Object Design Inc v Object Design Australia Pty Ltd
[1997] FCA 917
•2 JULY 1997
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - appointment of provisional liquidator and administrator to same company - applicant minority share-holder and creditor - application for appointment of provisional liquidator of company - likelihood of company insolvency in near future - appointment by company of administrator - consent to appointment of administrator by majority share-holder - whether appointment of administrator valid - whether company “being wound up” - whether appointment of provisional liquidator precludes director from resisting winding up petition - whether director acting as officer or company itself - Corporations Law contemplating appointment of administrator notwithstanding appointment of provisional liquidator - functions of administrator and provisional liquidator - appointment of administrator allowed and appointment of provisional liquidator rescinded
WORDS AND PHRASES - “being wound up”
Corporations Law s 436A, 513A, 471A(2), 437G(1), 447A(1) and 447C
Re Laverton Nickel NL (1979) ACLC 32,084
Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105
Aloridge Pty Limited v Christianos (1994) 12 ACLC 237
OBJECT DESIGN INC v OBJECT DESIGN AUSTRALIA PTY LTD
NO G 3177 of 1997
JUDGE: HEEREY J
PLACE: MELBOURNE
DATE: 25 AUGUST 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) G 3177 of 1997 ) GENERAL DIVISION )
BETWEEN: OBJECT DESIGN INC
ApplicantAND: OBJECT DESIGN AUSTRALIA PTY LTD
Respondent
JUDGE: HEEREY J PLACE: MELBOURNE DATE: 2 JULY 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
The appointment of the provisional liquidator on 24 June 1997 is rescinded.
Declare that Dean McVeigh has been validly appointed as administrator of the respondent pursuant to Pt 5.3A Div 2 of the Corporations Law.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) G 3177 of 1997 ) GENERAL DIVISION )
BETWEEN: OBJECT DESIGN INC
ApplicantAND: OBJECT DESIGN AUSTRALIA PTY LTD
Respondent
JUDGE: HEEREY J PLACE: MELBOURNE DATE: 2 JULY 1997
REASONS FOR JUDGMENT
A provisional liquidator and an administrator under Part 5.3A of the Corporations Law have been appointed to the respondent company. The applicant, a United States corporation, is a shareholder as to 15 percent in the respondent, which is the applicant's Australian distributor of computer software and has been so since 15 October 1996. The remaining 85 per cent of the shareholding is owned by another US corporation, Oscom Communications Inc.
A number of disputes have arisen between the applicant and the respondent which centre around, or at least include, allegations of failure to remit certain proceeds of sales made by the respondent. It is alleged that the respondent is currently indebted to the applicant in the sum of US$388,836.76, which is said to be the total of payments due since approximately January 1997. It is further alleged that the respondent did not pass on to the applicant, as it was obliged to, payments made by certain creditors. There is also an allegation that a director of the respondent wrongfully received some $300,000 from the respondent's bank account.
On 3 June last, the applicant terminated the distribution agreement. On 24 June a provisional liquidator was appointed by order of the Registrar Seccombe on the application of the applicant in its capacity as a creditor of the respondent. On 25 June that order was confirmed, subject to some variations, by Ryan J.
When the matter came on this morning, counsel for the respondent produced evidence of the appointment of Mr Dean McVeigh as an administrator. Counsel tendered the consent in writing of Mr McVeigh and a minute of a resolution of the directors of the respondent, which recorded that Mrs Shaunagh McEvoy, as sole director, held the opinion that the company was likely to become insolvent at some future time. It was resolved that the company appoint Mr McVeigh as administrator pursuant to s 436A of the Corporations Law. The common seal of the company was attached to the minute. Also tendered was a fax from Oscom to Mrs McEvoy dated 1 July 1997 which states as follows:.
Dear Shaunagh,
Oscom Communications Inc. (Oscom) is vigorously opposed to the appointment of a Provisional Liquidator to the undertakings and assets of Object Design Australia Pty Ltd (ODA). This appointment has caused severe damages and has crystallized certain liabilities pursuant to technology, commercial and employment contracts.
Oscom is reluctantly prepared to support the appointment of a voluntary Administrator and will work with the Voluntary Administrator to ensure that all lawful and legitimate Australian creditors are paid 100 cents in the dollar. Oscom also proposes to work closely with the Voluntary Administrator to assist in recovering property that it believes has been converted from the Company.
Oscom will work towards a scheme that will see all Australian creditors paid 100 cents in the dollar and will put forward a proposal to acquire ODI’s 15% shareholding.
Oscom will also assist the Voluntary Administrator to reinstate the International Distribution Agreement that was improperly terminated and to recover orders and funds that have been diverted from ODA. Oscom believes it is important that John Siniscal is separately and personally prosecuted in Australia for his breach of fiduciary duty to ODA.
It is Oscom’s understanding that the Provisional Administrator will be paid from ODA’s assets and Oscom will also guarantee any shortfall in professional fees.
Oscom is bringing extensive actions against ODI in Delaware and the continuing appointment of a Provisional Liquidator to ODA will jeopardize Oscom’s ability to obtain appropriate relief in the USA Courts.
Oscom unequivocally supports the appointment of a Voluntary Administrator and will ensure that all legal and lawful Australian creditors are paid in full.
This is clearly a Shareholder dispute and Oscom is prepared to vigorously prosecute these actions in the United States of America.
Sincerely,
(sgd)
William Pugh
Chief Executive
Oscom Communications Inc.
Sections 436A of the Law provides:
(1) A company may, by writing under its common seal, appoint an administrator of the company if the board has resolved to the effect that:
(a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and
(b) an administrator of the company should be appointed.
(2) Subsection (1) does not apply to a company that is already being wound up.
In my opinion, it cannot be said of the respondent that it “is already being wound up”.
The ordinary meaning of that expression is that a winding up has commenced by the making of a winding up order. That meaning is confirmed by s 513A which, in a number of instances, fixes the time in which the winding up is “taken to have begun or commenced”. All those instances, however, are premised on the event of a Court order for winding up having been made.
Counsel for the applicant relied on s 471A(2) which relevantly provides:
(2) While a provisional liquidator of a company is acting, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except:
(a)as a provisional liquidator of the company; or
(b)as an administrator appointed for the purposes of an administration of the company beginning after the provisional liquidator was appointed; or
(c)with the provisional liquidator’s written approval; or
(d)with the approval of the Court.
However, while the appointment of a provisional liquidator has a paralysing effect on the company and brings to an end the power of the directors, there remains at least a residual power in directors to appeal against the appointment or oppose the winding up order: Re Laverton Nickel NL (1979) ACLC 32,084 at 32,086, Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105 at 1113. I do not think for s 471A(2) should be read so as to exclude that long-established residual provision, the need for which is obvious as a matter of justice. But it is likely that s 471A(2) does not apply anyway because Mrs McEvoy was not performing or exercising a function or power as an officer of the company in the sense of contracting or entering into some other arrangement on behalf of the company; rather her passing of the resolution was an act of the company itself.
Moreover, I think the suggested limitation on the company’s power seems to be inconsistent with s 437C(1) and (4) which relevantly provide:
(1) While a company is under administration, a person (other than the administrator) cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except with the administrator’s written approval.
(4) In this section:
“officer”, in relation to a company under administration, includes:
(a) a receiver who is not also a manager; and
(b) a receiver and manager appointed by a court; and(c) a liquidator or provisional liquidator appointed by the Court before the administration began.
Thus the Law expressly contemplates that an administrator may be appointed, notwithstanding that a provisional liquidator is already in place. That seems to me consistent with the overall purpose of Part 5.3A which is to provide a radical new system of insolvency administration so that the fate of the company can be determined in a prompt and commercially practical way by its creditors. The administrator in this setting is to fulfil a role comparable to that of a surgeon, albeit that heroic surgery may be called for, as distinct from the undertaking function of a provisional liquidator or liquidator.
It is accepted that s 447A(1) confers power to terminate the administration. As to whether that power should be exercised, counsel for the applicant relied on the decision of Burchett J in Aloridge Pty Limited v Christianos (1994) 12 ACLC 237. That case, of course, was an exercise of discretion on its own facts. It is not therefore a question of distinguishing it, but in any event I note that it was a case where the administrator had been appointed by a chargee of the company under s 436C and it may be that different considerations apply to such an appointment as opposed to appointment by the company itself which has a fundamental interest in continuing business if it possibly can.
His Honour said (at 239):
In the circumstances, I infer that the appointment of an administrator was made, not in pursuit of the purposes for which the Corporations Law makes provision for such an appointment, but in order to wrest control of the affairs of the company away from the provisional liquidator in the hope that the administrator might prove more compliant. I hasten to add that no submission was put at the hearing of this matter to suggest that the administrator would in fact have shown himself to be partial.
In the present case, it certainly could not be suggested that Mr McVeigh, an experienced insolvency accountant, would be in any way partial, and the applicant did not advance any such argument. It may be that the appointment of the administrator was made with a view to wrest control of the affairs of the respondent away from the provisional liquidator, but that will be the case whenever it is sought to remove a provisional liquidator, however meritorious the claim. In any case the respondent will not return to the control of the former directors but to the administrator: see especially ss 437C and 437D.
Counsel for the applicant raised a number of discretionary matters, including alleged unlawful removal of assets. The provisional liquidator has already made some investigations in this regard and has produced a report which will, of course, be available to the administrator who will be able to take such action as he sees fit.
The fact that serious allegations are made on one side should not, I think, weigh against my conclusion that the appointment of the administrator should be confirmed. There has not been any or any adequate time to answer those allegations. The allegations can be dealt with and the property of the respondent equally well preserved under the Part 5.3A administration. While there is on the table the proposal from Oscom to fund a 100 cents in the dollar compromise, that seems another good reason to continue the administration, since it is the very sort of outcome which the Law contemplates. Whether that will occur or not, of course, at the moment one cannot say, but at least the Court should not destroy the possibility of that occurring. Finally, I note that although allegedly the respondent has been in default since January of this year, which is some six months ago, the applicant did not take any steps to enforce that payment, either by conventional statutory demand or otherwise, until the very serious step of appointment of a provisional liquidator.
There was a suggestion by counsel for the applicant that Mr McVeigh and the provisional liquidator might be appointed as joint administrators. I think that would create unnecessary duplication and expense. Moreover, it might give rise to the perception that each joint administrator was in some way a representative of an interest group.
So for those reasons I will order that the appointment of the provisional liquidator be rescinded. I declare, pursuant to s 447C, that Dean McVeigh has been validly appointed as an administrator of the respondent.
I will reserve liberty to apply for all parties as to directions in relation to the security already lodged. There will be no order as to costs.
I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey
Associate:
Dated: 25 August 1997
Counsel for the Applicant: Mrs S Crennan QC and Mr J D Wilson Solicitor for the Applicant: Clayton Utz Counsel for the Respondent: Mr D H Denton Solicitor for the Respondent: Freehill Hollingdale & Page Date of Hearing: 2 July 1997 Date of Judgment: 25 AUGUST 1997
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