Klatt v Sacco Pty Ltd (Administrator Appointed)

[2021] QSC 271

SUPREME COURT OF QUEENSLAND

CITATION:

Klatt v Sacco Pty Ltd (Administrator Appointed) [2021] QSC 271

PARTIES:

MICHAEL KARL KLATT

(applicant)

v

SACCO PTY LTD (ADMINISTRATOR APPOINTED)

(respondent)

FILE NO/S:

BS 10543 of 2021

DIVISION:

PROCEEDING:

ORIGINATING COURT:

Trial Division

Application

Supreme Court

DELIVERED ON:

DELIVERED AT: 

17 September 2021 (ex tempore)

Brisbane

HEARING DATE:

17 September 2021

JUDGE:

Daubney J

ORDERS:

I will hear the parties as to the appropriate form of order.

CATCHWORDS:

 CORPORATIONS – RECEIVERS, CONTROLLERS AND MANAGERS – APPOINTMENT – GENERALLY – where respondent company was the trustee of a family trust – where applicant is the administrator of the deceased estate of former trustee company director – where company went into voluntary administration and administrator appointed – where applicant and respondent seek appointment of a receiver and manager of the assets of the trust – where applicant submits separate independent liquidator should be appointed – where  respondent submits current administrator should be appointed – where applicant submits appointment of current administrator gives rise to an apprehension of bias – where current administrator was appointed by referral from the company’s law firm – whether this referral relationship gives rise to a reasonable apprehension of bias

Australian Securities and Investments Commission v Franklin [2014] 223 FCR 204

Bank of Queensland & Anor v Ross Auto Auctions Pty Ltd (in liq) (Receivers & Managers appointed) [2015] QSC 347
Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337
Re Mecfab Holdings Pty Ltd [2015] NSWSC 46

COUNSEL:

A Messina for the applicant

D Copley for the respondent

SOLICITORS:

Mullins for the applicant

Stone Group Lawyers for the respondent

1. By a Trust Deed dated 13 June 1995, Sacco Pty Ltd (“Sacco”) was appointed trustee of the Moss Family Trust (“the Trust”).  Through the Trust, Sacco operated a business known as “Rite Price Distributors” which distributed industrial marine timber, decorative paint, and other accessories.  Until April 2018, the directors of Sacco were Colin Moss and his wife, Sharon Moss.  Since 24 April 2018, their daughter, Rischelle Moss, has been the sole director of Sacco. 

2. Mr Moss died on 3 May 2018.  Mr Klatt, a partner of Mullins Lawyers, was appointed administrator of the deceased estate of Mr Moss by order of this Court on 12 August 2020. Mrs Sharon Moss lacks legal capacity and her financial affairs have been administered by the Public Trustee of Queensland pursuant to an administration order made by QCAT on 7 December 2018.  For convenience, I will refer to the Colin and Sharon Moss representatives as referring to Mr Klatt as a personal representative of the deceased estate of Mr Colin Moss, and the Public Trustee as the financial administrator of Mrs Sharon Moss. 

3. On 24 August 2021, Mr Glenn O’Kearney was appointed under the provisions of the Corporations Act 2001 (Cth) as voluntary administrator of Sacco. Mr O’Kearney is a registered liquidator who practices as GT Advisory and Consulting. One of the consequences of the appointment of Mr O’Kearney as administrator of Sacco was that Clause 9.3(v) of the Trust Deed operated such as to automatically determine and vacate Sacco’s appointment as trustee of the Trust.

4. I note that Mr Klatt, as the personal representative of Colin Moss who was named as the principal under the Trust, has the power to appoint a new trustee.  Mr Klatt, however, has expressly declined to exercise that power of appointment.  Since the appointment of Mr O’Kearney, therefore, Sacco has continued to hold the assets of the Trust as a bare trustee.  In that capacity, however, Sacco can do no more than protect the Trust assets.  It has, for example, no power to dispose of Trust assets.

5. Mr O’Kearney has continued to trade the Trust’s business.  In the course of that, he has conducted investigations which have revealed that the business: 

   (a)employs four staff; 

   (b)operates from leased premises on the Gold Coast; 

   (c)has a turnover of approximately $1.4 million; and

   (d)has liabilities of some $1.6 million made up of: 

   (i)      trade creditors of over $200,000; and

   (ii)      related party loans of some $1.4 million. 

6. One of the related party loans is to a company (Simshell Pty Ltd) that was, in fact, deregistered in 2014.  Investigations are continuing in relation to that purported loan as to whether it had been incorrectly recorded in the books, and to determine the true position.  Mr O’Kearney is of the view that if the business is sold, either as a going concern or individually, the proceeds will be insufficient to pay unsecured creditors. 

7. Since his appointment, Mr O’Kearney has undertaken what he describes as the usual steps required of an administrator, which he has detailed in an affidavit by him filed before the Court.  In addition, he has continued to trade the business and has conducted an expression of interest campaign that has resulted in mixed expressions of interest from parties who are currently undertaking due diligence for the acquisition of the business. 

8. A proposal for a deed of company arrangement has been received which is currently being reviewed. Mr O’Kearney says that a second report to creditors is being prepared which is due to be sent to creditors by 21 September 2021, with the second meeting of creditors to take place on or before 29 September 2021. 

9. That being said, it must also be noted that both Mr Klatt, the administrator of the deceased estate of Mr Colin Moss, and the Public Trustee, who is the administrator of the financial affairs of Mrs Sharon Moss, have raised concerns particularly about the conduct of Rischelle Moss in connection with the company and the Trust business.  Those concerns could be summarised as: 

   (a)how Rischelle Moss acquired the shares in Sacco from the deceased Mr Colin Moss and Mrs Sharon Moss; 

   (b)a restructure of the beneficiary loan accounts owing to the deceased and Mrs Sharon Moss; 

   (c)the use of company money for what appears to be, or is asserted to be, the personal benefit of Rischelle Moss, including the purchase of luxury motor vehicles and paying significantly higher wages to herself than had hither to be the case;  and

   (d)seeking to, effectively, extinguish the beneficiary loan accounts of the estate of Mr Moss and the interests of Mrs Moss in the Trust through an arrangement with creditors. 

10. Now, obviously, all of these matters need to be appropriately investigated and resolved, and of course, the affairs of the Trust and the Trust business need to be regularised for the interest of the various creditors of the business and the beneficiaries under the Trust. 

11. So as a consequence, there are two applications before me:  one by the representatives of the interests of Colin and Sharon Moss, and one by the administrator of Sacco. Each application seeks the appointment of a receiver and manager over the assets and undertaking of the Trust.  It is uncontroversial that both sides have standing to bring their application.  It is also uncontroversial and indeed, self-evident, even on the brief recitation of the facts that I have just given, that in the circumstances a receiver and manager should be appointed, and that it is just and convenient for a receiver to be appointed.  The only question is who should be appointed. 

12. On one side, Mr O’Kearney says that he should be appointed.  The representatives for the interest of Colin Moss and Sharon Moss, however, say that another independent registered liquidator, Mr Weatherly, should be appointed. 

13. The justification for appointing an administrator, such as Mr O’Kearney, as receiver of the assets of a trust of which the company had been trustee, were summarised by Brereton J in Re Mecfab Holdings Pty Ltd:[1]

    Doing so will facilitate and simplify the administration of the company by providing for the trust business and assets to be under the same control as the company while it is in administration, and enable the plaintiff, as receiver, to secure and preserve the trust assets in aid of enforcement of the first defendant’s indemnity in respect of the liabilities it incurred in its capacity as trustee of the Trust, and in aid of recovery of the plaintiff’s costs of the receivership (and because the first defendant’s sole function was to act as trustee of the Trust,  the general costs of the administration).

    [1][2015] NSWSC 46, [9].

14. In his capacity as administrator, Mr O’Kearney has already undertaken significant work investigating the business, property, and financial circumstances of the Trust’s business.  He would carry the benefit of that work into the receivership.  It stands to reason that at least some of that work will be duplicated if a new person comes in as receiver. 

15. The Colin and Sharon Moss representatives, however, raised the spectre of apprehended bias to argue that it should not be Mr O’Kearney who was appointed as receiver, but the completely independent Mr Weatherly.  The argument is put as follows in the submissions by their counsel:

    [12] Here, there is a reasonable apprehension that Mr O’Kearney might not discharge his duties with independence and impartiality because of his relationship with his lawyers, Stone Group, who are also Sacco’s lawyers and who refer work to Mr O’Kearney’s firm.  If appointed receiver, Mr O’Kearney will be required to investigate the complaints made about Ms Moss’ conduct.  And this in turn might include an investigation into the role of his solicitors, Stone Group, in such conduct.

    [13] This arises because Stone Group acted for Sacco on instructions from Ms Moss in response to the statutory demands served on Sacco by Mr Klatt and the Public Trustee.  They were involved in negotiations with Mr Klatt, which, in effect, proposed an arrangement akin to a deed of company arrangement.  They were then involved in Mr O’Kearney’s desire to propose a deed of company arrangement from Ms Moss.

    [14] Pressing for a deed of company arrangement is not considered in the interests of the estate or Mrs Moss because the complaints raised about Ms Moss’ dealings with Trust assets is yet to be properly investigated.  Yet Mr O’Kearney wants to propose and vote on the deed of company arrangements at the next creditors meeting.

    [15] Mr O’Kearney appears to be alive to the conflict with Stone Group. In his second affidavit … he deposes that he will not seek advice from Stone Group on certain issues and he will instead engage in another firm.  Rather than purge the apprehension of bias, this concession accepts (it may be inferred) that it exists.

16. Clearly enough, the central plank to this argument is that it is the so-called relationship between Mr O’Kearney and Stone Group Lawyers which gives rise to the apprehension of bias.  So much was confirmed in an affidavit sworn today by Mr Klatt in which he said that his concerns in relation to Mr O’Kearney’s independence are further heightened by a number of facts, namely:

    [14.1] The administrator’s appointment to Sacco was as the result of a referral from Stone Group Lawyers.

    [14.2] Stone Group Lawyers previously acted for Sacco, presumably on instructions from its sole director and sole shareholder and were directly involved in formulating and putting forward proposals to both the estate and Sharon Moss with respect to resolving the statutory demands served on Sacco by both the estate and Sharon Moss.

    [14.3] The concerns which have been raised by myself and the PTQ (on behalf of Sharon Moss) directly call into question the conduct of the director in relation to the management of the financial affairs of Sacco ATF v MFT.

    [14.4] The administrator is continuing to instruct Stone Group Lawyers, including with respect to the present proceedings.  Notwithstanding:

    (a) that those were the concerns which have been raised on behalf of two substantial creditors of Sacco ATF v MFT (whom are also the primary beneficiaries of the MFT); 

    (b) the director, upon his instructions from Stone Group Lawyers, would have previously acted when acting on behalf of Sacco, [and] is effectively putting forward DOCA proposals in respect of Sacco which would have the effect of substantially affecting the rights and interests of the estate and Sharon Moss.

17. The only evidence on which these assertions of a relationship between Mr O’Kearney and Stone Group Lawyers is said to be based is found in disclosures made by Mr O’Kearney in his initial information for creditors document dated 25 August 2021.  In that document, he said:

    B: Circumstances of Appointment

    How I was referred to this appointment

    This appointment was referred to me by Stone Group Lawyers.  I believe that this referral does not result in a conflict of interest or duty because: 

    ·     Stone Group Lawyers refer insolvency related engagements to the Firm from time to time. Neither myself nor the Firm have any formal or informal referral arrangements with Stone Group lawyers and to my knowledge they do not exclusively refer such work to me or the Firm.

    ·     The Firm is not reliant upon referrals from Stone Group Lawyers who are one of the considerable number of firms, organisations, and persons who may refer work to, or seek advice from, the Firm.  This engagement is not financially significant to the Firm, and the receiving or otherwise of other referrals from Stone Group Lawyers is not material to the Firm.

    ·     Work referrals arising from networks of business professionals, advisors, and other persons are normal and accepted arrangements and do not inherently impact on the discharge of my statutory duties and obligations with an independence and impartiality.

    ·     There are no conditions on the conduct or outcome of this administration, arising from the referral, including no fees/commissions, agreement for work in the administration, or other benefits.  There is no expectation, agreement or understanding between myself and Stone Group Lawyers regarding the conduct of the administration, and I am free to act independently and in accordance with the law at applicable professional standards.

18. In an affidavit sworn on 16 September 2021, Mr O’Kearney said:

    …

    (c) I have not sought and will not seek legal advice from Stone Group Lawyers in relation to issues raised about the director’s loans, the DOCA proposal, or the investigations referred to in the email from Brandon Dunn to Sarah Higdon dated 10 September 2021, which is in my first affidavit at page 43 of exhibit GT0-1.

    (d) If legal advice is required, I will engage a separate firm.

19. By his counsel, Mr O’Kearney also offered an undertaking to cease using Stone Group Lawyers in the matter if he is appointed as receiver.  I note that Mr O’Kearney was not required for cross-examination as to the nature and extent of any supposed or asserted relationship with Stone Group Lawyers. 

20. Counsel for the Colin and Sharon Moss representatives submitted that the Court ought to proceed and determine this matter on the basis that there is some sort of referral relationship between Mr O’Kearney and Stone Group Lawyers.  The underlying concern there, of course, is the apprehension that Mr O’Kearney may somehow compromise himself in the performance of his duties as a receiver by reason of the past relationship, or to protect further referrals.  That inference, however, is simply not available on the evidence.  The disclosure made by Mr O’Kearney in the information notice does not say what counsel for the Colin and Sharon Moss interests would have it say.  If anything, it speaks to the contrary being the case. 

21. This is not a case like Bank of Queensland & Anor v Ross Auto Auctions Pty Ltd (in liq) (Receivers & Managers appointed) (“Bank of Queensland”).[2]  That was an application for removal of a liquidator on the basis of there being a reasonable apprehension of bias on his part due to his independence being compromised by his referral relationship with an unsecured creditor of the company which was providing financial advice regarding its actual or potential insolvency. 

    [2][2015] QSC 347.

22. In the course of his reasons for judgment, McMurdo JA referred to the well-known and well-accepted propositions arising from the judgment of the plurality in Ebner v Official Trustee in Bankruptcy.[3] That case related to the disqualification of judges in cases of apprehended bias, but it can be accepted that a similar test would apply in a case such as the present.  The governing principle, as articulated by their Honours in that case, was that the decision-maker will be disqualified if a fair-minded lay observer might reasonably apprehend that the decision-maker might not bring an impartial mind to the resolution of the question which the decision-maker is required to decide.  Their Honours also noted that the application of that principle requires two steps, as they said in [8] of the judgment of the plurality:

    First, it requires the identification of what it is said that might lead a judge (or juror) to decide a case other than on its legal and factual merits.  The second step is no less important.  There must be an articulation of a logical connection between the matter and the feared deviation from the course of deciding the case on its merits.  The bare assertion that a judge (or juror) has an “interest” in litigation, or an interest in the party to it, will be of no assistance until the nature of the interest, and the asserted connection with the possibility of departure from impartial decision making, is articulated.  Only then can the reasonableness of the asserted apprehension of bias be assessed.

    [3](2000) 205 CLR 337.

23. In Bank of Queensland at [24], McMurdo JA noted that the applicants in that case relied on a previous decision in Australian Securities and Investments Commission v Franklin (“ASIC v Franklin”)[4] where it was held that there was a reasonable apprehension that liquidators might not discharge their duties with independence and impartiality because of their relationship with an entity which regularly referred work to them, and which was a party to transactions with the company in liquidation which they would or might have to investigate.  His Honour noted, however, that in ASIC v Franklin, there was “more detailed evidence of the extent to which the liquidators or their firm benefitted from referrals from this entity than exists in the present case”.[5]

    [4][2014] 223 FCR 204.

    [5]Bank of Queensland, [24].

24. That point is even more directly relevant in the circumstances of the present case where, as will be apparent from what I outlined earlier in these reasons, there is no real evidence before the Court, beyond the statement by Mr O’Kearney in the information notice, which does not itself support the finding of such a relationship. 

25. In any event, McMurdo JA went on to examine the facts of the case before him.  In that case, the liquidator had given a statement of independence the terms of which are set out in [12] of His Honour’s reasons for judgment.  But there was more than that in the evidence before McMurdo JA because as appears from [24] of His Honour’s reasons for judgment, the liquidator in that case was cross-examined before His Honour, and under cross-examination the liquidator agreed with the suggestion that the particular party “frequently” referred insolvency matters to him, and the liquidator agreed that the majority of his appointments as a liquidator in creditors’ voluntary windings up in Queensland during the past year had been as a result of referrals from the particular party.  His Honour said that it was not suggested that the liquidator’s firm had any agreement or particular understanding with the party from which his performance as a liquidator might be compromised.  Rather, the applicant’s case there:[6]

    … is that he has obtained work on referral from IG sufficiently often to give him a personal interest in maintaining what must be a good business relationship with it and that this interest could come into conflict with his duty as a liquidator if to perform that duty, he would have to act adversely to IG’s interests.  I accept that Mr Kijurina has a personal interest of that kind.

    [6]Ibid, [25].

1. The only basis, of course, on which His Honour could accept that the liquidator had a personal interest of that kind was on the basis of the evidence to which His Honour had referred in the previous paragraph of his reasons, which went far beyond anything which is before the Court in the present case. 

2. Further in his reasons, His Honour noted that it was a case, as in ASIC v Franklin, where the entity, IG, appeared to have influenced the selection of a person who, as liquidator, would investigate its own pre-administration conduct.  In those circumstances, His Honour agreed with the approach of White J in ASIC v Franklin that a fair-minded observer might apprehend that the liquidator might not wish to put an ongoing source of business in jeopardy by the due performance of his duties.  McMurdo JA quoted White J’s observations that:[7]

   The ‘double might’ test is concerned with possibility and not reasonable expectation … in Ebner at [7], the majority said that the question is ‘one of possibility (real and not remote), not probability’.

   [7]Ibid, [31].

3. It is important to take note of that final observation that, in order to make good a case of apprehended bias, the possibility with which the case is concerned is one of possibility which is real and not remote.  That is to be contrasted with the circumstances in this case where the concerns about the prospect of the appointment of Mr O’Kearney as receiver possibly being infected by an apprehension of bias really amount to a miasma of speculation.  There is no real evidence before the Court on which to make a finding that the circumstances of apprehended bias pointed to by the Colin and Sharon Moss interests are likely to exist as a real and not remote possibility. 

4. In those circumstances, therefore, I am not satisfied that it has been demonstrated that it would be inappropriate to appoint Mr O’Kearney.  For the reasons addressed earlier, there are obvious benefits to the administration in continuing with Mr O’Kearney’s appointment, rather than bringing in a fresh person from the outside who would need to go over and redo work that has already been done.  That would simply give rise to cost and expense imposts on the estate which would not be for the benefit of the creditors or the Trust beneficiaries. 

5. Finally, I note that it is common ground that regardless of which of the nominees is appointed receiver, this is not a case in which it is necessary for the appointee either to give an undertaking as to damages or for the appointment to be subject to an order for security for costs.  I will hear the parties as to the appropriate form of order.