In the matter of Warwick Keneally as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd)

[2015] NSWSC 937

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

In the matter of Warwick Keneally as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd) [2015] NSWSC 937

Hearing dates:

30 January 2015, 21, 22, 26 and 28 May 2015

Decision date:

16 July 2015

Jurisdiction:

Common Law

Before:

Black J

Decision:

Declare that the administrator of the Company was not validly appointed. Parties to bring in short minutes of order to give effect to this judgment within 14 days.

Catchwords:

CORPORATIONS – meetings – notice of directors’ meetings – where directors notified of meeting less than two hours prior to commencement – where notice of meeting sent by text message – whether notice reasonable in the circumstances – whether order under s 1322(4) of the Corporations Act 2001 (Cth).

CORPORATIONS – voluntary administration – administrator – where directors appointed administrator – where directors not called to give evidence – where administrator’s evidence sought to establish solvency or likely insolvency – whether directors held requisite genuine opinion as to solvency or likely insolvency under s 436A of the Corporations Act 2001 (Cth).

CORPORATIONS – voluntary administration – administrator – where directors appointed administrator for the purpose of assisting with negotiations with another director and shareholder – whether purpose foreign to Pt 5.3A of the Corporations Act 2001 (Cth).

Legislation Cited:

- Corporations Act 2001 (Cth) Pt 5.3A, ss 128(4), 129, 248C, 435A, 436A, 439A, 447A, 447C, 1322(4), 1322(6)
- Evidence Act 1995 (NSW) s 136
- Supreme Court Act 1970 (NSW)

- Supreme Court (Corporations) Rules 1999 (NSW) r 2.13
- Uniform Civil Procedure Rules 2005 (NSW) r 20.14

Cases Cited:

- Ashrafinia v Ashrafinia [2012] NSWSC 500
- Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270
- BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2013] (2013) 82 NSWLR 383
- Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391
- Brash Holdings Ltd (admin apptd) v Katile Pty Ltd [1996] 1 VR 24; (1994) 13 ACSR 504
- Cadwallader v Bajco [2001] NSWSC 1193
- Cadwallader v Bajco (No 2) [2002] NSWSC 127
- Calabretta v Redpen Developments Pty Ltd (in liq) (recs and mgrs apptd) [2010] FCA 81; (2010) 183 FCR 47
- Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607; 13 ACSR 337
- Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 71 ACSR 250
- Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279
- Commonwealth of Australia v Irving (1996) 65 FCR 291
- Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd [2005] NSWSC 1005
- Correa v Whittingham [2013] NSWCA 263
- Correa v Whittingham (No 3) [2012] NSWSC 526; (2012) 267 FLR 120
- Cote v Devine [2013] WASC 79
- Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422
- Dhami v Martin [2010] NSWSC 770; (2010) 241 FLR 165
- Gangemi v Osborne [2009] VSCA 297
- Hickey v Aselford [2003] NSWSC 185
Jenashar Pty Ltd v Lemrib Pty Limited (1993) 11 ACSR 345
- Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
- Kazar v Duus (1998) 88 FCR 218
- McMaster v Eznut Pty Ltd [2006] WASC 109; (2006) 58 ACSR 199
- Mentha v Colorbus Pty Ltd (in liq) [2004] VSC 486; (2004) 51 ACSR 677
- Mitropoulos v The Greek Orthodox Church and Community of Marrickville and District Ltd (1993) 10 ACSR 134
- National Australia Bank v Market Holdings Pty Ltd (in liq) [2001] NSWSC 253; (2001) 37 ACSR 629
- Oil Basins Ltd v Bass Strait Oil Co [2012] FCA 1122; (2012) 91 ACSR 700
- Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428
- Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
- Re Compaction Systems Pty Ltd & the Companies Act [1976] 2 NSWLR 477; (1976) 2 ACLR 135
- Re Dominion Insurance Company of Australia Ltd (subject to Scheme of Arrangement) [2013] NSWSC 898; (2013) 276 FLR 338
- Re HPI Australia Pty Ltd [2008] NSWSC 1106
- Re Lime Gourmet Pizza Bar (Charlestown) Pty Ltd (formerly under administration) [2015] NSWSC 244
- Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418
- Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257
- Sheldon v Phillips (1895) 11 WN (NSW) 34
- Shirlaw v Graham [2001] NSWSC 612
- Sliteris v Ljubic [2014] NSWSC 1632
- Smolarek v McMaster (as administrator of Eznut Pty Ltd) [2006] WASCA 216
- St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851; (2004) 210 ALR 265
- Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201
- Super John Pty Ltd v Futuris Rural Pty Ltd [1999] NSWSC 627; (1999) 32 ACSR 398
- Toole v Flexihire Pty Ltd (1991) 6 ACSR 455
- Wagner v International Health Promotions (1994) 15 ACSR 419
- Watson v Foxman (1995) 49 NSWLR 315
- Weinstock v Beck [2013] HCA 14; (2013) 93 ACSR 231
- Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663; (2004) 51 ACSR 404

Texts Cited:

- A D Lang, Horsley's Meetings: Procedure, Law and Practice, (6th ed 2010, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

Cheng Lam (Plaintiff)
Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd) (First Defendant)
Warwick Keneally as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd) (Second Defendant)

Representation:

Counsel:
D Sulan/N Oreb (Plaintiff)
D R Pritchard SC (Defendants)

Solicitors:
Bridges Lawyers (Plaintiff)
Turks Legal (Defendants)

File Number(s):

2014/364758

Judgment

Introduction

1. The Plaintiff, Ms Lam, seeks relief in respect of the appointment of the Second Defendant, Mr Keneally, as voluntary administrator of the First Defendant, Australian Blue Mountain International Cultural & Tourist Group Pty Limited (administrator appointed) (“Company”). Ms Lam is a director of the Company. Mr Keneally is a chartered accountant and registered and official liquidator and was appointed, or purportedly appointed, as voluntary administrator to the Company pursuant to Pt 5.3A of the Corporations Act 2001 (Cth) on 10 November 2014. Ms Tang and Mr Chen, who are the other shareholders in the Company and the directors who voted in favour of the appointment of Mr Keneally as administrator, were not joined as party to the proceedings and no party suggested that they were a necessary party to the proceedings. Neither party called them to give evidence in the proceedings. They appeared briefly by Counsel on the first day of the hearing but declined an invitation to be heard in the proceedings, without becoming party to them, pursuant to r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW).

2. Ms Lam seeks the relief set out in her Amended Originating Process filed on 12 December 2014, on the basis set out in her Amended Points of Claim (“APOC”), including declarations under s 447C of the Corporations Act, the Supreme Court Act 1970 (NSW) or in the Court’s inherent jurisdiction that Mr Keneally was not validly appointed as administrator to the Company on 10 November 2014. Ms Lam also seeks orders under s 447A of the Corporations Act that, if Mr Keneally was validly appointed, Pt 5.3A of the Corporations Act operate in relation to the Company as if Mr Keneally was not validly appointed and an order that the administration come to an end or alternatively that Mr Keneally be replaced as administrator.

3. Mr Keneally and the Company (under his control) filed a Points of Defence dated 20 January 2015 (“POD”) which admits some matters, does not admit or takes issue with others and denies Ms Lam’s entitlement to the relief sought. By paragraph 42 of the POD, Mr Keneally and the Company also identify certain matters that, they contend, should lead the Court to deny Ms Lam relief in its discretion. Mr Keneally and the Company also filed a Cross Claim dated 20 January 2015, to which Ms Lam has responded by a Defence to Cross Claim dated 28 January 2015. By his Cross Claim, Mr Keneally seeks declarations under s 447C of the Corporations Act that he was validly appointed as administrator on 10 November 2014; orders pursuant to s 447A of the Corporations Act that Pt 5.3A operate in relation to the Company as if he was validly appointed on 10 November 2014, or alternatively declarations under s 447A and s 1332(4) of the Corporations Act that his appointment was not invalidated by reason of any procedural defect in the meeting of directors at which he was appointed. If Mr Keneally was not validly appointed, he seeks orders that he is entitled to receive his remuneration (including costs and expenses incurred) in respect of the administration.

Affidavit evidence

4. Ms Lam relies on her affidavit dated 11 December 2014 resworn on 28 January 2015. In that affidavit, Ms Lam sets out the background to the acquisition of a substantial property situated at Wentworth Falls, New South Wales by the Company, including her initial conversations with Ms Tang’s father, Mr Chun Tang, in respect of the matter, and the introduction of Mr Chen’s father, Mr Li Zuan Chen into the project in late September 2012. Ms Lam sets out contributions made, including to the original purchase price of the property (Lam [31]) and gives evidence of the work she and her husband did in respect of the project (Lam [48]) and of her subsequent dealings with other shareholders and the circumstances in which Mr Keneally was appointed as administrator of the Company. In her affidavit in reply, also dated 28 January 2015, Ms Lam responds to evidence given by Mr Keneally that seeks to establish a lack of cooperation on her part with him after his appointment as administrator of the Company. It is not necessary to address that issue, given the findings that I will reach below as to the validity of Mr Keneally's appointment and the application for validation of it. In broad terms, it seems to me that Ms Lam and her husband provided somewhat limited cooperation, qualified by the position that they had taken, in the event correctly, that Mr Keneally had not been validly appointed as administrator.

5. Mr Pritchard SC, who appears for Mr Keneally and the Company, made detailed submissions as to Ms Lam’s credit, and I should address that issue. Mr Pritchard did not submit that Ms Lam was telling deliberate untruths to her knowledge, other than in respect of evidence given when she was recalled in respect of paragraph 8ff of her affidavit dated 28 January 2015. Mr Pritchard did submit that the factors recognised in Watson v Foxman (1995) 49 NSWLR 315 may be present and that the Court should not accept her evidence as reliable, unless it was against interest or corroborated by contemporaneous documents. Mr Pritchard also emphasises the absence of corroborative evidence given by her husband, who did not give evidence.

6. I accept that there were significant difficulties with Ms Lam’s evidence, although little turns on them for the reasons I will note below. First, there were significant inconsistencies between Ms Lam’s affidavit evidence and her evidence in cross-examination, and her recall of events in cross-examination was on occasion significantly less than, or inconsistent with, her affidavit evidence. For example, Ms Lam’s affidavit evidence and her evidence in cross-examination was materially inconsistent as to whether she had received a draft sale agreement in November 2014 (Lam [86]–[87], T87–90); in relation to a telephone discussion with Mr Zhou on 10 November 2014 (Lam [92], T91–92); as to whether a text message she received on 10 November referred to a board meeting or only to a meeting (Lam [94], T94–96, 109); and between the account of the 10 November board meeting given in her affidavit and her recollection of that meeting in oral evidence, including as to whether Mr Li or Ms Tang made statements referred to in her evidence (Lam [96], T99–104). There was also a degree of implausibility in Ms Lam’s evidence that she was not aware of allegations of misappropriation that the Company’s other shareholders had made against her, at the time of her dealings with Mr Keneally, in the light of evidence that those matters were raised and addressed by her brother in her presence at a meeting with Mr Keneally on 13 November 2014 (Keneally 6.5.15 [49], Li [44], Lau [10], T61ff).

7. Ms Lam gave evidence through an interpreter. On one occasion, that interpreter properly drew to the Court’s attention to her concern that she may have mistranslated a question, and Ms Lam gave significantly different evidence when recalled to be cross-examined as to that matter, from the evidence she had previously given in cross-examination. It seems to me that the change in Ms Lam’s evidence suggested that she was seeking to avoid the consequences that she might have thought would follow from her earlier evidence in cross-examination. I do not consider it necessary to go further to address the submissions made by Mr Pritchard as to the extent to which Ms Lam’s brother may have become aware of the interpreter’s concerns and communicated them to Ms Lam, where little ultimately turns on Ms Lam’s credit for the reasons noted below.

8. It does not seem to me that there is ultimately any substantial issue in the case, other than possibly what occurred at the 10 November directors’ meeting, as to which Ms Lam’s credit is of particular significance, and there is a significant degree of common ground between Ms Lam’s evidence of that meeting and the affidavit evidence of Mr Li, an employee of Mr Keneally’s firm who attended that meeting. Mr Pritchard himself submits that the differences between Ms Lam’s and Mr Li’s evidence in relation to that meeting are of no consequence for the matters in dispute and I accept that submission, at least so far as differences between Ms Lam’s and Mr Li’s affidavit evidence is concerned. An inconsistency between Mr Li’s evidence in chief and his evidence in cross-examination, to which I refer below, may be of greater significance in that respect.

9. Mr Pritchard also points to the fact that Ms Lam’s husband was present in the Court for at least part of the hearing but did not give evidence and submits that a Jones v Dunkel [[1959] HCA 8; (1959) 101 CLR 298] inference should be drawn generally and, particularly, in relation to disputed events and conversations of 10 and 13 November 2014. I accept that submission, but it takes matters little further where those matters are not material to a determination of the matters in issue.

10. Mr Keneally relies on his affidavits dated 20 January 2015, 6 May 2015 and 20 May 2015. Mr Keneally also relied on affidavits of two members of staff, Mr Li dated 28 January 2015 and Ms Lau dated 28 January 2015. Mr Keneally’s first affidavit dated 20 January 2015 exhibits documentation relating to his appointment as administrator and sets out, to some extent, his contacts with Ms Tang, Mr Chen and their adviser, Mr Zhou, in the period before his appointment. In his first affidavit dated 20 January 2015, Mr Keneally also gave evidence of his understanding as to the Company’s solvency, as at 10 November 2014, which was admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as to his understanding of the relevant matters, and which I will address below. Mr Keneally also set out steps taken after his appointment, and referred to the market value of the Wentworth Falls property owned by the Company, development constraints and risk management issues as to the property, and set out his dealings with creditors and recommendations in his report under s 439A of the Corporations Act and his efforts to facilitate discussions between directors and shareholders following his appointment. That evidence was properly led by Mr Keneally so as to inform the Court of relevant matters, although it is not necessary to address aspects of it given the views that I have formed on other grounds. In particular, the value of the property and constraints on its development or sale are of little relevance, where there is no evidence that the Company is under any immediate pressure to sell the property in order to meet any debts that are presently due and payable. Mr Keneally also gave evidence in his 20 January affidavit that is potentially relevant to a claim for remuneration or quantum meruit. It is common ground between the parties that it is preferable to address such a claim after the Court has determined the substantive issues as to the validity of Mr Keneally’s appointment.

11. By a further affidavit dated 6 May 2015, Mr Keneally provided an update on tasks undertaken in the Company’s administration and responded to an affidavit and report of Mr Winterbottom dated 28 January 2015, directed to the Company’s solvency, which had been served by Ms Lam but which was ultimately not read. I will address that evidence so far as it relates to the Company’s solvency below. By a third affidavit dated 20 May 2015, Mr Keneally led further evidence as to events preceding the commencement of the proceedings, which was directed to explaining the fact that he had not brought an application to determine the validity of his appointment, prior to Ms Lam’s commencing this application, and also led further evidence in respect of his claim for remuneration.

12. Mr Pritchard submits that Mr Keneally answered questions directly, did not force evidence, and was prepared to and did make concessions against his possible self-interest; that the Court would be satisfied as to Mr Keneally’s professionalism; and that Mr Keneally did not advance his position by impermissible argument or non-responsive answers during cross examination. I generally accept that submission, with the qualification that I found aspects of Mr Keneally’s approach, both in his affidavit evidence and his cross-examination, to the question of the Company’s insolvency or potential insolvency to be unconvincing for reasons that I will address below.

13. By his affidavit dated 28 January 2015, Mr Li, who is a senior accountant employed by Mr Keneally’s firm, refers to his contacts with Ms Tang, to whom he was introduced by a personal acquaintance, prior to Mr Keneally’s appointment as administrator. These included telephone contacts on 1 October 2014, 9 October 2014, 3 and 4 November 2014, a meeting with Ms Tang and Mr Chen with Mr Keneally on 5 November 2014, and a further meeting with Ms Tang, Mr Chen and Mr Zhou with Mr Keneally on 7 November 2014. Mr Li also gave evidence as to the meeting at which Mr Keneally was appointed as administrator, to which I will refer below, and a subsequent meeting which he, Mr Keneally, Ms Lau attended with Ms Lam, her husband and her brother on 13 November 2014 (Li [43ff]) and to subsequent dealings with Ms Tang during the course of the administration. Another employee of Mr Keneally’s firm, Ms Lau, who was not involved with the administration of the Company on a day-to-day basis, also gave evidence as to her attendance at several meetings and telephone conferences at Mr Keneally’s request, to assist with translation. In particular, she gave evidence as to what occurred at meetings on 13 and 28 November and on 10 December 2014.

Background facts

14. I will now set out the background facts, some of which are not controversial and others of which are controversial. In doing so, I will reach factual findings that are relevant to the issues to be determined below. The Company was incorporated on 19 September 2012 (Ex D1, 3); its directors at that point were Ms Lam, Ms Tang and Mr Cui Chen (Ex D1, 4); and each of those directors held one share in the Company (Ex D1, 5). The Company was incorporated for the purpose of the purchase of a property at Wentworth Falls– which is the former Queen Victoria Hospital site and is of substantial size, of approximately 372 hectares – and obtaining development approval for and then selling the property (APOC [10]; POD [8]-[9]; Lam [33]; Keneally T140). The Company entered into contract to buy the property for an amount of $1,605,000 on 20 September 2012 (Ex D1, 106).

14. Ms Lam pleads that she caused the deposit of $160,500 to be paid in respect of the purchase of the property on 20 September 2012 (APOC [13]); and that contributions to the purchase price were made by Ms Lam and her husband, Mr Dong Chen; Ms Tang and her father, Mr Chun Fu Tang; and Mr Chen and his father, Mr Li Zuan Chen (APOC [12], [15]; POD [12]; Lam [35]). Mr Keneally did not admit the detail of those transactions, although he also did not advance any alternative case as to what had occurred. Ms Lam pleads that there was an express or implied term of the agreement between the investors that the repayment of their initial contributions or part of them was conditional on completion of the project and sale of the property following a successful development application (APOC [17]) and Mr Keneally does not admit that matter (POD [14]). Ms Lam and her husband appear to have had primary responsibility for taking steps to obtain development approval of the property, and took steps to do so from November 2012. Ms Lam pleads, and her evidence is that, she and her husband took steps to advance the project from 1 November 2012, including engaging consultants to assist in the preparation of a development application, architects to assist in the preparation of development plans and lawyers in respect of legal advice in respect of the property and engaging accountants to maintain the Company’s financial records and lodge tax returns (APOC [19]). Mr Keneally did not admit that proposition, though no evidence was led to the contrary.

15. It is common ground that a shareholder dispute developed between Ms Lam’s interests on the one hand and Ms Tang’s and Mr Chen’s interests on the other between May 2014 and November 2014 (APOC [20], POD [17]). At least on Ms Lam's account, Ms Tang, Mr Chen and their respective fathers then formed a view that it would be preferable to increase the Company's capital and extend its business so that it did not merely obtain development approval for the property, in the hope of onselling it at a profit, but went forward with the development of the property. Ms Lam’s evidence (Lam [65]) (admitted subject to limitation) is that, in mid May 2014, Mr Chen suggested that the investors make substantial additional contributions to expand the project, so that a total of $10 million would be contributed over several years; Ms Tang’s father indicated his support for that proposal; and Ms Lam indicated that she and her husband were not in a position to make a contribution of that size, and expressed the view that:

“It was always the idea to sell the Blue Mountains property after the development application had been obtained"

Ms Lam later signed the minutes of that meeting (Ex A1, 175–6) and additional contributions of $350,000 each were subsequently made on behalf of Ms Tang and Mr Chen, but not on behalf of Ms Lam and her husband (Lam [70]).

17. In July 2014, three additional directors were appointed to the company, being Ms Tang's father, Mr Chung Fu Tang, Mr Chen's father, Mr Li Zuan Chen and Ms Lam's husband, Mr Dong Chen, although those appointments did not change the extent of representation of the Lam, Tang and Chen interests on the Company's board. Ms Tang and Mr Chen and the interests associated with them previously, had and continued to have a majority on the board if they voted together.

18. Between September and November 2014, negotiations took place between the Company’s shareholders directed to the possible purchase of Ms Lam's shares in the Company, and Ms Lam indicated that she sought to have her shareholder loans paid out in the course of that purchase. A draft sale agreement was prepared in early November 2014 (APOC [23], POD [19], Lam [86]–[90], Ex A1, 180). Ms Lam’s affidavit evidence refers to negotiations to purchase her share in the Company commencing in September 2014 (Lam [80]ff) and to a meeting on 7 November 2014 when she was provided with the draft agreement in respect of the purchase (Lam [86]). That draft agreement was between Ms Lam and Mr Chen (Ex A1, 180ff) and referred to a loan of $650,633 by Ms Lam to the Company and provided for Mr Chen (rather than the Company) to purchase Ms Lam’s share in the Company for a share purchase price of $149,367 and also provided for Mr Chen to procure repayment of Ms Lam’s loan by the Company at completion. That draft agreement contemplated a consensual transaction in that regard, which would have required funding of the Company to repay that loan if it was not already in a position to do so. That draft agreement did not progress after that date, notwithstanding attempts made by Ms Lam to follow it up (Lam [90]). Ms Lam also pleads that, following the meeting on 7 November 2014, the investors associated with Ms Tang offered to pay $1.5 million for her interest in the Company (APOC [24]); Mr Keneally admits that an offer was made to purchase or sell Ms Lam's interest in the company and to settle other claims of Ms Lam against the Company for $1.5 million, but otherwise does not admit the paragraph (POD [20]) It is common ground that the settlement of that sale or purchase did not proceed.

19. In the meantime, in early October 2014, Mr Keneally, who was subsequently appointed as administrator to the Company, was approached by Ms Tang and Mr Chen about a possible retainer to investigate the expenditure of Company funds by Ms Lam, at a time that they were concerned that Ms Lam might have applied those funds for other purposes. Mr Keneally did not seek to establish the truth of any allegation that Ms Lam had misapplied Company funds in these proceedings, although he did seek to establish that other shareholders were genuinely concerned about that possibility. His subsequent investigations did not substantiate the suggestion of misapplication of the Company's funds in respect of the bulk of the funds involved, although the position in respect of several expenditures remains open.

20. It is common ground that several telephone calls and meetings between Mr Keneally and an employee of his firm, Mr Li, on the one hand and Ms Tang and Mr Chen on the other, took place prior to Mr Keneally’s appointment as administrator. Mr Keneally and Mr Li had a telephone conversation with Ms Tang on 1 October 2014, a meeting with Ms Tang and Mr Chen on 5 November 2014, and a meeting with Ms Tang and Mr Chen and their adviser, Mr Michael Zhou, on 7 November 2014 (APOC [26], POD [22]). Mr Li took handwritten notes of many of those meetings, but destroyed most of those notes in what he described as “the ordinary course of business” (Li [13], [16], [19], [21], [24]; Li T277–280), although a typed file note of the pre-appointment meetings was subsequently prepared (Ex D1, 46). It appears that a handwritten note retained by Mr Keneally of one meeting on 1 October 2014 (Ex A3) is more expansive than that typed note (Ex D1, 46). It seems to me that little ultimately turns on the absence of earlier handwritten notes made by Mr Li, given the findings that I reach on other grounds, and I do not consider it necessary to address the submissions as to credit made by the parties in that regard. In fairness to Mr Keneally, he faced some challenges in these meetings, because he did not speak Mandarin and conversations were conducted partly in Mandarin at those meetings, so that he was dependent on Mandarin speaking staff of his firm to translate what was said. It appears that the meetings were not conducted in a manner that involved a formal translation of everything that was said. Ms Lam pleads that she and her husband were not made aware of those meetings; Mr Keneally admits that he did not notify Ms Lam or Mr Chen of those telephone discussion or meetings, but says that he does not know whether they were aware of them (APOC [27], POD [23]).

21. In the conversation on 1 October 2014 between Mr Keneally, Mr Li and Ms Tang, Ms Tang advised Mr Keneally of a dispute between the shareholders (Ex A3; Keneally T153, 155; Li T281). Mr Keneally’s evidence, in his further affidavit dated 6 May 2015, is that Ms Tang had indicated, in that conversation, that:

“I would like someone independent to look at the Company records to see if I am right [as to the possibility of misappropriation]. If I am right then I will confront [Ms Lam] about it.” (Keneally 6.5.2015 [35])

Mr Keneally accepted in cross-examination that he gave Ms Tang some advice as to how she might approach the misappropriation allegations (Ex A3, T138-139), which included reference to directors’ and shareholders’ rights to records, the possibility of seeking legal advice and of her seeking bank records of the Company on a confidential basis (T155-157). On 7 October 2014, Mr Keneally sent Ms Tang a signed engagement letter in respect of the investigation of Ms Lam’s suggested misappropriation of Company funds, although that engagement did not proceed (Li Annexure A, Keneally T158). It seems to me that, at that point, Ms Tang was seeking to engage Mr Keneally as an advisor to Ms Tang and Mr Chen to investigate the possibility of any misappropriation of assets by Ms Lam. I would not necessarily treat these matters, in themselves, of depriving Mr Keneally of independence.

22. A further telephone call took place on 9 October 2014 between Mr Keneally, Mr Li and Ms Tang (T159). On 5 November 2014, Mr Keneally and Mr Li attended a meeting with Ms Tang and Mr Chen which is summarised in a typed note (Ex D1, 47; Keneally T161). That note records that:

“The issue of the directors resolving the company was or was likely to be insolvent was discussed. Pending Ms Lam’s claim that $1.5 million of loans were owed to her (despite the Company’s 30 June Financial Statements showing only c$650k owing) the Directors had formed the view that the company did not have sufficient resources to meet the debts. They were also unclear if [Ms Lam’s loan] was due and payable”.

The reference to “$1.5 million of loans were owed to [Ms Lam]” appears to refer to the suggested purchase price for Ms Lam’s interest in the business rather than the amount of loans due to her, and that note records that Ms Tang and Mr Chen “were also unclear” as to whether debts owing by the Company to the directors were due and payable or not. In cross-examination, Mr Keneally accepted that Ms Tang and Mr Chen told him at that meeting that they were unclear if Ms Lam’s shareholder loan was due and payable to her and that the possibility of Ms Tang and Mr Chen calling in their loans to the Company was not raised (T166, 168-169). Mr Keneally’s evidence was that Ms Tang also said at that meeting that she wanted to keep the property and asked if it could be bought back from any liquidator (Keneally 6.5.2015 [37]; T173).

23. Mr Keneally’s evidence is that, after the discussion in which he asked Ms Tang and Mr Chen whether Ms Lam’s loan was due and payable by the Company and their indication they were uncertain of that, he then said:

“If it is due and payable then it looks like the Company is or is likely to be insolvent. So it looks like the Company will not be able to pay [Ms Lam] the $1.5m. Either you or another third party may need to step in.” (Keneally 6.5.2015 [37])

There seem to me to be significant difficulties with the view which Mr Keneally expressed at this point. His comment as to the Company’s solvency was premised on an assumption, that Ms Tang and Mr Chen had not confirmed, that Ms Lam’s debt was then due and payable; he then treated an amount of $1.5m, which was the price being discussed between the shareholders for a negotiated transaction between them, a substantial part of which would be paid by Mr Chen to Ms Lam to acquire her share in the Company, as though it were an amount payable by the Company; and concluded that the Company was or was likely to be insolvent on that basis. That reasoning process does not seem to me to be properly founded.

24. Mr Keneally also expressed the view at that meeting that:

“In circumstances where we were not aware of all the circumstances facing the Company, the Directors seemingly had valid concerns about the appropriation of Company funds, by their fellow director, Ms Lam. It was therefore possible to debate a settlement closer to Ms Lam’s shareholder loan value, less any misappropriated monies may be more commercial.”

I recognise that that observation is qualified by the reference to Mr Keneally not being aware of all the Company’s circumstances. It is nonetheless difficult to see how Mr Keneally could have properly assessed the validity of Ms Tang’s and Mr Chen’s concerns without undertaking a factual inquiry of the kind that was later undertaken, which, as I noted above, demonstrated that the majority of the expenditures which were subject to those concerns had been properly made although some expenditures are still subject to inquiry. In cross-examination, Mr Keneally also accepted that he formed that view that the other directors seemingly had valid concerns about the appropriation of Company funds by Ms Lam without having spoken to Ms Lam (T161). Mr Keneally’s comments as to the terms of a “settlement” with Ms Lam also seem to be directed to advancing Ms Tang’s and Mr Chen’s interests, in their personal capacity or their capacity as shareholders, and to be potentially inconsistent with the independence that would be expected of a potential administrator.

25. The note of the meeting suggests that three options available to Ms Tang (Ex D1, 47–48) were discussed at that meeting, namely a negotiated settlement with Ms Lam, a voluntary administration with a view to a deed of company arrangement or a voluntary liquidation. Mr Li’s evidence in cross-examination was that only an investigation of the company’s financial records and voluntary administration were discussed at this meeting and liquidation was not (T282–283). It is not necessary to resolve this difference in the evidence given the findings I have reached on other grounds.

26. On 6 November 2014, Mr Li, with Mr Keneally’s authority, sent Ms Tang and Mr Chen a pre-appointment remuneration letter in respect of a proposed voluntary administration (Ex A4; Li [20]; Keneally T 134). Mr Keneally and Mr Li did not send the pre-appointment remuneration letter to Ms Lam (Keneally T169; Li T206). Mr Keneally fairly accepted in cross-examination that he thought as at 6 November 2014 that it was important that all the directors (including Ms Lam) were aware of the potential appointment of a voluntary administrator (T170). I accept that, in the ordinary course, a potential administrator need not deal with all directors, although it is by no means clear to me that Mr Keneally could reasonably have assumed that Ms Tang or Mr Chen would inform Ms Lam of these matters where he was aware of the existing shareholder dispute. It is not necessary to reach a final view in that regard.

27. Mr Keneally, Mr Li, Ms Tang, Mr Chen and Mr Zhou (an accountant acting for Ms Tang and Mr Chen) attended a further meeting on 7 November 2014 (Keneally 20.1.15 [27]; Ex D1, 48). The note of that meeting records that Ms Tang and Mr Chen advised Mr Keneally that a settlement offer of $800,000 had been made but not accepted by Ms Lam (Ex D1, 48). There was also discussion of the fact that, if a liquidator was appointed, the liquidator would conduct a full investigation into the transactions and liabilities incurred by the directors (Keneally 20.1.15 [28(c)]; Ex D1, 48).

28. Mr Li received a telephone call from Ms Tang, on the evening of 9 November 2014, in which she said:

“I think we want to appoint [Mr Keneally] as Administrator of the Company. We would like to come to your office tomorrow at 10am to have a meeting with you and [Mr Keneally]. If we decide to go ahead, can we use one of the meeting rooms at your office to have the directors’ meeting.”

Mr Li subsequently sent an email to Mr Keneally at 8.30am on 10 November 2014 (Ex A5) which advised that:

“[Ms Tang] called me last night & they decided to appt us to be the VA & come in & sign the paper today at 10.30am.

If nothing changes in the last minute, we should be able to get the job on board”.

Mr Pritchard seeks to construe this email as indicating no more than it was the intention of the directors (or, more precisely, Ms Tang and Mr Chen) to call a meeting for the purposes of the consideration of the appointment of a voluntary administrator and submits that “perhaps” those directors had a view of the outcome of the meeting prior to its occurring. I accept the position that Ms Tang had communicated to Mr Li was not a concluded one, but it seems to me to record more than a mere possibility that administrators would be appointed.

29. Ms Lam in turn gives evidence (Lam [92]) of a telephone call from Mr Zhou, an adviser to Ms Tang and Mr Chen, at about 10:30am on 10 November 2014, in which he advised Ms Lam that:

“the majority shareholders, they have changed their mind and no longer wish to proceed with the Blue Mountains project".

Ms Lam, presumably anticipating a sale of the property, asked Mr Zhou what real estate agent would be used and he did not respond. That communication did not disclose the position advised by Ms Tang to Mr Li the evening before or the fact that another meeting would shortly take place with Mr Keneally, and was also inconsistent with Ms Tang’s emphasis, in her dealings with Mr Keneally, on her wish to retain the property, which indicated that there had been no change of mind by the majority shareholders as to the development.

30. A further meeting took place between Mr Keneally, Mr Li, Ms Tang, Mr Chen and Mr Zhou at his firm’s offices at 11.20am on the morning of 10 November 2014. Both Mr Keneally and Mr Li gave evidence as to this meeting. Mr Li’s evidence is that he made handwritten notes of that meeting which he destroyed “in the ordinary course of business” after he had typed up a file note of that meeting, on 14 November 2014. Mr Keneally was advised at this meeting that Ms Tang and Mr Chen wished to call a directors’ meeting to consider whether to appoint an administrator at short notice because they were departing for China that evening (Ex D1, 50). Mr Keneally informed Ms Tang and Mr Chen that:

“[W]hile it was short notice, given the Directors travel plans, and that there were other directors locally based in Sydney, it was unusual, but it was most likely reasonable to provide approximately three (3) hours’ notice – so long as they were able to consult the Chinese based directors about the meeting. I advised that they should consult a lawyer if they had any concerns, as it were possible that there would be grounds for any director to raise the notice period given was not reasonable.” (Ex D1, 50)

For the reasons noted below, the advice given by Mr Keneally as to the adequacy of the three hours’ notice of the meeting was very likely incorrect. By the time of this meeting, the discussions between Mr Keneally, Ms Tang and Mr Chen had continued for over a month, and Mr Keneally fairly accepted in cross-examination that it occurred to him during the meeting that “Ms Lam should know what is going on” (T177). Mr Keneally fairly accepted in cross-examination that less than three hours’ notice was not reasonable (T178) and he also fairly accepted that he was concerned at that time that Ms Lam may not have had sufficient notice of the meeting or time to consider her views (T187). Mr Keneally also fairly accepted in cross-examination that he was aware that each of the meetings prior to his appointment occurred without Ms Lam’s knowledge and that he was concerned about that matter (T188). In the event, as I will note below, Ms Tang and Mr Chen in fact provided significantly less than three hours’ notice of the meeting to Ms Lam and her husband.

31. Mr Keneally then instructed Mr Li to prepare proxy forms for signature by Ms Tang’s and Mr Chen’s fathers prior to the directors’ meeting on 10 November (T183). Mr Pritchard submits that any issue concerning those proxies was not a matter the subject of pleading or opening submissions of Ms Lam and is not properly before the Court. The former proposition is correct but the latter is not, since Mr Keneally pleaded that those proxies were valid in his Points of Defence, putting that matter squarely in issue. So far as consideration of the question of solvency was concerned, the proxy forms provided merely that Ms Tang’s and Mr Chen’s fathers would tick a box as to whether they were for, against or abstained from a resolution that it was the directors’ opinion that the Company is insolvent or is likely to become insolvent. Even if the proxies had been completed and signed by Ms Tang’s and Mr Chen’s fathers, they may well not have been sufficient to indicate that they had properly turned their minds to the question of the Company’s solvency. There is also no suggestion that the Company’s constitution permitted one director to give another a proxy for directors’ meetings, so that another director could then exercise more than one vote at such a meeting, and it is questionable whether that course would be open at general law: see for example, A D Lang, Horsley’s Meetings; Procedure, Law and Practice, 6th ed, LexisNexis Butterworths, 2010, [22.11].

31. In any event, the proxy forms were not completed before they were signed by Ms Tang’s and Mr Chen’s fathers, were returned without ticking the relevant boxes (Li, Annexures E-F; Ex A1, 204-205) and were then completed by Ms Tang and Mr Chen. By the commencement of the board meeting later on 10 November, at least Mr Li was aware that Ms Tang and Mr Chen’s father had not completed those forms but had purportedly authorised Ms Tang and Mr Chen to do so “on [their] behalf” and he saw Ms Tang and Mr Chen complete those forms signed by their fathers in blank (Li 28.1.2015 [31]). Mr Li informed Mr Keneally of that matter on that day (T286). Perhaps surprisingly, there is no suggestion that it then occurred to either Mr Keneally or Mr Li that that matter had the result that Ms Tang and Mr Chen’s fathers had not properly engaged with the question of the Company’s solvency prior to Mr Keneally’s appointment as administrator. Nonetheless, as Mr Pritchard points out, a quorum was present for the meeting and the directors present, Ms Tang and Mr Chen, voted in favour of the resolution, so the real issue to be determined is the validity of that meeting having regard to the other matters raised by Ms Lam. I did not understand Mr Sulan to contend to the contrary.

32. In the event, Ms Lam was given less than the three hours’ notice of the directors’ meeting that had been discussed at the earlier meeting on 10 November between Ms Tang, Mr Chen, Mr Zhou, Mr Keneally and Mr Li. Ms Lam refers, in her affidavit evidence, to the receipt of text messages in respect of the board meeting called for that day (Lam [94]–[95]). About 1:16pm on 10 November 2014, Mr Chen sent a text message to Ms Lam and her husband advising of a meeting of the board that afternoon and of a telephone number to call to attend that meeting. A subsequent text message was sent to Ms Lam, but not her husband, at 2:50pm advising of a different telephone number.

33. Ms Lam and her husband attended part of the directors’ meeting by telephone (Ex D1, 9) and that was the first time that Ms Lam was made aware of Mr Keneally’s and Mr Li’s involvement (Lam [99]). The Plaintiffs initially pleaded that much of the board meeting was conducted by Mr Li. Mr Li’s affidavit evidence broadly supports that proposition, although Ms Lam accepted in cross-examination that Ms Tang had the primary conduct of that meeting. Ms Lam's affidavit evidence was that Mr Li said at the commencement of that meeting that:

“The Company is bankrupt and therefore it is necessary to appoint an administrator to the Company. The fathers are in agreement with the resolution that an administrator be appointed". (Lam [97])

Ms Lam also gave evidence, which I accept, that she requested a meeting in person and indicated she was not voting on any resolution in the telephone meeting, and withdrew from the meeting before the resolution was put (Lam [99]). Mr Li’s evidence is also that Ms Lam and her husband hung up the phone prior to any vote at that meeting (Li [33]).

35. Mr Li’s evidence is substantially consistent with Ms Lam’s evidence of the conversation during that meeting, so far as he indicates that he played the primary role in that meeting, with the exception of two short statements made by Ms Tang, prior to Ms Lam terminating the call (Li [33]). Mr Li’s affidavit did not record any substantive discussion, either with Ms Lam and her husband before they withdrew from the meeting or between Ms Tang and Mr Chen when the meeting continued, of the Company’s financial position or whether it was solvent or insolvent. Indeed, the only discussion that he records directed to the appointment of the administrator is as follows (Li [34]):

“[Tang]: The first resolution to vote on is that the Company is likely to be insolvent.

Jiang Jie Tang and Cui Chen both raised their hands.

[Li]:   You have special proxies. Li Zuan Chen has appointed Cui Chen to vote. Chun Fu Tang has appointed [Ms Tang] to vote so you can both vote on behalf of your fathers.

[Tang]:   The second resolution to vote on is to appoint Warwick Keneally as Administrator of the Company.

Jiang Jie Tang and Cui Chen both raised their hands.”

36. Mr Li also gives evidence that corroborates aspects of Ms Lam’s account of the conversation, including that he referred to “their fathers” in the conversation and that Ms Lam said words to the effect set out in paragraph 99 of her affidavit as to her wish that the directors meet in person, although his evidence is that he told Ms Tang to tell Ms Lam she could abstain from voting if she did not want to vote, and Ms Tang did so, rather than his doing so. There was therefore substantial agreement between the only two witnesses called who were present at that meeting as to what had occurred at it. It seems to me that that in turn raises some doubt as to the weight to be given to concessions made by Ms Lam, when she was cross-examined with considerable vigour, through an interpreter, as to the conduct of that meeting.

37. As I noted above, Ms Lam’s evidence in cross-examination was that she was told by Ms Tang that the Company was “bankrupt” at the meeting on 10 November 2014. An assertion of that proposition, without reasons or an opportunity for reasoned discussion, does not seem to me to be a substantive consideration of the Company’s financial position. Mr Li gave evidence, in cross-examination (T289-290) but not in his affidavit evidence, of a discussion in the 10 November board meeting, after Ms Lam hung up, of the Company’s financial position and documents. I think it objectively unlikely that such a discussion occurred, since it is highly unlikely that Mr Li would have neglected to include it in his affidavit had it occurred; Ms Tang and Mr Chen did not place any real focus previously or subsequently on any question of the Company’s solvency; and Ms Tang and Mr Chen had determined and advised Mr Li of their likely, or at least potential, course on the previous night. Mr Li’s evidence in cross-examination seems to me to have been influenced by a recognition of what ought to have occurred.

38. Mr Keneally did not attend the directors’ meeting held on 10 November 2014, although Mr Li subsequently advised him of matters that had occurred at that meeting and provided him with minutes of the directors’ meeting and the proxies tabled at that meeting. Mr Li prepared the minutes of that meeting (Ex A1, 206) from a pro forma maintained by his firm (Li [39]). The minutes of that meeting are, at best, significantly incomplete. They record that Ms Tang and Mr Chen’s fathers attended the meeting “by way of special proxy” without noting that the special proxies were completed by Ms Tang and Mr Chen after they were signed by their fathers in blank. They record that Ms Lam and Mr Chen attended the meeting by telephone, without disclosing that they withdrew from the meeting prior to the resolution being passed. They record that:

“The Directors considered the financial affairs of the Company after reviewing its financial records and considered that the Company is insolvent or likely to become insolvent.

The Directors considered the further consequences of the Company’s position and the appointment of an Administrator under Part 5.3A of the Corporations Act.” Ex A1, 206)

Having regard to Mr Li’s affidavit evidence of what occurred at the meeting, I am not satisfied that such consideration occurred. The minutes of that meeting also record resolutions put to the meeting that it was the directors’ opinion that the Company is insolvent or is likely to become insolvent and that the Company appoint Mr Keneally as administrator. They record, in respect of each resolution that it was:

“Carried by voices, noting that both Cheng Lam and [her husband] Dong Chen abstained from voting this resolution.” (Ex A1, 206)

That proposition seems to me to be also to be, at best, substantially incomplete, where Ms Lam and her husband had withdrawn from the meeting before the resolutions were put. The meeting also does not record Ms Lam’s protests, which Mr Li accepts had occurred, as to the fact that the meeting had proceeded without an opportunity for the directors to meet in person. In saying that, I recognise that a telephone meeting was permissible under the Company’s constitution.

39. A notice of appointment of Mr Keneally as administrator was signed by Ms Tang and Mr Chen on 10 November 2014, referring to the resolution of the directors passed on that date to appoint him as administrator (Ex D1, 11). It is common ground that the Company had approximately $644,244 in its bank account as at the date of Mr Keneally’s appointment on 10 November 2014 (APOC [33], POD [29]. The Company then also owned the Wentworth Falls property, which was unencumbered, and it appears it then had approximately $95,000 in trade creditors (Keneally 20.1.2015 [123]).

40. Ms Lam advances several criticisms of the Declaration of Independence (DIRRI) subsequently made by Mr Keneally (Ex D1, 19). That document was initially prepared by Mr Li from a proforma held on his firm’s system (T214-215, 292), although it was reviewed and signed by Mr Keneally. There is nothing particularly surprising or inappropriate in that approach. Mr Keneally accepted that part of the DIRRI dealing with the circumstances of his appointment was drawn from the sample in the ARITA Code (T226), presumably reflecting the way in which the firm’s proforma was prepared. That matter would not generally involve any difficulty, but here causes difficulty where the level of Mr Keneally’s and Mr Li’s prior engagement with Ms Tang and Mr Chen was out of the ordinary and not fully captured by the common form of such disclosures. Mr Keneally accepted in cross-examination, fairly although not particularly readily, that aspects of the DIRRI were incomplete and that it should have disclosed the advice he had given Ms Tang and Mr Chen on 1 October 2014 about the steps they could take to investigate the misappropriation allegation against Ms Lam (T227); the 7 October 2014 engagement letter (T228-229); and the advice that he had given on 10 November 2014 regarding the adequacy of notice of the directors’ meeting (T229). Mr Keneally also accepted that a statement in the DIRRI that solvency advice was given to the directors was inaccurate, because such advice had not been given (T217). That concession may not be consistent with the discussion of that matter at the meeting on 5 November 2014, to which I have referred above.

41. Mr Keneally, Ms Lau and Mr Li arranged a meeting with Ms Lam after Mr Keneally’s appointment as administrator, which was also attended by her husband, Mr Dong Chen, and her brother, Mr David Chao (Keneally 6.5.2015 [49]). Mr Keneally raised the allegation of misappropriation with Ms Lam at that meeting and also referred to discussions concerning settlement of Ms Lam’s claims and her suggested sale price of $1.5m (Keneally 6.5.2015 [49]). The meeting was mostly conducted in English and partly in Mandarin, although Ms Lam’s evidence in cross-examination suggests that her brother took a more significant role in the meeting than her, since he had stronger English skills than her. Also on 13 November 2014, Mr Keneally wrote to Ms Lam (Ex A1, 254) advising that:

“[b]ased on my recent discussion with all shareholders, it is my intention to attempt to use the voluntary administration period to resolve disputes between the shareholders of the Company, in particular, the transfer of your one (1) share to the other directors”.

42. On 18 November 2014, Ms Lam lodged a proof of debt in the administration for an amount described as “initial contribution plus development costs paid on behalf of the Company” in the amount of $650,633 (Ex D1, 523) and a further amount described as referable to “running the project in relation to market research, liaison with project manager, architects, environment, consultant etc” in an amount to be quantified (Ex D1, 524).

43. The first creditors’ meeting was held on 20 November 2014 (Keneally 20.1.2015 [62], Ex D1, 266 – 274). Ms Lam was represented by a financial advisor, Mr Sprowles of Hayes Advisory, and a solicitor, Ms Younes, at that meeting and they expressed concern that reasonable notice had not been given to Ms Lam in respect of the directors’ meeting on 10 November 2014 and that the directors were using voluntary administration for an improper purpose where the Company may not be insolvent. Mr Keneally’s solicitor responded that

“In the event Ms Lam or any director wished to challenge that validity of the meeting, they should perhaps do so as soon as practicable given that the administration would continue to proceed in the meantime and, in this context, it would possibly assist things if the issue were to be dealt with sooner rather than later.”

44. It seems to me that the position adopted by the administrator’s solicitor gave too little weight to the principle that an administrator should take reasonable steps to confirm the validity of his or her 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 or her appointment: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422 at 423; Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257 at [60]; Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663; (2004) 51 ACSR 404 at [63]; Mentha v Colorbus Pty Ltd (in liq) [2004] VSC 486; (2004) 51 ACSR 677. I find it difficult to see that Mr Keneally could have satisfied himself of the validity of his appointment in the circumstances then known to him without a prompt application to the Court, given the shortness of the notice period for the directors’ meeting, by contrast with the long period of prior discussions between Ms Tang and Mr Chen and Mr Keneally and his staff, and where the only justification for the short notice that had then been identified was Ms Tang’s and Mr Chen’s travel plans. It does not seem to me to be sufficient in that situation for his solicitor to express the view that a party with a concern as to that issue could make its own application to the Court, abrogating the administrator’s responsibility to address such an issue.

45. By his letter dated 25 November 2014 to shareholders and directors of the Company (Ex A1, 264), Mr Keneally referred to his appointment as administrator at the meeting on 10 November 2014 and advised that:

“Based on my recent discussions with all shareholders, it is my intention to attempt to use the voluntary administration period to facilitate a resolution of the disputes between the shareholders of the Company. In particular, shareholders will need to determine whether:

●   They can reach an agreement on the quantum of the shareholders’ loans, other debts and project management fees payable to Ms Cheng Lam; and

●   A resolution can be achieved that may result in the transfer of Ms Cheng Lam’s share in the Company to other the remaining [sic] shareholders as part of a potential settlement.

It my preliminary opinion that it is likely to be in the best interests of all shareholders and creditors for the disputes among the shareholders to be resolved during the voluntary administration period.”

46. I do not doubt that Mr Keneally genuinely held the aspiration expressed in this letter of seeking to facilitate a settlement between shareholders. There were nonetheless difficulties with the approach which he adopted. The first is that Pt 5.3A of the Corporations Act was not introduced as a mechanism to resolve shareholder disputes and its use for that purpose would tend to expose the Company, its creditors and its contributories to a risk, which these proceedings amply demonstrate, that substantial costs would be incurred and no benefit would be achieved if shareholders could not in fact resolve their differences, or indeed if the costs incurred by the administrator then become an obstacle to such a resolution. Second, the suggested form of resolution of the shareholders’ differences was a buy-out of Ms Lam, which constrained the range of possible outcomes, with no reference being made either to the possibility that Ms Lam might buy out Ms Tang and Mr Chen – although that possibility was subsequently explored – or a third party sale, as would ordinarily be contemplated in an administration.

47. By letter dated 28 November 2014, Ms Lam’s solicitors raised several concerns as to Mr Keneally’s appointment (Ex A1, 267–276, Ex D1, 564–573). In particular, Ms Lam's solicitors indicated that she would attend of a meeting of shareholders and their representatives that Mr Keneally had called for 1 December 2014, but that she reserved all of her rights including:

“(a)    that the Purported Appointment is invalid;

(b)    that the Purported Administrator is not entitled to be indemnified out of the Company assets for any remuneration or costs that have been incurred;

(c)   that the Purported Administrator is not entitled to maintain any lien over the assets of the Company …

We put you on notice that unless an appropriate resolution is concluded at the meeting on 1 December 2014, we consider it appropriate that the Purported Administrator approach the Court to seek declarations as to the validity or otherwise of his Purported Appointment."

By that letter, Ms Lam’s solicitors also advised Mr Keneally of her explanation for payments by the Company to Sky Profit Properties Development Pty Ltd, a company associated with her husband, on 8 July 2013 and of $20,000 to her on 3 May 2013 and $7,900 to her on 3 December 2013, which were matters of concern to Ms Tang and Mr Chen that had been raised by Mr Keneally. Mr Keneally’s evidence is that he, Ms Lau and Mr Li then discussed that letter with Ms Tang (Keneally 20.1.2015 [84]). Mr Keneally suggested that Ms Tang would need to set out the reasons why an administrator was appointed in an affidavit (Lau, Annexure C; T273). In the event, that did not occur.

48. By email dated 28 November 2014, Mr Keneally's solicitors responded to Ms Lam's solicitors (Ex A1, 277A–277B) that Mr Keneally:

“proposes to approach the Court at the earliest opportunity next week to seek relief including a declaration in accordance with section 447C(2) of the Corporations Act 2001 that he was validly appointed and orders compelling your clients to deliver to him the certificate of title and keys to the Blue Mountains property and the books and records of the company.”

Mr Keneally did not take that course, which would have allowed a prompt resolution of the issues as to his appointment. I should note, in fairness to him, that he took the view that it was preferable to defer such an application, by reason of ongoing discussions between the shareholders at that point, and that reasoning had some force.

49. After his appointment, Mr Keneally continued investigations into the suggestion of misappropriation of funds by Ms Lam. By a file note dated 1 December 2014, he recorded that total payments made from the Company’s bank account prior to his appointment were $1,875,402 and he had to date been able to verify $1,703,722 of those payments against the Company’s books and records and was, at that stage of his investigation “satisfied that these payments are valid payments made in respect of the Company’s affairs and business”. He noted that payments of $171,630 remained under inquiry, including payments of $100,000 to Sky Profit Property Pty Ltd (as I noted above, a company associated with Ms Lam’s husband) on 8 July 2013; $20,000 to Ms Lam on 3 May 2013; and $44,000 to Pure Projects NSW, a consultant to the Company, on 5 August 2014. Mr Li sent a copy of that file note to Ms Tang and Mr Chen, but not to Ms Lam or her husband, on 1 December 2014 (Ex A6). I appreciate that Ms Lam was, in a sense, the target of Mr Keneally’s inquiries in this regard. However, that would not have prevented his either advising all directors, or none of them, of his progress in that investigation rather than advising two of the directors of that progress to the exclusion of Ms Lam and her husband, who were also directors of the Company.

49. By his report under s 439A of the Corporations Act, dated 5 December 2014 (Ex D1, 430), Mr Keneally recorded the background to his appointment as follows, based on his discussions with Ms Tang and Mr Chen:

“●   Both Ms Tang and Mr Chen had been dispute with Ms Cheng Lam in relation to the nature of a number of transactions during the period prior to the date of voluntary administration.

●   Ms Tang alleged that Ms Lam, a Director of the Company, may have been using the Company’s funds to conduct the business of her other related entities without the knowledge or approval of the board of directors of the Company.

●   Ms Lam had made an offer to settle her shareholder loans, other claims, and to sell her one (1) share to the other directors of the Company for an amount of $1.5 million.

●   The Company did not have sufficient cash to meet this payment in full.

●   Both Ms Tang and Mr Chen had been in negotiations with Ms Lam in relation to this settlement prior to the date of voluntary administration.

●   The Directors had not been able to reach an agreement regarding the terms of a settlement.

●   Both Ms Tang and Mr Chen were of an opinion – as the majority directors and shareholders of the Company, who also comprise the majority of the Company’s creditors – to call in shareholder loan funds owing to them.

●   As a result, the majority of the board of directors resolved to place the Company into Voluntary Administration on 10 November 2014.

●   It appears that the catalyst for the appointment of the Voluntary Administrator was the failure to resolve disputes between the directors/shareholders of the Company, regarding the alleged misappropriation of funds, failure to reach an agreement regarding a payment to Ms Lam’s [sic] for shareholder loans, other debts and claims, and a decision by the majority directors/shareholders to call in loans owing to them.”

Mr Keneally also noted, under the heading “causes of financial difficulty” that:

“The financial difficulty of the Company can be directly attributed to disputes among the shareholders resulting in the Company’s major creditors (Ms Tang and Mr Chen) considering calling upon their loans. The solvency of the Company is therefore dependent upon a number of facts including whether shareholder loans are due and payable, and the negotiated settlement for repayment of Company debts owing to Ms Lam, and a payment for equity in the amount of $1.5 million, which the Company did not have funds to pay.”

51. With all respect to Mr Keneally, it seems to me that the reasoning in this passage of the report is not well-founded, and it reflects a more fundamental difficulty with Mr Keneally’s approach to the question of the Company’s insolvency or likely insolvency. The fourth dot point, recording that the Company did not have sufficient cash to meet the payment of $1.5 million in full, failed to recognise that (as I have noted above) the amount referred to related to a negotiation to purchase Ms Lam’s interest in the Company, as to which only part of the payment would be funded by the Company, and that part of that payment would only be funded by the Company if shareholders agreed the transaction would go forward. The statement that Ms Tang and Mr Chen “were of an opinion … to call in shareholder loan funds owing to them” was not correct, if it is intended to indicate that they had decided to do so, since the evidence is to the contrary. The reference to “a decision by the majority/shareholders to call in loans owing to them” is also not correct, where no such decision was made, as Mr Keneally conceded in his affidavit evidence and in cross-examination. The passage relating to “causes of financial difficulty” in turn attributes a suggested financial difficulty of the Company to Ms Tang and Mr Chen “considering calling upon their loans”. That proposition has the difficulty that the mere consideration of that matter cannot cause any financial difficulty for the Company, unless Ms Tang and Mr Chen decided to take that course, which they did not, or were likely to take that course. Any suggestion that they were likely to undertake that course is undermined by Mr Keneally’s evidence in cross-examination that Ms Tang and Mr Chen had not responded in a “positive way” to that possibility when Mr Keneally raised that possibility with them (T169). Mr Keneally also recommended that the Company be returned to the control of its directors if the dispute between them could be resolved.

52. By 9 December 2014, Ms Tang and Mr Chen, who had appointed Mr Keneally as administrator, had apparently come to regret that step. On 9 December 2014, they advised Mr Li, and he advised Mr Keneally, that they did not want anyone involved in the negotiations between them and Ms Lam as they did not wish to incur any more professional fees and they wanted the administration to end at the second creditors meeting so they could liaise directly with Ms Lam (Ex D1, 548; Keneally 20.1.2015 [92]). Discussions between shareholders in respect of a possible acquisition of Ms Lam's shares, or alternatively an acquisition by Ms Lam of Ms Tang’s and Mr Chen’s shares, continued over that period. Between 1 December 2014 and 10 December 2014, Mr Keneally and his staff engaged in further attempts to encourage a resolution of the dispute between the shareholders which also did not succeed. On 10 December 2014, Mr Li again advised Mr Keneally that Ms Tang and Mr Chen wanted the administration to come to an end “so they can reduce costs and negotiate directly with [Ms Lam]” (Ex D1, 554 – 556; Keneally 20.1.2015 [93]).

53. These proceedings were commenced on 11 December 2014. Mr Keneally sent a circular to creditors on the same date (Ex D1, 562), following the commencement of these proceedings, stated that he had formed the view that the Company’s directors and shareholders were unlikely to resolve the dispute between them and changed his recommendation as to what was in the best interests of creditors to a recommendation that creditors resolve to place the company in liquidation at the second meeting of creditors on 15 December 2014. That meeting was subsequently adjourned by order made by the Court.

Whether reasonable notice was given of the directors’ meeting of 10 November 2014

54. Ms Lam contends that Mr Keneally’s appointment as administrator of the company was invalid, first, because the directors’ meeting at which he was appointed was not validly called under cl 119 of the Company’s constitution, because reasonable written or oral notice of that meeting was not given to Ms Lam and her husband in their capacity as directors, or alternatively reasonable written or oral notice was not given to all other directors of the Company.

55. Clauses 119 and 123 of the Company's constitution relevantly provide that:

“119   Any director may, by giving reasonable written or oral notice [to] all other directors, call a director's meeting at any time. Directors may have meetings, adjourn meetings and regulate the meetings in any way they see fit.

123   Upon consent by a majority of directors, director [sic] meetings may take place using some technological medium. This consent may only be withdrawn a reasonable time before such a meeting is to take place. A technological medium used for such a meeting must be capable of giving all participants a reasonable opportunity to participate in the meeting."

Clause 133 of the Company's constitution in turn provides that a resolution of directors must be passed by a majority of the votes cast by those directors entitled to vote on the resolution.

56. As I noted above, Ms Lam’s evidence (Lam [94]) is that, at 1.16pm on 10 November 2014, she received written notice by text message of a directors’ meeting to be held at 3pm that afternoon. Mr Pritchard notes, in submissions, a suggestion by Ms Lam in cross-examination that that text did not identify the meeting as a directors’ meeting (T92, 93, 109). It is not necessary to address that matter further where that document was not produced and where its content would make no difference to the findings that I have reached.

57. Mr Sulan, who appears with Ms Oreb for Ms Lam, submits that the time required for reasonable notice of a meeting depends “upon the circumstances and its limit is determined by what is fair to both parties”: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 567-568; Hickey v Aselford [2003] NSWSC 185 at [26]; McMaster v Eznut Pty Ltd [2006] WASC 109; (2006) 58 ACSR 199 at [162]. In Hickey v Aselford above, Gzell J held that notice of a meeting to consider a resolution to appoint a voluntary administrator that was given one afternoon in respect of a meeting to be called for the following morning was reasonable notice. In McMaster v Eznut Pty Ltd above at [169], [178], a shorter period of notice was held to be reasonable where there was urgency in appointing an administrator and, in Ashrafinia v Ashrafinia [2012] NSWSC 500, a short notice period was held to be reasonable where there was an urgent need to retain solicitors in respect of litigation. Mr Sulan submits that, in determining what is fair and reasonable, the relevant factors include the nature of the company and the nature of the business to be transacted: Toole v Flexihire Pty Ltd (1991) 6 ACSR 455 at 461; Ashrafinia v Ashrafinia above at [33]. Mr Pritchard draws attention to substantially the same authorities as those to which Mr Sulan refers. The question essentially reduces to whether notice given at 1.16pm of a meeting to be held at 3pm that afternoon, being notice of less than two hours, was reasonable in the circumstances.

58. In his opening submissions, Mr Keneally contended that the notice that was given of the directors’ meeting on 10 November was reasonable notice, on the basis that all of the directors, except for Ms Lam and Mr Chen, were resident in China; all of the directors were then in Sydney either in person “or by valid proxies held by their representatives” on 10 November 2014; Ms Tang and Mr Chen were scheduled to leave Sydney in the evening of 10 November 2014 to return to China; the Company's constitution contemplated the conduct of meetings by telephone and other technologies; notice of the meeting was given “some three hours” before the meeting was conducted (a proposition that is not correct on the evidence, as I noted above); and Ms Lam and her husband attended the directors meeting and participated in it by telephone. In dealing with the shorter notice of the meeting that was in fact given, as emerged from the evidence, Mr Pritchard submits that:

“Notice of 1 hour and 44 minutes was reasonable in all the circumstances. There had been a breakdown in the dealings and relationship between the directors, there was a concern about the continuing conduct of Ms Lam in circumstances where Ms Lam had effective day to day control of the Company in Australia; Ms Lam was actively involved in her Sky Profit Properties Burwood development; there were outstanding and undisputed third party trade debts owed by the company which could not be paid by reason of the directors’ dispute and the need for dual signatories [on the Company’s bank accounts and] the Company’s substantial related party loans; and directors of the Company usually resident overseas in China were present in Australia and to return overseas later that day. The issue of possible external control of the Company needed to be considered and determined urgently, including the issue of the directors determining the Company was solvent or likely to become insolvent and possible personal liability risks for the directors.”

59. I am not persuaded by this submission, where each of these matters to which Mr Pritchard refers had existed for several weeks before the meeting was called, with the possible exception of matters relating to Ms Tang's and Mr Chen's travel plans, and there is no evidence as to when those travel plans were made, or indeed that they were in fact made. The best evidence of the lack of urgency of the position is that Ms Tang and Mr Chen took several weeks, after first approaching Mr Keneally, to determine that they would appoint an administrator to the Company, and that nothing had happened on or about 10 November 2014 to increase the urgency of the matter. In those circumstances, it seems to me that little weight should be given to the submission that, but for the fact of any travel plans of Ms Tang and Mr Chen, it was necessary to call the directors’ meeting on less than two hours’ notice. It does not seem to me that any inconvenience to Ms Tang and Mr Chen in requiring the variation of their travel plans in order to give greater notice of the meeting, warranted the very short notice given of that meeting, absent any other urgency in the matter.

60. Mr Pritchard also submits that Ms Lam was in Sydney and actually received the notice; she had sufficient time to and did actually attend the meeting by telephone; she participated in the meeting, although withdrawing once she was told of the proposed resolutions; there was no requirement to give Ms Lam notice of the business proposed to be conducted at the meeting; and the Company was a small private company, the directors were the effective owners of the Company and had been meeting and/or discussing the future of the Company over recent times. Mr Pritchard also refers to Ms Lam’s acknowledgement in cross-examination that text messages were a regular method of communication between Ms Lam and Mr Chen (T92). I accept that is the case, although it is not to the point where the issue is not how, but when, notice of the meeting was given to Ms Lam. Mr Pritchard also submits that Ms Lam gives no evidence that meetings were not called in this manner or at such short notice previously. While that is correct, it does not seem to me to be of particular significance, since the notice required for a meeting to appoint an administrator may be more (given the importance of the decision) or less (given any urgency in the position) than the notice required for board meetings in the ordinary course.

61. Mr Pritchard also submits that Ms Lam gives no evidence of actual prejudice by receipt of the period of notice of the meeting that she actually received as opposed to, for example, longer notice of that meeting. It does not seem to me that the absence of such evidence is of particular significance, where it would have been hypothetical to the extent that it was addressed to what Ms Lam would have done if she was given notice that was not in fact given, and the options available to her in that situation were obvious enough, and included giving proper consideration to the matters to be addressed at the meeting (if she was told what they were, a matter that I will address below) or arranging for an adviser to attend the meeting with her, a course to which Ms Tang and Mr Chen could not have objected where they themselves took it, in having Mr Zhou attend the meeting with them. Mr Pritchard also submits that there is no evidence that any of the other directors (including Ms Lam’s husband, who did not give evidence as I noted above) regarded the notice period as unreasonable or prejudicial. I give little weight to the absence of such evidence. Ms Tang and Mr Chen would not have taken that view, since they chose to give that short notice; their fathers did not, as I noted above, participate in the meeting in any meaningful way; and, whatever the views of Ms Lam’s husband or the other directors, the Court can determine the reasonableness of the notice given objectively and by reference to the relevant circumstances.

62. Even if Ms Tang and Mr Chen were proposing to, or did, return to China on the evening of 10 November – which, as I noted above, has not been established as a matter of fact, as distinct from their having advised Mr Keneally of such an intention – it seems to me that their travel plans provided no justification for calling a meeting in respect of the very significant decision to appoint an administrator to the Company, with less than two hours’ notice to Ms Lam and her husband. The lack of reasonable notice is emphasised, it seems to me, by the fact that Ms Tang and Mr Chen had by that time been in discussions with Mr Keneally for over a month as to the relevant issues, a matter which would have been apparent to Mr Keneally; they had advised Mr Li that they proposed to appoint an administrator the night before, and they could have given notice of the meeting to Ms Lam and her husband at that time, a matter that would also have been apparent to Mr Keneally; and there was no evidence of any immediate financial demands against the Company, requiring that such an appointment be made on that day, a matter that should also have been apparent to Mr Keneally. I am comfortably satisfied that reasonable notice was not given of the directors’ meeting.

63. Mr Pritchard submits that Mr Keneally was entitled to assume that the acts within the Company’s constitution were duly and properly performed and was not bound to enquire whether acts of internal management had been regular. He refers to Sliteris v Ljubic [2014] NSWSC 1632 at [28], where I observed that:

In Correa v Whittingham(No 3) [2012] NSWSC 526; (2012) 267 FLR 120 at [42], I observed, with reference to authority, that the steps involved in a person’s appointment as administrator of a company were a dealing with the company for the purposes of ss 128 and 129 of the Corporations Act and that the assumptions available under s 129(1) reflected the indoor management rule, by which persons dealing with a 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. I treated such an assumption that was available to the administrators, in dealing with the company, as also being available to them in an application made by a privy of the company who challenged the validity of that dealing with the company. That approach was not questioned on the appeal to the Court of Appeal ([2013] NSWCA 263 at [118]ff). … [T]here could not be a “bifurcation” of the validity of the Administrators’ appointment, such that a different result was reached as between an attack on that appointment brought in the name of the Company and an attack on it brought, in reliance on dealings between the Company and the Administrators, by Mr Sliteris as a director or shareholder of the Company.”

64. Mr Pritchard submits that the fact that an employee of Mr Keneally, Mr Li, was present to facilitate the meeting on 10 November 2014 does not deprive Mr Keneally of the entitlement to such an assumption and that Mr Keneally cannot have “vicarious” knowledge of any irregularity (if found) and was not aware of any alleged irregularity in his appointment until prior to the commencement of these proceedings. It is not necessary to determine the correctness of that submission, which would have the potential consequence that an administrator would be able to isolate himself or herself from matters known to his or her senior employees which ought to have been, but were not, drawn to his attention. That question does not arise in this case, because any assumption in respect of the notice given of the 10 November meeting is not available to Mr Keneally by reason of the matters he knew, without relying on other matters known to Mr Li.

65. A person is not entitled to make an assumption specified in s 129 of the Corporations Act if he or she knew or suspected that assumption was not correct: s 128(4) of the Corporations Act. Mr Keneally knew that a maximum of three hours’ notice of the meeting was to be given to Ms Lam. That notice would not have been reasonable notice for the same reasons that less than two hours’ notice of the meeting was not reasonable notice, to which I referred above, and which were largely matters known to Mr Keneally, as I also noted above. In those circumstances, Mr Keneally knew the matters that had the consequence that the notice of the meeting did not comply with the requirements of the Company’s constitution, although he and Mr Li did not make further inquiry to determine when Ms Tang and Mr Chen actually gave that notice and did not then realise that even shorter notice of that meeting had been given than had been discussed with Mr Keneally.

99. I do not consider that the fact that Ms Tang and Mr Chen did not give evidence can support, in itself, any inference that the purpose of Mr Keneally’s appointment was not a genuine one. As Mr Pritchard points out, they were not joined as parties to the proceedings by the Plaintiff; they are not in Mr Keneally’s “camp”; and there would have been some difficulty in compelling their attendance to the extent that they are either residing in China, or at least travel there from time to time, notwithstanding the brief appearance by Counsel on their behalf at the commencement of the proceedings.

100. I ultimately do not consider it necessary to determine the submission as to improper purpose in respect of investigating the misappropriation allegations, although it seems to me that, as matters have developed, Ms Tang and Mr Chen may have been under the misapprehension that voluntary administration provided a proper means for their concerns as to misappropriation of funds by Ms Lam to be investigated at the Company’s cost, rather than their own, irrespective of any question of the Company’s insolvency or likely insolvency. It does not seem to me that the evidence supports an inference that Ms Tang and Mr Chen appointed an administrator to advance their negotiations with Ms Lam, although it is clear that Mr Keneally did ultimately seek to facilitate those negotiations. The discussions with Mr Keneally as to the shareholder dispute prior to his appointment seem to me to be consistent with a wider purpose of Ms Tang and Mr Chen seeking advice as to their position generally, and the later actions by Mr Keneally seem to me to reflect his view of the value which he could add in the relevant situation, which seems to me to have been genuinely held although potentially inconsistent with the purposes of Pt 5.3A of the Corporations Act so far as they are directed to the issue of insolvency or potential insolvency not providing a mechanism for the resolution of shareholder disputes.

Discretionary matters raised by Mr Keneally’s Defence

101. As I noted above, Mr Keneally contends that the Court, in its discretion, would not grant any relief claimed by Ms Lam in these proceedings and relies on the particulars set out in paragraph 42 of his Points of Defence in that regard. That proposition is particularised on the basis that Ms Lam “delayed unnecessarily” in bringing the proceedings; Mr Keneally and the Company and third party creditors have suffered and will suffer prejudice by Ms Lam's delay in bringing the proceedings; Ms Lam will suffer no material prejudice if the relief claimed is not ordered; the Company is likely to be insolvent or is insolvent and is the subject of a substantive shareholders dispute; Ms Lam “only holds a minority shareholding” of the Company; and the “majority of the parents of the shareholders” (by which I assume Mr Keneally refers to the parents of Ms Tang and Mr Chen) support his position.

102. Mr Pritchard points to the concerns raised on behalf of Ms Lam at the first meeting of creditors on 20 November 2014, and to Mr Keneally’s solicitors’ response drawing attention to the possibility that Ms Lam could apply to the Court, and to the desirability of such an application being brought promptly. He also refers to the matters raised by Ms Lam’s solicitors in their letter dated 28 November 2014, to which I have referred above. Mr Pritchard submits that:

“Notwithstanding that Ms Lam had knowledge of the material matters now being sought to be ventilated on this application by no later than 10 November 2014 and legal and financial representation in relation to her position, Ms Lam failed to commence these proceedings until 11 December 2014, very shortly before the second creditors meeting. … Ms Lam made the (perhaps understandable) commercial decision to try and negotiate a settlement with the other directors. Having failed in achieving that outcome, she should not be now permitted to effectively put herself back in the position she was in prior to the meeting on 10 November 2014.”

Mr Pritchard anticipates the criticism that Mr Keneally could equally have brought an application to the Court to clarify the validity of his appointment, and responds that:

“While on 28 November 2014, Mr Keneally’s solicitors indicated that they would make application to the Court in relation to the issue of the validity of the appointment of Mr Keneally, Mr Keneally quite reasonably in circumstances of the “in principle” settlement agreement between the parties did not make an application prior to commencement of these proceedings.”

103. I do not accept those submissions, so far as they take the somewhat inconsistent approach that delay by Ms Lam was blameworthy and inaction by Mr Keneally was reasonable. It seems to me that the delay on Ms Lam's part is a neutral factor, where Mr Keneally should have sought to satisfy himself as to the validity of his appointment, and did not approach the Court for a declaration as to that question, notwithstanding that real doubts had plainly arisen in that regard and he had at one point contemplated such an application. Mr Keneally’s explanation for not bringing such an application, by reference to continuing negotiations between the shareholders, is equally applicable to the delay for which he criticises Ms Lam. So far as Mr Keneally has plainly incurred costs and expenses and any entitlement to remuneration, he has done so in circumstances that he was on notice of the issues as to the validity of his appointment and had not brought an application to the Court to resolve them.

104. Mr Pritchard also submits that the orders sought by Ms Lam are not supported by any other director, shareholder, or third party creditor of the Company and are not supported by Ms Lam’s husband, one of the other directors. That proposition requires the qualifications that, although Ms Tang, Mr Chen and Ms Lam’s husband did not seek to be heard in these proceedings (indeed, as I noted above, Ms Tang and Mr Chen declined an opportunity to be heard offered to their Counsel who briefly appeared at the commencement of the hearing), Mr Keneally’s evidence is that Ms Tang and Mr Chen had expressed the wish to him that the administration terminate, and it might seem unreal to conclude that Ms Lam’s husband did not support the application where he sat beside her in Court during part of the hearing.

105. Mr Pritchard also submits that the administrator has incurred costs and expenses and entitlement to remuneration totalling $66,408 between 10 November 2014 and 4 December 2014 (and additional costs and expenses since that time) which would not have been incurred had Ms Lam not delayed in the commencement of the subject proceedings, and Ms Lam makes no offer to pay costs and remuneration incurred by Mr Keneally. That does not seem to me to assist him where it was open to him to seek clarification of the validity of his appointment from the Court, once it was apparent that genuine issues existed in that respect, and the additional costs and expenses to which he is exposed reflect as much his not doing so as any delay on Ms Lam’s part. Mr Keneally will, if invalidly appointed, have the opportunity to bring a claim for remuneration and expenses, as he does, at least to the extent they have incontrovertibly benefitted the Company, although I recognise that his recovery of remuneration and costs on that basis may be significantly less than would be recovered in respect of a valid appointment.

Declarations sought by Mr Keneally under s 447C of the Corporations Act

106. By his Cross Claim, Mr Keneally seeks declarations under s 447C of the Corporations Act that he was validly appointed as administrator on 10 November 2014. This section relevantly provides that:

“447C(1) If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company’s creditors may apply to the Court for an order under subsection (2).

447C(2) On an application, the Court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground.”

107. The orders made by the Court under this section are declaratory rather than curative: Smolarek v McMaster (as administrator of Eznut Pty Ltd [2006] WASCA 216 at [25]; Re HPI Australia Pty Ltd [2008] NSWSC 1106 at [8]. Such a declaration cannot be made since, absent curative orders under s 447A of the Corporations Act or otherwise, the findings that I have reached above have the result that Mr Keneally’s appointment was not valid.

Whether Mr Keneally’s appointment should be validated under s 447A of the Corporations Act

108. By his Cross-Claim, Mr Keneally also seeks orders under s 447A of the Corporations Act that Pt 5.3A should operate in relation to the Company as if he was validly appointed on 10 November 2014. Mr Keneally also seeks declarations under s 447A and s 1322(4) of the Corporations Act that his appointment was not invalidated by reason of any procedural defect in the meeting of directors held on 10 November 2014 at which he was appointed. I have addressed the latter claim above and now address his wider claim under s 447A of the Corporations Act.

109. Section 447A of the Corporations Act is widely expressed, providing, relevantly, that:

“The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.”

In Brash Holdings Ltd (admin apptd) v Katile Pty Ltd [1996] 1 VR 24; (1994) 13 ACSR 504 at 507, the Full Court of the Supreme Court of Victoria noted that that section:

“evidently proceeds on the view that Pt 5.3A is inadequate in the provision which it otherwise makes for the new form of administration and that it is therefore necessary to enable gaps in the Part to be filled by the exercise by the court of wide powers to make such orders as it thinks appropriate about how the Part is to operate in relation to a particular company.”

In Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 at [17]-[18], [23]-[24], the plurality of the High Court noted that:

“The power is not cast in terms of a power to make orders to cure defects or to remedy the consequences of some departure from the scheme set out in the other provisions of Pt 5.3A. Its operation is not confined to such cases. Nor is there anything on the face of s 447A(1) that suggests that it should be read down. In particular, the words of the provision are wide enough to confer power to make orders which will have effect in the future but which are occasioned by something that has been done (or not done) under the other provisions of Pt 5.3A before application is made under s 447A(1). …

[T]he orders contemplated in the examples go beyond a curial determination of what is the effect of existing provisions of the Part on a particular company in the circumstances that may be established in a proceeding; the orders contemplated are orders that alter how the Part is to operate in relation to a particular company, not how the Part does operate in relation to that company.”

110. In Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607; 13 ACSR 337 at 341, Young J similarly noted that the section confers “plenary powers” on the court “to do whatever it thinks is just in all the circumstances”, having regard to the rights of the various groups of persons affected by the administration. In Shirlaw v Graham [2001] NSWSC 612 at [14], Young CJ in Eq similarly noted that s 447A of the Corporations Act is a plenary power which may be used to overcome a defect in compliance with the appointment procedure under s 436A of the Corporations Act. In Calabretta v Redpen Developments Pty Ltd (in liq) (recs and mgrs. apptd) [2010] FCA 81; (2010) 183 FCR 47 at [37], Yates J in turn observed that:

“The discretion whether to exercise the power [under s 447A] is undoubtedly a plenary one, to be exercised having regard to all the circumstances of the case that have been brought to the Court’s attention by the applicant for relief and by those who have an interest in the matter and who may be affected by the granting of that relief. One relevant consideration is whether substantial injustice would be caused by effectively validating an otherwise invalid appointment: McIntosh [(as joint and several admins of CMX Technologies Pty Ltd) v CMX Technologies Pty Ltd (admins apptd) (2005) 56 ACSR 283] at [32].”

Mr Pritchard also refers to Correa v Whittingham [2013] NSWCA 263 at [5], where Barrett JA (as his Honour then was) referred to the application of the section:

“in the frequently encountered case of an order preparing or validating the appointment (or purported appointment) of an administrator which is defective because some element required by Pt 5.3A itself is lacking. In circumstances of that kind, the s 447A order causes Pt 5.3A to operate even though its own terms are not fully satisfied.”

111. Mr Pritchard submits that the Court should validate Mr Keneally’s appointment since the irregularities relied upon by Ms Lam were procedural not substantive; if the irregularities now relied upon had not occurred and regularity had occurred, the outcome of the meeting would still have resulted in the appointment of Mr Keneally as administrator; and there is no actual prejudice to Ms Lam or any third party by reason of the irregularities now relied on. I do not accept these submissions, for reasons that will be apparent from my findings above, and the reasons why I declined relief under s 1322(4) of the Corporations Act. It seems to me that the irregularities involved in the short notice of meeting caused substantial detriment to Ms Lam, by way of depriving her of the opportunity to take advice or have an adviser attend the meeting with her. I should not assume that, if Ms Lam had the opportunity to take advice or bring an adviser to that meeting and she or that adviser had pointed the relevant issues out to Ms Tang and Mr Chen, they would have proceeded to an appointment of an administrator, notwithstanding the statutory basis to do so was not established. Mr Pritchard also submits that I should validate Mr Keneally’s appointment because the Company was insolvent or likely to be insolvent as at 10 November 2014 and the Company is presently insolvent or likely to be insolvent. I have not accepted Mr Keneally's evidence that the Company was insolvent or likely to be insolvent as at 10 November 2014 and he has not established that it is presently insolvent or likely to be insolvent, at least if it is not liable for the substantial costs which would have been incurred in his defence of these proceedings.

112. Mr Pritchard submits that, if the Court does not make the orders under s 447A of the Corporations Act, the Company will return to the control of the directors who, it is to be assumed, would simply hold a further directors’ meeting to appoint a voluntary administrator and/or a liquidator and/or approach the Court for an order that the Company be wound up on the just and equitable grounds; and that there is no dispute that the relationship between the directors has irretrievably broken down, with apparent attempts to settle the dispute between them prior to and since the commencement of the proceedings have failed and there being no present likelihood of resolution. It does not seem to me that the consequence to which Mr Prichard refers is likely to follow from declining to make orders under s 447A of the Corporations Act. Other possibilities are that, as Ms Tang and Mr Chen had previously advised Mr Li, they would then seek to negotiate the purchase of Ms Lam's shares without third party intervention and the costs of external professional advisers. I would not assume that a voluntary administrator would be appointed, where the Company's insolvency or likely insolvency at this point is not established. If the directors cannot resolve their differences, and where the basis for appointment of a voluntary administrator is not established, it is any event preferable that any relief such as the appointment of a provisional liquidator be sought on a proper basis rather than an improper one.

113. Mr Pritchard also submits that I should validate Mr Keneally’s appointment because the Company’s undisputed trade creditors have been prejudiced by the current position including the dispute between directors; repeats the matters on which Mr Keneally relied to submit that Ms Lam should not be granted relief in the exercise of the Court’s discretion, which I have addressed above; and also repeats the submissions that Ms Lam’s application is not supported by any of the other directors or shareholders, which I have also addressed above. It has not been established the trade creditors were prejudiced by the dispute between the directors, although payments to them may well have been delayed by the administration. I have not accepted that Ms Lam's delay in approaching the court is any more or less unreasonable than Mr Keneally's delay in approaching the Court, where each of them was aware of the issues surrounding his appointment from shortly after it occurred.

114. Mr Sulan submits that, if the Court finds, as I have, that Ms Tang and Mr Chen did not hold the opinion (or a genuine opinion) that the Company was insolvent or likely to become insolvent, neither s 447A not s 1322 of the Corporations Act are engaged. In Wagner v International Health Promotions above at 422, Santow J held that s 1322 of the Corporations Act was not sufficiently wide to cure failure with a mandatory requirement for a resolution under s 436A of the Corporations Act, which was not a procedural irregularity for the purposes of that section and went to the underlying statutory basis for the appointment of an administrator. In Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428, dealing with s 447A of the Corporations Act, Merkel J treated the issue as one of discretion rather than of power, noting (at [19]) that the Court

“should hesitate to exercise the power under s 447A to overcome a failure to comply with a statutory requirement for a valid appointment of an administrator”.

His Honour nonetheless exercised that power in that case, where the relevant company was in fact insolvent and it was necessary for the directors to take steps to address the position and the failure to pass a resolution complying with s 436A was the result of inadvertence. In this case, it is not necessary to decide whether any limitation on the Court’s power to validate the appointment is one of power or discretion, where the findings that I have made that the Company was not insolvent or likely to become insolvent, and that Ms Tang and Mr Chen had not formed a genuine view to that effect, would deprive the Court of power to validate the appointment on the former basis and provide a strong reason not to do so on the latter basis.

115. Mr Sulan also submits that there are additional reasons why the curative provisions under s 447A of the Corporations Act should not be applied. He submits that a general curative order to validate an administration under s 447A can only be made where the exercise of power is consistent with the objects of Pt 5.3A: BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 at [194]. In oral submissions, Mr Sulan refers to the decision in BE Australia above at [194], [207] where Campbell JA (with whom McColl JA agreed) observed that the exercise of a power under s 447A has to be for a purpose consistent with Pt 5.3A of the Act, and submits that the making of such an order would in this case not maximise the chances of the Company continuing in existence or create any greater return to creditors from a winding up, or otherwise advance the purposes of Pt 5.3A of the Act. It seems to me that, as Mr Sulan submits, the administration of the Company will neither increase the prospects of the business continuing in existence, where it is a special purpose vehicle with one asset being a property, nor will it increase the return to creditors compared to a liquidation, where the Company has (or at least had, prior to the administration) sufficient funds held in its bank account to pay its current creditors.

115. For these reasons, I am not satisfied that I should grant the wider relief sought by Mr Keneally under s 447A or s 1322 of the Corporations Act, where the statutory preconditions to the appointment of an administrator under s 436A of the Corporations Act were not satisfied.

Mr Keneally’s independence

117. The parties also addressed submissions as to Mr Keneally’s independence. I should refer to those submissions, although it is not necessary to, and is preferable not to, express a final view as to that issue given the findings that I have reached on other grounds. The Code of Professional Practice for Insolvency Practitioners, 3rd ed, 1 January 2014 (as amended 18 August 2014) published by the Australian Restructuring Insolvency and Turnaround Association (Ex A9) emphasises the care that an insolvency practitioner must take when meeting directors prior to appointment, to determine the capacity in which he is being asked to advise the relevant director; emphasises that advice to directors in respect of their obligations as liabilities as directors or in relation to their personal financial affairs “creates a risk to independence that will prevent the Practitioner being appointed”, unless the information provided is of a general nature; and also notes that:

“If it becomes apparent that the director is seeking anything other than general information in either their capacity as a director or their own personal capacity, then if the Practitioner wishes to leave open the prospect of an appointment to the Company, the Practitioner should recommend that the director obtain that advice from another practitioner.”

118. Mr Pritchard points out, and I accept, that the Code of Professional Practice contemplates that an insolvency practitioner may, at least in the ordinary course, deal with some but not all of the directors of a company prior to an administration. I am not, however, assisted by the submission that Mr Pritchard makes as to the hypothetical situation where there was compelling evidence of a defalcation by a director, and that defalcation had caused a company’s actual insolvency, and his submission that it would not necessarily be for the insolvency practitioner to communicate with the defaulting director in that case. That hypothetical situation seems to me to have little resemblance to the facts of this case, where neither the fact of defalcation nor the fact of insolvency are established in this case. Mr Pritchard characterises the “advice” provided by Mr Keneally prior to his appointment as advice given to the Company, by its director, Ms Tang, about options available to the Company to deal with issues potentially going to its ultimate solvency or insolvency arising out of misappropriation allegations. I do not doubt that, in the ordinary course, a potential administrator may provide at least general information to a company, by one or more of its directors, prior to his appointment, without compromising his independence. In this case, it seems to me that Mr Keneally’s advice was addressed to the particular concerns of Ms Tang, as a director and shareholder, rather than the Company’s position, and was directed to the question of concerns as to misappropriation, rather than any issue as to solvency, which had not been raised at that time.

119. It seems to me that there is a real possibility that the extent of advice provided by Mr Keneally and Mr Li, as to the steps which Ms Tang and Mr Chen might take in respect of the investigation of the suggestion of misappropriation by Ms Lam and in respect of the negotiations to buy out Ms Lam’s shares, was inconsistent with his maintaining sufficient independence to be appointed as administrator, although I do not express a final view in that regard.

Whether Mr Keneally should be replaced if the administration continued

120. Mr Sulan submits that, if the Court holds that the administration is to continue (either because the appointment was valid or because curative relief is granted), then it is necessary to consider whether Mr Keneally should be replaced. Mr Sulan points out that the “guiding principle” for the valid appointment of an administrator is that he or she must be independent and must be seen to be independent: Commonwealth of Australia v Irving (1996) 65 FCR 291 at 294-295. He submits that involvement with a company prior to administration that is “substantial”, or gives rise to a reasonable apprehension that the administrator might be impeded from acting impartially, will disqualify a person from appointment: Irving above at 296; Cote v Devine [2013] WASC 79 at [53]. He submits that the pre-appointment contact between Mr Keneally and Ms Tang and Mr Chen and his communications and involvement in the shareholder dispute since his appointment ought to rule him out from any future role.

121. Mr Pritchard submits that no basis for the removal of Mr Keneally has been established. Mr Pritchard responds to the criticism of Mr Keneally’s discussions with Ms Tang prior to his appointment by emphasising that those discussions led to no separate engagement of Mr Keneally or his firm, and submitting that they were discussions with Ms Tang in her capacity as a director of the Company. Mr Pritchard submits that the issue of possible misappropriation of Company funds by Ms Lam was a matter of apparently genuine concern by the other directors and was relevant to the solvency or likely solvency of the Company. Mr Pritchard also submits that Mr Keneally was entitled to and did genuinely take the view that any communication he had with the director of the Company prior to his appointment was, or was likely to be, made known to all directors as part of all directors having access to Company documents, and that there is nothing in his conduct after his appointment which discloses any bias or partiality to any party. Mr Pritchard also submits that Mr Keneally has performed all necessary and appropriate duties and functions while administrator (Keneally 20.1.2015 [36]–[117]) and there is no pleaded allegation to the contrary. Mr Pritchard responds to criticisms of the disclosures made in the DIRRI, to which I have referred above, that those disclosures are appropriate, do not contain material errors and materially comply with the substance and effect of the requirements of the Code of Professional Practice and the law, and the criticisms that Mr Keneally had accepted in cross examination were not substantial, or not so substantial as to impugn his appointment, independence and/or remuneration. Mr Pritchard also submits that the Court would have regard to the costs associated with replacement of an administrator and the delay of Ms Lam in prosecuting this claim, which was not advanced until 12 December 2014 after the proceedings were commenced.

122. Given the findings that I have made above on other grounds, and the potential reputational impact of a decision to remove an administrator, I consider it preferable not to determine this matter where it is not necessary to do so. I should make clear that observation should not be read as containing any suggestion that any determination of that matter would have been adverse to Mr Keneally. The question does not arise on my findings, and, if an appellate Court takes a different view as to those findings, it would then arise in a different factual context, for determination by reference to those findings of the appellate Court that are different from my findings.

123. For completeness, I note that criticisms were made of Mr Keneally’s role in the proceedings. It is also not necessary to address these given the findings that I have reached on other grounds. I should briefly indicate that I do not accept that he was obliged to file a submitting appearance and I accept that he was entitled to defend the propriety of his conduct. In particular, Mr Pritchard rightly points out that, had Mr Keneally filed a submitting appearance, the Court would have been left without any contradictor, particularly where the Chinese directors and/or shareholders of the Company were not joined as defendants in the proceedings, although the Plaintiffs had brought a late application to do so in mid-January 2015. I also accept that, as Mr Pritchard points out, Mr Keneally had a proper interest in the proceedings, which he was entitled to defend, where Ms Lam sought to invalidate his appointment, even if it were valid, by an order under s 447A of the Corporations Act, sought orders for his removal, and resisted his Cross-Claim for remuneration if his appointment was found not to be valid or the Court made no order under s 447A of the Corporations Act. I note, but do not need to address, a further question whether the vigour of Mr Keneally’s (or his legal representatives’) attacks on Ms Lam, in seeking to defend his role, could have caused difficulty for his independence had he otherwise been successful in the proceedings.

Mr Keneally’s claim to remuneration

124. Mr Keneally submits that, if the Court is otherwise against him in relation to the validity of his appointment and refuses an order under s 447A of the Corporations Act in his favour in respect of that appointment, it should make an order entitling him to his remuneration (including costs and expenses) associated with the conduct of his administration to date. Mr Keneally seeks such an order, at least in the first instance, under s 447A of the Corporations Act. Mr Sulan accepts that a curative order under that section to allow Mr Keneally to claim remuneration may be available, in principle. However, he submits that such an order should not be made, by reason of Mr Keneally’s involvement with the circumstances of his appointment: Deputy Commissioner for Taxation v Portinex above; Cadwallader v Bajco Pty Ltd (No 2) [2002] NSWSC 127.

125. Mr Pritchard also points out that an administrator who was not validly appointed would be entitled to remuneration on a quantum meruit basis, and refers, inter alia, to Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201 at 204; Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 71 ACSR 250; and Correa v Whittingham (No 3) [2012] NSWSC 526; (2012) 267 FLR 120 at [224] (which was reversed in Correa v Whittingham above, without criticism of this paragraph, and where the matter was returned to the trial judge for determination of a quantum meruit claim); Re Lime Gourmet Pizza Bar (Charlestown) Pty Ltd (formerly under administration) above at [88]. Mr Pritchard accepts that an administrator’s right to remuneration on that basis is limited to the remuneration done for work which was of incontrovertible benefit to the company: Re Dominion Insurance Company of Australia Ltd (subject to Scheme of Arrangement) [2013] NSWSC 898; (2013) 276 FLR 338 at [43] per Brereton J (in the context of invalidly appointed liquidators). Mr Pritchard also raises the possibility that it may be appropriate for an assessment of the remuneration to be referred to a referee for determination under Uniform Civil Procedure Rules 2005 (NSW) r 20.14, which was noted in Correa v Whittingham (No 3) above at [225], although ultimately not adopted in that case.

126. It seems to me that a claim for quantum meruit is open to Mr Keneally, even if not strictly pleaded, where all the relevant factual issues have been addressed in the evidence in respect of Mr Keneally’s claim under s 447A of the Corporations Act, although detailed submissions as to quantum were deferred by agreement of the parties. It seems to me preferable to address this issue, in its entirety, after the parties have had the opportunity to review the findings in this judgment and make submissions as to whether and how they might affect a claim for remuneration and costs and as to the quantum of that claim.

Relief sought by Ms Lam

127. As I noted above, Ms Lam seeks a declaration under s 447C of the Corporations Act, the Supreme Court Act and in the Court’s inherent jurisdiction that Mr Keneally was not validly appointed as administrator to the Company on 10 November 2014. The findings that I have reached above have the result that Ms Lam is entitled to such a declaration. Ms Lam also sought orders under s 447A of the Corporations Act that, if Mr Keneally was validly appointed, Pt 5.3A operate in relation to the Company as if Mr Keneally was not validly appointed and an order that the administration come to an end; or alternatively that Mr Keneally be replaced as administrator. The occasion for such orders does not arise given the findings that I have reached. I will hear the parties in respect of Mr Keneally’s quantum meruit claim and, after the determination of that issue, as to costs.

128. The parties should bring in agreed short minutes of orders to give effect to this judgment or, if there is no agreement, their respective draft short minutes and short submissions as to the differences between them, within 7 days.

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Amendments

26 August 2015 - Paragraph 33 lines 7 and 9 - replace the reference to "Mr Chen" with "her husband".

Paragraph 87 - correct "was called p" to "was called up".

Parties - replace Applicant with Plaintiff, First Respondent with First Defendant and Second Respondent with Second Defendant.

Decision last updated: 26 August 2015