Dallinger v Halcha Holdings Pty Ltd (in admin)

[1995] FCA 1058

CATCHWORDS

CORPORATIONS - Company under administration - Application to remove administrator - Grounds for removal - Application for order ending administration because provisions of Part 5.3A being abused - Objects of Part - Whether Part available only in cases where at date of administrator's appointment some prospect exists of saving company from liquidation - Corporations Law, ss.435A, 447A, 449B.

Network Exchange Pty Ltd v. MIG International Communications Pty Ltd (1994) 12 ACLC 594
Advance Housing Pty Ltd v. Newcastle Classic Developments Pty Ltd (1994) 12 ACLC 701
Re Dunquil Pty Ltd (1985) 9 ACLR 950
Re Australian Federation of Construction Contractors; Ex parte Billing (1986) 68 ALR 416
Aloridge Pty Ltd v. Christianos (1994) 13 ACSR 99

JEFFREY RAYMOND DALLINGER v HALCHA HOLDINGS PTY LTD (ADMINISTRATOR APPOINTED) (ACN 003 747 402) and CHRISTOPHER MEL CHAMBERLAIN VG 3117 of 1995

COURT:Sundberg J

PLACE:Melbourne

DATE:8 December 1995

IN THE FEDERAL COURT OF AUSTRALIA     )

VICTORIA DISTRICT REGISTRY  )          No VG 3117 of 1995

GENERAL DIVISION  )

BETWEEN:JEFFREY RAYMOND DALLINGER

Applicant

AND:HALCHA HOLDINGS PTY LTD (ADMINISTRATOR APPOINTED)

(ACN 003 747 402)

Firstnamed Respondent

AND:CHRISTOPHER MEL CHAMBERLAIN

Secondnamed Respondent

COURT:Sundberg J

DATE:8 December 1995

PLACE:Melbourne

MINUTES OF ORDER

The Court orders that the application be dismissed with costs, including reserved costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA     )

VICTORIA DISTRICT REGISTRY  )          No VG 3117 of 1995

GENERAL DIVISION  )

BETWEEN:JEFFREY RAYMOND DALLINGER

Applicant

AND:HALCHA HOLDINGS PTY LTD (ADMINISTRATOR APPOINTED)

(ACN 003 747 402)

Firstnamed Respondent

AND:CHRISTOPHER MEL CHAMBERLAIN

Secondnamed Respondent

COURT:Sundberg J

DATE:8 December 1995

PLACE:Melbourne

REASONS FOR JUDGMENT

SUNDBERG J:

The applicant ("Dallinger") seeks an order under s.447A(1) of the Corporations Law that the administration of the first respondent ("the company") be ended. Alternatively he seeks an order under s.449B that the second respondent be removed as administrator. The following account of the company's history is taken from Dallinger's affidavit sworn 7 March 1995. Dallinger is a shareholder in and a creditor of the company. The other two shareholders are Ian Bruce and Terry Smith. Dallinger, Bruce and Smith hold 50 shares each. All three were directors, but Dallinger resigned on 14 October 1994. Between mid 1989 and the end

of November 1994 the company carried on business as a retailer of computers and computer software and a provider of computer technical and repair services in the Albury/Wodonga area.  It did so under the name "Compnetronics", and used a logo and, successively, the slogans "Computer & Network Specialists" and "Computer & Network Services".  With the aid of the name, logo and slogans, the company acquired reputation and goodwill in the area as a result of its trading.

Until 26 August 1994 Dallinger was a full time employee of the company as well as a director.  On that day he resigned as an employee as a result of differences with Bruce and Smith.  Soon after resigning he sought repayment of his $35,000 loan account with the company.  He later sought payment of another $26,734 said to be due to him.  The company does not appear to have disputed that the money was owing, but was not immediately able to pay.  In October 1994 Dallinger sued the company in the Albury Local Court to recover the loan money.  He then caused a statutory demand to be served on the company.

On 27 October the company's then solicitor wrote to Dallinger's solicitor informing him that on the previous day the directors had met with a registered company liquidator to canvass options relating to the company's future, including temporary external administration and liquidation.  The identity of the liquidator was not disclosed.  The letter mentioned possible proceedings by the company against Dallinger for breach of fiduciary duty.

In early 1995 the company sued Dallinger in this Court for a declaration that he had breached s.232 of the Corporations Law and for damages. At about the same time the company filed a defence and cross claim in the Local Court proceeding. The cross claim was to the same general effect as the claim in this Court.

On 15 February 1995 the second respondent was appointed administrator of the company ("the administrator") pursuant to s.436A of the Corporations Law. Dallinger asked the administrator for details of the company's creditors. He was told the only creditors were the three shareholders, the company's former and current solicitors, and its accountant. Dallinger was however of the view that there were at least six other creditors, including the lessor of the premises from which the company operated and AGC in respect of a vehicle leased by the company.

On 22 February the first meeting of creditors was held.  Shortly before this meeting Dallinger discovered that in October 1994 Bruce and Smith had caused to be incorporated a company called Compnetronics Australia Pty. Ltd. ("CA").  They were its only directors.  At the meeting, which was attended by Dallinger, Bruce, Smith and the company's present and former solicitors, the administrator asked Bruce and Smith for details of the company's liability to AGC.  Bruce said that CA was looking after the payments due to AGC in respect of the vehicle.  He also said that CA was acquiring stock from the company when it needed it at cost plus 10 per cent.  A few days later the administrator told Dallinger's solicitor that the company had transferred its business to CA, that the company was "finished", and that the real purpose of the administration was to lead to its liquidation.

At about this time Dallinger discovered that CA was using the company's logo, a similar slogan to one used by the company, and the company's old address, telephone and fax numbers.

In early March the administrator gave notice of a meeting of creditors to be held on 10 March to consider whether the administration should end, or the company should execute a deed of company arrangement or be wound up.  The notice was accompanied by a report by
the administrator pursuant to ss.438A and 439A and a statement of his opinion on the three options mentioned.  In his report the administrator concluded that the only viable option was for the company to go into liquidation on the ground that it was not solvent, having a deficiency of $150,006.  The report drew attention to the following matters:

(a)The company's overdraft with its bank had been reduced from $142,000 in the period before the administrator's appointment to virtually a nil balance on his appointment.  The administrator did not think the bank had been preferred by the reduction, but the company's directors, as sureties, may have been.

(b)Bruce and Smith had commenced CA's business in October 1994.  This business was said to be "quite consistent" with that of the company, which had traded as Compnetronics.

(c)The company had sued Dallinger for breach of fiduciary duty.

(d)Bruce and Smith might be in breach of their duty to the company by allowing its assets to be transferred to CA without the company receiving "some consideration".

(e)A liquidation was desirable to allow all these matters to be further investigated.

Dallinger said he was most concerned that the events outlined above constituted a

carefully orchestrated and executed plan which Bruce and Smith have devised with the assistance and support of their advisers to frustrate my avenues of redress in pursuing claims I have against (the company) and in relation to the transfer of the business from (the company), a company in
which I hold one third of the shares and which was apparently solvent until about 30th November 1994, to Compnetronics Australia, a company with which I am unconnected, the effect of which has been to make (the company) insolvent.

He said the administrator had advised Smith and Bruce on their options in their dispute with him.  All other creditors appear to have been paid.  He believes that Bruce had guaranteed the company's overdraft and had given a mortgage to secure the guarantee.  His experience was that the company always had creditors to pay and virtually always had an overdraft.  His affidavit concludes as follows:

Having regard to the Secondnamed Respondent's prior role as adviser to Bruce and Smith, I can have no confidence that the Secondnamed Respondent has investigated matters as thoroughly as a completely independent and impartial administrator would have.  If the Secondnamed Respondent were to become the liquidator I could have no confidence that he would properly inform himself as to and consider the merits of issues such as voidable dispositions of (the company's) assets, breaches of duty by its directors and determination of its true financial position.  Although the Secondnamed Respondent has adverted to such matters in his report, I am concerned that the administration and a subsequent liquidation, if under the Secondnamed Respondent's control, will treat these serious matters in a perfunctory way, to the benefit of Bruce and Smith and to my detriment.

Even if the Secondnamed Respondent were, as liquidator of (the company), to agree to institute proceedings against Compnetronics Australia, Bruce and Smith, I would still fear that control of the proceedings would not be in totally impartial hands, as I am entitled to expect.

On 9 March, on the application of Dallinger, Jenkinson J. ordered pursuant to s.447A that the meeting of creditors scheduled for 10 March be deemed to stand adjourned until after the present application had been determined.

In the course of cross-examination Dallinger accepted that at the creditors' meeting on 22 February he did not raise his concerns about the administrator's lack of impartiality.  When asked why he had not done so, he said he didn't think it appropriate at that stage.  He agreed that one of the items on the agenda at the meeting was whether the administrator should be appointed or whether some other person should assume the role.  He said that although he did think about whether some other person should be appointed, he said nothing.  He accepted that after leaving the company's employ, but while still a director, he had set up his own business which was the same as that operated by the company.  In relation to the reduction of the overdraft, he said that unlike Smith and Bruce he had given no security to the bank.

The administrator's response to Dallinger's affidavit can be summarised as follows:

(a)he did meet with Bruce and Smith on 26 October 1994 with a view to assisting them evaluate the options available to the company.  He explained the procedures involved in a creditors' voluntary liquidation, but did not discuss Dallinger's possible breach of fiduciary duty, though this was mentioned by Bruce and Smith.

(b)On 6 February 1995 Bruce told him that Dallinger might vote against a resolution to wind up the company.  The administrator then suggested using Part 5.3A of the Law "as a means of last resort to have the (company) placed into liquidation".

(c)He has "no difficulty" with the arrangement under which CA meets the payments under the AGC lease.

(d)To the best of his knowledge there are no creditors apart from those already identified, and the company has no continuing obligations under any lease of its former premises.

(e)At the creditors' meeting on 22 February the AGC lease was discussed, as was CA's acquisition of the company's stock.  Creditors were given the opportunity to appoint someone else as administrator, but no other name was put forward, and no creditor questioned the administrator's competence or suitability to act.

(f)He denies that he told Dallinger's solicitor that the real purpose of the administration was to lead to a liquidation of the company.

(g)His report to the Australian Securities Commission will draw attention to the claims of breach of fiduciary duty on the part of Dallinger, Bruce and Smith, and he is considering civil proceedings in relation to the claims.

(h)He denies participating in a "carefully orchestrated and executed plan".  He says that the course he has thus far recommended is the approach most likely to secure the best return for creditors.

1. He has not advised Bruce and Smith with regard to their disputes with Dallinger.  He has advised the company alone, and has acted impartially.

(j)He is investigating whether the reduction of the overdraft constituted a preference, but doubts whether the bank was preferred.

(k)If he continues as administrator he will further investigate the company's stock position.

(l)If he is appointed liquidator he will consider what course, if any, should be taken on behalf of the company with regard to possible claims against Bruce, Smith, Dallinger and CA.

The administrator's account of his meeting with Bruce and Smith on 26 October is supported by the company's former solicitor, Mr. Trivett, who attended.  He said that the administrator advised them of the nature of the available options, and that when Bruce and Smith started to tell the administrator about the proceedings instituted by Dallinger, he cut them off, saying these matters were better explored with the company's solicitor, and that an administrator or liquidator was independent of the company and could not advise its directors.  There was no further discussion of the Dallinger issues until after the administrator left the meeting.  Mr. Trivett subsequently wrote to Dallinger's solicitors referring to detailed discussion at the meeting as to the company's right to take action against Dallinger.  The discussion he referred to was the discussion that occurred after the administrator had left the meeting.

When asked in cross-examination whether, having read the administrator's and Mr. Trivett's affidavits, he still had an apprehension that the administrator would or might favour the Bruce/Smith side over his own, Dallinger said he was still concerned that the administrator had been appointed by Bruce and Smith, though he accepted that as he had resigned as a director, he could not expect to have had any involvement in the appointment.

Section 449B empowers the Court to remove an administrator and appoint a replacement. It says nothing about the grounds upon which an order can be made. In Network Exchange Pty. Ltd. v. MIG International Communications Pty. Ltd. (1994) 12 A.C.L.C. 594 Hayne J. said:

an order for removal should be made only if it is demonstrated that such an order would be for the better conduct of the administration. It is not to be contemplated that the power under section 449B is to be exercised save in circumstances that justify or require its exercise and those, speaking generally, would appear to be circumstances in which the order would conduce to the better conduct of the administration concerned.

Dallinger has not satisfied me that the administration would be better conducted if the administrator were replaced by another person.  His claim that Bruce, Smith and the administrator have carefully orchestrated and executed a plan to frustrate his avenues of redress has not been made out.  Indeed counsel disclaimed the suggestion that the administrator was in fact partial.  Those who were present during the whole of the 26 October meeting depose that while there may have been detailed discussion about the disputes between Dallinger on the one hand and Bruce and Smith on the other, it occurred after the administrator had left.

Dallinger's claim that he has no confidence that the administrator has investigated matters as thoroughly as an impartial person would is also based on the contention that the administrator had a prior role as adviser to Bruce and Smith.  As I have said, he had no such role.

The claim that if the administrator were to become the liquidator, as he would on a winding up as a result of s.446A, he would not properly inform himself about possible breaches of duty by directors, about the company's financial position, and about voidable dispositions of the company's assets, is also based on a perceived lack of impartiality on the administrator's part derived from the erroneous assumption that the administrator had advised Bruce and Smith about their disputes with Dallinger.

Nothing has been put before me to suggest that the administrator, whether in that role or as liquidator, will treat the issues of concern to Dallinger in a perfunctory way, to the benefit of Smith and Bruce and to Dallinger's detriment.  The position is the same in relation to Dallinger's fear that proceedings instituted by the administrator as liquidator against CA, Bruce and Smith would not be impartially conducted.

Dallinger has not put before me anything that causes me to doubt the suitability, competence and impartiality of the administrator, and nothing else that demonstrates that the administration would be better conducted by someone else.  I accept the administrator's assurances that he has been investigating and will continue to investigate whether the bank received a preference, whether any of the directors was preferred, whether any of the directors breached any duties to the company, and whether the proceedings issued by the company against Dallinger should be pursued.  I have no reason to doubt that if he decides to take proceedings against any relevant person, he will conduct them in a professional, conscientious and impartial fashion.

The applicant advanced, as the appropriate test to be applied under s.449B, that applicable to the removal of a liquidator under s.473(1). That section permits the removal of a liquidator
"on cause shown".  In Advance Housing Pty. Ltd. v. Newcastle Classic Developments Pty. Ltd. (1994) 12 A.C.L.C. 701, at pp.704-705 Santow J. said:

the correct balance is struck by permitting the liquidator to act as such even if there be a prior involvement with the company in liquidation, provided that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited.  In short the question should be whether there would be a reasonable apprehension by any creditor of lack of impartiality on the liquidator's part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance.

In the Network Case Hayne J. said that s.449B may not be as markedly different from s.473 as the different drafting would suggest, and referred to Re Adam Eyton Ltd. (1887) 36 Ch.D. 299, at p.306 as affording some support for that view. There Bowen L.J. said that "due cause" (the earlier form of "cause shown") was not limited to unfitness of the liquidator, but was measured by reference to the "real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed". If the appropriate test be that propounded in Advance Housing rather than the "better conduct of the administration" test favoured by Hayne J., Dallinger has not satisfied it.  I accept that when he made the present application Dallinger had an apprehension that the administrator was or may have been in the opposing camp.  I also accept that on the information then available to him his apprehension was reasonably held.  But the matter must be tested at the date of the hearing.  Is his apprehension, which he continued to assert, though by no means forcefully or persuasively, while giving evidence, now reasonably based?  Since he swore his initial affidavit Dallinger has read the administrator's and Mr. Trivett's affidavits.  Their accounts of the meeting on 26 October were not shaken in cross-examination, and at the end of their evidence any apprehension of lack of impartiality that may have been reasonable in the absence of their evidence ceased in my view to be reasonable.  In Re Dunquil Pty. Ltd. (1985) 9 A.C.L.R. 950, at p.955 Olsson J. referred to the need to scrutinize with great care any proposal to appoint as official liquidator a person who has had a prior nexus with the company and to give due recognition to the legitimate fears and perceptions of a substantial body of the creditors. His Honour added:

it must never be forgotten that for those who have a particular perception, that perception is the reality, notwithstanding that, in the long term, the true facts may have rendered a perception which was apparently not unreasonably based ... ill founded.

... these proceedings have now enabled what was originally a reasonable basis for concern to be dispelled.

That is the case here.  The administrator's and Mr. Trivett's evidence showed Dallinger's apprehension, which was apparently reasonably based, to be ill founded.

Section 447A(1) empowers the Court to make such order as it thinks appropriate "about how this Part is to operate in relation to a particular company". Sub-section (2) gives an example of an order that can be made under sub-s.(1). If the Court is satisfied that the administration should end because the company is solvent, the provisions of Part 5.3A are being abused, or for some other reason, it may order the administration to end. The applicant's case was that the administration should end because the provisions of the Part are being abused. It was said that the appointment of an administrator was an abuse because the objects of the Part were neither achievable nor intended to be achieved by the appointment; that the purpose of the appointment was to bring about a liquidation without the need for a members' special resolution or an application to the Court. The object of Part 5.3A is set out in s.435A:

to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

In support of the contention that the Part was not intended to be used where it is known before the administrator conducts his preliminary review of a company's affairs that it cannot be saved from liquidation, counsel referred to passages in the Explanatory Memorandum of November 1992 on the Corporate Law Reform Bill 1992 which, when enacted, introduced the new Part. Commenting on proposed s.435A, it was said:

This section will emphasise that the primary object of the Part is to maximise the chance of the company emerging from administration with as much as possible of its business continuing in existence.  The insertion of the new Part is primarily designed to redress concerns that Australia's current corporate insolvency laws are inflexible and that they too easily and too often lead to the liquidation of companies, when some such companies could have been saved.

...

Proposed section 435A will also recognise that, no matter how efficiently the new administration procedure operates, there will be cases where it is not possible to save a company or its business. In this situation, the object of the new provisions will be to provide for a fair and efficient winding up, and in particular one that results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

Section 435A does not in my view require Part 5.3A to be limited to the case where, at the date of the administrator's appointment, there is some prospect of saving a company from liquidation. Paragraph (b) does not appear to me to contemplate only the case where, in the course of administration, it becomes apparent for the first time that it is not possible for the company to continue in existence. The provisions of the Part should be given a beneficial construction. The machinery provided by the Part should be available in a case where, although it is not possible for the company to continue in existence, an administration is likely to result in a better return for creditors than would be the case with an immediate winding up. While the sentence in the Explanatory Memorandum upon which the applicant relies - "Proposed section 435A will also recognise that, no matter how efficiently the new administration procedure operates, there will be cases where it is not possible to save a company or its business" - may suggest that par.(b) is so limited, I do not think the section is ambiguous or obscure for the purposes of s.15AB(1)(a) of the Acts Interpretation Act 1901. Accordingly that sentence cannot be used to give the section a meaning other than its natural one. See Re Australian Federation of Construction Contractors; Ex parte Billing (1986) 68 A.L.R. 416, at p.420.

It is clear that the directors relied on the administrator for advice about the course that should be adopted, and acted on his advice in appointing him. He recommended an administration under Part 5.3A because it was a "common sense and commercial approach to crystallising (the company's) assets and realising the best return for the creditors ...". He believed that a forced sale of the company's assets would result in a considerably reduced return to creditors. In cross examination he said that on 6 February 1995 he recommended an administration because he felt that it was in the best interests of the general body of creditors for someone to take control of the company's affairs as soon as possible. I am satisfied that in opting for an administration the directors were following the administrator's advice that it would be preferable for all creditors that there be an administration rather than a winding up. I am not satisfied in terms of s.447A(2)(b) that the provisions of Part 5.3A are being abused.
It was also contended for the applicant that when the appointing directors have a purpose other than the genuine purpose of seeking to improve the position of the company or its creditors, an order may be made under s.447A terminating the administration. It was said that nothing suggested that the position of creditors could be enhanced by the appointment of an administrator. Reliance was placed on Aloridge Pty. Ltd. v. Christianos (1994) 13 A.C.S.R. 99. Christianos had secured the appointment of a provisional liquidator. The liquidator took steps of which Christianos disapproved, whereupon Christianos appointed an administrator under Part 5.3A. Burchett J. made an order terminating the appointment under s.447A. His Honour found that the appointment of the administrator had been made, not in pursuit of the purposes for which the Law made provision, but in order to wrest control of the company's affairs from the provisional liquidator in the hope that the administrator might prove more compliant to Christianos' wishes. In other words the appointment was not made in the interests of the company or its creditors.

For the reasons I have given, I do not accept that the directors' purpose in appointing the administrator was not the genuine purpose of seeking to improve the position of the company's creditors.  Dallinger's probable opposition to a voluntary liquidation may have prompted the administrator to raise Part 5.3A.  But I accept that his advice to the directors, on which they acted, was that in the interests of creditors (including themselves) an administrator should be appointed forthwith in preference to a winding up by the court.

The application is dismissed with costs, including reserved costs.

I certify that this and the preceding 15 pages are a true copy of the reasons for judgment of the Honourable Justice Sundberg

........ ........ ........ ........ ........ ........

Associate

8 December 1995

Counsel for the Applicant:  I Martindale

Solicitors for the Applicant:  James G Sloan

Counsel for the Respondent:  A Garantziotis

Solicitors for the Respondent:  David Koschitzke

Date of Hearing:  17 November 1995

Place of Hearing:  Melbourne

Date of Judgment:  8 December 1995