrator by that time, prior to a conversation with Mr Transfield of OLGR to which I will refer below and that that is inconsistent with his recollection of events on that day. In my view, this letter (and a similar letter to the Casino Liquor & Gaming Control Authority at about the same time) indicate that Mr Whittingham then understood that his appointment had occurred by the time those letters were sent and prior to the conversation with Mr Transfield, and to that extent are inconsistent with Mr Whittingham's evidence of his recollection of the sequence of events on that day. It is, of course, also possible that Mr Whittingham had simply not given careful consideration to the time at which his appointment became effective when those letters were sent.

1. The Plaintiffs also submit that Mr Whittingham "concealed" the existence of that letter to OLGR by not including it in his affidavit evidence in chief. I do not accept that submission and note that Mr Whittingham had referred in his affidavit to the substantially similar letter which was sent by facsimile at about 9.30am on that date to the Casino Liquor & Gaming Control Authority (Ex KMW-5, 679). I do not consider that any aspect of this matter suggests, as the Plaintiffs contend, that Mr Whittingham either sought to give false evidence or did so. While the Plaintiffs put further written submissions as to the implications of the situation where a party tells a falsehood, it is not necessary for me to address those submissions since their premise was not established.

1. Mr Whittingham had a telephone conversation with Mr Transfield of OLGR later on 17 November 2008. Mr Whittingham's evidence was that he had been advised by Ms Sanchez and another partner in his firm that Mr Transfield was the right person to speak to within OLGR in respect of the Club. According to Mr Whittingham, he advised Mr Transfield that he was seeking endorsement to be appointed as voluntary administrator; Mr Transfield said that the OLGR had been looking at appointing its own administrator to the Club (a matter which is also established by other evidence); and Mr Transfield told him he was "okay to go ahead" with his appointment as administrator and that "written confirmation will follow through the post" (Whittingham [18], T73). Mr Whittingham's evidence was that he regarded Mr Transfield's statement as an approval by the Casino, Liquor & Gaming Control Authority for the purpose of s 41 of the Registered Clubs Act (to which I will refer below) (T74-75). Mr Transfield made a file note of the conversation which did not record that statement having been made. Mr Transfield's file note of that conversation was not complete and in some respects it seems to have been in error; in particular, the file note recorded Mr Transfield as having called Mr Whittingham whereas it appears from contemporaneous telephone records that Mr Whittingham called Mr Transfield.

1. On balance, I consider that Mr Whittingham was mistaken in his evidence that Mr Transfield gave him express oral approval for appointment as administrator and the letters to OLGR and the Casino Liquor & Gaming Control Authority to which I have referred above indicate that he was also mistaken in his evidence that any such approval was given prior to his accepting appointment. There may have been a degree of reconstruction involved in Mr Whittingham's recollection of events in this regard. However, I do not accept the Plaintiffs' submission that Mr Whittingham was untruthful and dishonest in that evidence.

1. Mr Whittingham's evidence is that, after the conversation with Mr Transfield, he accepted appointment as administrator on 17 November 2008 and Ms Sanchez authorised the resolution and notice of appointment being dated with that date (Whittingham [19]). Mr Whittingham also gives evidence that he signed a consent to act as administrator and handed it to Ms Sanchez on that date.

1. Mr Whittingham sought advice from external solicitors on 17 November 2008 as to the validity of his appointment and was advised that his appointment was valid (Whittingham [75], Ex KMW-5, 629, T91). I will address the significance of this advice below.

1. OLGR sent an email to Mr Whittingham on 25 November 2008 requesting that he apply for the Authority's approval to his appointment as administrator under s 41 of the Registered Clubs Act (to which I will refer below) (Ex KMW-5, 677) and he wrote to OLGR on 26 November 2008 applying for that approval (Whittingham [96]-[97], Ex KMW-5, 678-693). On 28 November 2008, OLGR gave written approval for Mr Whittingham's appointment as administrator (Whittingham [98], Ex KMW-5, 695). This occurred 11 days after Mr Whittingham, on his evidence, accepted appointment as voluntary administrator. I will return to this matter below in dealing with the Club's contention that Mr Whittingham's appointment was invalid because it was not approved under s 41 of the Registered Clubs Act before it occurred.

Minimum number of directors

1. The Plaintiffs contend, first, that Mr Whittingham's appointment was not valid because the Club did not at the relevant time have the number of directors required by its articles of association (to which I will refer, for convenience, as its constitution) and its board was incapable of functioning. At the time of Mr Whittingham's appointment or purported appointment as voluntary administrator of the Club, there were only four directors of the Club, namely Mr Faustino Garcia, Mr Daniel Garcia, Ms Yolanda Sanchez and Ms Maria Sanchez. At that time, the Club's constitution (as varied by a special resolution, notice of which was lodged with the Australian Securities and Investments Commission on or about 21 August 2006) provided that its board of directors was to consist of 7 directors and that a quorum for any meeting of the board was 4 directors (Ex P9A 398D). The Plaintiffs put their case on that basis in their Amended Points of Claim, although they conducted their case at the hearing on the primary basis that the number of directors specified in the constitution was 13, the number of directors required prior to the amendment of the Club's constitution. On either basis, the number of directors at the relevant time was less than the number specified in the Club's constitution.

1. There is authority that, if the number of a company's directors has fallen below the minimum prescribed in the constitution, but sufficient directors attend a meeting to constitute a quorum, those directors may validly act provided a company's constitution expressly or impliedly authorises them to do so: Re Scottish Petroleum Co (1883) 23 Ch D 413 at 431; Re Bank of Syria [1900] 2 Ch 272 at 278, aff'd Re Bank of Syria [1901] 1 Ch 115 at 120-121; and see Halsbury's Laws of Australia at [120.8185]. However, the provisions of the constitutions considered in those cases typically authorised the directors to continue to act either generally or for a specified purpose notwithstanding that the number of directors had fallen beneath the specified minimum. There is no corresponding provision in the Club's constitution and Mr Whittingham did not contend such a provision could be implied. Where the Club's constitution does not expressly or impliedly authorise directors to act where the numerical requirement as to the number of directors is not satisfied, then acts of a board will not be valid in that situation: Re Sly, Spink & Co [1911] 2 Ch 430; Gosford Christian School Ltd v Totonjian [2006] NSWSC 725; (2006) 201 FLR 424 at [54]ff; Singh v Singh [2008] NSWSC 386 at [95].

1. As the Plaintiffs contend, this has the consequence that there could not be a valid directors' meeting and there could be no proper authority to pass the resolution to appoint the administrator until the board was first brought back to the constitutional minimum of 7 directors. Mr Whittingham accepts that, absent an entitlement on his part to prevent the Club asserting the invalidity of the resolution by the board, the fact that only 4 rather than 7 directors were in office would invalidate the resolution for his appointment. Subject to the application of ss 128-129 of the Corporations Act and to the Court's powers under s 447A and s 1322 of the Corporations Act (to which I will refer below), this finding would be sufficient to invalidate Mr Whittingham's appointment.

1. The Plaintiffs also submit that no directors were in office at the relevant time by reason of the Club's failure to hold annual general meetings in 2007 and 2008. This submission is outside the matters raised by the Points of Claim and I declined to grant leave to amend the Points of Claim to permit this matter to be raised. This submission is therefore not open to the Plaintiffs.

Quorum at meeting approving Mr Whittingham's appointment

1. The Plaintiffs also contend that Mr Whittingham's appointment was invalid because a quorum was not established for any meeting of directors at which that appointment was made. I have referred to the form of resolution of directors appointing Mr Whittingham which was returned by Ms Yolanda Sanchez to Mr Whittingham in paragraph 17 above. The form of that resolution did not comply with the guidelines provided in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63, where Young J observed that minutes of a directors' meeting should contain a note of the time of commencement of the meeting and a list of those present.

1. The Club's constitution originally provided that the quorum for a meeting of the Committee was 6 members of the Committee (cl 32(a)). However, that clause was amended by the special resolution passed on 30 January 2005 to reduce the quorum of the Committee to 4 members. The Plaintiffs contend that the meeting at which the resolution to appoint Mr Whittingham was purportedly passed was attended only by Ms Yolanda Sanchez and Ms Maria Sanchez. That contention was not, in my view, established by the evidence. Neither Ms Yolanda Sanchez or Ms Maria Sanchez gave evidence in the proceedings. One of the other two directors in office at the time, Mr Faustino Garcia had sworn an affidavit in the Plaintiffs' case but that affidavit was not read. Various emails were tendered which made various assertions as to what occurred at that meeting but those communications were admitted only as evidence of the communications and not as truth of the matters asserted and provide no basis for any factual inference as to what occurred at the meeting.

1. The Plaintiffs rely on Recital A of the Deed of Company Arrangement ("DOCA") subsequently prepared by Mr Whittingham's solicitors which stated that:

"On 17 November 2008, two directors of the board of the Company resolved that, in the opinion of each director, the Company was insolvent, or was likely to become insolvent at some future time, and an administrator of the Company should be appointed. ..."

The Plaintiffs contend that it was not to Whittingham's credit that in cross-examination he then tried to suggest that Recital A was in error, noting that he had asked his solicitors to draw up the deed of company arrangement. I am unable to accept this submission. The explanation for the suggested error offered by Mr Whittingham, in response to an invitation by the cross-examiner to explain the matter, was that the draftsperson of the recital may have assumed that two directors were present because two directors had signed the instrument of appointment and that explanation is not implausible. Neither Mr Whittingham nor his solicitors had personal knowledge of the facts and, as noted above, the members of the Club who could have given evidence of that matter did not do so.

1. The Plaintiffs also contend that the fact that Ms Sanchez signed the minute of resolution as chairperson meant that Mr Faustino Garcia (who was president of the Club) must not have attended the meeting and accordingly there would have only been three directors in attendance which rendered the meeting inquorate; however, that would not follow if Mr Faustino Garcia and Mr Daniel Garcia had attended the meeting by telephone and (as Ms Sanchez advised Mr Whittingham) supported the resolution but did not wish to be seen to have signed it.

1. Several questions put to Mr Whittingham in cross-examination assumed that the other directors of the Club had been contacted separately (rather than when they were together in a single place and the phone placed on speaker or by way of a conference call) but that proposition was not squarely put to him and, in any event, Mr Whittingham's understanding of what occurred could only have been derived from what he was told since he was not personally present at the directors' meeting, and he accepted that the only basis for his belief that other directors knew about his appointment was what Ms Sanchez had told him (T92). The Plaintiffs have also not established that the meeting took place by Ms Sanchez separately and successively telephoning the directors, in which case the meeting is likely to have been ineffective as a directors meeting, rather than by a means which allowed the four directors to consult together in which case it is likely to have constituted a valid meeting: Re GIGA Investments Pty Ltd (in admin) (1995) 17 ACSR 472. Where the position in that regard is unknown, the Plaintiffs have not shown that the manner in which the meeting took place led to its invalidity.

1. Mr Whittingham contends that I should draw an adverse inference from the Plaintiffs' failure to call Mr Faustino Garcia to make good the allegation that the meeting of the board at which Mr Whittingham was established was inquorate. It is not necessary for me to do so since that allegation fails simply because the Club has not led the evidence which would be necessary to establish that proposition.

1. The Plaintiffs conversely contend that I should draw an inference adverse to Mr Whittingham because there is evidence that he, or his advisers, had considered leading evidence from Ms Sanchez but had not done so. The principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 applies where a party is "required to explain or contradict" a matter and its basis is "plain commonsense": Jones v Dunkel per Windeyer J at 320-322. In Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 at [63], Heydon, Crennan and Bell JJ observed in their joint judgment that:

"The rule in Jones v Dunkel is that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party's case."

The principle in Jones v Dunkel does not compel the drawing of such an inference: Galea v Bagtrans Pty Ltd [2010] NSWCA 350 at [2]; CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335 at [82]; Commonwealth Bank of Australia v Hamilton [2012] NSWSC 242 at [204].

1. In my view, Mr Whittingham's failure to call Ms Sanchez does not give rise to an inference that her evidence would not have assisted his case, where his not calling such evidence is equally consistent with his advisers having formed the view that he had no need to lead that evidence where the Plaintiffs had not led evidence from either Mr Faustino Garcia and Mr Daniel Garcia that they had not participated in the relevant meeting by telephone or approved his appointment so that there was no case to be answered by Mr Whittingham in that regard.

1. The appointment of an administrator under s 436A of the Corporations Act requires the board to have resolved to the effect that, in the opinion of the directors voting for the resolution, the company is insolvent or likely to become insolvent at a future time. The formation of such an opinion is a precondition to the valid exercise of the power to appoint an administrator: Kazaar v Duss [1998] FCA 1378; (1998) 88 FCR 218; 29 ACSR 321. The Plaintiffs also contend that the Club's board had failed to form a genuine opinion as to the Club's insolvency.

1. So far as that contention depends on directors' subjective reasoning process, the Plaintiffs have not established it where no director has given evidence, and it is not to the point that no director of the Club had filed an affidavit on behalf of Mr Whittingham deposing to any belief that the Club was insolvent where it was a matter for the Plaintiffs to establish the case which they advanced. So far as the Plaintiffs contend that the directors of the Club had failed to form such a view because Mr Faustino Garcia and Mr Daniel Garcia did not hold that view or did not participate in the relevant meeting, that contention must fail for the reasons noted above. So far as the Plaintiffs contend that Ms Sanchez did not have access to audited accounts, she knew or should have known the matters to which I have referred above and the Club's failure to prepare accounts was not a matter that would have provided any basis for comfort as to its solvency. As I note below, the information which was available to the Club's directors at that time (including the fact of continuing trading losses, a deficiency in current assets, suppliers having placed the Club on a cash on delivery basis and the Club's failure to meet its statutory obligations in respect of employee contributions) provided a strong basis for a view that the Club was in fact insolvent at the relevant time.

Application of indoor management rule

1. Mr Whittingham contends that his appointment is valid by reason of the statutory assumptions under ss 128-129 of the Corporations Act. The Plaintiffs contended in closing submissions that it was not open to Mr Whittingham to rely on those sections because they were not specifically referred to in Mr Whittingham's Points of Defence. The Plaintiffs also contend that Mr Whittingham did not depose that he made any relevant assumption and that any reliance by Mr Whittingham upon any such assumption would depend on the evidence that he made it and further evidence (which they do not further identify) might have been led to challenge or refute it.

1. In my view, it is open to Mr Whittingham to rely on the statutory assumptions in ss 128-129 of the Corporations Act. Mr Whittingham's Points of Defence pleaded that he formed the view that he was validly appointed, he gave evidence of his understanding that he had been validly appointed and was cross-examined at length as to the basis for that understanding. Mr Whittingham's reliance on ss 128-129 of the Corporations Act was identified in his opening outline and the Plaintiffs did not then suggest that they were in any way disadvantaged by that matter or were deprived of the opportunity to lead relevant evidence. In my view, the case was thereafter conducted on the basis that this matter was in issue. The Plaintiffs have identified no specific evidence that could or would have been led in order to meet Mr Whittingham's reliance on the statutory assumptions. Moreover, once the Club successfully applied, on the first day of the hearing, to be joined as Second Plaintiff in the proceedings, Mr Whittingham was entitled to the opportunity to raise such defences as might be available to the Club's claim.

1. The Plaintiffs also contended that Mr Whittingham could not rely on ss 128-129 of the Corporations Act in response to Ms Correa's claim by reason that each creditor is entitled to bring proceedings to obtain a declaratory order as to the validity of an administrator's appointment under s 447C of the Corporations Act and, the Plaintiffs contend:

"it follows that the right of action is each individual creditor's own right of action and cannot be affected by any act or omission by the Club or by any other creditor or member".

I do not accept this submission. Section 447C of the Corporations Act allows each creditor to seek such a declaration but the creditor's entitlement to that declaration must be determined by reference to the circumstances of the administrator's appointment including any dealings between the administrator and the relevant company. If the consequence of those circumstances and the applicable legal principles (including ss 128-129 of the Corporations Act) is that the administrator was validly appointed to the company, then the Court would make a declaration to that effect irrespective of whether the company, a member or a creditor sought the relevant declaration. The Plaintiffs' submission would lead to the surprising result that an administrator's appointment could at the same time (and, in this case, in the same proceedings) be declared to be valid in an application brought by the Club, by the application of ss 128-129 of the Corporations Act, and declared to be invalid in an application by a creditor or member of the Club relying on the same facts.

1. Turning now to the application of these sections, a person is entitled to make the assumptions specified in s 129 of the Corporations Act in relation to dealings with a company and the company is not entitled to assert that any of those assumptions are incorrect in proceedings in relation to those dealings: s 128(1). The purpose of these sections is "to protect outsiders from unreasonable reliance by a company on any failure to comply with the requirements of the memorandum and articles or any other rules of law relating to the administration of a company": Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279; (1991) 6 ACSR 464; 10 ACLC 253. The assumptions available under ss 128-129 of the Corporations Act are available to a person who has "dealings" with a company. Different views as to the scope of that concept have been taken in the authorities: Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662 at 667; Bell Resources Holdings Pty Ltd v Commissioner for ACT Revenue Collections (1990) 22 FCR 178; 2 ACSR 211; Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 17 ALD 658; 86 ALR 119; 7 ACLC 525; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649; 9 ACLC 324; Story v Advance Bank of Australia Ltd (1993) 31 NSWLR 722; 10 ACSR 699; 11 ACLC 629. On any view, it seems to me that the steps involved in a person's appointment as administrator of a company is such a dealing with the company. In Wagner v International Health Promotions (admin apptd) (1994) 15 ACSR 419 at 422, Santow J accepted that these provisions would be available to an administrator where an issue arose as to the authority of those purporting to execute an instrument of appointment under seal.

1. The assumptions available under s 129(1) of the Corporations Act include that the company's constitution has been complied with and are an expression of the indoor management rule, by which persons dealing with the company may assume that acts within its constitution are duly and properly performed and are not bound to inquire whether acts of internal management have been regular: County of Gloucester Bank v Rudry Merthyr Steam and House Coal Colliery Co [1895] 1 Ch 629; Morris v Kanssen [1946] AC 459; Australian Capital Television Pty Ltd v Minister for Transport and Communications above; Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 170 CLR 146; 2 ACSR 161. If that assumption is available to Mr Whittingham, it would be an answer to the Plaintiffs' claims that the requirements in the Club's constitution as to the minimum number of directors constituting the board and the number of directors constituting a quorum for a directors' meeting were not satisfied in respect of his appointment as administrator.

1. A person is not entitled to make an assumption specified in s 129 of the Corporations Act if, at the time of the dealing, he or she knew or suspected that that assumption was incorrect: s 128(4). A company seeking to avoid the application of the statutory assumptions bears the burden of persuasion that a person claiming to make an assumption knew or suspected that the assumption was incorrect: Ford's Principles of Corporations Law at [13.300]. In the present case, the assumption that the Club's constitution was complied with in respect of his appointment is available to Mr Whittingham unless he knew or suspected that it was incorrect, at the time of his purported appointment as administrator.

1. The Plaintiffs contend that, at the time of his purported appointment and thereafter, Mr Whittingham knew or ought reasonably to have known that his appointment was invalid or alternatively was put on notice or inquiry that his appointment was invalid (Points of Claim [8]). The latter proposition would not be sufficient to deprive him of the ability to rely on the assumptions permitted under s 129 of the Corporations Act, since that section requires actual knowledge or suspicion that the assumption is incorrect, and does not adopt the "put on inquiry" test which had previously been adopted in Bank of New Zealand v Fiberi Pty Ltd (1993) 14 ACSR 736; 12 ACLC 48. I will deal with the several matters on which the Plaintiffs rely to establish such knowledge or suspicion in turn.

1. First, the Plaintiffs rely on the fact that an ASIC search undertaken by Mr Whittingham would have disclosed that the Club's constitution required at least seven directors to be appointed and four directors to form a quorum for a directors' meeting. The Plaintiffs also contend that a "cursory review" of the Club's constitution would have revealed that the directors' meeting was not in accordance with the constitution because the board was not then validly constituted and the number of directors at the meeting was below that fixed for a quorum. Mr Whittingham's evidence was that it was not normal practice of administrators to review a company's constitution at the point of appointment and that he asked the legal advisers which he had retained in respect of the matter to review the Club's constitution and advise him in that regard. Mr Grellman also did not accept that it was necessary for an administrator to personally review a company's constitution when considering the validity of his appointment, but accepted that it would be best practice to obtain legal advice (T426). Mr Whittingham had taken that course.

1. The expert witness called by the Plaintiffs, Mr Silvia, outlined the steps which he considered a reasonably competent administrator would take prior to accepting appointment as administrator, which included, inter alia, obtaining a copy of an ASIC search for the Club and obtaining a copy of the Club's constitution. However, Mr Silvia acknowledged on cross-examination that he could not recall if he had personally read the constitution of the one registered club to which he had in fact been appointed as administrator (T283). Mr Silvia also expressed the view that a reasonably competent administrator would have concluded that article 26 of the Club's constitution required the Club's board to comprise at least 13 ordinary members and a quorum was to comprise at least 7 members. That conclusion neglected the amendment to the Club's constitution which had been filed with ASIC, which had reduced the minimum number of directors to 7 and the quorum for a directors meeting to 4. I will refer below to Mr Silvia's evidence in respect of legal advice obtained by Mr Whittingham as to the validity of his appointment.

1. The expert called by Mr Whittingham, Mr Grellman, was also asked a series of questions in cross-examination as to the steps which an administrator could or should have taken to have confirmed what he had been informed as to the circumstances in which he had been told his appointment had occurred. Mr Grellman indicated that he would be inclined to take assurances given by a director on face value but would certainly seek legal advice, but also accepted that it would be preferable for an administrator to satisfy himself that all of the directors were of one mind. I do not consider that this evidence ultimately assists in resolution of the proceedings, in circumstances that, first, it has not been established that the directors were not of one mind in respect of the appointment of Mr Whittingham and second, the disqualifying factor for the purposes of s 128(4) of the Corporations Act is not being placed on inquiry but knowing or suspecting that the Club's constitution was not complied with. The fact that Mr Whittingham could, or should, have made further inquiries as to these matters does not establish that he knew or suspected that his appointment did not comply with the requirements of the Club's constitution.

1. The Plaintiffs also rely on a subsequent review of the Club's constitution by Mr Whittingham on 6 February 2009, recorded in his time sheet and referred to in his supplementary report to creditors dated 17 February 2009, and submit that Mr Whittingham must thereafter have had serious doubts about the validity of his own appointment and was obliged to approach the Court to seek a validation order. However, that matter cannot establish that he knew or suspected that his appointment did not comply with the Club's constitution at the time it was made.

1. Second, the Plaintiffs contend that Mr Whittingham knew or should have known that Ms Yolanda Sanchez and Ms Maria Sanchez had not been validly appointed as directors of the Club as at 14 and 17 November 2008, because Ms Sanchez had variously resigned and been reappointed as a director of the Club on previous occasions; there were only two directors of the Club between 29 September 2008 and 1 October 2008, and article 35 of the Club's constitution required its board to appoint a successor if the office of any director became vacant. I do not consider that the relatively complex line of reasoning articulated in this submission is such that I should find that Mr Whittingham either knew or suspected that his appointment did not comply with the Club's constitution at the time it was made.

1. Third, the Plaintiffs contend that the fact that the minute of the resolution of directors appointing Mr Whittingham did not on its face disclose who attended the meeting of the directors should have put Mr Whittingham on notice and inquiry to investigate the circumstances of his appointment. I accept that further inquiries could have been made by Mr Whittingham in respect of the conduct of the directors' meeting, given the absence of detail contained on the face of the minutes. An administrator should seek to confirm the validity of his appointment if, immediately after appointment, the resolution or instrument of appointment does not appear to be valid or if, during the course of the administration, he is put on inquiry about the validity of his appointment: Deputy Commissioner of Taxation v Portinex Pty Ltd (No 2) [2000] NSWSC 557; (2000) 34 ACSR 422 at 423; Wilson v Manna Hill Mining Company Pty Ltd (2004) 51 ACSR 404 at [63]. The Plaintiffs contend that the standard of investigation is not discharged by relying on the assurances of others, including the company's directors or solicitors: Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257 at [60]; Mentha v Colorbus Pty Ltd (in liq) [2004] VSC 486; (2004) 51 ACSR 677. I also accept that reliance on such assurances is not conclusive. On balance, I consider that Mr Whittingham could and probably should have made such further inquiries in the circumstances of this case, including potentially contacting the other three directors disclosed by the ASIC search. However, as I have noted above, being put "on inquiry" is not sufficient to prevent Mr Whittingham relying on the statutory assumptions under ss 128-129 of the Corporations Act.

1. I do not accept the next step in the Plaintiffs' submissions, that, had Mr Whittingham made further inquiry of any director of the Club other than Ms Yolanda Sanchez, "he would have learned of the serious defects in his purported appointment". I cannot accept that contention since there is no evidence of how the other directors would have responded to such an inquiry. Those other directors did not give evidence that they had not in fact participated in the relevant meeting by telephone or had not assented to Mr Whittingham's appointment. No issue was raised by the other directors of the Club with Mr Whittingham, at the time of his appointment, to indicate that they had not participated in the meeting at which he was appointed, at least by telephone, or did not support that appointment. In particular:

• On 17 November 2008, Mr Whittingham sent letters to Mr Faustino Garcia and Mr Daniel Garcia to advise them of his appointment as administrator and that, as officers of the Club, they were not entitled to exercise any function or power without his approval and also gave them notice of the first creditors' meeting and required they provide him with specified information.

• By letter dated 17 November 2008, the Australian Securities and Investments Commission also wrote to each of Mr Faustino Garcia and Mr Daniel Garcia advising them of Mr Whittingham's appointment as administrator.

• Mr Faustino Garcia and Mr Daniel Garcia did not then respond to Mr Whittingham with any suggestion that there had been no meeting of directors to appoint Mr Whittingham as administrator or that they had not participated in such a meeting by telephone or otherwise or had not voted in favour of a resolution for his appointment.

• By email dated 28 November 2008, Mr Daniel Garcia advised ASIC of a claim that the board had not properly appointed Mr Whittingham as administrator, by reason that the directors were deadlocked as to that appointment, not by reason of any failure of Mr Faustino Garcia and Mr Daniel Garcia to participate in the relevant meeting. Mr Daniel Garcia was not called by the Plaintiffs to give evidence to support the allegation made in the email to ASIC, which was admitted only as evidence of the communication and not as evidence of the truth of its content. Mr Daniel Garcia did not advise Mr Whittingham of this contention until nearly 7 months later, when he forwarded his communication to ASIC to Mr Whittingham by email dated 18 July 2009.

• The expert witness called by the Plaintiffs, Mr Silvia, accepted in cross-examination that a reasonably competent administrator could understand that, when he and ASIC had advised directors of his appointment as administrator, they would advise him if they had not agreed to that appointment (T282).

1. In my view, Mr Faustino Garcia's and Mr Daniel Garcia's failure to advise Mr Whittingham of any issue as to their consent to his appointment at the time it took place tends against any finding that Mr Whittingham knew or suspected that they had not participated, at least by telephone, in the meeting at which he was appointed. The Plaintiffs also rely on statements by two members and former directors of the Club, after Mr Whittingham's appointment, that they had concerns about the validity of his appointment. However, those matters were admitted only as proof of the communications and not as proof of their truth and those members have not given evidence in the proceedings. I do not consider that those matters establish that Mr Whittingham either knew or suspected that his appointment was invalid.

1. Fourth, the Plaintiffs contend that the instrument of Mr Whittingham's appointment was signed by Ms Yolanda Sanchez and Ms Maria Sanchez as directors of the Club and persons authorised to sign for the Club; the common surname implied that the two signatories were related and may not be truly independent of each other; and article 63 of the Club's constitution provided that the seal could not be used except by authority of the board and in the presence of two members of the board. I do not consider that these matters established that Mr Whittingham knew or suspected that his appointment did not comply with the requirements of the Club's constitution. He had been provided with a minute which purportedly recorded a resolution of the directors for his appointment and there is no principle that persons who are related to each other or have a common surname may not attest the application of a common seal if properly authorised to do so.

1. There are other factors which lead me to conclude that Mr Whittingham did not in fact know or suspect that his appointment did not comply with the Club's constitution at the time it was made. As I have noted above, Mr Whittingham sought advice from external solicitors on 17 November 2008 as to the validity of his appointment (Whittingham [75]). His evidence was that he sought that advice because of the form of the minute and instrument of appointment which he had received from Ms Sanchez and because a former director of the Club, Mr Martin, had brought proceedings against the Club in respect of matters such as its failure to hold annual general meetings or prepare accounts and he had arranged a meeting with Mr Martin and his legal advisers on 18 November 2008 (T91). His account of his conversation with his solicitor indicated that he had disclosed relevant matters to that solicitor, including that the minutes did not indicate which directors were present at the meeting; the inquiry which he had made of Ms Sanchez about the difference between the draft minute which he provided to her and the minute she returned to him and her explanation that the other two directors had confirmed their agreement with the appointment by phone; his conversation with Mr Transfield, to which I will refer below; and that the resolution and instrument of appointment had been dated 17 November 2008 on the basis of discussion with Ms Sanchez (T96.30). The solicitor expressed a preliminary view that Mr Whittingham had been validly appointed, subsequently reviewed the Club's constitution and considered the issue of the validity of the appointment of directors, and advised Mr Whittingham on 18 or 19 November 2008 that he had been validly appointed (Whittingham [76]). Mr Whittingham made a contemporaneous note of that advice in his notes in preparation for the meeting with Mr Martin and his lawyers which corroborates his evidence that such advice was obtained (Whittingham [75], Ex KMW-5, 629, T102).

1. The Plaintiffs criticised Mr Whittingham for not obtaining confirmation of his solicitor's advice as to the validity of his appointment in writing. The relevance of this criticism is not immediately apparent, particularly where Mr Whittingham's contemporaneous note corroborates his evidence that such advice was given. However, I should observe that, in my view, Mr Whittingham was entitled to rely on oral advice given by an experienced firm and it was not unreasonable for him to be "very conscious of expending money at that time" as he indicated in his cross-examination (T102). The Plaintiffs also rely on Mr Silvia's evidence that he would personally review company constitutions rather than engaging a solicitor to do so; that insolvency practitioners are responsible for their own actions and quite often are given erroneous advice; that a reasonably competent administrator cannot simply rely on legal advice but must test that advice and bring his own commercial judgment to bear on that advice; and, ultimately, that the administrator "may rely on advice from the solicitor having tested the advice given" (T284-285). That evidence appeared to largely reflect Mr Silvia's individual practice rather than being evidence of the practice of the body of reasonably competent administrators, and I am not persuaded that an administrator's exercise of commercial judgment would provide particular assistance in respect of legal issues such as the application of a company's constitution in particular circumstances, the validity of a board meeting or the possible application of the indoor management rule in the relevant circumstances.

1. The Plaintiffs also advanced the further submission, derivative of their submission in respect of the letter to OLGR, that Mr Whittingham could not rely on legal advice because "he did not act in good faith" and withheld important information from his solicitor that he had accepted his appointment prior to giving a written consent to act and before being approved to act by the OLGR. I do not accept that either a failure to act in good faith or any intentional withholding of important information were established. It was not established that either Mr Whittingham, or indeed OLGR, then recognised that the assent of the Casino Liquor & Gaming Authority to Mr Whittingham's appointment had the importance which has emerged in these proceedings.

1. Acceptance of the Club's submission would also require the Court to accept the unlikely proposition that Mr Whittingham, knowing or suspecting that his appointment was invalid, chose not to take the simple steps which were available to him to seek a declaration of the validity of that appointment from the Court, at a time when any invalidity as to that appointment could readily be cured. That course is not an inherently likely one and the evidence before me did not disclose any explanation as to why Mr Whittingham would have chosen to take it.

1. The Plaintiffs also contend that Mr Whittingham "[a]ttempted to subvert the protections for the Club in the DOCA" by seeking from the Court a direction in November 2009 that he be permitted to hold the relevant meeting of creditors. There was a difficulty with the form of the application for directions made to the Court, which was identified in the judgment of Brereton J in Application of Kenneth Michael Whittingham; Re The Spanish Club Ltd (subject to deed of company arrangement) [2009] NSWSC 1426, namely that s 445CA of the Corporations Act had the result that creditors could only pass a resolution to terminate the DOCA under 445C(b) of the Corporations Act if there had been a breach of it which had not been rectified before the resolution was passed, and no breach of the DOCA such as to fulfil the requirement of s 445CA had been identified. Mr Whittingham's evidence was that he was not aware of that matter until Brereton J delivered that judgment. The Court ultimately declined to grant that direction.

1. The expert witness called by the Plaintiffs, Mr Silvia, ultimately accepted on cross-examination that it was open to a reasonable administrator to approach the Court to seek an order permitting completion of the Drivas sale (T271, T316). Part 5.3A of the Corporations Act authorises an administrator to approach the Court for directions and no basis was established before me to suggest that it was improper for Mr Whittingham to take that course. To the contrary, it seems to me that Mr Whittingham might well have been properly criticised had he permitted the then situation - where members would not approve the sale of the Club's properties, creditors could not be paid and the commercial objectives of the DOCA were increasingly less likely to be achieved - to continue without seeking to resolve that situation by directions from the Court. The difficulty with the particular form of direction sought is not a matter which, in my view, justifies relief under s 447E of the Corporations Act where Mr Whittingham was represented by legal advisers in respect of this application.

Mr Whittingham's conduct from December 2009 (Amended Points of Claim [87]-[95])

1. The Plaintiffs also advance criticisms of Mr Whittingham's conduct in relation to a new sale process for sale of the properties from December 2009. The new sale process provided for Ms Correa to solicit new offers from prospective purchasers to be lodged with Mr Whittingham by 5 January 2010. The Plaintiffs contend that:

"The period for [Ms Correa] to procure new offers for the purchase of the Club's properties was unreasonable and not given in good faith having regard to the intervening Christmas period and was only agreed to by [Ms Correa] under duress. Further, under the new sales process, the Administrator made no efforts or attempt to procure any further offers either by himself or through his appointed selling agents, Colliers" (Amended Points of Claim [89])

1. Mr Whittingham took steps to bring about a further sale process for the Club properties from mid December 2009 (Whittingham [411]), which extended both to Drivas and the interests represented by Somerset Ryckmans. Mr Whittingham obtained an updated valuation of the properties at that time of 86 Liverpool Street of $3,000,000; 88 Liverpool Street of $7,150,000 and the properties in one line of $9,500,000. This valuation was provided by Valuecorp which had originally valued the properties; it will be noted that the valuation provided for 86 Liverpool Street in December 2009 was $150,000 less than the valuation provided in January 2009; the valuation provided for 88 Liverpool Street was now $450,000 less than the valuation provided in January 2009; and the valuation for both properties was now $400,000 less than the valuation provided in January 2009.

1. Three offers were made to purchase the Club properties by 5 January 2010, two from Drivas and a third from a third party which subsequently withdrew its offer. No offer was made by SRG. The Plaintiffs contend before me that this must have resulted from the relatively short period permitted for the sale process. I would not draw that inference, where Drivas was able to make two offers within that time period; a third party not previously involved in the process was able to make an offer in that period; and no witness was called by the Plaintiffs to establish that any difficulties of SRG in making an offer at this time arose from matters of timing.

1. The Plaintiffs' allegation that the time limit for new offers in the sale process adopted between December 2009 and February 2010 was unreasonably short is inconsistent with the fact that Ms Correa's solicitors, Somerset Ryckmans, had suggested a 7 day period for the receipt of such offers in a letter dated 14 December 2009 (Ex KMW-5, 2669-2670) and Ms Correa had indicated her agreement with the revised sale process at the creditors' meeting on 17 December 2009 (Whittingham [419]; Ex KMW-5, 2681). The Plaintiffs also did not make good the allegation that Ms Correa only agreed to the sales process under "duress" where Ms Correa did not give evidence in the proceedings.

1. The Plaintiffs also attack Mr Whittingham's conduct in respect of a refusal to allow members to put an adjournment motion at a meeting of members held on 8 February 2010 (Amended Points of Claim [93]-[95]). This claim was pressed throughout the hearing then abandoned in written submissions after the hearing. An extraordinary general meeting of the Club was convened on 1 February 2010 and subsequently adjourned to 8 February 2010. Mr Whittingham declined to further adjourn the meeting on that date and members voted by a substantial majority against the sale of the Club premises to Drivas. It was not established that Mr Whittingham's failure to adjourn the 8 February 2010 members' meeting was unreasonable, where it appears that there was continued opposition to the sale of the properties at that meeting and any adjournment would have resulted in further costs being incurred.

1. I do not consider that actual prejudice has been established by reason of these matters, in the sense that the Club or members would have been in a better position had Mr Whittingham acted differently. A sufficient nexus has also not been established between Mr Whittingham's behaviour in respect of these matters and the relief sought under s 447E of the Act.

Matters after February 2010 (Amended Points of Claim [98]-[108]

1. The Plaintiffs contend that, in March 2010, "out of malice towards the members, or otherwise unreasonably and contrary to the interests of the members", Mr Whittingham ceased to trade the Club "on the pretext of cashflow reasons and compliance issues" (Amended Points of Claim [101]). It does not appear that this allegation was abandoned but the Plaintiffs did not make it good.

1. The evidence establishes that the Club's cash flow issues were real, not a pretext, in circumstances that the Club had incurred an operating loss of $528,789.12 in the period 1 December 2008 to 30 November 2009 (Whittingham [405], Ex KMW-5, 2618-2621). Compliance issues concerning the Club were also real, where Mr Whittingham had obtained quotes for the costs of fire safety works of around $74,000; had done some of those works and negotiated an extension of time with Council to perform the balance of those works; and the Club's insurers had required the outstanding fire safety works be completed by 31 March 2010 as a condition of continuing insurance over the property (Whittingham [428]). Mr Silvia accepted on cross-examination that it was reasonable to close the Club given its financial circumstances, although he criticised Mr Whittingham for not seeking funding from creditors and members beforehand to keep open the Club (T322). I have referred above to the evidence of the steps which had been taken by Mr Whittingham to obtain third party funding and noted that there is no evidence that members would in fact have provided any substantial funding, as Mr Silvia conceded elsewhere in his cross-examination (T288). The Plaintiffs did not establish the serious allegation that Mr Whittingham acted out of malice towards members.

1. The Plaintiffs also criticise Mr Whittingham's conduct in respect of a lender's statement subsequently issued by Perpetual (as trustee for Australian Unity) to the administrator and to an entity, Trantin, to which Perpetual assigned its security in about April 2010. The Plaintiffs contend that, in failing to ensure that the amount being claimed by the secured creditor was correct, the administrator acted in a manner prejudicial to the interests of the Club's members, or did an act, or made an omission that was prejudicial to such interests (Amended Points of Claim [108]). The acceptance of the payout figure by Mr Whittingham's solicitor appears to have reflected a view that the lender's statement was binding on the Club except in the case of manifest error. No reason has been identified why the amount which Trantin was obliged to pay Australian Unity was not a matter to be resolved as between Trantin as the assignee of Australian Unity's debt and Australian Unity, and it was in fact resolved in that manner. Even if the Club had any economic interest in this matter, it suffered no loss by reason of this matter where the amount of the payout figure was reduced by direct dealings between Trantin and Australian Unity. A sufficient nexus has also not been established between Mr Whittingham's behaviour in respect of these matters and the relief sought under s 447E of the Act.

Summary

1. For the reason set out above, I do not consider that it has been established that the conduct of Mr Whittingham of which the Plaintiffs complain was in fact prejudicial to members, although it was undoubtedly inconsistent with Ms Correa's wishes as to several matters and, so far as Mr Whittingham continued to seek to complete the Drivas sale contract, also inconsistent with the majority of members' not having approved that sale. I also do not consider that the evidence before me establishes a link between those matters and Mr Whittingham's remuneration or part of it so as to support an order that Mr Whittingham is disentitled by reason of these matters to all or any quantified part of the remuneration to which he would otherwise be entitled.

Remuneration and legal costs incurred by Mr Whittingham

1. Section 449E of the Corporations Act relevantly provides:

"449E(1A) The administrator of a company under a deed of company arrangement is entitled to receive such remuneration as is determined:

(a) by agreement between the administrator and the committee of inspection (if any); or

(b) by resolution of the company's creditors;

(c) if there is no such agreement or resolution - by the Court.

449E(2) Where remuneration is determined under paragraph 1(a) or (b) or paragraph (1A)(a) or (b), the Court may, on the application of ASIC, of the administrator or of an officer, member or creditor of the company:

(a) review the remuneration; and

(b) confirm, increase or reduce it."

1. The Plaintiffs seek an order that Mr Whittingham reimburse the company for an amount equal to legal costs, including Counsel's fees, incurred and paid by him from Club funds during the period of the voluntary administration and during the deed administration period, or alternatively for work undertaken in the period after 31 July 2009. It was common ground between the parties that the questions in relation to Mr Whittingham's remuneration in these proceedings arose at a general level, as to whether he was disentitled to any remuneration in respect of the DOCA or in respect of particular aspects of his activities, and these proceedings did not raise the question of quantification of the particular amount of remuneration to which the Mr Whittingham was entitled.

1. The Plaintiffs claim that the remuneration incurred and claimed by Mr Whittingham from and after 17 November 2008 was and is:

(a) unreasonable and excessive and involved the performance of work which was not necessary for the proper conduct of the administration;

(b) related to work performed in trading the Club's business despite the fact that a manager had been retained by the Administrator at significant cost to manage on-going trading of the Club;

(c) related to work performed by the Administrator which was manifestly in breach of the DOCA terms;

(d) related to work performed by the Administrator which was contrary to the interests of, or prejudicial to, the members of the Club;

(e) related to work performed which provided no benefit whatsoever to the Club, its creditors or members; and/or

(f) related to work performed by the Administrator in circumstances where he was never validly appointed as administrator of the Company and therefore incurred by him as a trespasser to the property and assets of the Club. (Amended Points of Claim [117])

1. The Plaintiffs did not advance submissions in respect of all of these matters and, to the extent that submissions were advanced, the Plaintiffs did not establish these criticisms for the reasons noted above. The remuneration and expenses claimed by Mr Whittingham are undoubtedly substantial; however, a substantial claim which is found to be justified on review under s 449E of the Act is not improper, and the claim will not be permitted to the extent that it is not found to be justified under s 449E of the Act. At one point during his cross-examination, Mr Grellman expressed the view that he would expect an administrator to be charging between $5,000 and $20,000 per month for the overview and supervision of trading operations of a Club (T412). Mr Grellman rightly acknowledged that he had expressed that view without information as to the practical complications which may have existed in continuing the operations of the Club (T413). In my view, Mr Grellman's evidence in that regard is of little assistance. There was no other expert evidence before me as to the proper level of fees which would have been charged in an administration of this complexity or which would support a finding that the level of fees charged by Mr Whittingham were inappropriate by reason of their amount.

1. The Plaintiffs allege that, so far as remuneration and legal costs were incurred by Mr Whittingham after 31 July 2009, they were incurred by him and his legal advisers:

"(a) acting in a manner contrary to the provisions of the DOCA;

(b) acting in a manner contrary to the interests of, and in a manner prejudicial to, the members;

(c) unsuccessfully resisting the interlocutory injunctive relief sought by Ms Correa in proceedings 4777 of 2009;

(d) unsuccessfully seeking to vary the DOCA and then subsequently unsuccessfully seeking judicial advice;

(e) considering and rejecting offers for the purchase of the properties by Ecoblue Developments and SRG which the Administrator understood and well knew would have been acceptable to members;

(f) undertaking a revised sales process which was both manifestly unreasonable in its terms and which process was ultimately rejected by members at the meeting on 8 February 2010." (Amended Points of Claim [97])

1. The Plaintiffs have not established these costs were improperly or unreasonably incurred, so far as these categories of work were undertaken, for the reasons set out above. Mr Silvia was critical of the extent of the costs and expenses incurred by Mr Whittingham after 31 July 2009, but that criticism appears to have reflected his criticisms of the sale process which I have addressed above. Mr Silvia did not seek to identify the proportion of the costs incurred after that date which he contended were unreasonable and, although he contended that such remuneration and expenses would have been reduced by taking a "more proactive" approach with members, he was unable to quantify the amount of any such reduction, and the premise that members might have taken a different view of the proposed sale to Drivas had a different approach been adopted is speculative for the reasons I have noted above.

1. On the findings which I have made, the quantum of fees which are properly recoverable by Mr Whittingham will be determined in his application for the Court to order the payment of those fees under s 449E of the Corporations Act.

Mr Whittingham's quantum meruit claim

1. Mr Whittingham advanced a quantum meruit claim against the contingency that the Court found that his appointment as administrator was invalid and did not exercise its discretion to validate the appointment under s 447A and/or s 1322(4) of the Corporations Act.

1. It appeared to be common ground between Mr Whittingham and the Club that, if Mr Whittingham had not been validly appointed (as the Club contends), then he would be entitled to remuneration on a quantum meruit basis: Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; 11 ACLR 637; Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201 at 204; Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663; Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139; (2005) 218 ALR 449; Sherred v McDonald above; Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) WAR 53; 71 ACSR 250. Mr Whittingham identifies 19 categories of work which he contends would be within the scope of the remuneration recoverable by him on a quantum meruit basis. I have dealt with the Plaintiffs' criticisms of a number of those categories of work above.

1. It is not necessary to determine this claim having regard to my findings above, which have the result that Mr Whittingham is entitled to remuneration determined under s 449E of the Corporations Act. I can also see no utility in seeking to determine that alternate claim on the basis of my findings, where it is only likely to require determination in circumstances that an appellate court has set those findings aside. In any event, any determination as to Mr Whittingham's remuneration on a quantum meruit basis would depend upon the review of the particular work he had done and, if it becomes necessary, it may well be appropriate for determination by a referee appointed by the Court under Pt 20 r 14 of Uniform Civil Procedure Rules 2005 (NSW).

Orders

1. I direct the parties to submit Short Minutes to give effect to my judgment within 7 days, in agreed form or, if no agreement is reached between them, their respective drafts of those Short Minutes and short written submissions as to the Orders which they contend should be made.

Costs

1. The Plaintiffs also seek an order that Mr Whittingham pay their costs of the proceedings (and bear his own legal costs in connection with the proceedings) without any recourse to or right of reimbursement out of the Club's assets. The findings I have set out above do not support that order. I will hear the parties as to costs generally after they have had opportunity to consider my judgment.

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Decision last updated: 22 May 2012