Peter Joint v Program It Pty Ltd
[2020] VSC 486
•10 August 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 01008
IN THE MATTER of PROGRAM IT PTY LTD
| PETER JOINT | Plaintiff |
| v | |
| PROGRAM IT PTY LTD & ORS | Defendants |
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JUDGE: | SIFRIS JA |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 5 August 2020 |
DATE OF JUDGMENT: | 10 August 2020 |
CASE MAY BE CITED AS: | Peter Joint v Program IT Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2020] VSC 486 |
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CORPORATIONS – Appointment of administrators – Whether company insolvent - Whether appointment made by sole director in good faith or for a collateral purpose – Whether appointment constitutes an abuse of process – Whether appointment should be set aside or terminated; s 447A(1) and (2) Corporations Act 2001 (Cth) – Company not liable for legal costs relating to oppression claim between shareholders – Company solvent and appointment constitutes an abuse of process. Resolution and appointment set aside and terminated.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr G McCormick | Goldsmiths Lawyers |
| For the Defendants | Mr A Segal | Rigby Cooke Lawyers |
HIS HONOUR:
A Introduction
The first defendant, Program IT Pty Ltd, (Program IT or the Company) is a company incorporated pursuant to the Corporations Act 2001 (Cth) (Act).
The plaintiff, Peter Joint (Joint) is the holder of 49 shares in Program IT. The third defendant, Sandia Kam Lin Rose (Sandia Rose) is the holder of 51 shares in Program IT.
During the period 31 October 2002 to 12 May 2009 Joint was a director of Program IT. Since 2009 he has not had much to do with the Company but still retained his shares. The second defendant, John Zing San Tan (Tan) was appointed a director on 18 March 2002 and remains the sole director of Program IT. Tan is the husband of Sandia Rose.
In the circumstances set out in detail hereunder, Joint alleges that the affairs of the Company have not been conducted in the best interests of the Company as a whole and that such conduct, mainly by Tan, but also by Sandia Rose has discriminated against his interests. Joint alleges that the parties have lost all trust and confidence in each other and that the relationship has irretrievably broken down. He seeks orders that his shares be acquired alternatively such other orders as may be appropriate under the oppression provisions of the Act (s 233 of the Act) (the Oppression Proceeding).
Tan and Sandia Rose deny any oppressive conduct. They admit that Joint retains a 49% interest in Program IT. The court was informed at a directions hearing on 13 July when the Oppression Proceeding was fixed for trial on 5 August, that they were content for such holding to remain and that they were running the Company without any involvement by Joint. They denied that there was any deadlock. They opposed any relief. No mention was made of any solvency issues.
The matter was fixed for trial on 5 August following an application by Joint to rely on an experts report dated 18 February 2020 prepared by CFAS Advisory (the Smith Report) as to the value of the shares in the Company. The value differed significantly from the value arrived at by the joint expert, Graeme Tyshing, appointed by the court (the Tyshing Report). Leave was required under s 65O of Civil Procedure Act 2010 (Vic). In view of the significant differences in the valuations, the circumstances of this case, as set out hereunder, and other relevant matters leave was granted although the trial was to proceed on liability only.
In accordance with the order of the court made on 13 July 2020, Joint filed and served his further affidavit on 20 July 2020. Pursuant to that order, the defendants were required to file and serve their affidavits by 5:00pm on 27 July 2020. No such affidavits were filed. Instead, and without any prior notice, late on 28 July, the plaintiff’s solicitors were notified by the defendants’ solicitors that Paul Burness and Matthew Kucianski had been appointed administrators (the Administrators) of Program IT (the Appointment). On inquiry being made that evening as to the basis on which they were appointed, Rigby Cooke replied by email that it was pursuant to s 436A of the Act. Section 436A requires that there be a board resolution that in the opinion of the directors (in this case, Tan, as the sole director) the company is insolvent or likely to become insolvent in the future. Pursuant to s 440D of the Act, the effect of the Appointment is to stay the proceeding as against the Company and Tan and Sandia Rose.[1] It was not suggested by any party, for reasons that are obvious, that the Oppression Proceeding should proceed against Tan and Sandia Rose.
[1] In the Matter of Capital General Corporation [2000] VSC 570 [21].
The plaintiff sought leave to issue, in these proceedings, a summons pursuant to s 447A of the Act to end the Administration on the basis that Program IT is solvent, and further or alternatively that the provisions of Part 5.3A of the Act are being abused by Tan and Sandia Rose, in particular as a means of effectively staying these proceedings against the Company and themselves.
At an urgent directions hearing on 31 July 2020, I permitted the application to proceed and made orders and directions accordingly. I vacated the trial of the Oppression Proceeding and fixed the application for a virtual hearing on 5 August. Affidavits and submissions were filed, two witnesses were cross examined and the virtual application proceeded. In view of the urgency of the matter I indicated that judgment would be delivered on 10 August 2020. These reasons were therefore prepared as a matter of some urgency.
B Relevant background[2]
[2]The relevant background, much of which is uncontroversial, is taken from the plaintiff’s Points of Claim dated 24 April 2020.
It is necessary to set out some background and history relating to the Oppression Proceeding.
Program IT was incorporated on or about 22 June 2000. At all material times the business of Program IT has been to assist other companies and entities to manage call centres, business intelligence and customer relations management.
Joint became an employee of Program IT shortly after its corporation. One of the major clients of Program IT as at 2004, and to this day, is the Australian Department of Defence. Joint and Andrew Harris (an employee of Program IT) held the requisite security clearance for the Department of Defence. A contract with the Department of Defence is the main source of income of the Company (the Defence Contract)
The share capital of Program IT has at all material times been, and is, 100 fully paid shares. At the time of incorporation of Program IT and up to on or about 16 January 2002, Jason John Stephens (Stephens) held all of the shares in the Company.
Stephens was a director of Program IT from on or about 22 June 2000 to on or about 18 March 2002.
Since on or about 18 March 2002 to date, Tan has been a director of Program IT. From on or about 18 March 2002 to on or about 2 June 2008, Tan was also the company secretary of Program IT.
On or about 31 October 2002, Stephens transferred 49 shares in Program IT to Joint. Since this time, Joint has held those 49 shares. Stephens held the remaining 51 shares in trust for himself and Tan.
On or about 31 October 2002, Joint became a director of Program IT.
On or about 16 November 2004 Joint commenced proceedings in this Court (No 9176 of 2004) against Stephens pursuant to sections 232, 233, 461(1)(f), (g) and (k) of the Act seeking orders (inter alia) that Stephens be compelled to acquire Joint's shares in Program IT. These proceedings were tried by Dodds-Stretton J in March of 2007.
At that trial Stephens did not dispute that Program IT was conducted as a quasi-partnership in corporate form and that the relationship between Joint and Stephens had irretrievably broken down justifying the winding up of the company on the just and equitable ground pursuant to section 461(1)(k) of the Act. Stephens further conceded that it would be appropriate to order that he purchase Joint’s shares in Program IT. Dodds-Stretton J delivered her judgment on 14 May 2007[3] and ordered (inter alia) that Stephens purchase Joint’s shares in Program IT.
[3]Joint v Stephen (2007) 62 ACSR 309.
Further hearings took place on 30 October 2007 and 7 February 2008 and Robson J delivered his judgment on 7 February 2008.[4] His Honour determined that Joint’s shares had no value and declined to wind up the Company on the just and equitable ground. Joint appealed to the Court of Appeal and the appeal was heard on 29 September 2008.
[4]Joint v Stephens (No 2) (2008) 26 ACLC 207.
On 21 November 2008, the Court of Appeal delivered its judgment[5] which allowed Joint’s appeal and (inter alia):
(a) declared that Stephens had engaged in oppressive conduct by procuring the exclusion of the plaintiff from the management of Program IT and otherwise denying him any role in, or benefit from, the Company from 22 October 2004; and
(b) ordered that Stephens purchase the plaintiff's shares in Program IT, valued as at the date of the institution of the proceedings, for $732,307 plus interest in the sum of $187,768.97 (a total of $920,075.97).
[5]Joint v Stephens (2008) 26 ACLC 1467.
From on or about 2 June 2008 to on or about 25 November 2010, Stephens was company secretary of Program IT. On or about 12 May 2009, Joint resigned as a director of Program IT. Since 12 May 2009, Tan has been the sole director of Program IT.
On 23 September 2009, Gardiner AsJ made an order in accordance with the Court of Appeal judgment that (inter alia) Stephens execute a share transfer of Joint’s 49 shares to himself and that he pay Joint the sum of $920,075.97 plus a further amount of interest of $73,642.10.
On or about 26 October 2009, Stephens transferred all his 51 shares in Program IT to Tan.
Stephens did not comply with the Order of Gardiner AsJ and declared himself bankrupt on or about 25 November 2009.
Joint has, accordingly, remained a shareholder of Program IT to date, with 49 shares. On or about 25 November 2010, Stephens resigned as company secretary of Program IT and Tan became company secretary instead. Tan has remained as company secretary to date.
On or about 11 May 2015, Tan transferred to Sandia Rose the 51 shares that had been transferred to him by Stephens.
Tan and Sandia Rose are husband and wife. From on or about 11 May 2015 to date, Sandia Rose has held the 51 shares.
Early in 2018 Joint became aware that Program IT had continued in business to that time and (in particular) that the Defence Contract had continued despite he, as one of the two persons with the requisite security clearance, no longer being a director or employee of the company.
In the period from his resignation as a director on 12 May 2009 to date, Joint:
(a) has received no notices of General Meetings of Program IT;
(b) has received no minutes of any such meetings;
(c) has not received any of the annual financial statements of Program IT;
(d) has not received copies of any tax returns lodged;
(e) has not had access to the books and records of Program IT;
(f) has received no dividends or other distributions or payments from Program IT;
(g) has received no notification from any of the defendants that the company had continued to trade or that the Defence Contract had continued.
Program IT has continued to trade since on or about 12 May 2009 and has declared dividends and made distributions and payments to Tan and Sandia Rose.
Since on or about 12 May 2009, further or alternatively on or about 26 October 2009, and continuing up on or about 11 May 2015, it is alleged that Tan has operated the Company as if he was the sole owner of it and Joint has no minority interest in it at all.
By letter sent to Tan on or about 29 June 2018, Joint by his solicitors sought (inter alia) copies of the ‘annual accounts’ of Program IT. By letter dated 25 July 2018, Tan declined access to the books and records. Messrs Goldsmiths again wrote to Tan in similar terms to their letter dated 29 June by letters dated 2 August 2018 and 6 September 2018. No reply was received to these two letters.
These proceedings were then commenced on 12 March 2019.
C The Evidence
Prior to the appointment of the Administrators on 28 July, and despite substantial differences in the experts reports, there was no suggestion of insolvency or the likelihood of insolvency. There are two main factual issues that account for the substantial differences in the expert valuations. The first relates to a suggested loan by Sandia Rose to the Company in the sum of $325,000 (the Sandia Loan). The second relates to the employment of Sandia Rose and Alex Tan, the son of Sandia Rose and Tan. Smith assumes that there was no loan and that there was no basis for the employment of Sandia Rose and Alex Tan. Tyshing accepts both. This difference has resulted in the valuation of the shares held by Joint varying between $33,309 and $876,847. This was one of the reasons why I permitted Joint to rely on the Smith Report. Solvency however, was never an issue.
In his affidavit sworn 20 July 2020, for the purposes of the Oppression Proceeding, Joint deals with each of these matters. His evidence, if accepted, supports the assumptions made by Smith and the higher valuations. So far as the Sandia Loan is concerned, Joint deposes that the loan was in fact made in 2002 – 2003 to another company, Program Development Pty Ltd. He deposes that the loan did not appear on the books of Program IT until 2015. Further and relevantly the loan was never mentioned in the earlier proceedings.
In relation to the employment of Sandia Rose, Joint deposes that despite her remuneration of $337,771.21 for the financial years 2015 – 2019, she has no training or qualifications in IT and has never had any security clearance that would enable her to work on the Defence Contract.
Alex Tan was an employee for the period 2013 – 2016 and received payment of $129,278. Joint deposes that Alex was not involved in any of the projects and did not have any security clearance for the Defence Contract. He deposes further that he was informed by Andrew John Dennis (Dennis), the Principal Consultant at Program IT, that Alex was not regularly in the office and did some ‘general admin stuff’.
The defendants have not responded to these allegations. As noted they made the Appointment the day after their affidavits were due. They have still not responded to these allegations.
Two affidavits were filed by Joint before the urgent hearing on 30 July. In the first, Dennis deposes that as Principal Consultant, he is responsible for a team of consultants. He deposes that he is the business relationship manager for the customers and manages their projects and ongoing support. Dennis refers to the Company’s two major contracts, being the Defence Contract and the contract with Unicorn Systems. In paragraph 6 and 7 of his affidavit Dennis deposes as follows –
[6] I was informed by John Tan on 28 July 2020 at or about 4.30pm that Program IT Pty Ltd was place into voluntary administration. I was advised that legal costs was the reason Program IT Pty Ltd was placed into voluntary administration. I have not been provided with any further information regarding why Program IT Pty Ltd was placed into voluntary administration.
[7] I am not aware of any circumstances or issues with operations that would cause Program IT Pty Ltd to become insolvent or likely to become insolvent save for Mr Tan’s comments to me regarding legal costs in paragraph 6.
In an affidavit sworn 29 July 2020 Joint deposes to a conversation with Dennis where Dennis confirms that he is not aware of any problems with the customers of Program IT.
Two affidavits were filed by the defendants. In an affidavit sworn 1 August 2020, Wayne Manna (Manna) an accountant of Netherby, South Australia deposes that since 2014 and as Daynes Advisory he has prepared and lodged the Company’s tax returns for the years ending 30 June 2014 to 30 June 2019, and also assisted with ad hoc accounting issues. With the assistance of Tiana Machin (Machin) the Company’s bookkeeper he has prepared a Balance Sheet and Profit and Loss statement (P&L) for the year ending 30 June 2020. Machin has also prepared a cash flow forecast (Forecast) which shows that the Company will run out of working capital in the week ending 11 October 2020. Manna concludes that ‘[b]ased on my review of the Balance Sheet , the P&L and the forecast, I believe that Program IT is likely to become insolvent at some time in the future.’ His cross examination, as referred to below, does not confirm this conclusion.
The Balance Sheet shows total assets of $521,256.63 and total liabilities of $538,848.71, a deficit or negative equity of $17,592.08. More importantly, total current assets are $263,009.33 and total current liabilities are $199,804.03. The Non-Current Liabilities include the disputed Sandia Loan in the sum of $301,035.03.
The P&L shows income of $841,097.78, cost of sales of $213,647.56 making a Gross Profit of $627,450.22. Expenses are $744,736.83 making an operating loss of $117,286.61. After taking into account other items the Net Loss is $134,743.05. Included in expenses is the sum of $410,420.61 for Wages and Salaries and $60,673.04 for Employee Entitlements (Long Service Leave). An amount of $41,205.45 is recorded for directors fees. Legal Fees are recorded as $61,907.47. The income does not take into account the full amount of the Defence Contract.
The second affidavit, sworn 1 August is by Tan. Most of the affidavit is not relevant to the present application before the Court. In paragraphs [45] – [47] Tan refers to the legal costs of the proceeding. He deposes that his solicitors required $74,000 to be placed into their trust account by 29 July 2020 for the estimated costs of the trial (the Request). He deposes further as to advice to the effect that the costs of any appeal ‘could be in the range $75,000 to $100,000’. It is apparent that he has assumed that the Company is liable for the costs of the trial of the Oppression Proceeding, and that this perceived contingent liability was the sole reason for the Appointment. In paragraphs [53] – [56] Tan deposes as follows –
[53]Up until 24 July 2020, I had been able to manage things so that Program IT was able to meet its day-to-day expenses as well as any legal fees it was incurring.
[54] Then, however, as the rapid escalation of legal costs to be incurred in connection with the upcoming trial on liability (as well as any subsequent legal steps) became apparent, I knew that Program IT would have no ability to pay such legal costs if it incurred them. Certainly, Program IT had no ability to meet the request from its solicitors for $74,000 within a short time (or at all) to cover the anticipated costs of the trial on liability.
[55] After obtaining advice from my legal representatives about appointing administrators to Program IT, I arrived at the difficult conclusion on Saturday 25 July 2020 that the impact of this proceeding meant that Program IT was likely to become insolvent at some future time and the appropriate course was to appoint administrators.
[56]After working so hard since 2009 to restore Program IT to a position where it had been able to keep its employees in work, and provide an essential service to the Department of Defence, it was personally devastating to arrive at this decision, particularly with the impact this would have on Program IT’s longstanding staff.
Finally, Tan exhibits an email from Matthew Kucianski to Ed Comri, the defendants solicitor (Exhibit JT 5). In the email Kucianski comments on the solvency position. He says that his comments are ‘preliminary comments’ and ‘general comments only’. Kucianski has not sworn an affidavit and in any event his comments are self-serving and of little assistance.
Manna and Tan were required to attend the virtual hearing for cross examination.
Manna’s evidence does not assist the defendants. In fact it supports the application in a number of important respects. First, although not an insolvency expert, Manna an accountant, confirmed that none of the indicia of insolvency were present. The Company continued to meet its financial obligations as and when they fell due and operated on a net cash position without an overdraft.
Secondly and most importantly Manna – the Company’s accountant who did the tax returns and gave advice on important matters from time to time - was only engaged to provide a second opinion after the Appointment. He relied on the Forecast prepared by Machin and did not verify the figures. This is not meant as a criticism. He agreed that the six month Forecast did not take into account the higher income derived from the back end of the Defence Contract and that accordingly the six month forecast income did not reflect the true annual income from that contract. However, he said that he did a back of the envelope calculation and that as at the end of June 2021 the Company would have a negative cash flow of $30,000. So what. As he properly and readily conceded this rough calculation says nothing at all about the Company’s ability to pay its debts as and when they fall due and was not an indicator of insolvency. He also agreed that he had not taken into account the increased value of the Defence Contract and was in fact unaware of such increase. Although the back of the envelope evidence was properly objected to, it highlights the lack of independence of Manna and the defendants unsuccessful endeavours, after the event and based on the financial position and cash flow of the Company, matters not considered by Tan and not the basis of his decision to appoint, to justify the ill-conceived Appointment. Again, this is not meant as a criticism of Manna.
It is not entirely clear whether Manna included legal fees in his calculation. If he did not, which I assume is the position, his evidence does not suggest, confirm or in any way establish the insolvency or likely insolvency of the Company, a position he agreed with. This leaves the legal costs, the entire basis of the decision made by Tan. Manna did not give evidence about this aspect.
Tan’s evidence does not assist the defendants. In fact it supports the application in critical respects.
According to Tan the Appointment was made very quickly. On 24 July everything was fine. He was managing the Company and there were no cash flow problems. Then on 24 July he received the Request for funds ($74,000) to be deposited into the trust account of Rigby Cook for the anticipated costs of the forthcoming trial on 5 August. The Company could not pay this amount and he determined that the Company was insolvent and that he was obliged to stop trading. He made the decision straight away and after discussions and advice from Rigby Cook confirmed his decision on 25 July 2020 and made the Appointment on 28 July.
There is no evidence of what transpired between 25 and 28 July, that is what documents or financial records were considered, what discussions took place and with whom, and importantly what factors Tan took into account in reaching his decision, a decision required to be made in good faith. The only evidence is that he considered that the Company could not pay a debt that it was liable for and was therefore insolvent. He then received advice from the very solicitors requesting the payment on account, that the Appointment was appropriate (thereby eliminating the very ‘liability’ that was the basis of the Appointment) and it was made three days later. I interpolate here that if there was no legal costs payable what was the purpose and need for the Appointment? According to Tan, there was no need as everything was going fine.
There are other relevant aspects of Tan’s cross examination.
First, Tan agreed that he simply accepted the Figure of $74,000 and did not question, discuss or endeavour to negotiate the figure or the requirement to pay it all upfront. The estimate was not in evidence.
Secondly, he did not consider the impact of the decision on the Defence Contract. There is no dispute that the impact could effectively destroy the business.
Thirdly, Tan had no idea about the Voluntary Administration regime and the usual expected outcome. In fact he gave evidence that if permitted he would like to continue trading but without the liability associated with the legal costs. Again, I interpolate that without such costs there is no work for any Administration to do. In terms of the normal outcome of an Administration, there is no need for any deed of company arrangement (s435C(2)(a)). There is no basis to wind up the Company s435C(2)(c)). It is unnecessary for creditors to resolve that the Administration end (s435(2)(b)). It should never have begun.
Fourthly, he did not have the Forecast prior to making the decision and did not fully understand it. He needed Machin to walk him through it. In any event, he said that he regarded the Forecast as an estimate. However, it is clear from his evidence that his focus was not on the general financial condition of the Company, which was fine up to 24 July, but solely on the legal costs. As noted earlier, evidence about the general financial condition, appears to have been an afterthought in an endeavour to justify the Appointment. It was not a matter considered by Tan. Tan conceded that the usual indicia of insolvency were not present as at the date of the Appointment.
Fifthly, even making allowances for his medical condition, Tan was a most unimpressive witness. He was evasive. As an accountant for many years it is curious that having saved the business – a profitable business to his family providing employment and the like – he, according to his evidence, made no endeavour at all to deal with the legal costs a matter that he perceived as being critical to the solvency and therefore survival of the Company. Unless of course he had another agenda. There is nothing in his evidence to rebut the obvious inference of such other agenda as is explained below. In fact it only confirms that there has been an abuse of process.
D The parties submissions
Plaintiff’s submissions
The plaintiff submits that the Appointment of the Administrators is invalid and should be ended essentially for three reasons:
(a) The Appointment was not made in good faith and was made for a collateral purpose;
(b) The Company is solvent;
(c) The Appointment was not in the best interests of the Company.
The plaintiff submits that Tan appointed the Administrators for the ulterior purpose of staying the Oppression Proceedings as against the Company, himself and Sandia Rose so that he and Sandia Rose would not incur further legal costs in defending the proceedings. The plaintiff relies on the decision of In the Matter of Lime Gourmet Pizza Bar[6] to contend that the appointment of an administrator for an ulterior purpose is invalid and an abuse of process.
[6][2015] NSWSC 244.
The plaintiff submits that Program IT is solvent. The plaintiff relies on the evidence of Tan. Tan deposed that the basis for concluding that the Company is likely to become insolvent is that it did not have the ability to pay the estimated legal costs in connection with the trial of these proceedings. The plaintiff contends that the Company is not liable to pay the legal costs of defending the litigation unless it is ultimately found that no oppression exists and that the legal costs of defending the claim are not in the best interests of the Company. The plaintiff further submits that Tan did not take adequate steps to satisfy himself that the Company was insolvent or is likely to become insolvent.
The plaintiff submits that the appointment was not in the interest of the Company on the basis that the appointment may jeopardise the Defence Contract. The plaintiff relies on the evidence of Tan to the effect that the Defence Contract accounts for approximately 85% of the Company’s income. Pursuant to the Defence Contract, if an administrator is appointed to the Company, the Defence Department may terminate the contract immediately. The plaintiff submits that putting the Company into Administration for the purpose of staying the proceedings could not be in the best interest of the Company in circumstances where it stands to lose 85% of its income from the Defence Contract.
Defendant’s submissions
The defendants submit that the plaintiff’s application should be dismissed on the grounds that the evidence shows that the Company is likely to become insolvent and that Tan made the decision to appoint the Administrators for a proper purpose.
The defendants submit that Tan was fully informed about the financial position of the Company and its cash flow position. The defendants further submit that Tan had a genuine and bona fide belief that the Company is likely to become insolvent and relied on Manna’s review of the Company’s financial position in reaching this belief.
The defendants submit that Program IT has paid the legal costs of the proceeding to date and that it is not inappropriate given the Company’s interests in these proceedings. Other issues raised by the defendants are referred to where relevant below.
E The Authorities
Appointment of administrators not made in good faith or made for a collateral purpose is invalid
It is well established that the appointment of administrators not undertaken in good faith or made for a collateral purpose is invalid. As was said in In the Matter of Lime Gourmet Pizza Bar:[7]
22Mr Mandoh submits, and I accept that, if a director’s opinion as to insolvency is not held, or is not held genuinely or in good faith, a resolution passed by the directors to appoint an administrator under s 436A of the Corporations Act is invalid: Kazar v Duus above at 333 – 334; Londish v Sheahan – Re Valofo Pty Ltd [2010] NSWSC 337 at [27]. Mr Mandoh refers to the observation of Merkel J in Kazar v Duus above at 230 – 231 that it is implicit in the statutory requirement under s 436A of the Corporations Act that the relevant director’s opinion as to the insolvency, or likely insolvency, of the company that the opinion be bona fide and genuinely formed. Statements of the directors' opinion are relevant to whether they have formed the requisite opinion but the court must approach that question objectively: Kazar v Duus above; Smolarek v McMaster as Administrator of Eznut Pty Ltd [2008] WASCA 234. Mr Mandoh also submits that it is not sufficient to support an administrator’s appointment that directors are merely uncertain as to a company’s solvency: Kazar v Duus above; Wagner v International Health Promotions (1994) 15 ACSR 419 at 421. Mr Mandoh also refers to the observation of Weinberg J in Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182 at 218 that the question whether directors genuinely believed that a company was actually insolvent, or likely to become so at some future time, will depend largely upon whether they took adequate steps to satisfy themselves that the statutory requirements were met before resolving to appoint an administrator.
23Mr Mandoh also points to the observation of Merkel J in Kazar v Duus above (at 335-336) that the exercise of the power to appoint an administrator will be invalid, and the purported appointment will be invalid, if that power is exercised for an ulterior or extraneous purpose and that purpose is substantial in the sense that the decision would not have been made but for the ulterior purpose. There is, of course, also other authority indicating that the appointment of an administrator for a collateral or ulterior purpose will be invalid: St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851; (2004) 210 ALR 265; Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391.
[7][2015] NSWSC 244 at [22]-[23].
In the leading authority on abuse of process, Williams v Spautz[8] the plurality said the following:
In his dissenting judgment in Goldsmith v. Sperrings Ltd., Lord Denning M.R. was of the view that to issue a writ for an improper purpose constitutes without more an abuse of process (1977) 1 WLR, at pp 489-490. His Lordship appears to have regarded the cases on the tort of collateral abuse of process, including Grainger v. Hill, as supporting this proposition. In this respect, Lord Denning may well have been incorrect. However, his Lordship was right in treating the comments of Lord Evershed M.R., when he delivered the judgment of the Court of Appeal in In re Majory, as supporting the proposition. There, Lord Evershed referred (1955) Ch, at pp 623-624 to a general rule:
“that court proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused”.
In our view, that is a correct statement of the principle.
[8](1992) 174 CLR 509,
Later in the same case, the plurality said the following:
It has been suggested that the criterion for abuse of process is whether the improper purpose is the sole purpose of the moving party. See, for example, the use of the word “merely” by Isaacs J. in Varawa (1911) 13 CLR, at p 91. However, in more recent times it has been said, in our view correctly, that the predominant purpose is the criterion. That was the test applied by Lord Denning in Goldsmith v. Sperrings Ltd. (1977) 1 WLR, at p 496 and by the English Court of Appeal in Metall and Rohstoff v. Donaldson Inc. In giving the judgment of the Court in the latter case, Slade L.J. observed (1990) 1 QB, at p 469.
“(A) person alleging such an abuse must show that the predominant purpose of the other party in using the legal process has been one other than that for which it was designed”.
Another useful summary as to the relevant principles appears in Blackadder v McQuinn & Ors[9] where Hiley J, said the following:
[9][2017] NTSC 29 at [11]-[16].
11. Solvency is defined in s 95A(1) of the Act:
A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
12. The opinion of the director(s) must be “bona fide and genuinely formed”. An inability to determine whether a company is insolvent cannot, without more, found an opinion that it is or is likely to be insolvent. The belief that the company was insolvent or likely to become insolvent in the near future, must be “reasonable in the circumstances” and should be formed on reasonable grounds. The Court’s finding will depend largely upon whether the directors took “adequate steps to satisfy themselves that the statutory requirements were met”. The power to appoint can only be exercised in the best interests of the company as a whole.
13. In Smolarek v McMaster as administrator of Eznut Pty Ltd (No 2), Pullin JA (Wheeler JA and Le Miere AJA agreeing) said, at [55] - [56]:
The opinion referred to in s 436A must be bona fide and genuinely formed. A concluded opinion, rather than a tentative opinion, is necessary. If a bona fide opinion is genuinely formed as to ‘actual’ or ‘likely’ insolvency, that opinion will satisfy the requirements of s 436A. The requisite opinion is that of the directors voting for the resolution, rather than that of its individual members.
The ultimate task of the court is to determine, having regard to the actual facts and circumstances, whether on the balance of probabilities the opinion required to be formed by the repository of the power as a condition of its exercise has been formed. Statements as to subjective intention are relevant, but the Court must approach its task of classification of the conduct in question objectively.
14. The actual state of the financial affairs of a company at the time of the appointment of a voluntary administrator is not determinative of the validity of a resolution passed by a director pursuant to s 436A of the Act. However, evidence of the actual state of the financial affairs of a company at the time of the appointment of a voluntary administrator may ground inferences as to the validity of the opinion of a director expressed in such a resolution.
15. In Downey v Crawford, Weinberg J said, at [196]:
[T]he question is not whether, as at that date, the company was actually insolvent, or likely to be so at some future time. It is rather whether the directors genuinely believed that this was so, and whether that belief was reasonable in the circumstances. That in turn will depend largely upon whether they took adequate steps to satisfy themselves that the statutory requirements were met before resolving to appoint Mr Downey as administrator.
16. The purpose of a resolution to appoint a voluntary administrator must be ascertained, then characterised as proper or improper. After identifying the actual purpose or purposes of the directors who voted in favour of a resolution to appoint a voluntary administrator, it is relevant to ask what the substantial purpose was and whether the resolution would have been passed were it not for an improper purpose.
Finally, in Kazar v Duus,[10] Merkel J said:
Evidence was adduced by Kazar as to actual insolvency as at 20 June and by Duus as to actual solvency as at 20 June 1998. The material relied upon was not available to the Governing Committee on 20 June 1995 and therefore can have no relevance to its opinion or purpose as at 20 June 1998. Further, the evidence is subject to many contingencies and requires a more.
Object and normal outcome of administration
[10](1998) 29 ACSR 321.
It is necessary to consider the object of Part 5.3A as set out in section 435A and the ‘normal outcome of administration’ as set out in s 435C(2). These provisions are as follows:
435A. Object of Part
The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence—results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Note: Schedule 2 contains additional rules about companies under external administration.
435C. When administration begins and ends
….
(2) The normal outcome of the administration of a company is that:
(a)a deed of company arrangement is executed by both the company and the deed’s administrator; or
(b)the company’s creditors resolve under paragraph 439C(b) that the administration should end; or
(c)the company’s creditors resolve under paragraph 439C(c) that the company be wound up.
‘Deeds of company arrangement’ are provided for by Pt 5.3A. As is apparent from section 444A of the Act, the creditors of a company must agree to enter into it with provisions therein as to the property of the company that is to be used to pay its debts, any moratorium or release of debts and other relevant matters (s 444A(4)).
Put shortly, a deed of company arrangement represents a decision by the creditors to allow the company to trade out of any present or likely insolvency. As was said by Merkel J in Kazar v Duus:[11]
[11](1998) 29 ACSR 321.
The incorporation of Pt 5.3A is a subsidiary provision to assist an Association when it is seeking a “breathing period” in order to deal with actual or potential insolvency with a view, inter alia, to entering into a deed of arrangement with creditors.
And later:
Under s 435C the administration ends when one of three outcomes, which are each expressed as the “normal” outcome of the administration, occurs. Those outcomes are that a deed of company arrangement is executed, the company’s creditors resolve that the administration should end or the company’s creditors resolve that the company be wound up.
It is clear from the foregoing that the exercise of the power to appoint an administrator under s 436A must be in furtherance of the object of Pt 5.3A as set out in s 435A. Thus, if the power to appoint an administrator is exercised for a purpose unrelated to that object but for an ulterior or extraneous purpose then it will be invalidly exercised.
Legal costs
75 The better and prevailing view in Australia is that in oppression type disputes, the costs of the proceeding should not ordinarily be borne by the company. In the leading case of Power v Ekstein,[12] Austin J said -
[12](2010) 77 ACSR 302.
[111] The plaintiff submits that the proceedings involve a dispute between shareholders rather than a dispute involving the Companies, and in those circumstances the costs of the proceedings should not to be borne by the Companies.
[112] In Re DG Brims & Sons Pty Ltd,[13] Byrne J said:
[13](1995) 16 ACSR 559 AT 591.
Many thousands of dollars of company funds have been spent on lawyers, accountants and valuers in defending these proceedings on behalf of the majority shareholders. This is unfair and infringes the basal principle that “the powers, and the funds, of a company may be used only for the purposes of the company”. No doubt a small part of the expenditure was justifiable; for example, in discovery, and in resisting such orders as that the company purchase the shares or pay a dividend for 1991. Expenditure to protect its discrete interests or for other proper purposes of the company may be made from company resources. The essential dispute here, however, is between the shareholders; and company funds should not have been used to defend the majority shareholders.
[113]These principles were approved by Young J in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 733; [1998] NSWSC 413; BC9804582, and by White J in Cassegrain v CTK Engineering Pty Ltd (2005) 54 ACSR 249; [2005] NSWSC 495 at [90]–[91]; see also Metropolitan Petar v Mitreski [2008] NSWSC 243; Grace v Grace [2007] NSWSC 6; compare Sellar v Lasotav Pty Ltd [2008] FCA 1766 (Sellar). The last of these cases indicates a different approach to the other authorities. According to Foster J in Sellar (at [30]), the court will be generally reluctant to interfere at the interlocutory stage of the payment of legal fees and expenses unless there is good reason to do so. With respect, while that may be so as a general proposition, it is not an accurate reflection of the approach in Australian and English authority where the question relates to expenditure of company funds on costs of litigation involving a dispute between shareholders.
[114] As to English authority, Foster J places some reliance on Re a Company (No 1126 of 1992) [1994] 2 BCLC 146. In that case Lindsay J reviewed the English case law on the question whether a company should become involved in oppression proceedings between its shareholders, and reached a series of conclusions (at 155–6) which included the following:
there is no rule that necessarily and in all cases active participation and expenditure is improper; the test of whether the company’s participation and expenditure is proper is whether it is necessary or expedient in the interests of the company as a whole; in considering that test the court’s starting point is a sort of rebuttable distaste for such participation and expenditure, and initial scepticism as to its necessity or expediency, and so a company that has actively participated bears a heavy onus.
[115]His Lordship’s “rebuttable distaste” for the expenditure of the company’s funds on litigation involving a dispute between shareholders stands in contrast with the observations of Foster J. In Re Milgate Developments Pty Ltd [1993] BCLC 291 and Re a Company (No 00450 of 1988), ex parte Johnson [1992] BCLC 701, injunctions were granted to prevent shareholders or directors from causing their companies to actively defend proceedings, subject to an exception for compliance with obligations such as discovery. On balance, it seems to me that Lindsay J’s statement of the principles emerging from the English cases reflects the preponderance of Australian authority and I should follow that approach in preference to the approach taken by Foster J in Sellar.
Test for insolvency
In ASIC v Plymin, Elliott and Harrison,[14] Mandie J referred to and applied a decision of Palmer J in relation to the test for insolvency. At paragraph [378] Mandie J said–
[14][2003] VSC 123.
In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation,[15] Palmer J summarised the relevant principles (at [54]) as follows:
[15](2001) 39 ACSR 305, 316-317.
“(i) whether or not a company is insolvent...is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole: Sandell v Porter; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 and Powell v Fryer;
(ii) in considering the company's financial position as a whole, the court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: Sandell v Porter; Taylor v ANZ; Newark and Sheahan v Hertz;
(iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency: Bank of Australasia v Hall (1907) 4 CLR 1514; at 1528; 14 ALR 51; Norfolk Plumbing at 615; Taylor v ANZ at 784; Guthrie v Radio Frequency Systems Pty Ltd (2000) 34 ACSR 572; at 575;
(iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand: Antico at 331; Hall, above; Melbase, above at 199; Carrier, above at 253; Cuthbertson & Richards Sawmills Pty Ltd v Thomas, above at 320; Lee Kong, above at 112;
(v) in assessing solvency, the court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the court’s satisfaction, that:
• there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or
• there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or
• there has been a well-established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand: Newark at 260; Antico, above at 331; Melbase, above; Cuthbertson & Richards Sawmills Pty Ltd v Thomas, above; Powell v Fryer, above at 600;
(vi) it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Powell v Fryer, Melbase, Cuthbertson & Richards Sawmills Pty Ltd v Thomas.”
F Analysis
In my opinion the Administration of the Company should end for each of the three reasons referred to in s 447A(2). Of course, any one reason is sufficient. In my opinion it has not been established that the Company is insolvent or likely to become insolvent. I consider that the provisions of Pt 5.3A of Chapter 5 of the Act have been abused. In fact, I consider this to be a classic case of abuse. Finally I consider that it is in the interests of justice (some other reason – s 447A(2)(c)) that the Administration end. The Appointment of the Administrators on 28 July was, in the circumstances, audacious, entirely improper, without any justification, in bad faith and entirely misconceived. It must end immediately.
Solvency
There are none of the usual indicia of insolvency in a trading company. There are no demands for payment or evidence of overdue accounts or that accounts will not be paid as and when they fall due. There are no agreements with creditors or requests to extend time for payment. This was admitted by both Manna and Tan. The only suggested ‘creditor’ causing any concern is the Company’s solicitors. As will be demonstrated it is a misguided concern. Further, the Company’s current assets exceed current liabilities. The critical point is that the evidence does not establish that the Company will be unable to pay its debts as and when they fall due. In fact, but for legal fees the opposite is the case, as was conceded by Tan and also Manna. Until 24 July and before he received the Request for funds in trust on account of fees and disbursements, and not the payment of an actual account, there was no question of insolvency or the likelihood thereof. The focus and sole basis of his decision was the request for funds in trust. The focus on the financial position of the Company over the next six months as per the inaccurate and misleading Forecast, and indeed the next year as per the rough (and inaccurate) back of the envelope calculation, played no part in the decision made by Tan and represent an attempt, a very bad attempt, to justify the bad decision after the event. The question therefore is whether the Request, for $74,000 to be held on trust and on account of fees, made the Company insolvent or likely to become insolvent. During cross examination, Tan said that it made the Company insolvent although his affidavit refers to the likelihood of insolvency. In my opinion the Request did not have this effect even if the sum of $74,000 was a debt payable by the Company.
It is notable that there is no evidence, or explanation, as to the resources of the Company, whether by way of bank facilities, other external funding or funding by the director or shareholder. It is not explained why the Company or the other defendants would not fund or obtain funding for the legal costs of an otherwise solvent trading company in relation to a case they have to date vigorously defended and a Company they have saved and wanted to keep. The short point is that so far as may be relevant the Company has not demonstrated that it was unable to provide or obtain funding. Unless of course the Company did not want to. This appears to be the case. Tan was prepared to give a personal indemnity to the Administrators in the sum of up to $40,000. When asked why he would not give a personal guarantee to the solicitors for $74,000 he answered rather indignantly that $40,000 is not $74,000. This of course assumes that the full $74,000 was required and indeed was a debt of the Company.
At paragraph [45] I referred to the legal fees as a ‘perceived contingent liability’. Let me explain. First, this is not the liability of the Company. The Oppression Proceeding is a fight between shareholders relating to alleged oppressive conduct. The Company ought not pay the legal expenses of any of the warring parties. It is not properly a company expense. There is no reason why Joint who (admittedly) remains a 49% shareholder should in effect bear 49% of the costs. In my opinion the costs – the entire basis of the Appointment – is not a proper corporate expense, save perhaps for a small amount. The appointment should not have been made on this basis. In my opinion the authorities, referred to above are sufficiently clear on this point. Tan and Sandia Rose are parties in their own right with critical and serious allegations made against them. There is no reason why the Company should pay their costs. Although the dispute relates to the Company and the Company is the subject matter of the litigation, it is a classic shareholders dispute involving the conduct of the majority shareholder and its sole director. Although properly a party, it has no role to play or perhaps a very limited role. In most cases it is desirable for the company to remain neutral. I am far from satisfied that the Company has discharged the heavy onus of establishing that payment of such costs is, in the circumstances, justified, as referred to in the authority relied on and accepted by Austin J referred to above. It is inconceivable that they did not step forward and offer to pay the requested amount – or a lesser negotiated or staggered amount – in circumstances where they contend that they are extremely distressed by the situation which was according to Tan inevitable and the only course open to him. Unless of course they did not want to which appears to be the case.
Secondly, even if the legal costs did constitute a proper corporate expense, it is not an expense payable in full immediately and irretrievably. The nature of the expense, unlike the usual trade debt, raises many questions that remain unexplained. The funds were to be held in trust and presumably, in the absence of agreement released progressively as and when costs are incurred in the preparation and running of the case. Several points may be made. Was there any discussion with the solicitors about fees? If there were cash flow or solvency problems (assuming legal fees to be a corporate liability) was a payment programme discussed? Were contingency or deferred fees discussed? Was security from the director or shareholder discussed? If these arrangements, which occur all the time, were possible, and it has not been demonstrated otherwise, the suggested impact on cash flow and solvency would be substantially eliminated. What about the prospect of recovering legal fees? What about endeavouring to resolve the Oppression Proceeding and avoid legal costs? What about the costs of the Administration? These matters, of course go beyond the issue of solvency and illustrate the abuse and why it is in the interests of justice that the Administration be terminated immediately.
There are further issues that touch upon solvency.
I am not satisfied that income has properly been accounted for. In any event, as noted, the income will increase as a result of the extension of the Defence Contract. In this regard it should be noted that the assumptions underpinning the Forecast are not stated.
I am not satisfied that the expenses as stated are accurate in a number of respects.
In my opinion there has been a deliberate attempt to understate income and overstate expenditure, in order to represent that the position is worse than it actually is thereby justifying, after the event, the ill-conceived Appointment.
The Sandia Loan has not been dealt with by the defendants despite the cogent evidence adduced by Joint as to the circumstances surrounding that loan.
In all of the circumstances, but particularly the attitude and approach to legal costs, the director could not on any view properly form the opinion that the company was or was likely to become insolvent. The decision was not made in good faith. I consider that it was made in bad faith.
Abuse of process
It is clear that without the legal costs there would be no basis for the requisite belief by the director and no appointment. There is simply no credible evidence to suggest that absent legal fees and absent the Oppression Proceeding, the appointment would nevertheless have been made at this stage particularly in light of the extension of the Defence Contract and the regret deposed to by the director about the consequences of the Appointment on employees. The Company would have continued trading. Curiously, because of the Appointment this is the position, that is, no legal fees will be incurred and there is no reason for the Appointment. The Company is admittedly solvent. What is the Administration to achieve? None of the outcomes contemplated by the legislation have application. The Company simply continues without being burdened, indirectly and directly, by the Oppression Proceeding. If the Administration remains the effect on the Oppression Proceeding is obvious.
Pursuant to s 435A of the Act the normal outcome of an Administration is either to maximise the chances of the company continuing to trade or if that is not possible to facilitate a better return to creditors than in a winding up. In the circumstances none of these outcomes are readily applicable.
In fact the contrary is the position. By the Appointment Tan has put at risk the Defence Contract, which accounts for a substantial part of the income and therefore viability of the Company. This is potentially a far worse outcome. All in an endeavour to avoid legal costs which should not in any event be paid by the Company. This constitutes an abuse of the Voluntary Administration regime.
The abuse is indeed highlighted and exacerbated by the manner in which the appointment was made, the timing thereof and failure to properly consider all relevant matters prior to any appointment. This tells against any decision in good faith and after proper enquiry. There is no suggestion that the Company was insolvent as at the date of the Appointment. In fact Tan agreed that it just breaks even. However, there is no evidence of what specific enquiries or advice Tan sought and obtained prior to making his decision. All of the evidence as to the likelihood of insolvency – inadequate, insufficient and in some respects inadmissible - was obtained post factum in an endeavour to justify the decision. A decision based on a liability that is for the most part not the liability of the Company. Further, the Company seeks an opportunity to properly address solvency issues. This should have been done properly prior to the Appointment particularly in the circumstances of this case and the pending trial date.
The defendants submitted that the Brigginshaw[16] standard was applicable to any finding of abuse of process, involving as it does some misconduct or bad faith on the part of Tan. It was submitted further, and in this regard, that the contended abuse was not put to Tan. To the extent that the Brigginshaw standard is applicable, for the reasons set out above , I am comfortably satisfied to the requisite degree, that there has been an abuse of the process contemplated by Pt 5.3A of the Act. Further, having reviewed the cross examination of Tan, I am satisfied that the relevant matters and the suggested abuse were properly and sufficiently put to him. It follows that in answer to another but related submission made by the defendants, no Browne v Dunne[17] point arises.
[16]Brigginshaw v Brigginshaw (1938) 60 CLR 336.
[17]Browne v Dunn (1893) 6 R 67 (HL).
The defendants also submitted that Joint was aware of the fact that legal costs were paid by the Company and did not object. However, the fact that no objection was made does not mean it was and is a proper corporate expense. It is not in this case. It was not suggested that such awareness, if indeed Joint was sufficiently aware, constitutes some form of estoppel or waiver.
Interests of justice
In my view, in the circumstances and for the reasons referred to, and summarised below, it is clearly in the interests of justice that the Appointment be set aside.
It is clear from the evidence that the Company was solvent on 24 July and, but for the Request, for funds to be held in trust on account of fees, there was no basis to conclude that it was likely to become insolvent within the next year. On the contrary, the Defence Contract had increased in value and the back of the envelope rough calculation done by Manna as at 30 June 2021, even if accepted, says nothing about solvency as the concept is understood by the authorities, a matter properly conceded by Manna. Finally, the financial position of the Company, apart from the Request, was not relied on as the basis for the Appointment. In fact Tan gave evidence that he would like to continue trading and would have but for the legal costs ‘if it incurred them’ (paragraph [54] of his affidavit). This leaves the impact of the Request on the solvency of the Company and the related question of the bona fides and quality of the decision made by Tan.
The Request, although presumably made to the Company, was not a liability of the Company, whatever the opinion of Tan or his Solicitors. If indeed such advice was obtained from his Solicitors, a matter that Tan was vague about and which was not pressed because of lawyer client privilege, it was wrong. I very much doubt that such unqualified advice was given. If the Company was not liable or properly as a matter of law had no obligation to pay the amount (or certainly most of it) into trust, there is no question of any impact on the financial position of the Company which admittedly remained solvent. Accordingly there was no basis on which the director, Tan could properly conclude, whatever his subjective belief, that the Company was insolvent.
Finally, assuming that there was such liability or that Tan genuinely believed that there was, it does not necessarily follow that the Company was insolvent. It is no answer, particularly in the circumstances of this case, given the nature and basis upon which the Request was made, to simply say we haven’t got the money. All of the matters and questions posed in paragraphs [81] and [82] above are relevant. The sum of $74,000 was not a debt as such. Is the amount realistic for a two day trial and was it negotiable both as to amount and the timing of payment? Were contingency fees an option? What was Counsel’s attitude? What about the recovery of costs in the event of a win which the defendants no doubt considered probable? It is inconceivable that Tan would simply accept the figure without any discussion or negotiation in circumstances where the failure to pay could mean the loss of his company. Unless of course he had another agenda. Further, and assuming the figure was not negotiable, an assumption most unlikely in the circumstances, what other resources were available to the Company? Why did it not seek an overdraft in a matter relevant to its survival? As posed earlier, why did Tan or Sandia Rose not offer to provide or arrange funds? Why did the defendants not elect to conduct their own case as often happens when litigants are unable to afford legal representation? Tan is an experienced accountant and company director and worked for the tax office for many years. No doubt Manna, who he met at the tax office, would have assisted the defendants. A combination of these arrangements would have enabled the defendants to properly continue their vigorous defence of the Oppression Proceeding, without being in a position where the Company would be unable to pay its debts as and when they fell due. Of course, to repeat, none of this was considered. The inescapable conclusion and entirely permitted inference is that there was another agenda. The agenda was to avoid the trial – the very next week – of the Oppression Proceeding with the risk of a buy-out order or a winding up order, and the use of the Voluntary Administration regime to stop the trial and recover the Company. Raising funds, or undertaking any of the above obvious suggestions, would indeed derail the strategy and compel the trial to proceed. The abuse is obvious. The short and obvious point is that if they wanted to run the trial they could have. Finally and most importantly and to repeat, because the Voluntary Administration regime has no role to play – the Company being in the same comfortable position as it was before the Request and the Appointment – there has been an abuse of process. In fact the Company is in a potentially far worse position because of the prospect of losing the Defence Contract and the liability for the legal costs of the Administration to date. That is why it is in the interests of justice to terminate the Appointment forthwith.
G Disposition
The Appointment will be set aside and terminated forthwith under s 447A of the Act and a declaration of invalidity will be made under that section. I will hear from the parties about costs, the trial of the Oppression Proceeding and other relevant matters.
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