Kirwan v Cresvale Far East Ltd (in liq) - [2002] NSWCA 395

NEW SOUTH WALES COURT OF APPEAL

CITATION: Kirwan v Cresvale Far East Ltd (In liq) [2002] NSWCA 395

FILE NUMBER(S):
40188/01

HEARING DATE(S): 19, 20 August 2002

JUDGMENT DATE: 10/12/2002

PARTIES:
Nigel Peter Kirwan (Appellant/4th Cross Respondent)
Cresvale Far East Limited (1st Respondent/1st Cross Respondent)
Cresvale Securities Limited (2nd Respondent/2nd Cross Respondent)
Vanda Russell Gould (3rd Respondent/Cross Appellant)
Cresvale Capital Pty Limited (4th Respondent/3rd Cross Respondent)

JUDGMENT OF: Meagher JA Giles JA Young CJ in Eq

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 3672/00

LOWER COURT JUDICIAL OFFICER: Austin J

COUNSEL:
D J Higgs SC and R J H Darke (Appellant)
M Cashion SC (1st Respondent)
P M Wood (2nd & 4th Respondents)
S D Rares SC and P J Dowdy (3rd Respondent)

SOLICITORS:
John A Glynn & Associates (Appellant)
Minter Ellison (1st Respondent)
Blake Dawson Waldron (2nd & 4th Respondents)
Henry Davis York (3rd Respondent)

CATCHWORDS:
CORPORATIONS- Administrator- Fiduciary duties- Duties re exercising casting votes- Standards of conduct for administrators- Liability of administrator to suffer order for costs. CORPORATIONS- Shares- Allotment- When power to allot exceeded. EQUITY- Equitable relief- Requirement to do equity. MEETINGS- Casting votes- Principles governing exercise. PROCEDURE- Costs- Administrator arguing both for the company and himself personally- How costs borne if unsuccessful. (D)

LEGISLATION CITED:
Corporations Act 2001 (Comm) s 175, Pt 5.3A (particularly ss 439A(4)(c), 443C, 443D, 447E), ss 513C, 536, 600B
Corporations Regulations 5.6.21, 5.6.23, 5.6.26
Supreme Court Act 1970, s 76

DECISION:
See paras 449, 450 and 451

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40188/01
SC 3672/00
MEAGHER JA
GILES JA
YOUNG CJ in EQ
Tuesday 10 December 2002

KIRWAN v CRESVALE FAR EAST LTD (IN LIQUIDATION)

Judgment

MEAGHER JA: In this matter I have had the advantage of reading in draft the judgments of both Giles JA and Young CJ in Eq. I shall not recite once more the relevant facts, which are, perhaps more than adequately, set out in the judgments.
On the central question (which has now become obsolete) of whether the issue of shares should have been set aside on the grounds of improper purpose, I respectfully agree with Young CJ in Eq. Securities was carrying on business as a stockbroker; everyone agreed it should continue to do so; it was desperately short of capital, and was dancing on the brink of insolvency; it could not continue in business, unless there was some injection of capital; capital could have put it in liquidation, but did not do so; nobody was prepared to supply it with any capital, except Mr Kirwan; Mr Kirwan did so, in return for the issue of shares. In these circumstances, the correct principle is that set out by his Honour:
“Likewise, if a company has need of capital and there is only one avenue of obtaining that capital, then even though the person who is subscribing the extra capital and has a dominant purpose in obtaining control and even though that person is a director of the company, there would be no improper purpose in making the allotment.”
Austin J should have applied that principle.
On the issue of Mr Gould’s alleged impropriety, I entirely agree with Giles JA.
GILES JA: There was more than money at stake in these appeals. An unusually extended introduction is desirable.
Cresvale Securities Ltd (“Securities”) carried on business as a stockbroker. It was a wholly owned subsidiary of Cresvale Capital Pty Ltd (“Capital”), itself a wholly owned subsidiary of Cresvale Far East Ltd (“Far East”). Mr Nigel Kirwan was one of its directors.
On 23 June 2000 Securities became subject to voluntary administration. Mr Vanda Gould was appointed administrator. At a creditors’ meeting held on 21 July 2000 it was resolved, on the casting vote of Mr Gould, that a deed of company arrangement (“the DCA”) be approved. The DCA was executed on 9 August 2000. Mr Gould was the deed administrator.
The DCA provided, amongst other things, for the allotment and issue by Securities to Mr Kirwan or his nominee of 20,000,000 shares for a subscription price of $100,000. The shares were issued and the money was paid. As a result, the shareholding of Capital was diluted to 5.33 per cent.
By an originating process filed on 22 August 2000 Far East claimed an order terminating the DCA and an order that, if the DCA was terminated, Mr Anthony McGrath or some other person be appointed as liquidator of Securities. It joined as defendants to the application, in numerical order, Securities, Mr Gould and Capital. Mr Kirwan was joined as fourth defendant at a later date.
Far East was directed to file a statement of claim, and did so on 20 September 2000. The relief claimed was more complete, and was relevantly -
“51.A declaration that the deed is invalid and ineffective by reason that the Deed Resolution is not in accordance with Section 439C of the Corporations Law;
52.In the alternative, an order terminating the Deed pursuant to section 445D of the Corporations Law;
53.In the alternative, an order pursuant to section 600B(3) of the Corporations Law setting aside the Deed Resolution;
54.An order that Anthony Gregory McGrath or some other fit and proper person be appointed liquidator of the first defendant in the place of the second defendant;
55.A declaration that the share issue pursuant to the Deed is invalid and ineffective;
56.An order that the said share issue be set aside;
57.An order that the share register of the first defendant be rectified accordingly … ”
By a cross-claim filed on 13 September 2000 Capital claimed relief encompassing but going beyond that claimed by Far East. It named as cross-defendants, in numerical order, Securities, Mr Gould and Mr Kirwan. In the body of the cross-claim it also named Far East, as third cross-defendant ahead of Mr Kirwan. The relief claimed was relevantly -
“(a)Cresvale Securities be wound up and Anthony Gregory McGrath be appointed as liquidator;
(b)the Deed of Company Arrangement executed on 9 August 2000 (the ‘deed’) be terminated pursuant to section 445D of the Corporations Law;
(c)the deed be declared void pursuant to section 445G(2) of the Corporations Law;
(d)the administrator be removed pursuant to section 447E(1) of the Corporations Law;
(e)the administrator be removed pursuant to section 449B of the Corporations Law;
(f)the Court set aside the deed pursuant to section 600B of the Corporations Law;
(g)the administrator be removed pursuant to section 447E(1) and 449B of the Corporations Law;
(h)the deed be set aside pursuant to section 600B of the Corporations Law;
(i)the allotment of shares to the third cross-defendant be declared void and the share registry [sic] be rectified accordingly … ”
Each of Far East and Capital pleaded extensively the grounds on which it claimed relief. The grounds included robust allegations against Mr Kirwan and Mr Gould.
Far East’s grounds included allegations that the report to creditors provided by Mr Gould for the meeting of 21 July 2000 was false or misleading and materially incomplete; that DCA was for the improper purpose of diluting Capital’s shareholding in Securities and giving control of Securities to Mr Kirwan and the other directors of Securities; and that the issue of shares under the DCA was for the improper purpose of benefiting the directors of Securities and “to wrest control of the first defendant from the third defendant to the fourth defendant. It was also alleged, without specific assertion of impropriety, that the effect of the DCA was to deny to creditors of Capital the opportunity to have Securities wound up and have voidable transactions investigated “particularly in circumstances where one of those transactions was between the first defendant and the fourth defendant (the Virotec Transaction)”.
Capital’s grounds included allegations that Mr Gould “wrongly and without reasonable cause” rejected Capital’s proof of debt at the meeting of 21 July 2000; that Mr Gould’s report to creditors was false and misleading and inadequately detailed the proposed DCA; and that the issue of the shares under the DCA was “for an improper purpose amounting to a fraud on the power, disclosing the unlawful purpose of the deed of arrangement” and was for the improper purpose of benefiting the directors of Securities and taking control of Securities from Capital. A section of Capital’s grounds was devoted to the allegation that Mr Gould had failed properly to carry out his functions, by failing to investigate a “potential” claim against Mr Kirwan in relation to sale of shares in Virotec Pty Ltd (“Virotec”) by Securities to Mr Kirwan; by failing to investigate an “apparent and likely claim” against Mr Kirwan and other directors of Securities for trading whilst insolvent; by failing to make inquiries relating to an underwriting agreement entered into by Mr Kirwan as to which Newland Resources Ltd (“Newland”) was claiming against Securities; by admitting a claim by Mr Kirwan’s service company Kamadhenu Management Pty Ltd (“Kamadhenu”) for Mr Kirwan’s “alleged” services to Securities; and by “improperly” exercising his casting votes at the meeting of 21 July 2000 and an earlier meeting of creditors of 30 June 2000. The section was summed up -
“33. The administrator has failed to carry out his duties as administrator in an objective and impartial manner, and has allowed himself to become aligned with Kirwan’s interests in the course of Kirwan promoting a scheme to acquire control of Cresvale Securities, and to avoid having his dealings with Cresvale Securities and his management of its affairs investigated and brought to account for the benefit of Cresvale Securities, its shareholders and creditors.”
Neither pleading made specific mention of hostility by Mr Gould towards one of the liquidators of Capital, Mr Peter Hedge. That, however, became an issue in proceedings.
The proceedings were heard by Austin J on 13 and 14 February 2001. His Honour published reasons on 28 February 2001, the conclusion to which was -
“236 Therefore, I believe (subject to any further submissions by the parties) that the principal orders I should make are an order removing and replacing Mr Gould under s 449B, an order terminating the DCA under s 445D, an order setting aside the allotment and issue of shares in Securities on 11 August 2000, an order under s 175 rectifying the register of members of Securities accordingly, and an order for costs.
237 I shall direct the plaintiff to bring in draft short minutes of orders, and stand a matter over to a time when submissions can be made with respect to the form of the orders, and with respect to costs.”
It will be necessary to go to Austin J’s reasons in some detail. For the present, the following will illustrate why there was more than money at stake in these appeals.
His Honour said that he agreed with the submission that views of Mr Gould found in his report to creditors, remarks he made at the meeting of 21 July 2000 and his evidence in the proceedings were “inadequately researched, biased in favour of Mr Kirwan and unfairly prejudiced against Mr Hedge”. He also said that he accepted the submission that there were criticisms of Mr Gould’s rejection of the proof of debt lodged by the liquidators of Capital, based on alleged unfair preferences, and that there were strong criticisms of Mr Gould’s exercise of his casting votes at the two meetings of creditors. He said -
“96. The cumulative effect of all these matters is to create an impression of strong bias in favour of Mr Kirwan and unfair prejudice against Hedge. That is a matter of significance for the exercise of my discretion to terminate the DCA.”
In the course of detailed discussion of Mr Gould’s exercise of his casting votes, his Honour held that there was “improper exercise” of casting votes to defeat a resolution at the meeting of 20 June 2000 that Mr Gould be replaced by Mr Greg Hall and Mr Hedge and another resolution at that meeting that Mr Gould be replaced by Mr McGrath, and that it was “improper” for Mr Gould to exercise his casting vote so as to cause the resolution for approval of the DCA to be passed unless there were very strong reasons for doing so and that the reasons advanced by Mr Gould were not strong enough “to justify his extraordinary action”. His Honour said at one point, “I have held that it was improper for him to exercise his casting vote to have the proposed DCA approved, and it would be equally improper for him to exercise his casting vote to keep himself in office so that he could fully formulate and advocate the proposal”.
His Honour described a passage in Mr Gould’s report to creditors as “false or misleading”, and said that there were other deficiencies in the report which he nonetheless did not think had any significance “other than as an indication of an unprofessional approach to the statutory requirements”.
His Honour said that he regarded Mr Gould’s failure to admit the proofs of claim of Capital and Newland for the purposes of voting at the meeting of 21 July 2000 “as improper conduct”.
His Honour considered that the DCA was clearly disadvantageous to Far East, Capital and Newland, and in that regard said -
“Capital was deprived of its control of Securities for no direct consideration, and in Mr Gould's view, it was not a creditor entitled to participate at all in distributions. Far East was disadvantaged indirectly by the unfavourable treatment of Capital, since it was the holding company of Capital and also a substantial creditor of Capital. Newland, if its claim succeeded, would be deferred to employees and trade creditors. Far East and Newland would receive only a proportion of their claims in distributions. The business would be launched again in the hands of the directors, free of their claims and with its assets intact.”
His Honour held that the issue of the shares to Mr Kirwan was for an improper purpose, “to wrest control of Securities from Capital by using Pt 5.3A when negotiation failed”. In that connection his Honour said that Mr Kirwan persuaded Mr Gould that Mr Hedge had treated him unjustly in various ways and that the proposed DCA would be fair notwithstanding its effect on the control of Securities, and that “Mr Gould was willing to be persuaded without making adequate investigations”.
In considering whether it was appropriate to terminate the DCA his Honour said -
“225 I have found that a passage in the Report by Mr Gould was false or misleading, and that there was a material omission from the Report with respect to the possibility of recovery [sic] Mr Kirwan's profit in the Virotec transaction. It is also appropriate for me to consider the general tone of the Report. It is evident from my summary of it that I regard the Report as a biased document, demonstrating an uncritical acceptance by Mr Gould of the information and opinions supplied to him by Mr Kirwan, and an unjustified hostility towards Mr Hedge.
226 I have also found that effect cannot be given to the deed without injustice, and that the deed is unfairly prejudicial to and unfairly discriminatory against Far East and Capital, in the specific ways set out above. And I have found that it was improper for Mr Gould to use his casting vote to defeat the First and Second Resolutions and to support the Third Resolution.
227 I have had to subdivide the facts, so that I can deal with the submissions of the parties. However, as Wordsworth said, 'we murder to dissect'. Here the whole is greater than the sum of the parts. By the mechanism of Part 5.3A and the DCA, control of a company has been wrested away against the wishes of its direct and indirect holding companies, whose shareholding interest has been reduced from 100% to 5.33%. Control has been delivered into the hands of a man who failed to achieve that outcome through negotiation. That man derived an enormous profit from dealing with the company while he was a director of it, and the adoption of the DCA effectively prevented further investigation of that transaction. He has produced just enough money to pay employees and trade creditors and thereby secure their support. The numerical majority of creditors who supported the DCA represented debts which were a small fraction of the debts of the creditors who opposed it. Two major claimants were not allowed to vote on the proposal. The chairman, who accepted uncritically the information supplied to him by the director and did not make adequate independent investigations, and consequently misled creditors, exercised his casting vote to ensure that the DCA was approved. The end result is so unfair that the Court cannot allow it to stand.”
After considering reasons for not terminating the DCA and concluding that it was appropriate to terminate it, his Honour said -
“231 In some cases justice may require the Court not only to terminate or set aside the deed for the future, but also to reverse the wrongful implementation of the deed in the past. This is such a case, since justice requires that the allotment and issue of shares pursuant to the DCA be set aside. If, in the circumstances of the case, the only source of judicial power is in Pt 5.3A, the Court will not be able to achieve its objective, because ss 445H and 451C have the effect that the Court's order terminating the deed does not affect things done under it. In the present case, however, I have found that the allotment and issue of shares by the directors of Securities pursuant to the DCA was for an improper purpose. I have equitable jurisdiction to set aside the allotment and issue, and statutory jurisdiction under s 175 to make an order correcting the register of members. I shall do so.”
His Honour added -
“I am inclined to make these orders conditional upon Securities repaying allotment money actually paid by Mr Kirwan to it, but I shall hear any submissions which the parties may wish to make on that point.”
Following publication of the reasons of 28 February 2001, further submissions with respect to the form of the orders were made on 8 March 2001 and Austin J published reasons and made declarations and orders on that day.
The declarations and orders were -
“The Court ORDERS that:
1.The second defendant be removed from office as the administrator of a deed of company arrangement executed by the first defendant on 9 August 2000 (‘Deed’), pursuant to section 449B(a) of the Corporations Law;
2.Peter James Hedge be appointed as the administrator of the Deed pursuant to section 449B(b) of the Corporations Law;
3.The deed be terminated pursuant to section 445D of the Corporations Law.
The Court DECLARES that:
4.The allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000 was:
(a) for an improper purpose; and
(b) invalid.
5.The allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000 be set aside.
6.The share register of the first defendant be rectified pursuant to section 175(2) of the Corporations Law to rectify the setting aside of the allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000.
The Court further DECLARES that:
7.The fourth defendant as trustee for the GNPK family trust is an ordinary unsecured creditor of the first defendant for the $100,000 paid to the first defendant as consideration for the share issue which has been set aside.”
The reasons dealt principally with the return of the $100,000. His Honour said that the inclination stated in his reasons of 28 February 2001 as to repayment of the $100,000 went only to whether Mr Kirwan should be entitled at all to repayment of that sum. He did not accept Mr Kirwan’s submission that the allotment and issue of shares should not be set aside unless the $100,000 was repaid in full, and held that there should only be the entitlement to repayment of an ordinary unsecured creditor expressed in declaration 7. In doing so his Honour noted that “in cases of fraud something much less than complete restitution in integrum [sic] is appropriate” but that since Far East “does not now contend that I should treat the fourth defendant as guilty of fraud of that kind”, in this case I do not propose to take [Mr Kirwan’s] wrongdoing into account in exercising my discretion as to the form of relief”. He later said, when identifying a factor in his exercise of discretion, that “without necessarily classifying the fourth defendant’s conduct as fraudulent in a moral sense, I regard it as having led to the remedial outcome that the allotment and issue of shares must be set aside”.

Further submissions with respect to costs were made on 10 April 2001. On 10 September 2001 Austin J published reasons and made the orders -
“The Court ORDERS that:
1.The first, second and fourth defendants pay the plaintiff’s and the third defendant’s costs of and incidental to these proceedings.
2.With respect to Order 1, insofar as the first defendant is concerned, the plaintiff’s and the third defendant’s costs are to be costs in the liquidation of the first defendant.
3.With respect to Order 2, insofar as the second defendant is concerned, he is to pay the plaintiff’s and the third defendant’s costs of these proceedings personally.
4.The second defendant is to pay his and the first defendant’s costs of and incidental to the proceedings, personally. Those costs of the first and second defendants are not payable from the assets or funds of the first defendant on any basis.
5.The application by Newland Resources Limited for an order for costs in its favour is denied.”
Newland was represented on 10 April 2001, purportedly as supporting creditor. The principal issue was Far East’s submission, supported by Capital and Newland, that orders should be made to ensure that to the extent that Mr Gould must pay Far East’s and Capital’s costs he must do so personally without any recourse to the assets of Securities, and that Mr Gould should pay the whole of his own costs and the whole of the costs of Securities personally without any recourse to the assets of Securities. As can be seen from the orders made, this submission was upheld. In the course of upholding it Austin J summarised his “findings against Mr Gould”, at some length, and said that they amounted to “findings of impropriety, as well as negligence, throughout the course of the administration”.
The allegations against Mr Kirwan and Mr Gould thus bore fruit, with copious findings adverse to both of them and to Mr Gould in particular and translation of the findings to loss of his shareholding and effective under-recovery of his $100,000, in the case of Mr Kirwan, and removal from office and a significant personal costs burden, in the case of Mr Gould.
Mr Kirwan appealed, in his amended notice of appeal stating that he appealed -
“ … from those parts of the decision of Austin J in which his Honour held -
(a)that it was appropriate to make an order under s 445D of the Corporations Law terminating the Deed of Company Arrangement, thereby causing the Second Respondent to be taken to have passed a special resolution that it be wound up voluntarily;
(b)that an allotment and issue of shares in the Second Respondent to the Appellant was for an improper purpose and invalid; and
(c)that the allotment and issue of shares be set aside otherwise than on condition that the consideration paid by the Appellant for the shares be repaid to him.”
Mr Kirwan named as respondents, in numerical order, Far East, Securities, Mr Gould and Capital.
In the amended notice of appeal Mr Kirwan sought that the declarations and orders 3 to 7 inclusive made by Austin J on 8 March 2001 be set aside, or alternatively that declaration 7 then made be set aside and declarations 5 and 6 be expressed to be conditional upon the repayment of the $100,000 paid for the shares plus interest, with consequential orders that Far East and Capital pay his costs of the proceedings.
Mr Gould also appealed, in the form of a cross-appeal. The respondents to his appeal, in numerical order, were Far East Securities, Capital and Mr Kirwan. His appeal was expressed to be “from the whole of the decisions [sic] of Austin J”, and the orders sought in the amended notice of cross-appeal were -
“1.That the appeal be allowed and that without disturbing Orders 1-3 inclusive of 8 March 2001 it be:
(a)Declared that in the events which have happened the DCA ought not to have been terminated by Austin J;
(b)Declared that in the events which have happened Mr Gould ought not to have been removed as administrator or liquidator of Securities.
2. The orders of 10 September 2001 be set aside.
3. That the statement of claim and cross claim be dismissed.
4.That the appellant’s costs before Austin J and in the Court of Appeal be payable by the first and third respondent to the appeal and/or out of the funds of the second respondent.
5.Declare that the appellant is entitled to be indemnified out of the assets of the second respondent in respect of his costs of and incidental to the proceedings before Austin J and in the Court of Appeal.”
It will be seen that Mr Kirwan did not contest Mr Gould’s removal as administrator, nor of course did he contest the costs orders made against Mr Gould. While Mr Kirwan contested the loss of his shareholding, he also sought to have full recovery of his $100,000. For his part Mr Gould expressly did not seek to be reinstated as administrator, but nonetheless contested the underlying holdings that the DCA should be terminated and that he should be removed as administrator; and his contest over the costs orders made against him was more than consequential, and involved the independent issue of his entitlement to indemnity from the assets of Securities.
In the appeals each of Mr Kirwan, Mr Gould and Securities was separately represented, and Far East and Capital were separately but jointly represented.
At the hearing of the appeals Mr Kirwan did not maintain his amended notice of appeal so far as he had sought that order 3, the termination of the DCA, be set aside. Further, he indicated that, Securities having gone into liquidation and the shares now being worthless, he was “not terribly fussed” about overturning the order that the allotment and issue of the 20,000,000 shares be set aside. He made it plain that his concern was to have overturned the declaration that the allotment and issue of those shares was for an improper purpose and invalid, while accepting that if that meant that there was no basis for the allotment and issue of the shares to be set aside then the order that it be set aside would have to be overturned. He said that even if the order setting aside the allotment and issue of the shares was not overturned, the declaration that he was an ordinary unsecured creditor of Securities for the $100,000 paid for the shares should be overturned. It was made sufficiently clear that Mr Kirwan’s interest was first in having the finding of an improper purpose impugned, and secondly in getting back his $100,000.
As has been seen, Mr Gould did not ask that the orders terminating the DCA and removing him as administrator be set aside: instead, he asked for declarations that those orders “ought not” have been made. Perhaps excessively, and inconsistently, he asked that all the costs orders made on 20 September 2001 be set aside, not only those affecting himself, and asked globally that the statement of claim and cross-claim be dismissed. At the hearing of the appeals it was also made sufficiently clear that Mr Gould’s interest was in his good name, by displacing the findings critical of his conduct, as well as in the personal costs burden imposed by the costs orders.
History
Capital and Securities were incorporated in Australia. At all material times the directors of Securities were Mr Kirwan, Mr Neil Anderson and a third person. Austin J said that there was some uncertainty whether the third director was Mr Neill MacPherson or Mr Matthew Sonnemann, but that it was more likely than not that it was Mr MacPherson. Messrs Kirwan and MacPherson were also directors of Capital. The two companies engaged in inter-company lending and other financial transactions.
Kamadhenu lodged proofs of debt in the liquidation of Capital and the administration of Securities for provision of Mr Kirwan’s services. The admission by Mr Gould of the proof of debt in the administration of Securities was one of the alleged failures properly to carry out his function. I will return to this in due course, but it is clear enough that there were arrangements whereby Mr Kirwan and Mr MacPherson were remunerated though their respective service companies.
Far East, the holding company of Capital and of Securities through Capital, was incorporated in Hong Kong, and was itself a wholly owned subsidiary of Princeton Economics International Inc (Princeton”), a company incorporated in the Turks and Caicos Islands. Princeton was one of a global group of related companies (“the Princeton group”) carrying on business primarily in stockbroking and the mining industry.
On about 3 September 1999 the United States District Court, Southern District of New York appointed Mr Alan Cohen as temporary receiver to the Princeton group, purportedly down to and including Securities. At some time, possibly also in early September 1999, Princeton and Far East were placed into liquidation or provisional liquidation by orders in their respective jurisdictions of incorporation. I will refer generally to Mr Cohen and the foreign liquidators as the external administrators.
On 16 September 1999 Capital transferred all its listed investments and its furniture and fittings to Securities. The listed investments included 6,717,719 shares in Virotec (at the time called TIN Australia NL), which were transferred at their then market value of 3.8 cents per share, and 2,490,058 Virotec options, which were transferred at 1 cent each. The listed investments were transferred at a value of $415,534, of which $280,174 was attributable to the Virotec securities, and the furniture and fittings were transferred at a value of $174,610.
Although not specifically identified in the pleadings, as the case was conducted this was a voidable transaction investigation of which, within the allegations in Far East’s grounds, was denied to creditors of Capital by the DCA. The allegations in Capital’s grounds did not include that Mr Gould failed to investigate it. Whether the transaction might have been voidable gained some prominence in the proceedings.
On 30 September Mr Hall and Mr Hedge were appointed voluntary administrators of Capital.
By a letter to Securities dated 30 September 1999 the Australian Stock Exchange expressed its view that the listed investments recently acquired by Securities did not have a ready market for the purpose of calculating Securities’ liquid capital position under the ASX Business Rules. It required that the listed investments be excluded from Securities’ liquid capital calculations unless the holdings were liquidated or Securities could demonstrate that they were readily marketable.
Securities’ response included selling the Virotec shares on the stock market on about 22 October 1999. Most of the shares were bought by Mr Kirwan as trustee for the GNPK Family Trust. Austin J said -
“A graph of trading volumes shows very low turnover at that time, implying that the market in the shares of Virotec was relatively illiquid. The market price of Virotec shares rose from under 10 cents in February 2000 to peak at about $1.30 early in March 2000, on vastly increased turnover. The evidence does not disclose the precise number of shares acquired by Mr Kirwan, nor whether he disposed of any shares at the peak of the market. A written submission by counsel for Capital put the gain at $11.3 million, but evidence to that effect in an affidavit by Mr Hedge was rejected. However, it appears that his potential gain was in the order of several million dollars.”
This transaction was the voidable transaction specifically identified in the allegations in the grounds as a transaction investigation of which was denied to creditors of Capital by the DCA (in the pleading of Far East) and a transaction which Mr Gould failed to investigate (in the pleading of Capital).
The sale of the listed investments did not satisfy the Australian Stock Exchange. It required that Securities have further liquid capital by 31 December 1999.
On 8 December 1999 Capital was placed in liquidation as a result of resolutions passed at a meeting of creditors on that date. Messrs Hall and Hedge were appointed liquidators.
Capital’s shares in Securities were its most valuable asset. Messrs Hall and Hedge as administrators of Capital had attempted to sell the shares. They had advertised the shares in the Australian Financial Review on 13 October 1999 and had conducted what Austin J described as various discussions.
By a letter dated 10 December 1999 Mr Kirwan and Mr MacPherson offered to purchase the shares for $140,000. The offer included that claims against Capital by their respective service companies would be deferred until full payment of other creditors had been made.
No other offers had been or were received. Mr Hedge considered that, given the Australian Stock Exchange’s liquidity requirement for Securities, acceptance of the offer was in the best interests of Capital. Securities was still trading, and Mr Hedge considered that it was solvent on a balance sheet basis. Austin J thought that implicit in Mr Hedge’s view that the offer was in the best interests of Capital was that the liquidity requirement could not be met, that Securities would be prevented from trading, and that with the loss of its licence Capital’s shares in Securities would effectively become worthless.
On 24 December 1999 there were executed a sale of shares deed and a deed of assignment. Both were expressed to be subject to conditions, including that by completion the liquidators of Capital were to be reasonably satisfied that no objection to the deeds had been made by the external administrators. Apparently this condition was stated because the liquidators of Capital had not had time to consult the external administrators. It could be waived by the liquidators.
The purchaser in the sale of shares deed was Mr Kirwan as trustee for the GNPK Family Trust or his nominee. What happened about Mr MacPherson’s involvement was unclear.
Austin J summarised the sale of shares deed as follows:
“24 The deed contained four principal operative parts:
?First, Capital (in liquidation) agreed to sell its shares in Securities to Mr Kirwan, in his capacity as trustee of the GNPK Family Trust. The purchase price was $140,000, and a deposit of $14,000 was payable upon execution of the deed.
?Secondly, Mr Kirwan (both in his capacity as trustee and personally) and Mr MacPherson undertook to contribute to Securities an amount not exceeding $350,000 on or before 31 December 1999, as required by the Australian Stock Exchange, to satisfy its capital adequacy requirements. The contribution was to be on the usual subordination terms required by the Exchange. There was provision for repayment of the deposit payable for purchase, if the deed was terminated, but no provision in the deed for return of the contribution to Securities' liquid capital in the event of termination.
?Thirdly, the deed dealt with claims for payment by the service companies of Mr Kirwan and Mr MacPherson (Kamadhenu Management Pty Ltd and Jackred Pty Ltd, respectively). Those companies had agreed with Capital to provide to it consultancy services by their nominated executives, Mr Kirwan and Mr MacPherson respectively. By the deed, Messrs Kirwan and MacPherson, and their respective service companies, agreed to subordinate their claims for payment to the claims of the unsubordinated creditors of Capital.
?Fourthly, Securities agreed to subordinate, to the claims of the unsubordinated creditors of Capital, its claim to repayment of the net loan said to have been made by it to Capital (which the deed quantified at $135,689).”
It may be added that fifthly, Capital and the liquidators agreed not to bring proceedings against Securities in relation to, amongst other things, “any claim against [Securities] which the liquidators may have against [Securities] for a voidable transaction within s 588FE of the Corporations Law”. But in return claims by Securities were assigned to Capital. By the deed of assignment, which was interdependent with the sale of shares deed, Securities assigned to Capital for two years the benefit of any rights of action it may have against third parties for unlawful conduct in relation to the affairs of the Capital group. The unlawful conduct was defined widely, and would have included any right of action against Mr Kirwan in relation to the acquisition of the Virotec shares.
Under the sale of shares deed completion was to take place on 25 January 2000. The obligation to contribute in order to satisfy the Australian Stock Exchange’s liquid capital requirements involved contribution prior to settlement, and contribution although the conditions had not been fulfilled. Subordinated loans sufficient to satisfy the liquid capital requirements were made to Securities by 31 December 1999. They included a loan of $160,000 by Mr Kirwan.
Mr Cohen objected to the two deeds and the transactions they embodied. The nature of the objection was not disclosed in the evidence. By a letter dated 21 January 2000 the liquidators’ solicitor told Mr Kirwan’s solicitor of the objection and that the liquidators were not prepared to waive the condition, and said that it was apparent that the deeds would “not be effective”. In unexplained circumstances a different solicitor for Mr Kirwan wrote to Capital’s solicitors on 24 January 2000, saying that Mr Kirwan had not heard that the liquidators were satisfied that no objection to the deed had been made, that he was ready, willing and able to complete the purchase, and that completion was demanded the next day.
The next day did not bring completion. Rather, on 25 January 2000 the liquidators of Capital convened a members’ meeting of Securities, the sole member being Capital, for 28 January 2000, for the purpose of passing a special resolution that Securities be wound up. What lay behind this was not disclosed in the evidence. In circumstances also not disclosed, the meeting did not proceed. As Austin J said, the proposal for winding up demonstrated that “all relevant parties were aware as from January 2000 that a resolution to wind up Securities was an option for the liquidators of Capital, as long as Capital remained the sole shareholder of Securities … “.
Austin J recorded that by approximately the end of January 2000 completion of the sale of shares deed “had ceased to be a real practical prospect”. The calling of the meeting, however, brought renewed intervention from the Australian Stock Exchange. It immediately told Securities that Securities should cease taking on new business, and again questioned Securities’ liquidity position. The evidence did not go into detail on what then occurred, but Securities continued in business until the voluntary administration in June 2000.
One of the business transactions in this period was the Newland underwriting agreement. Securities co-underwrote a renounceable rights issue by Newland by an agreement dated 7 March 2000. Mr Kirwan as trustee of the GNPK Family Trust made a statutory declaration expressing a guarantee of Securities’ performance of the underwriting agreement to a maximum amount of $1,754,676. Austin J said that it appeared “that the guarantee was for the benefit of Capital, given to procure Capital’s assent to the transaction”. That is a little odd. The statutory declaration recited that Mr Kirwan had entered into a contract to purchase the shares in Securities from Capital and that the contract “is conditional and settlement is yet to be effected”, and also expressed an undertaking to Capital until settlement of the contract to guarantee Securities’ performance of any underwriting agreement entered into by Securities. This was followed by the expression of the specific guarantee of the Newland underwriting agreement. As at March 2000 it is unlikely that the liquidators would have acknowledged the continuance of the contract for sale of shares. The occasion for the statutory declaration is rather speculative.

Following through the Newland transaction, the issue was under-subscribed and by a letter dated 23 May 2000 Newland called on Securities to take up rights at a cost of $1,576,277. Securities responded by a notice dated 8 June 2000 terminating the underwriting agreement under an entitlement to do so if representations made by Newland were incorrect in any material respect. There was correspondence over whether the representations on which Securities relied were made and whether they were made with Newland’s authority.
By a letter to Mr Gould dated 11 July 2000 the solicitors for Newland provided him with relevant documentation and gave notice that it claimed to be a creditor of Securities for the $1,576,277. Mr Gould replied acknowledging the solicitors’ letter and saying, “As you are aware, the directors dispute your claim to be a valid creditor of the Company”.
In the report to creditors for the meeting of 21 July 2000 Mr Gould said, “I have received a letter of demand from solicitors acting for Newland Resources Limited requesting payment of $1,576,776.80. This sum relates to an alleged debt due to an underwriting commitment of Cresvale”. He listed that amount as a contingent liability, and appended a note to the liability -
“An amount of $1,576,276.80 may be payable to Newland Resources Limited in respect of an underwriting agreement entered into with Cresvale. Currently this amount is only a contingent liability. The directors are of the opinion that this amount will not be payable, but at best substantial legal costs may be payable in defending the action.”
The solicitors for Newland wrote again to Mr Gould, before the report to creditors and notice of meeting had been received, in rather strident terms but making clear that Newland claimed at the least to be a contingent creditor with a right to lodge a proof of claim, to have a just estimate of the value of its claim made, and to be allowed to vote at a meeting of creditors subject to the vote being declared invalid if in due course the proof of debt was properly rejected. After receipt of the documents, on 20 July 2000 Newland lodged a proof of claim.
Although not directly part of the allegations in the pleadings, refusal to allow Newland’s vote as a creditor at the meeting of 21 July 2000 came to be part of the proceedings; it was perhaps part of Capital’s allegation that Mr Gould failed to make inquiries relating to an underwriting agreement as to which Newland was claiming against Securities. I will come to that in due course.
Returning to early 2000, Austin J said that Mr Kirwan continued to press Mr Hedge with his offer to buy the shares in Securities, and that Mr Hedge’s attitude was unclear.
As to pressing Mr Hedge with the offer to buy the shares in Securities, the evidence was far from extensive. There was the letter of 24 January 2000 earlier mentioned. According to the minutes of the meeting of creditors of 30 June 2000, Messrs Kirwan and MacPherson were not happy about the liquidators’ failure to proceed with the sale of the shares and they continued to offer to buy the shares, but there was no detail. At one point Austin J said that Mr Kirwan “threatened legal proceedings on the basis that Mr Hedge had not acted independently of the US receiver”, the evidence of which is not clear; so far as I can see the only evidence was as to Mr Kirwan commencing proceedings to challenge the US receivers jurisdiction, which is a different thing. No doubt Mr Kirwan did press Mr Hedge. But I do not think that there was evidence that he went beyond what could be regarded as normal commercial negotiation.
As to Mr Hedge’s attitude, Mr Hedge had initially considered that the sale was in the best interests of Capital. The evidence did not reveal whether or not he was influenced by the objection of the external administrator. Austin J said that Mr Hedge’s attitude appeared to have been influenced by his developing assessment of the prospect of recovery of the Virotec shares sold by Securities to Mr Kirwan in October 1999, and that his attitude appeared to have changed in March 2000 when the market price for Virotec shares escalated dramatically.
The basis for what his Honour said seems to have been that in a report to the creditors of Capital dated 23 March 2000 Mr Hedge spoke of “developments in the liquidation” since December 1999, saying -
“Sale of Shares in Cresvale Securities Limited (“CS”)
CS is a 100% subsidiary of CC and continues to trades [sic] as a stockbroking business licensed by the Australian Stock Exchange.
Following various attempts to sell these shares a conditional agreement was entered into on 24 December 1999.
The various conditions attached to this sale agreement have not been satisfied to date and I am now in the process of considering how best to move forward as liquidator with the sale of these shares.
I will be in a position to discuss this matter in further detail at the forthcoming creditors meeting.
Possible Preference Claim
Investigations into the company’s affairs have addressed a transaction involving the transfer of various assets prior to liquidation.
On 16 September 1999 CC transferred all of its listed investments and furniture and fittings to CS to repay CC’s intercompany loan liability to CS. Included in this transaction were 6,717,719 shares in TIN Australia NL (“TIN”) transferred to CS at their then market value of $255,273 (3.8c/share).
This transaction appears to constitute an unfair preference under Section 588FA of the Corporations Law which could be set aside by the Liquidators of CC. However, as CC owns 100% of the shares in CS, any benefit in setting this transaction aside would be offset by an equal decrease in the net worth of CS.
Accordingly, there has previously been no financial benefit in endeavouring to set this transaction aside.
A recent development with the TIN shares has lead to the matter being further investigated and will also be discussed in detail at the creditors meeting.”
The report ended -
“Conclusion
The priorities in the liquidation are at present to:
(i) finalise the realisation of CC’s investment in CS.
(ii)consider the possibility of any recoveries involving the TIN share transaction.
(iii)finalise investigations into the company’s affairs and report to ASIC in accordance with the Corporations Law.
I will discuss these matters in more detail at the meeting of creditors.”
From the report Austin J inferred that Mr Hedge reasoned that -
“ … to the extent that Securities had disposed of Virotec shares to Mr Kirwan in October 1999 there may have been some prospect of Securities recovering the shares or their value from him. Proceedings against Mr Kirwan could be taken, if Securities was first placed in voluntary liquidation. However, such proceedings became economically worthwhile only when the market value of Virotec jumped in March 2000.”
The report does not obviously link the sale of the shares in Securities with any preference in the September 1999 transfer by Capital to Securities of the listed investments. In particular, it contemplates sale of the shares in Securities rather than their retention so that, through shareholder control, Securities could be put into liquidation and its liquidator could then recover the Virotec shares or their value from Mr Kirwan. There was no evidence of the discussion at the meeting of creditors. The more important issue is not so much why Mr Hedge was unwilling to proceed with sale of the shares, as whether Mr Gould was shown to have taken an unreasonable view of his unwillingness. It was certainly not clear why Mr Hedge was unwilling to proceed with sale of the shares, and speculation as to his reason or reasons is not a good basis for criticising Mr Gould.
The company secretary of Securities, Mr Richard Burnett, wrote to Mr Hedge by a letter dated 1 June 2000, in response to a letter from Mr Hedge dated 24 May 2000 which was not in evidence. Austin J summarised the letter of 1 June 2000 -
“39 The letter of 1 June 2000 noted that in the three-month period ending 31 March 2000, which had covered the major part of the most active trading seen by the Australian Stock Exchange for several years, Securities had been reduced to only six active dealers and, allegedly as a result of this, the company recorded a loss. It said that the directors were conscious of the need to increase substantially the number of investment advisers, but no action could be taken until the future direction of the company had been put in place. The directors did not expect profitability to return until they were able to secure the services of at least 10 more advisers. After reviewing the value of the company's assets, the letter concluded that Securities had little or no value to outside parties, and conveyed the directors' unanimous view that any offer above the level of shareholders' funds should be seriously considered.”
It should be added that the letter included that projected shareholders’ funds were minimal and that any delay would undoubtedly result in no distribution to shareholders in the event of liquidation.
Austin J said that “[i]t would not have been unreasonable for Mr Hedge to regard [the letter] as a self-serving plea on behalf of Mr Kirwan”. The letter was responding to a letter from Mr Hedge, and the evidence gave no reason to treat it as other than an accurate account of the position of Securities. In short, when Mr Kirwan and Mr Gould said (as they did) that they considered that Mr Hedge’s delay in deciding whether he would sell Capital’s shares in Securities was detrimental to the interests of Securities, and to Capital as its sole shareholder, so far as the evidence went they were correct. It was submitted by counsel for Far East that Securities had declined in the period prior to 2000, that its unprofitability was endemic, and that the decline in 2000 could therefore not reasonably be laid at Mr Hedge’s door. That misses the point being made in the letter, which was that the uncertainty prevented steps to turn the company’s fortunes around.
In his report to the creditors of Capital dated 15 June 2000 Mr Hedge returned to the sale of Capital’s shares in Securities and the possible preference claim. He said -
“Possible Preference Recovery
On 16 September 1999 CC transferred all of its listed investments and furniture and equipment to its subsidiary, Cresvale Securities Ltd (“CS”) to repay the amount of approximately $480k due from CC to CS. This transaction is have [sic] prima facie a preference in favour of CS.
There was initially no value to creditors of CC in pursuing the recovery of this transaction from its subsidiary while the value in the transaction was being realised in the sale of the CC shares in CS.
However, certain of the shares transferred to CS included Virotec shares which increased in value to an extraordinary extent in March this year and the value of the preference is therefore being investigated in further detail and legal advice is being sought.
This transaction is further complicated by the fact that the Virotec shares in question were transferred from CS to one of its directors, Nigel Kirwan, in October 1999.
I will be consulting the creditors [sic] Committee of Inspection and reporting further to creditors on this matter.
Investment in Cresvale Securities Limited (“CS”)
CS is a 100% subsidiary of CC and continues to trades [sic] as a stockbroking business licensed by the Australian Stock Exchange.
Following various attempts to sell these shares a conditional agreement was entered into on 24 December 1999. The various conditions attached to this sale agreement were not satisfied and that contract lapsed.
I am now in the process of considering how best to move forward with the realisation of this investment.
The possible preference transaction reported above may be relevant to my strategy in this regard.”
The Delphic concluding words were not otherwise explained. There was no evidence of Mr Hedge’s investigation of the possible preference recovery, of any legal advice he sought or received, of consultation with the creditors’ committee, or of further reporting to creditors.
Austin J said that estimated future legal fees of $100,000 in the financial figures in Mr Hedge’s report could be fairly inferred as intended to cover “the cost of pursuing the preference claim against Securities and Mr Kirwan”. The figure was not necessarily for the future, and any inference is rather speculative. I will return to this.
Austin J said -
“43 The narrative history of events to this point shows that considerable tension, if not animosity, had developed between Mr Kirwan and Mr MacPherson, on the one hand, and Mr Hedge on the other. Mr Kirwan was at all times pushing vigorously to purchase the shares in Securities. Mr Hedge had at first taken the view that a sale of the shares in Securities would be in the best interests of the creditors of Capital, but when there was a dramatic escalation in the market price of Virotec shares in March 2000, it became appropriate for him to investigate the sale of Virotec shares to Mr Kirwan more closely. Mr Kirwan was highly critical of Mr Hedge's action, and threatened legal proceedings on the basis that Mr Hedge had not acted independently of the US receiver.”
Mr Kirwan’s criticism was of Mr Hedge’s failure to proceed with sale of the shares. So far as the evidence showed, Mr Kirwan’s criticism of Mr Hedge’s action had been the letter of 27 January 2000 and the letter of 1 June 2000 from the company secretary of Securities. I have earlier commented on the reference to legal proceedings on the basis that Mr Hedge had not acted independently of Mr Cohen. The criticism was not Mr Kirwan alone and, whilst it could be described as critical of Mr Hedge’s action, was confined in scope. The reference to considerable tension, if not animosity, is hardly justified. Undoubtedly Mr Kirwan wanted to purchase the shares in Securities. Mr Hedge’s initial preparedness to sell the shares to him had been tempered, although Mr Hedge was still considering “how best to move forward with the realisation of this investment”. It was far from explicit in Mr Hedge’s reports that he was investigating the sale of the Virotec shares to Mr Kirwan “more closely”, although in the report of 15 June 2000 it was referred to as a complication.
As I have said, on 23 June 2000 Securities became subject to voluntary administration. At a meeting on that day the directors resolved unanimously that in their opinion Securities was likely to become insolvent at some future time, that Mr Gould should be appointed voluntary administrator, and that the company seal be attached to the notice of appointment of Mr Gould as administrator. The resolution was signed by Messrs Kirwan, Sonnemann and Anderson as directors and Mr Burnett as company secretary.
Mr Gould met representatives of the Australian Stock Exchange. Either shortly before or just after his appointment as administrator the Australian Stock Exchange had suspended Securities from trading because it did not meet the necessary liquidity requirements. The representatives of the Exchange told Mr Gould that they saw no impediment to Securities resuming trading once the liquidity requirements were met.
Mr Gould then met the directors of Securities. Mr Kirwan told Mr Gould that he wanted to put capital into Securities, to allow it to resume trading and to continue to employ its current staff. The directors told Mr Gould that the staff wanted to continue to work for Securities. Austin J said -
“Mr Gould said he formed the view that it was desirable to avoid liquidation in order to prevent one of the major assets of Securities, its securities dealers licence for which $250,000 had been paid, from becoming worthless. The directors made him aware of the attempted sale of the shares in Securities to Mr Kirwan in December 1999 and the attitude of the US receiver, and he reviewed the Virotec transaction. I infer that, after these investigations, he was favourably disposed to a proposal which would put the business in the hands of Mr Kirwan so that it could resume trading while retaining its present employees.”
The first meeting of creditors was held on 30 June 2000. Those attending included Far East (by Mr Michael Hughes), Capital (by Mr Ray Mainsbridge) and Mr Kirwan. Mr Kirwan attended as creditor for $160,000, presumably the $160,000 subordinated loan pursuant to the deed of 24 December 1999, and also on behalf of Kamadhenu as creditor for $120,000. Far East attended as creditor for $828,675. Far East was by far the largest creditor. As will be seen, at this point Capital did not claim to be a creditor, although Mr Mainsbridge participated in the meeting to some extent.
Early in the meeting Far East moved that Mr Gould be removed as administrator of Securities and replaced by Messrs Hall and Hedge. According to the minutes of the meeting -
“Robert Dubler then asked the Chairman if he had admitted in part or whole any debt from Cresvale Capital Pty Limited. The Chairman advised the meeting that Cresvale Capital Pty Limited did not appear to be a creditor of Cresvale Securities Limited. The Chairman further advised that Cresvale Capital Pty Limited was in fact a debtor of Cresvale Securities Limited for approximately $135,000. This was confirmed by Nigel Kirwan who then produced a letter dated 26 May 2000 from PriceWaterhouseCoopers, the Liquidator of Cresvale Capital Pty Limited. The letter confirmed that an amount of $135,689 was owed by Cresvale Capital Pty Limited to Cresvale Securities Limited. Robert Dubler then asked the Chairman if a formal proof of debt had been provided for Cresvale Capital Pty Limited. The Chairman advised that it had not. Accordingly Cresvale Capital Pty Limited did not have a right to vote at the creditors meeting.”
The letter of 26 May 2000 was from the liquidators to Securities responding to an audit verification request, and stated that according to Capital’s records it owed $135,689 to Securities as at 31 March 2000. A record of the meeting prepared by Mr Hughes included that Mr Mainsbridge said that Capital “would not be lodging a proof of debt at this time”.
There was then debate on the motion. Austin J said that Mr Kirwan and Mr MacPherson spoke against the motion, and -
“They criticised Mr Hedge, alleging that Mr Hedge's administration of Capital had caused substantial delays which had an adverse effect on business of Securities. Mr Kirwan alleged that Mr Hedge had interests other than the interests of creditors of Securities as his priority, namely interests of the US receiver and the Hong Kong liquidator. Both Mr Kirwan and Mr MacPherson criticised the costs of the administration of Capital.”
According to the minutes of the meeting, the full debate on the motion was -
“Nigel Kirwan then responded to the first resolution moved by Michael Hughes. Mr Kirwan said he had no confidence in the work that would be performed by PriceWaterhouseCoopers based on his experience with them in the liquidation of Cresvale Capital Pty Limited.
Mr Kirwan also stated that he had encountered substantial dealys with all his dealings with PriceWaterhouseCoopers and these delays had had an adverse effect on the business, the employees and the creditors. He stated that he had spent at least six and a half months attempting to resolve the sale of the Cresvale Securities Limited business with Mr Hedge. He also stated that the issue of a preferential payment being raised may also create a conflict of interest with Mr Hedge being the Administrator of Cresvale Securities Limited. He further stated that he strongly believed Mr Hedge had interests other than the creditors of Cresvale Securities Limited as his priority, namely the US Receiver and the Hong Kong Receiver. In addition, he believed PriceWaterhouseCoopers’ costs to conduct the administration would be too high. He believed the costs quoted by Mr Gould would be preferable for the company.
Neill Macpherson also responded to this first resolution. As a creditor he said he had no confidence that Mr Hedge would undertake the administration and, if necessary, liquidation in an efficient or economical way. He also expressed concern regarding the estimate of Mr Hedge’s fees. In particular he referred to the fees incurred in the liquidation for Cresvale Capital Pty Limited. Those fees were currently $98,000 with a further $200,000+ in future costs plus $100,000 in legal fees. Mr Macpherson stated that he could not understand how such costs could be warranted.
Michael Hughes then responded to the claims of Neill Macpherson and Nigel Kirwan. He stated that Peter Hedge was the logical choice with his familiarity of the Cresvale corporate structure. Also Peter Hedge was familiar with the US matters which he stated were relevant to the current process. He further stated that liquidations are expensive and the quality of the outcome was more important than the dollar amount.
Mr Hughes then produced a consent to act as Administrator of Cresvale Securities Limited signed by Anthony McGrath of KPMG in Sydney. Mr Hughes stated his client would be happy for Mr McGrath to act as Administrator if the meeting was not willing to accept Mr Hedge of PriceWaterhouseCoopers.
Mr Macpherson enquired why Mr Gould should not continue as Administrator.
Mr Hughes went on to say that Mr Gould did not have the international connections and expertise required to handle the administration of Cresvale Securities Limited. He stated that his client did not have confidence in Mr Gould and the quality of his work as he was only a small practitioner but did have confidence in PriceWaterhouseCoopers or KPMG to handle this matter.
Mr Kirwan responded to this claim by Mr Hughes. Firstly, he said that the US matters were not relevant as no formal accusations had been raised in Australia from the United States. Secondly, Mr Hedge had made no attempt to investigate any of the allegations made by the US Receiver even with access to the company’s documents. Mr Kirwan advised that PriceWaterhouseCoopers had had unfettered access to the documents of Cresvale Securities Limited for a period of three weeks. At the end of three weeks Mr Kirwan said he restricted access to these documents by PriceWaterhouseCoopers staff as he had become aware they were investigating records on behalf of O’Melveny & Myers, the US Receiver, which was improper because of client confidentiality. He stated that during this three week period no evidence was found to support any of the allegations. Mr Mainsbridge noted that he disputed Mr Kirwan’s claims.
James Beaton of Minter Ellison then asked the Chairman whether, to the best of his knowledge, all other creditors, would be paid except for Cresvale Far East Limited. The Chairman replied that if the matter was not conducted efficiently he doubted all other creditors could be paid in full.”

Mr Hughes’ record of the meeting included in this respect -
“Nigel Kirwan spoke against the motion. He said that his experience with the administration and liquidation of Cresvale Capital meant that he had no confidence whatsoever in Peter Hedge or anyone associated with PriceWaterhouseCoopers conducting the administration in a proper manner. He said that the administration and subsequent liquidation of Cresvale Capital has involved substantial delays with an adverse impact on Cresvale Securities and its employees. He said the negotiations have been strung along for a purchase and there has been no substantial effort by Hedge in that regard. He said that he believes that Peter Hedge has a conflict of interest in that there is a ‘potential claim’ by Cresvale Capital against Cresvale Securities. He said that the administrator of Cresvale Securities should be independent from the liquidator of Cresvale Capital. He said that Hedge has been acting in the interests of the US receiver and the Hong Kong liquidators, rather than in the best interests of the creditors of the corporation. He said that the US receiver has no jurisdiction in Australia. He said the costs incurred in the Cresvale Capital liquidation have been exorbitantly high and he does not think that they have received value for money. He said that Vanda Gould has given a very competitive estimate of his fees, which is in the best interest of the creditors.
Neil [sic] MacPherson also spoke against the motion. He said that the cost of the Cresvale Capital liquidation has been too high. He said that he has no confidence that Peter Hedge will do the job expeditiously for a competitive price.
Michael Hughes said that the logic of appointing Peter Hedge and Greg Hall is their overwhelming knowledge of the issues in this case. He said that there is an international investigation on foot and that requires careful coordination and knowledge of what has to be done. He said the creditors should focus on quality of outcome rather than cost.
Michael Hughes said that if the mood of the meeting is to oppose the nomination of Peter Hedge and Greg Hall then we are also instructed to put forward the nomination of Tony McGrath from KPMG as an alternative substitute administrator. Michael Hughes tabled a consent to act.
Neil MacPherson asked Michael Hughes whether he was suggesting that Vanda Gould was not competent.
Michael Hughes said, ‘Not at all’. Michael Hughes said that our client just feels that Vanda Gould is not the man for the job and again raised concerns about the size and lack of international network of Vanda Gould’s firm.
Nigel Kirwan said that Cresvale Far East have not come to the party in negotiations. He said that there is no international investigation. He said that the US receiver has not sought to invoke his jurisdiction here. He said that he had commenced proceedings which were substantially withdrawn to challenge the US receiver’s jurisdiction. He said that in those proceedings the receiver had a number of opportunities to invoke his jurisdiction but did not do so. He said that Peter Hedge has made no attempt to investigate the allegations which have been made by the US receiver. He said that he gave unfettered access to Peter Hedge to inspect all the records of the company in January on the condition that there was no copying. He said that three weeks were made available. At the end of those three weeks he discovered that the PriceWaterhouseCoopers people who were doing the investigation were actually working for the US receiver. He said that they came up with nothing. He said there has been no attempt to investigate anything ariseing from that inspection.
Ray Mainsbridge said that he would dispute that the investigation was ‘unfettered’.”
The resolution was put to the vote by show of hands. Far East voted in favour, and there were 16 votes against. A poll was demanded. Because Far East was by far the largest creditor, the majority in value was in favour of the resolution but the majority in number were against it. Mr Gould exercised his casting vote and voted against the resolution.
Far East then moved that Mr Gould be removed as administrator of Securities and replaced by Mr McGrath. It put forward Mr McGrath as an independent insolvency practitioner not subject to the objections which had been raised against Messrs Hall and Hedge. Austin J said, “But Mr Gould argued against the proposal, saying that Far East had contributed to delays in the sale of business negotiations”.
According to the minutes of the meeting, what was said was -
“Michael Hughes stated for the record that the reasons raised earlier in respect of Mr Hedge did not apply to Mr McGrath of KPMG. The Chairman responded by saying that PriceWaterhouseCoopers alone was not the problem but also Cresvale Far East Limited which had contributed to Mr Kirwan’s concerns due to their ‘dilly-dallying’ in the sale of business negotiations. Mr Beaton asked the Chairman what was meant by ‘dilly-dallying’. Mr Nigel Kirwan expanded on this by stating that he had made numerous offers to buy Cresvale Capital Limited but had little response from PriceWaterhouseCoopers. He said that his offer would be the best outcome for the creditors of that company as Mr Hedge could not locate any other purchaser. Despite numerous promises being made no formal arrangement was undertaken.
Robert Dubler then asked Mr Hughes if Mr Gould was removed as Administrator and another Administrator was appointed, would his client give an assurance that the other creditors of the company would be paid in full if higher administration costs were incurred. Michael Hughes’ response to this was no.”
Mr Hughes’ record of the meeting included -
“Michael Hughes said that the nomination of someone independent from KPMG removes any concerns the directors or creditors could have about a conflict of interest. Further, Cresvale Far East is the largest creditor in the administration by far. It is only appropriate that Cresvale Far East’s nomination be accepted. Vanda Gould said that he rejected that. He said that Cresvale Far East do not have clean hands in this matter. He said that they have been ‘dilly dallying’ for seven months and have done nothing. He said that the actions of Cresvale Far East have contributed to the problems which Cresvale Securities has faced.
Nigel Kirwan said that the liquidators of Cresvale Far East led him down the garden path. He said that about $25,000 was wasted. He said that Cresvale Far East then made a demand on Cresvale Securities which was improper. He said that he and Neill had attempted some time ago to reach a resolution with Cresvale Far East but all their attempts had been rejected. He said that they had made an offer that Cresvale Far East accept a lesser sum on 30 July 2000 but that had been rejected. He said that would have involved foregoing a substantial claim.
Michael Hughes informed the meeting that Cresvale Capital does not have to sell its shares. That is a matter for it. Further, it is irrelevant that Cresvale Far East is negotiating with Kirwan and the other directors. That is a matter for it. Cresvale Far East is the largest creditor by far. Michael Hughes said that under IPAA Guidelines, Vanda Gould should exercise his discretion in favour of the creditor owed the largest amount in value. Michael Hughes said that the only reason given for why Vanda Gould did not vote in favour of the change on the last occasion was because he was concerned about independence. That issue has been removed.
There was a comment from the floor to the effect that the major concern was in fact the cost structure of a major firm. The creditors want that cost structure to be avoided.
Robert Dubler then asked whether if Cresvale Far East was contending it is the only creditor of any significance and all the other creditors will be paid out, would Cresvale Far East indemnify all the other unsecured creditors so that there was no risk to them? Michael Hughes said that he held no such instruction [sic] and that was an extraordinary suggestion.”
The voting on this resolution was the same as on the previous resolution, and Mr Gould again exercised his casting vote and voted against the resolution.
It was then resolved that Mr Gould remain as voluntary administrator, the voting reflecting the same positions and Mr Gould exercised his casting vote in favour of the resolution. After other matters which it is not necessary to note, the meeting closed.
Mr Gould circulated his administrator’s report to creditors under cover of a letter dated 14 July 2000. Austin J summarised and commented on the report as follows -
“71   The Report began by giving a history of Securities and expressing Mr Gould's opinions of the reasons for the company's failure. It referred to Mr Hedge's claim that the transfers of assets from Capital to Securities on 16 September 1999 may have been voidable preference transactions. The Report said:
'Senior Counsel has advised that there is no voidable preference and I am also advised he conveyed this opinion directly to the Liquidator [Mr Hedge] and his legal advisers. I am also of the view that Senior Counsel is correct in his opinion based on my understanding of the transaction and note that to date the Liquidator has not formally pursued this matter.'
72   The Report expressed the view that a share sale would provide the best outcome for Capital's shareholders. It claimed that the directors of Securities became 'increasingly frustrated' with Mr Hedge when it appeared that the share sale would not take place, and as a result, the uncertainty surrounding the future of Securities increased, and this directly affected Securities' profitability. The Report gave an account of the decline of Securities' business in terms very similar to the company's letter of 1 June 2000, attributing business difficulties to the lack of certainty about the company's future.
73   The Report gave an explanation and justification of the decision by the directors to resolve to put Securities into voluntary administration, and to appoint Mr Gould as administrator. It said that after Mr Hedge decided not to enter into an agreement for the sale of the shares in Securities, the company was in a difficult position because it could not increase its income structure by employing further advisers due to its uncertain future. It said that the directors became aware that Securities would shortly be in breach of the liquidity requirements of the Stock Exchange regulations and would no longer be able to trade.
74   The Report set out summary balance sheets for Securities as at 26 June and 13 July 2000. The former was stated to be a summary of Mr Gould's understanding of Securities' financial position as at the date of his appointment as administrator, based on his preliminary investigations and the directors' disclosures. The latter was intended to be an estimate by Mr Gould of the financial position of Securities immediately prior to entry into the proposed DCA. It assumed, for example, that some of the receivables had been collected and some of the liabilities to employees and trade creditors had been discharged.
75   The two balance sheets are inconsistent in some ways:
?    the first gives separate figures for cash on general account and on trust account, while the second gives a figure only for 'cash', which is more than the figure for cash on general account, but less than the sum of the figures for cash on general and trust accounts in the earlier balance sheet;
?    the first balance sheet shows as an asset 'Cash-ASX Fidelity Account' but this item does not appear at all in the second balance sheet;
?    the first balance sheet shows the loan to Capital (quantified at $135,689) as a receivable but that asset has a nil value in the second balance sheet.
76   In both balance sheets the claim by Kamadhenu Management for $120,000 for providing the services of Mr Kirwan is described as an account payable and is retained at its full amount, and the claim by Newland under the underwriting agreement for $1,576,277 is described as a 'contingent liability', but corresponding claims by Securities against sub-underwriters are not noted as assets in either balance sheet.
77   The balance sheet as at 26 June 2000 shows net liabilities based on valuation at $1,402,257, and shows net liabilities on the basis of estimated realisable values as $2,018,209. The balance sheet as at 13 July 2000 shows these two figures as having increased to $1,527,817 and $2,179,722 respectively. This enabled Mr Gould to conclude in the Report that Securities is 'clearly insolvent'.
78   The Report estimated and compared the returns to various classes of creditors under the proposed DCA and in a liquidation. Two sets of estimates were given, depending upon whether the 'contingent claim' by Newland was or was not included. If the Newland claim was excluded, all creditors other than subordinated creditors would receive 100 cents in the dollar under both the DCA and in a liquidation, while subordinated creditors (including Mr Kirwan and Far East as lender) would receive 22.2 cents in the dollar under the DCA and 8.6 cents in the dollar upon liquidation. If the Newland claim was included, employees would receive 100 cents in the dollar both under the DCA and upon liquidation, but trade creditors would receive only 27.5 cents in the dollar on liquidation while they would receive 100 cents in the dollar under the DCA. Kamadhenu Management would receive nothing under the DCA and 27.5 cents in the dollar upon liquidation. Far East as a lender would receive 33.8 cents in the dollar under the DCA and 27.5 cents in the dollar on liquidation.
79   These figures led Mr Gould to recommend in the Report that creditors should prefer the DCA, because the costs of liquidation and losses on actual realisations would reduce the dividend payable to all creditors except employees, and would permit previous employees to be reinstated to their former positions. The Report pointed out that in a liquidation the Newland claim might proceed to litigation, which may entail a delay of up to two years before a distribution could be made. Under the DCA Mr Kirwan would provide an indemnity to trade creditors with respect to the Newland claim, and would provide funds to meet the legal costs of defending the claim.”
It should be said with respect to para 75 in this summary that the first balance sheet shows the loan to Capital as of nil realisable value in the same manner as the second balance sheet; and with respect to para 76 in the summary that (as earlier mentioned) the note to the contingent liability to Newland included, “The directors are of the opinion that this amount will not be payable, but at best substantial legal costs may be payable in defending the action”.
It is appropriate to set out at this point the passage in the report found by Austin J to have been false or misleading. It was -
“Creditors will appreciate that it is possible for a liquidator to bring actions against directors that would not be available if creditors approve a Deed of Company Arrangement.
In accordance with my responsibilities I have attempted to make appropriate inquiries into the financial affairs of the Company. I have not completed a full investigation of the kind that would be performed should the company be placed into liquidation. Creditors will appreciate that only a liquidator has the power to pursue certain transactions which took place prior to the date of liquidation. Any recovery may provide a return to unsecured creditors. In the matter of Cresvale, because of the ASX supervision it is highly unlikely that such offences could be proved.
An independent liquidation of Cresvale may also have better prospects of bringing an action against the Liquidators of Cresvale Capital and Cresvale Far East for the losses suffered by their actions.”
The report concluded -
“The information contained in this report is based on preliminary investigations into the affairs of the Company and advice from relevant parties. In these circumstances, creditors must appreciate the limitations on the information provided and the potential for inaccuracies.
I trust the above report adequately discloses the information pertaining to the Company’s position (subject to the limitations discussed above) and therefore allows creditors to make a more informed decision as to the Company’s future. I welcome further advice or comments from creditors on the report and the affairs of the Company.
Should you have any queries, or require any further information, please do not hesitate to contact me.”
Austin J later summarised the DCA as follows -
“97 The DCA was executed on 9 August 2000. It contained the following key points:

Securities was required to issue, and the administrator, the members of Securities and the directors were each required to cause Securities to issue, 20 million ordinary shares to Mr Kirwan or his nominee at one half a cent each, in return for a cash payment by Mr Kirwan of $100,000 (clause 5.1 - the share issue would dilute the shareholding interest of Capital in Securities from 100% to 5.33%);
Mr Kirwan and Kamadhenu Management each agreed to defer the amount of $120,000 behind other trade creditors, but in front of the 'subordinated debt' owing to Far East (clause 5.2.1);
Mr Kirwan agreed to indemnify all other trade creditors except Far East, including employees to the extent necessary, should the Newland claim be successful (clause 5.2.2 - evidently this was thought to be necessary in case payments to trade creditors under the DCA might be held to be unfair preferences);
Mr Kirwan agreed to provide funds to the administrator to meet the legal costs of defending the Newland claim, but those funds would be repayable to him in full in the event that the claim was successfully defended (clause 5.2.3 - it appears from discussion at the second creditors' meeting that this clause was not intended to cover costs found to be payable by Securities to Newland in the event that Newland was successful);
Mr Kirwan would take over all operational matters of the company including leases of machinery and would satisfy the requirements of the Stock Exchange (clause 5.2.4);
the administrator would call for proofs of debt from unsecured creditors and would open and maintain a bank account (clauses 9 and 10);
the administrator would pay unsecured creditors out of the fund in an order of priority which ranked the employees and trade creditors above Kamadhenu Management and Far East, placing Far East at the lowest priority on the ground that it had agreed to subordinate its debt to all other creditors;
there would be a first distribution out of the $100,000 subscribed by Mr Kirwan for shares and also from any money collected by pursuit of the company's collectable debts, and a final distribution at the conclusion of the Newland claim;
the DCA would come to an end 30 days after the final distribution, unless it was otherwise terminated;
distributions under the DCA would discharge the debts of all creditors as at 26 June 2000 (including Far East, Mr Kirwan and Kamadhenu Management); and
the DCA contained other relatively standard provisions for such a deed.”

Because of Austin J’s agreement with the submission that the views of Mr Gould in the report were biased in favour of Mr Kirwan and unfairly prejudicial against Mr Hedge, and his Honour’s opinion that the report was a biased document demonstrating “an uncritical acceptance by Mr Gould of the information and opinions supplied to him by Mr Kirwan and an unjustified hostility towards Mr Hedge”, it is appropriate to note in full that part of the report on which his Honour seems to have based paras 72 and 73 in his summary earlier set out and his views of its tenor.
After describing events up to the sale of shares deed of 24 December 1999, Mr Gould said -
“Mr Kirwan advised that in the week prior to this conditional agreement being completed the Liquidator had advised Mr Macpherson that he had no problems with the sale proceeding and that he only inserted the conditional clause into the agreement as a formality to please Mr Cohen. Accordingly, Messrs Kirwan and Macpherson had no doubts that the sale would proceed as planned. The truth or otherwise of these matters is now irrelevant to the Company other than as background and the possibility that Messrs Kirwan and Macpherson, their service companies and the Company may have a cause of action against the Liquidator.
As a consequence of the agreement of 24 December 1999 Mr Kirwan advanced $160,000 to the Company as a subordinated loan to meet the capital adequacy requirements of the ASX. Mr Kirwan may have a cause of action against the Company and the Liquidator as, strictly speaking, this sum is regarded as a type of trust receipt as the proposed contract did not proceed.
During the period from January 2000 until the Company was formally placed in administration on 26 June 2000, negotiations continued between Mr Kirwan and the Liquidator as to the possibility of the sale of shares in Cresvale.
It appears that the Liquidator did not complete the transaction because Mr Cohen opposed the sale. I understand Mr Cohen’s concerns related to unspecified suspected ‘improprieties’ of Mr Kirwan. These concerns have never been documented. Directors advise that no evidence of any such transactions was ever identified to them even though directors allowed the liquidator three weeks’ access to the Company’s records. Directors claim the Liquidator advised that he could not establish any impropriety.
The Liquidator has raised the issue of a possible preference payment recovery from Cresvale in respect of listed investments and equipment transferred from Cresvale Capital on 16 September 1999. Senior Counsel has advised there is no voidable preference and I am also advised he conveyed this opinion directly to the Liquidator and his legal advisers. I am also of the view that Senior Counsel is correct in his opinion based on my understanding of the transaction and note that to date the Liquidator has not formally pursued this matter.
Nevertheless the commercial reasons the Liquidator still has for delaying the share sale transaction are unclear. It appears, however, that a share sale would provide the best outcome for Cresvale Capital’s sharesholders. The existence of sale agreements supports this opinion, as well as substantial correspondence between Mr Kirwan and the Liquidator and Mr Kirwan’s advance of personal funds and stock to the Liquidator to assist with the orderly winding-up of Cresvale Capital.
The directors of Cresvale became increasingly frustrated with the Liquidator as it appeared that the share sale transaction would not take place and as a result of this, the uncertainty surrounding the future of the Company increased. This directly affected the Company’s profitability.
Directors have advised that the six month period to 21 March 2000 was a high volume trading period on the Australian stock market; however, as a result of the uncertainty regarding Cresvale’s future, the Company was not able to take advantage of this. The Company was reduced to only six active dealers during this period and recorded a loss of $40,362. Directors have advised that they were conscious of the need to substantially increase the number of investment advisers; however, they could not take the required action as the future direction of the Company has not been resolved. Directors attribute these difficulties to the indecision concerning the sale of the Company’s shares.
During April 2000 Cresvale incurred a further loss of $64,077 and in May incurred a loss of approximately $90,000. The directors did not expect profitability to return to the Company until they were able to secure the services of at least a further 10 investment advisers. This required a stable company in which advisers could build a career and the provision of adequate financial facilities.
During the six months to June 2000 the net asset value of Cresvale fell by $192,439 as a result of trading losses and continued to fall as the Company was unable to increase income or reduce its fixed and variable costs. Directors examined the cost structure and it seemed unlikely that any further cost savings could be achieved.
In a desperate attempt to save the Company the directors relayed this information to the Liquidator on 1 June 2000, unanimously stating that any offer for the acquisition of the shares in Cresvale above the projected shareholders’ funds should be seriously considered as any delay would result in further shareholder losses accruing in Cresvale, thereby minimising any possible dividend in the event of the liquidation of the Company. I have been unable to locate any response from the Liquidator.
On 15 June 2000 the Liquidator issued his report to creditors of Cresvale Capital. In this report he stated that following various attempts to sell the shares in Cresvale, a conditional agreement was entered into on 24 December 1999. He then stated that the conditions attached to this sale agreement were not satisfied and the contract substantially lapsed. He further stated that he was now in the process of considering how to best move forward with the realisation of the investment.
Following the Liquidator’s decision not to enter into an agreement for the sale of shares in Cresvale and in light of the accruing losses in the Company, together with the inability of the Company to increase its income structure by employing further advisers due to the uncertain future of the Company, the Company was in a difficult position. The directors became aware that the Company would shortly breach its liquidity requirements under ASX regulations and would no longer be able to trade.
On 23 June 2000 the directors resolved to put the Company into voluntary administration and appointed me as Administrator. I accepted this appointment on 26 June 2000.
To date I have not been able to reach any understanding with the Liquidator concerning his overall position. My letter to him remains unanswered. His position may differ from what is outlined above and I have relied upon the correspondence file and the directors’ representations in making this report which is subject to time constraints.”

As Mr Wood put at p 110 of the transcript:
"What we have from these three sets of minutes are reasons varying from impossibility to determine the value to the proof being late, to the debt being contingent, to the fact that there's an extended period without it being pursued."
Meagher JA then said: "And he didn't understand what the claim was" to which Mr Wood said, "Indeed. And what then complicates it even further is when Mr Gould was cross-examined on this topic … [there is] we submit … an admission by Mr Gould that there was something in this preference claim."
I should set out the provisions in the Regulations which Mr Gould purportedly applied. 5.6.23(2) provides:
"A creditor must not vote in respect of:
(a)          an unliquidated debt; or
(b)          a contingent debt; or
(c)          an unliquidated or a contingent claim; or
(d)          a debt the value of which is not established;
unless a just estimate of its value has been made."
5.6.26(2) says:
"If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained."
There is some tension between the two regulations. However, even if the administrator was correct in applying in 5.6.23, it is not permissible to refuse to allow a creditor to vote at all by not making a just estimate of the value of the claim. If 5.6.23 is to be applied, then there is an obligation on the chairman to make "for the purpose of voting" a just estimate. If the chairman finds it almost impossible to ascribe a value to the claim, then it should be valued at a dollar which at least would allow the claimant to be recorded amongst the number of creditors voting on the resolution.
The matter has been considered in previous decisions of this Court.
Hodgson CJ in Eq as his Honour then was, examined the matter in Vincent, White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93. He held that the doubt referred to in Regulation 5.6.26 was not doubt as to the existence or amount of the debt, but doubt as to whether a proof of debt should be admitted or rejected. In cases where the value of the debt was not established, and a just estimate had been made, the doubt must be a doubt as to whether the creditor should be allowed to vote on the basis of the just estimate. If the chairman had such a doubt, then the creditor should be allowed to vote on the basis of the just estimate. If no just estimate of the debt could be made at all, then 5.6.23 required the creditor not be permitted to vote at all and 5.6.26 would have no application. I am summarising what his Honour said at p 101.
I considered the matter in National Australia Bank Ltd v Market Holdings Pty Ltd (2001) 161 FLR 1; 37 ACSR 629. The case was a different one to the Vouris case, because in the Vouris case the chairman had made an estimate of the value of the proof, whereas in the Market Holdings case no such value had been attempted. I distinguished the Vouris case at 170 (FLR 27; ACSR 656) for that very reason.
There should have been no difficulty in assessing either the Capital claim or the Newland claim. Particularly the latter claim could have been easily assessed and valued. The claim was a simple one: the company had allegedly reneged on an underwriting agreement and either the loss Newland made was payable by the company, or it was not. It was not enough for the administrator to say that he had legal advice that the claim would fail. He needed to assess, at least in approximate terms, the chances of success which could easily be worked out, at least so far as a range is concerned, from legal advice. It was not open to decline to assess a just value on the claim and to reject it altogether.
This conclusion is reinforced by what Thomas J said in Re Oriel Homes Pty Ltd (1997) 15 ACLC 564, 565, where his Honour said that the reference in Regulation 5.6.23 to the making of a just estimate suggests that the administrator has an ultimate responsibility to make a decision on the matter. His Honour then said of 5.6.23 and 5.6.26 that under the latter:
"The power to admit includes the power to admit in part. If the position is clear, the chairperson should make a just estimate of the value of the debt. If, however, he or she is in genuine doubt, the claim must be allowed at the amount that the creditor has claimed and should thereupon be marked as 'objected to'. The creditor should then be allowed to vote at that value."
In the circumstances, his Honour considered that there was a contingent claim which should have been valued at one dollar.
There is then the consideration as to whether it was valid to class the Newland debt as a contingent debt in any event. The classic definition of a contingent debt is contained in Re William Hockley Ltd [1962] 1 WLR 555, 558, where Pennycuick J said:
"The expression 'contingent creditor' … must, I think, denote a person towards whom under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date."
That definition was adopted by the High Court in Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455, 459. Typically, there will be a contingent claim if it is necessary for the alleged creditor to establish that an event such as certification of his claim or the issuing of a statutory notice is necessary before it becomes a debt which can be the subject of action. A claim does not become a contingent claim merely because the company denies it. There was no event which had to occur before Newland could sue. The fact that it may have had to issue a statutory demand or sue in the District Court before being able to execute on the company's assets is neither here nor there.
Mr Wood's submission is valid that one must compare and contrast the difficulties that the administrator had in considering the claims of Newland and Capital on the one hand, with the ease in which he admitted the claim of Kirwan and his associated companies. There was very little material to back up these claims, yet no questions about them appeared to suggest themselves to the administrator.
When one considers the different reasons put forward at different times for rejection of the Capital and Newland's claims, the failure of an experienced company administrator to make a valuation of the claims, the rather strange approach generally to the claims, and compares this with the ease in which the Kirwan claim was admitted, it seems to me that one is justified in coming to the conclusion that the conduct of the administrator in and about this matter was very singular indeed.
It is a very serious matter to make a finding of improper conduct on the part of an administrator. One must apply the Briginshaw test. However, putting together all the matters that I have just discussed and adding in those discussed under head 3, it would seem to me that it was open to his Honour to come to the conclusion that this administrator had acted improperly.
6. Mr Rares SC acknowledges that for all practical purposes Mr Gould has now been removed as administrator and that so much has occurred since his removal that there is no utility in reversing the substantive order which Austin J made. However, he says that if, as a result of an erroneous judicial decision, a person has been prejudiced in a real way, even if the actual decision is not capable of reversal, that person should be entitled to a declaration that, for instance in this case, he has not been guilty of improper conduct. Mr Rares relies on what was said by the High Court in Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582 and 596-7, and see also Chief Constable of North Wales Police v Evans [1982] 1 WLR 1155, 1172.
Mr Wood submits that there is no utility in making such a declaration. He agrees that the court proceeds on the basis that reputation itself should be protected, but submits this does not mean that where a party such as Mr Gould has been afforded natural justice through his opportunity to be represented and give evidence in the proceedings he should be entitled to the benefit of a bare declaration where the practical status quo of what was ordered by Austin J will be maintained. He submits that the practical controversy between the parties concerns the termination of the DCA. The remedy which Mr Gould seeks is more to be used for the purposes of defending himself in any proceedings that might be brought against him to be deregistered as a liquidator and auditor. Mr Wood submits that allowing the appeal or making a declaration ultimately for this ulterior purpose would be unwarranted.
It seems to me that the general approach of Mr Rares is correct and that this Court might make a declaration if it came to the view that Mr Gould's conduct was not improper. However, I would have to put on that statement the rider that the onus would be on Mr Gould to establish affirmatively that he was entitled to such a declaration and it would be insufficient merely for him to say that on the Briginshaw standard the trial judge should not have come to the conclusion he did.
For the reasons I have already given, no such declaration should be made in the present case in any event because the basis for making the declaration has not been established on the facts.
7. This matter concerns the appropriate order for costs that should have been made at first instance. The essential question before us is whether Austin J properly exercised his discretion as to costs.
In an additional judgment delivered on 10 September 2001, Austin J concluded [94] and [95]:
"[94] I have found that Mr Gould has no entitlement to indemnity out of the assets of Securities. I have expressed the opinion that if costs are sought against a deed administrator as defendant, the normal order should not be limited to the assets of the company under administration. I have found that it was unreasonable for Mr Gould actively to defend the proceedings, given that the gist of the proceedings was to complain, successfully in the result, about Mr Gould's improper conduct. In those circumstances, there is no basis for departing from the normal order.
[95] In view of these conclusions, the proposition underlying paragraph 10 of the draft minutes is correct."
His Honour then proceeded to say that he had power to make such an order as he thought just under s 447E(1) of the Corporations Act and being satisfied that the administrator had managed the company's affairs in a way that was prejudicial to the interests of some or all of the company's creditors and members, by virtue of his improper conduct and by defending the proceedings for his removal he should make the order 10 in the short minutes which is now order 3 in Set B set out above.
His Honour then found that he should make order 11 in the short minutes for the reason he gave in para [96] of his reasons. He said, inter alia:
"I have found that Mr Gould is not entitled to an indemnity against Securities in respect of the costs of the proceedings. It therefore follows that he cannot recoup the costs incurred by him as the second defendant and a cross-defendant in these proceedings, and if he has purported to pay any of those costs out of the assets of Securities, he must reimburse Securities for that expenditure."
His Honour then made order 4 in Set B set out earlier.
The cross-appellant's notice of appeal contained ground 36 that "His Honour erred in declining to follow the decision of Young J in Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730." Needless to say, this ground had some immediate appeal. However, it is necessary to look at the submissions made by the cross-appellant in more detail. It is not necessary in view of what I have already said to consider again the question as to whether Mr Gould's conduct was or was not improper.
Mr Rares SC submitted that an administrator is not normally a party to this sort of litigation, and ought, where he or she is a defendant, be treated in the manner which Oliver J held appropriate in Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274. He further submits that Mr Gould was not removed for corruption or maladministration and that my decision in Biposo was correct in holding that, in circumstances such as the present, Mr Gould was entitled to his costs out of the assets of Securities. It is put that he was entitled and indeed, properly ought to have acted to defend the decision to execute the DCA. Further, analogously with what Needham J said in Re Shanks Byrne Industries Pty Ltd [1979] 2 NSWLR 880, 883, the difficulties were created by Far East and Capital on the one hand, and the employees and trade creditors or Mr Kirwan on the other, and Mr Gould's costs were properly to be borne by Securities.
Mr Cashion SC put that Mr Gould was a proper defendant to the proceedings and it was entirely appropriate that as the unsuccessful party he bear the costs of the successful parties. Mr Cashion put that Re Biposo merely set out a guideline for the exercise of discretion as Austin J held, but in any event, administrators appointed under a deed of company arrangement accept their appointment voluntarily and in that way at least their position should be distinguished from that of a court appointed liquidator. The Judge held that Mr Gould's conduct was not merely an error of commercial judgment or a failure to make enquiries, but was improper as well as negligent. Thus, as the Judge said [143], there was an obvious contrast between his findings and the lesser findings made against the liquidator in Re Biposo. It was unreasonable for the administrator to defend the proceedings to the extent he did.
Mr Rares says that in any event, Mr Gould's liability should be limited to one set of costs. Mr Cashion SC suggests that what the Judge did was quite proper.
I should now return to Austin J's judgment on the point and to the principal cases referred to.
In Re Wilson Lovatt & Sons Ltd a liquidator had mounted a claim against former directors which failed. He also mounted a preference claim against a bank which failed. Oliver J, as his Lordship then was, analysed what was in the leading textbooks and distinguished a series of situations, particularly the situation where there is a contest between the liquidator and a third party over costs, and where there is a dispute as to who should bear the costs within the company in liquidation's structure. He also distinguished the case where the liquidator is the plaintiff and where he is the defendant. At [45] of his additional judgment, Austin J cited Re Wilson Lovatt & Sons Ltd at 278 for supporting his proposition that:
"In the case of a court-appointed liquidator who is a defendant in proceedings, the Court has control of the winding up, and it is common practice in England to deal with a liquidator's claim to indemnity out of the company's assets … by limiting the order that the liquidator pay costs, in its terms, to payment out of the assets of the company. However … English authority suggests that an order limited to the company's assets will be made only where the adverse litigant does not object …".
Re Biposo was a case where the administrators of the company became liquidators following a meeting of creditors which resolved that the company be wound up. The liquidators gave me the impression that they were not appearing to behave impartially and I ordered their removal. However, I did not find maladministration or corruption, and said at 740:
"I do not consider that the conduct was sufficiently 'odious', to use [counsel's] word to take it out of the general rule that where a liquidator is removed primarily to protect the administration because of perceived problems with impartiality his costs and the plaintiff's costs should come out of the assets. I will reserve further consideration as to costs should the assets prove insufficient."
Austin J said at [49] that Re Biposo went beyond Re Wilson Lovatt in two respects: (a) it applied the general rule respecting court appointed liquidators to voluntary liquidators; and (b) it did not confine the circumstances in which a limited order is made to cases where the company's assets are sufficient to meet the costs obligation. With great respect, the second proposition is contradicted by Biposo itself, where further consideration was reserved in case this problem should occur. Austin J records that Mr Gould relied on Biposo as authority for the proposition that a liquidator and administrator will not be ordered to pay the successful plaintiff's costs personally unless corruption, maladministration or misconduct of an equivalent degree is established. Austin J rightly said that the case is not authority for such a narrow proposition. An unreported decision City & Suburban Pty Ltd v Smith (No 2) (Merkel J, Federal Court of Australia, 31 July 1998) supported the proposition. Austin J properly declined to follow this decision on its interpretation of Re Biposo, but he appeared to be convinced that Merkel J got it right and I got it wrong as to when one orders an administrator or liquidator to pay costs. This is rather surprising, as neither the Butterworths nor CCH Company Law Cases which usually pick up any significant decision in the corporations law field avidly, have seen fit ever to report Merkel J's decision.
A series of misunderstanding seems to have crept in both the submission and with respect, Austin J's judgment. The first is that there are two aspects to the problem as Oliver J said in Re Wilson Lovatt at 278: (A) as between the liquidator (or administrator) and an adverse litigant; and (B) as between himself and the estate. As to (A), Biposo merely dealt with whether applying a general guideline an order should be made against the administrator/liquidator in that case. (B) was left open for further consideration. It may be that it might have been preferable not merely to reserve further consideration but to make some more precise order at the time when I did make an order, but the competent counsel who appeared in the case did not urge that on me, and as far as I know, there was never any problem with assets. It is reading too much into Biposo to say that it was a policy decision that the successful plaintiff must bear its own costs over and above the assets held by the company.
Secondly, on proposition (A), the usual rule applies, viz: (i) costs are in the discretion of the court; (ii) as a general guideline a liquidator or administrator acting appropriately is entitled if unsuccessful that the costs be paid by the company and not by the liquidator or administrator personally.
I have no quarrel with the propositions outlined in the bankruptcy case of Adsett v Berlouis (1992) 37 FCR 201, that to say that only a trustee who has recklessly instituted or precipitated litigation should be deprived of the right to recover costs from the bankrupt's estate is too limited a proposition. This is, of course, a class (B) situation rather than a class (A). I also agree that authorities such as Re Beddoe [1893] 1 Ch 547, 558, that the basal question is whether the costs have been properly incurred or not.
With great respect, I cannot see two different lines of authority, one stemming from Biposo and the other from Adsett v Berlouis when all the cases are properly read.
However, the point should be made that, whilst it might be said that the trial judge made some minor errors in analysing the authorities, any error his Honour may have committed in this area really has no effect on the exercise of discretion. This must be so once one upholds the principle espoused by his Honour contrary to the submissions of Mr Gould that the occasions when a liquidator or administrator may be ordered to pay costs personally are not limited by the restricted interpretation of Biposo given by Mr Gould or endorsed by Merkel J in the City & Suburban case.

In [62] to [64] of his Honour's additional judgment, Austin J said first that he interpreted Re Biposo as setting out a guideline for the exercise of discretion given the generally discretionary nature of orders for costs. I would agree. He continued:
"It may be that in the case of a court-appointed liquidator, the guideline is very strong, since the liquidator is appointed by the Court as its officer to wind up the company on the court's behalf. In those circumstances one would expect the liquidator's liability to be limited to the assets of the company in liquidation except in extreme circumstances, and therefore that the Court will routinely limit the liquidator's liability for costs as unsuccessful defendant to the assets of the company, even where the assets may not be adequate to meet the costs liability."
In [63] his Honour says that it might be appropriate to take the same approach for a voluntary liquidator. He then, however, said in a passage described by Mr Rares SC as providing an extraordinarily unjust outcome:
"[64] In the case of an administrator under a deed of company arrangement, however, there is a significantly greater opportunity for the administrator to obtain contractual protection, since in the normal case the deed administrator has previously been the voluntary administrator of the company and in the latter capacity, he or she has had a substantial influence on the contents of the deed. That being so, it seems to me that there will less often be a justification for the Court to limit the liability for costs of an administrator as unsuccessful defendant, where the assets of the company may be insufficient to cover liability and the successful party objects to limitation. Indeed, in my opinion the normal costs order against a deed administrator as unsuccessful defendant will be the same as the normal costs order against a deed administrator as unsuccessful plaintiff – that is, an order that the administrator pay the successful party's costs, without limitation to the company's assets."
In [94], Austin J found it was unreasonable for Mr Gould actively to defend the proceedings. His Honour then took the view that it followed that the costs were not reasonably incurred and accordingly, as to (A), Mr Gould should pay the costs of the successful parties, and as to (B) there should be no indemnity.
With respect, it does not necessarily follow from Mr Gould's decision actively to defend the proceedings that all the costs incurred by Securities or Mr Gould were unreasonably incurred. It would be almost certain that some of those costs would be necessary to perform the duty of any reasonable administrator in seeking to put before the Court material which the Court would need to decide the issues before it.
Further, Mr Rares SC says that it is well recognised in the authorities that the trustee or a person in the role of a trustee is still entitled to be paid his costs out of the estate in a proper case where he has defended the suit for the benefit of the estate though at the same time, defended his own character. This is certainly so; see eg Walters v Woodbridge (1878) 7 Ch D 504, 509.
However I respectfully agree with the words of Heydon JA in Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at [35] that:
"Parties who see themselves as having a role of assisting the Court in some respects cannot easily also occupy the role of parties advancing positive self-interested claims in other respects – particularly where the arguments advanced by way of assistance to the Court are also strongly in the self-interest of those advancing them. Sacro egoismo is not a quality which a statutory office holder can easily claim."
In my view, because of what I have just said and because I have taken a different attitude to the degree of impropriety of Mr Gould, and because, at least to a minor extent I consider Austin J did not quite apply the right tests, this Court must exercise afresh the discretion as to costs.
In doing so, I bear in mind the principles that have already been adverted to in the submissions. In addition, some account has to be taken of provisions in the Corporations Act such as s 443C that the administrator is not liable for the company's debts except as provided by the Act, and s 443D that the administrator ordinarily is entitled to an indemnity for debts which he or she has personally incurred or his or her remuneration as fixed.
I will put aside for a moment s 447E of the Corporations Act upon which Austin J relied for the order he made. Apart from that section one would have thought that the order for costs so far as principle (A) is concerned that the administrator should pay the costs of the successful plaintiffs. So far as principle (B) is concerned, the administrator is entitled to be indemnified in so far as the costs were properly incurred out of the assets of the company. The matter should be referred to a costs assessor to work out what costs were properly incurred. As to the balance, there should be no indemnity.
If the assets of the company are insufficient, it will follow that the administrator will not be able to get in dollars and cents the amount for which he is entitled to be indemnified.
As to whether more than one set of costs should be allowed, it is necessary to see the structure of the litigation and the roles that the various parties played. Far East was the plaintiff, Securities, Mr Gould and Capital were the defendants. Capital then made a cross-claim against Securities, Mr Gould and Mr Kirwan as well as Far East. Both the originating process and the cross-claim sought that the DCA be terminated and that the share allotment of Mr Kirwan be set aside. The cross-claim sought much the same thing. Indeed, Austin J said at [3] of the judgment of 28 February 2001:
"In substance, the cross-claim raises the same issues as Far East's statement of claim."
As far as I can see, no comment was made until the time that costs were discussed as to whether there should be separate representation of the two interests. Because Far East and Capital were on different sides of the record, they could not be represented by the same counsel and solicitors. The general rule is that where one has separate claims resulting from the same act of the defendant, ordinarily each claimant is entitled to costs; see Oppenshaw v Whitehead (1854) 9 Ex 384; 156 ER 163 and Greir's case (1889) 45 Ch D 606.
It does not seem to me that Far East and Capital were sufficiently in the same interest for the cases requiring people in the same interest to join together with the penalty of only getting one set of costs. Even if this were possible, as I have said, the parties were on different sides of the record so that joint representation just could not occur.
Accordingly, in my view the order as to two sets of costs was appropriate. However, the costs assessor will doubtless be able to assess what is proper and to avoid duplication of effort in the light of the fact that two parties were pursuing the same end.
The issue involving costs needs also to be considered from another perspective.
Austin J relied on s 447E of the Corporations Act to justify orders Set B 3 and 4.
This is a general section empowering the Court to supervise administrators. It has its equivalent, although not exact equivalent, so far as liquidators are concerned, in s 536. So far as s 536 is concerned, in Re Anderson Group [2002] NSWSC 764, Barrett J held that the supervisory power of the Court under s 536 could properly be exercised with respect to an objection against a claim by a liquidator for his remuneration under s 473 so long as the appropriate parties were before the Court. With respect, this seems a wise and sensible decision.
By analogy the, Austin J could exercise the powers vested in him under s 447E of the Act so long as the creditors or a representative of them were parties. Indeed, despite a very verbose amended notice of cross-appeal there does not appear to be any challenge to the power to make these orders under s 447E.
To my mind, the orders are supportable under that section. Indeed, it is not uncommon, in cases of liquidators, (vide Re Network Welding Pty Ltd (No 2) [2001] NSWSC 809) or lawyers (vide Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134) for such orders to be made.
The proper order for costs against the administrator can be supported by s 447E of the Corporations Act as well as under a power to award costs under s 76 of the Supreme Court Act. However, in my view the costs which should be paid by Mr Gould under 447E are the same as under s 76, that is, the costs over and above those which were properly incurred in defending the DCA (even though some of those costs may have also gone to preserve Mr Gould's reputation).
8. It follows that the appeal should be allowed to the extent that it is made a condition of the order setting aside the allotment of shares that Mr Kirwan be paid $100,000 plus interest at the appropriate rate. Unless there are further submissions to be made as to the rate, it should be that under Schedule J to the Rules. On this basis and calculating interest from the date of filing the originating process, the interest payable is $23,500. No argument was put to us as to whether there should be any special order as to costs. I would think that order 1 of Set B as to costs of the hearing should be modified so that the following is added:
"Except in so far as those costs relate to the issue of whether the allotment of shares to Mr Kirwan should be set aside on which issue the plaintiff and third defendant are to pay the fourth defendant's costs.
As to the costs of the appeal, the appellant is entitled to his costs against Far East and Capital and probably jointly against the other respondents as well.
In my opinion, the cross-appeal should be dismissed with costs but there should be a variation of the order for costs in accordance with what I have outlined above.
Having now read the reasons of Meagher and Giles JJA, the following orders would seem to follow:
(1)          Appeal allowed in part.
(2)          Set aside declaration 7 made on 8 March 2001.
(3)          Vary declarations 5 and 6 made on 8 March 2001 –
(a)by adding at the commencement of declaration 5 “Upon condition that the first defendant repay to the fourth defendant the sum of $100,000 subscribed for the shares,” and
(b)by adding at the commencement of declaration 6 “Upon the same condition,”.
(4)Vary order 1 made on 10 September 2001 by adding at its conclusion, “save so far as the fourth defendant’s costs relate to the issue of repayment to the fourth defendant of the sum of $100,000 which costs are to be paid by the plaintiff and the third defendant”.
(5)Declare that the first defendant is also liable to pay the fourth defendant interest on the said sum of $100,000 in the amount of $23,500.
(6)Order that the said sum of $23,500 be paid by the fourth defendant to the first defendant.
(7)          Order that the respondents pay the appellant's costs of the appeal.
On the cross appeal the orders set out by Giles JA in para 264 reflect the views of the majority and should be the orders of the Court.
In view of the complications and the fact that counsel have not been able to address on what orders for costs should be made in the light of these reasons the parties should be directed to bring in agreed short minutes or, if they are unable to agree, competing short minutes and written submissions in support of the competing versions before the end of term. In the absence of agreement, the orders to be made will be finally determined on the written submissions.
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LAST UPDATED: 10/12/2002