Re Bluechain Pty Ltd (No 2)
[2021] VSC 260
•12 May 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 00327
IN THE MATTER of BLUECHAIN PTY LTD (ACN 129 214 795)
| GLENCURR CONSULTING PTY LTD (ACN 115 541 707) | Plaintiffs |
| and | |
| MARK WILLIAM WINNETT | |
| v | |
| BLUECHAIN PTY LTD (ACN 129 214 795) | Defendants |
| and | |
| BLUECHAIN PAYMENTS LIMITED (UK Company number 10646000) |
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JUDGE: | DELANY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 11 May 2021 |
DATE OF RULING: | 12 May 2021 |
CASE MAY BE CITED AS: | Re Bluechain Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 260 |
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CORPORATIONS – Administrators – No opportunity for creditors to vote on removal at first meeting – Application for removal by court – Alleged ostensible bias, lack of independence – Application refused – Administrators directed to convene first meeting to enable creditors to vote on s 436E(4) resolution – Australian Securities and Investment Commission v Franklin(liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85; (2014) 223 FCR 204 – Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 – Malhotra v Tiwari [2007] VSCA 101 – Rai v Chapman [2010] NZHC 1454 cited – Corporations Act 2001 (Cth), s 436E – Insolvency Practice Rules (Corporations) 2016, s 75-140(1)(b).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr H Somerville | DSS Law |
| For the First Defendant | Mr J Evans QC | SLF Lawyers |
| For the Second Defendant | Mr M Galvin QC with Mr J Kohn | Brand Partners Commercial Lawyers |
HIS HONOUR:
Background
On 17 February 2021 the Court made orders that Mr Richard Albarran and Mr Richard John Lawrence be appointed as joint provisional liquidators of Bluechain Pty Ltd (‘the Company’) in accordance with s 472(2) of the Corporations Act 2001 (Cth) (‘the Act’). Those orders were made ex parte on the application of Glencurr Consulting Pty Ltd (‘Glencurr’), a 36.55% shareholder in Bluechain Payments Limited (‘Payments’).
On 16 April 2021 the Court made an order by consent pursuant to s 436B(2)(g) of the Act appointing the provisional liquidators as administrators of the Company. The appointment of Mr Albarran and Mr Lawrence as provisional liquidators was terminated coincident upon their appointment as administrators. On 20 April 2021 the Court published reasons for those orders (‘Reasons’).[1]
[1]Re Bluechain Pty Ltd [2021] VSC 187.
The purpose of the 16 April 2021 orders was to allow the preparation and subsequent consideration by the creditors of the Company of a Deed of Company Arrangement (‘DOCA’) to be put forward on behalf of Payments. The Company is a wholly owned subsidiary of Payments.
Pursuant to liberty reserved in the 16 April 2021 orders, the matter was relisted on 11 May 2021 at the request of Payments. There has as yet been no DOCA put forward on behalf of Payments. Payments seeks an order that the administrators be removed and be replaced by Mr James Patrick Downey. On 26 April 2021, Mr Downey signed a consent to act as administrator.
The first meeting of creditors was held commencing at 11.03 am on 28 April 2021 as a virtual meeting by teleconference. It was chaired by Mr Lawrence. The transcript of the meeting is exhibited to an affidavit of Mr Brand, solicitor acting on behalf of Payments. The transcript records that Mr Lawrence noted the meeting to constitute the first meeting of creditors of the Company pursuant to s 436E of the Act and that in accordance with s 75–50 of the Insolvency Practice Rules (Corporations) 2016 (‘IPR’) that he would preside as the chairperson of the meeting. He noted that a quorum was in attendance as defined by s 75–105 of the IPR. He tabled the administrators’ Declaration of Independence, Relevant Relationships and Indemnities (‘DIRRI’) dated 20 April 2021. He tabled his circular to creditors dated 26 April 2021 which contained a copy of the consent to act and a DIRRI completed by Mr Downey. He told those in attendance at the meeting that, as outlined in his circular to creditors, he would be adjourning the initial meeting of creditors until Tuesday, 18 May 2021 pursuant to s 75–140(1)(b) of the IPR.
Mr Lawrence informed the meeting, as he had earlier done in his circular to creditors, that it was his opinion that the actions of creditors proposing the appointment of an alternative voluntary administrator were inconsistent with the parties’ mutually held views expressed at the Court hearing on 29 March 2021.[2] He said it was his personal opinion that the proposal to appoint Mr Downey was ‘an attempt to subvert the court’. He reported upon correspondence received by him from the plaintiffs’ solicitor noting their intention to have the matter urgently relisted and to press for final relief by way of winding up due to insolvency. He said it was his intention to adjourn the first meeting of creditors for 15 days, the maximum permitted period under s 75–140(2) of the IPR. No proofs of debt were called for. Over the opposition of a number of persons in attendance in person and by proxy, including persons described in the attendance register as related creditors and employees, the meeting was adjourned.
[2]This date reference is in error. It should have been a reference to the hearing on 16 April 2021.
The competing contentions
The meeting having been adjourned without a consideration by the creditors of whether or not to remove the administrators and, if so, to appoint someone in their place, as contemplated by s 436E(4) of the Act, Payments seeks an order that the Court replace the administrators by Mr Downey. Alternatively, Payments seeks an order that the administrators be compelled to convene the first meeting of creditors and be restrained from further adjournment without the leave of the Court.
In support of an order for removal, Payments referred to the desirability that administrators not only act impartially, but, as in the case of a liquidator, be seen to so act.[3] In Rai v Chapman,[4] in the context of a liquidator’s refusal to call a meeting because it was alleged the sole director of the company wanted him sacked as liquidator, the Court observed:
… That cannot be a good ground for opposing the calling of a creditors’ meeting. It is a matter of good governance that liquidators have to be accountable to creditors. Accountability can be achieved by allowing meetings to be held between creditors and the liquidator. Accountability may be reduced if there is not the machinery available to require meetings and to require a liquidator to appear at the meetings to answer the creditors for the conduct of the liquidation. A simple comparison would be this. Imagine, for example, that the directors of a company put off calling an annual general meeting, knowing that the shareholders would not have them voted back in again and stayed in office by stalling an annual general meeting. That would be reprehensible conduct. Mr Chapman’s tactic of stalling on calling a creditors’ meeting falls into the same category.[5]
[3]Trio Capital Ltd (Admin App) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; Krejci as liquidator of Eaton Electrical Services (2006) 58 ACSR 403; Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24, 30 (Street J).
[4][2010] NZHC 1454.
[5]Ibid, [18].
The orders sought by Payments are opposed by the plaintiffs, Glencurr, Mr Winnett, a director of the Company, and also by the administrators, Mr Albarran and Mr Lawrence.
Mr Winnett contends that the application to replace the voluntary administrators should be dismissed. He contends that ancillary orders should be made so that the voluntary administrators complete the task of conducting an orderly administration process, without further attempts to procure their replacement prior to them convening a second meeting of creditors. Alternatively, that the Company should be placed in liquidation.
Submissions filed on behalf of Mr Winnett provide a short chronology of interactions between Mr Downey and those who would wish to see him appointed as the replacement administrator. The chronology begins with contact between Mr Downey and the solicitor for Payments, Mr Brand on 12 March 2021. It is contended on behalf of Mr Winnett that these dealings are indicative of a lack of independence on the part of Mr Downey. That these communications were not disclosed to the Court on 16 April 2021 was said to be ‘surprising’.
On behalf of Mr Winnett it was submitted the administration is well advanced, the s 439A meeting convening period is coming to an end, and by 14 May 2021 the second meeting of creditors must be convened. A report is required at that time as provided for in s 75-225(3) of the IPR setting out the views of the administrators as to the Company’s business, property affairs and financial circumstances, and a statement, setting out whether in the administrators’ opinion it would be in the creditors interest for the company to execute a DOCA, or for the administration to end, or for the company to be wound up. Mr Winnett submitted in favour of an orderly voluntary administration where the existing administrators complete that report and the creditors vote in a timely fashion. It was submitted that if Payments’ application is acceded to, the orderly conduct of the administration will be imperilled and the convening period will be extended. It was submitted that there is no need for a first meeting. It is said that prompt consideration of a DOCA, which in the opinion of Mr Lawrence should be able to be put forward now, based on material available to its proponents, is in the interests of employees of the Company.
The administrators seek an order pursuant to s 447A the Act that Part 5.3A operate in respect of the Company as if s 436B of the Act does not apply in respect of its administration. Alternatively, an order that Part 5.3A of the Act operates in respect of the Company so that no creditor of the company, as defined in s 75–41(4) of the Insolvency Practice Schedule (Corporations) (‘IPS’), may vote at any meeting of creditors in respect of any proposal to replace the administrators. Further, that when convening the meeting of creditors to be held under s 439A, the administrators draw the attention of the creditors to their ability, at that meeting, to appoint a person or persons other than them as administrator of any DOCA, should the meeting resolve do so.
In opposing their removal, the administrators contend that none of the evidence recently filed by Payments should lead the Court to conclude that there is any benefit to creditors of the Company through the replacement of the administrators. It is in the interests of creditors to ‘get on’ with the administration and to dispense with the requirement for the first meeting, thereby removing the prospect of related party creditors replacing the administrators. They submit it appears likely, if the creditors are permitted to vote with the support of related creditors and employee creditors of the Company, that Mr Downey will be appointed. During the hearing I was taken to the register of those who participated in the meeting on 28 April 2021. I accept that if there had been a vote at that meeting that it is likely that the administrators would have been removed. Further, that whilst the majority required in number for removal is likely to have been achieved without relying on the votes of related parties, it is likely that a majority in value in favour of removal would have depended upon the votes of related parties.
It was submitted on behalf of Mr Winnett and on behalf of the administrators that if the Court were to order a first meeting so as to permit a vote on removal or otherwise of the administrators, it is likely the matter would come back to Court. That is said to be so on an application either by the plaintiffs or by interests associated with the plaintiffs, pursuant to s 75–41 of the IPS. It was submitted that s 75-41 is a matter that requires scrutiny of the removal of an administrator in the interests of arm’s length creditors. That section provides:
75-41Outcome of voting at creditors’ meeting determined by related entity--Court powers
Application of this section
(1)This section applies if, on the application of a creditor of a company under external administration, the external administrator of the company or ASIC, the Court is satisfied of the following matters:
(a)a proposal has been voted on by creditors (either at a meeting of the creditors or under section 75-40 without a meeting);
(b)if the vote or votes that a particular related creditor, or particular related creditors, of the company cast on the proposal had been disregarded for the purposes of determining whether or not the proposal was passed, the proposal:
(i)if it was in fact passed--would not have been passed; or
(ii)if in fact it was not passed—would have been passed;
or the question would have had to be decided on a casting vote;
(c)the passing of the proposal, or the failure to pass it, as the case requires:
(i)is contrary to the interests of the creditors as a group or of that class of creditors as a group, as the case may be; or
(ii)has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposal, or for it, as the case may be, to an extent that is unreasonable having regard to the matters in subsection (2).
Unreasonable prejudice to interests of creditors--matters to be taken into account
(2) For the purposes of subparagraph (1)(c)(ii), the matters are:
(a)the benefits resulting to the related creditor, or to some or all of the related creditors, from the proposal if passed, or from the failure to pass the proposal, as the case may be; and
(b)the nature of the relationship between the related creditor and the company, or of the respective relationships between the related creditors and the company; and
(c)any other relevant matter.
Court may make orders
(3) The Court may make one or more of the following:
(a)an order that the proposal be considered and voted on at a meeting of the creditors convened and held as specified in the order;
(b)an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:
(i) the proposal; or
(ii) a resolution to amend or vary the proposal;
(c)if the proposal was passed—an order setting aside the resolution passing the proposal;
(d)such other orders as the Court thinks fit.
Definition--related creditor
(4) In this section:
“related creditor”, for the purposes of a vote, in relation to a company, means a person who, when the vote was cast, was a related entity, and a creditor, of the company.
As submitted on behalf of Payments, while s 75-41 would give standing to a creditor disaffected by a successful vote to replace the administrators, the Court has no power to interfere with such an outcome pursuant to the section unless it is satisfied the criteria in s 75-41(1)(c) are met.
Opposing the course proposed by the administrators, Payments argued that s 447A of the Act and s 90-15 of the IPS should not be used to deprive the creditors of the right to vote on removal.
Events since 16 April 2021
The evidence includes details of the steps that Payments and those associated with it have taken since the matter was last before the Court to put together a DOCA for consideration by the creditors. Those efforts are continuing.
It is correct as submitted on behalf of Payments, that while no DOCA has been ‘formally’ provided to the administrators, there is no obligation according to the Act to do so either by or at the first meeting of creditors.[6]
[6]At a s 439A meeting (i.e. second meeting of creditors) there should be a draft deed or at least a ‘detailed prescription of what the deed is to contain, and a reference to it in the resolution’: Re Eastmark Holdings Pty Ltd (recs and mgrs apptd) [2015] NSWSC 1437, [34].
There is evidence of meetings and exchanges between the administrators and Mr McNamara, a chartered accountant and director of companies that have invested approximately $700,000 in Payments in relation to a proposed DOCA. Mr McNamara has given evidence of his intention to submit a DOCA following a format which would provide an estimated at or close to 100 cents in the dollar for ordinary unrelated unsecured creditors. Any such DOCA is based on the inclusion of a research and development tax incentive (‘R&D grant’) in the DOCA funding and agreement from related party creditors not to participate in payments from the DOCA. The issue of the availability of any R&D grant is a live one and one of some complexity in putting together any proposed DOCA and in the consideration of such a proposal by the creditors. Mr Lawrence has been in communication with the Australian Taxation Office regarding the R&D grant. The evidence on behalf Payments includes an affidavit from Mr Bernabe, an employee of the Company stood down without pay by the administrators on 17 February 2021, in relation to the likely time to draft a submission in support of obtaining such an incentive.
There is evidence from the solicitor for Payments, Mr Brand, that between 12 April and 23 April 2021 inclusive, his firm received 66 deposits from shareholders in Payments totalling $2,191,515. Further, that of the amount held in his firm’s trust account, $886,000 will be available for application towards a DOCA, subject to an acceptable DOCA being prepared and approved by the creditors. If a DOCA is not approved by the creditors, the shareholders’ funds held in his firm’s trust account must be returned to them.
The affidavit of Mr McNamara refers to requests made by him of Mr Lawrence at a meeting on 23 April 2021. It is clear from the affidavit that the requests by Mr McNamara at that meeting for guidance and information were promptly and appropriately responded to by Mr Lawrence.
The affidavit of Mr McNamara includes a statement by him that he remains willing to work with the administrators in relation to a DOCA. It also states that as the person assisting with the preparation of the DOCA that he has genuine and strongly held concerns that the administrators are not engaging constructively with him. Mr Lawrence does not agree with a number of the matters stated by Mr McNamara in his affidavit and expresses his view in his affidavit that Mr McNamara already has sufficient information to prepare and submit his proposed DOCA for consideration.
The affidavit of Mr Lawrence dated 5 May 2021 sets out in detail the work that has been performed by the administrators and also further work required in order for all major reporting requirements of the s 439A report to creditors to be completed by an administrator. I accept that the bulk of the work has already been completed. I was informed the administrators will be in a position to report to creditors by Friday, 14 May 2021.
Costs and delay issues
The evidence includes cost estimates both from the current administrators and from Mr Downey in relation to the costs of convening the second meeting of creditors, including preparing the report to creditors and associated documentation and the costs of administering a DOCA. Assuming no unforeseen circumstances, Mr Downey’s cost estimate is in the region of $60,000 plus GST for undertaking that work. Those costs are less than the costs anticipated by the existing administrators to carry out those steps. However, I accept the submission on behalf of Mr Winnett that Mr Downey’s estimate is very much a preliminary one. Further, that if he or any other administrator were to be appointed in place of the existing administrators, that it is likely the costs would be greater than as estimated by the existing administrators.
I also accept that should an alternative administrator be appointed, there may be considerable delay and costs as a result of the need for the new administrator to undertake his or her own enquiries. At least some duplication in that circumstance is inevitable.
There is power to extend the convening period or to convene the second meeting and then to adjourn it for no more than 45 days pursuant to s 75-140 of the IPR. The administrators do not seek an extension of the convening period.
Should the Court remove the administrators?
Three matters were identified in argument by senior counsel for Payments in support of an order for removal of the administrators. The first, the relationship between the administrators’ firm, Hall Chadwick, and Mr Winnett. The second, the events surrounding the 28 April 2021 meeting. The third, the complaints raised by Mr McNamara concerning his dealings with the administrators.
The material before the Court on 16 April 2021 included criticism of the independence of the administrators. However, those criticisms were refuted in affidavits made by the administrators. All parties, including Payments, were content to see the then provisional liquidators appointed as the administrators notwithstanding those unresolved and contested criticisms. It is difficult to see how the Court could be justified in acting now on those past criticisms to remove the administrators appointed by consent at a time when those very same criticisms were known.
Subjective concerns of Payments concerning the independence of the administrators following their appointment such as those expressed by Mr McNamara are not to the point. When seeking to assess ostensible bias, an objective and not a subjective assessment is called for.
I do not accept that the evidence establishes there is a proper basis to make an order for the removal of the administrators on the basis of apparent or ostensible bias. The attention of the Court was directed to Australian Securities and Investment Commission v Franklin(liquidator), in the matter of Walton Constructions Pty Ltd,[7] where White J said:
[7][2014] FCAFC 85; (2014) 223 FCR 204 (‘Franklin’).
55.Section 503 of the Corporations Act provides that the Court may “on cause shown” remove a liquidator appointed in a voluntary winding up and appoint another liquidator. The words “cause shown” are not to be construed narrowly. An applicant for removal may rely on any conduct or inactivity by a liquidator ranging from moral turpitude to bias, lack of independence, incompetence or other unfitness for office: Domino Hire Pty Ltd v Pioneer Park Pty Ltd [2003] NSWSC 496 at [58]; (2003) 21 ACLC 1,330 at 1,340. The overall considerations are the interests of the liquidation and the purpose for which the liquidator was appointed: Domino Hire at [58]-[63], 1,340-1.
…
57.An appearance of bias arising by association is a recognised category of disqualification: Webb v The Queen (1994) 181 CLR 41 at 74. It arises when the apprehension of bias results from some direct or indirect relationship, experience or contact with a person or persons interested in a matter.
…
59.It was common ground at first instance, and on the appeal, that the test for apprehended bias in a liquidator is the same as that which applies to the judiciary and to administrative decision makers. That is the test stated by the majority in Ebner v Official Trustee in Bankruptcy [2000] HCA 63 at [6]; (2000) 205 CLR 337 at 344, namely, whether “a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide”. Gleeson CJ, McHugh, Gummow and Hayne JJ went on to say (at [8], 345) that the application of this test requires two steps:
First, it requires the identification of what it is said 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 the 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 a 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.
…
85.The conflict was said to be between the respondents’ interest in receiving further referrals of insolvency work from the Mawson Group and the revenue which that work would generate, on the one hand, and their duty as liquidators, on the other, having regard to their responsibilities to the creditors of WCPL and WCQPL, and to the public interest. Consideration of the view of the hypothetical fair-minded observer in a case of this kind requires analysis of the interest said to give rise to the conflict and of the effect which that interest may have on the discharge of the respondents’ duties. It is necessary to keep firmly in mind that there must be a real, and not merely theoretical, possibility of conflict of duty or interest.[8]
[8]Ibid, [55], [57], [59], [85].
The evidence here falls short of satisfying either of the two steps identified in Ebner v Official Trustee in Bankruptcy,[9] and adopted by White J in Franklin.[10]
[9][2000] HCA 63, [6]; (2000) 205 CLR 337, 344.
[10][2014] FCAFC 85; (2014) 223 FCR 204.
I accept that there was no proper basis for the administrators to have adjourned the first meeting of creditors without permitting a vote pursuant to s 436E(4) of the Act as they did on 28 April 2021.
The events relating to the meeting on 28 April 2021, whilst regrettable, are not sufficient to warrant removal of the administrators by the Court. What occurred in the past can be addressed by ensuring the creditors are afforded the opportunity to vote as provided for in s 436E(4) of the Act at another meeting, if the making of such an order is otherwise appropriate.
As to the third matter, although there is complaint about the conduct of the administrators in the affidavit of Mr McNamara, those complaints are contested by the administrators and, even if accepted as entirely accurate, fall short of a sufficient basis for removal.
I do not propose to order the removal of the administrators.
Should the creditors be given the opportunity to vote upon the removal of the administrators?
It is appropriate to leave to the creditors of the Company the decision-making process in relation to the replacement or otherwise of the administrators as provided for in s 436E(4) of the Act.
The administrators informed the creditors in the circular to creditors on 26 April 2021 that they considered steps taken which might see Mr Downey appointed as administrator at the first meeting of creditors to be inconsistent with what took place at the hearing on 16 April 2021. On 27 April 2021, before the meeting scheduled to take place the following day, the solicitors for Payments corrected any misapprehension that the administrators might have had about what occurred and what was said in open court on 16 April 2021. The letter to the administrators’ solicitors drew attention to the statement by senior counsel for Payments in Court on 16 April 2021 that a consent was likely to be procured from another insolvency practitioner because of a perception of lack of independence on the part of the administrators. The letter went on to assert that the then proposed adjournment of the first meeting was an entirely inappropriate use of the adjournment power. That was said to be so because the Court had been informed of the potential for the administrators being replaced. It was asserted that to vote upon removal is a legislative right commonly invoked by creditors and that the first meeting should be held, not adjourned.[11]
[11]Second defendants, Affidavit of Jeremy Rupert Slocombe Brand, dated 6 May 2021, Exhibit ‘JRSB-8’, 13.
There was no response to this letter. The statement made by Mr Lawrence at the meeting the following day was either made in ignorance of the letter of 27 April 2021 or in disregard of the truth of its contents so far as the events that had taken place at Court on 16 April 2021 are concerned.
The creditors should be given the opportunity to remove and replace the administrators of the Company at a first meeting of creditors should they wish to do so. The decision by the administrators to refuse to permit that opportunity at the meeting held on 28 April 2021 was not an appropriate decision. Given the correspondence that immediately preceded the meeting, it reflects either poor communication with the letter not being drawn to Mr Lawrence’s attention, or poor judgment if it was. If it is due to poor judgment then it also calls into question Mr Lawrence’s independence.
I agree with the submission on behalf of Payments that there is nothing in the orders made on 16 April 2021, or in the Reasons, that is inconsistent with the exercise by creditors of the statutory right to remove the administrators at the first meeting of creditors should they see fit to do so. As stated in the letter dated 27 April 2021, during the hearing on 16 April 2021 senior counsel for Payments expressly referred to the likelihood that consent would be procured from another practitioner to act as administrator. The fact the chronology of earlier dealings with Mr Downey was not disclosed to the Court does not mean that an order should not be made enabling the creditors to vote.
Although the Reasons referred to the familiarity of the then provisional liquidators with the business of the Company, the Report prepared by them, and that the appointment of replacement administrators might add to the expense of the administration and cause delay, nothing in the Reasons or in what transpired during the hearing provides a proper basis for the adjournment of the first meeting of creditors on the administrators’ own motion for the reason stated by Mr Lawrence.
Disposition
I accept that it is not in the interests of the creditors as a whole or in the interest of the parties to this litigation that the disputes before the Court in relation to the administration are dealt with in a manner that is or may be productive of further litigation, if that can reasonably and appropriately be avoided.
In that context, the matter having been raised in discussion with senior counsel for Payments, I invited the parties to consider an order which removed the administrators, did not appoint Mr Downey, but appointed new administrators totally independent of the warring factions with orders providing for the convening by those administrators of the second meeting of creditors. This was the approach adopted by the Court of Appeal in Malhotra v Tiwari,[12] in analogous circumstances. In Malhotra, the Court said:
72.As we have said, the appellant no longer seeks orders that the liquidation of the company be terminated and a declaration that the company is solvent. He now seeks orders that the second respondents be removed and replaced as liquidators. We agree that those orders should be made. Given the need for further investigation as recognised by the judge and, more specifically, because of uncertainty as to what was done and not done in the course of the administration, it is inappropriate that the administrators remain as liquidators.
73.That does not mean that we have reached a conclusion that is adverse to the administrators. As already stated, there is not sufficient evidence from which to decide whether the administrators caused or are responsible for any loss or damage which the company may have suffered. It would also be inappropriate to make that decision without first affording the company an opportunity to be heard through an independent representative. But it is axiomatic that the administrators cannot investigate themselves. The consequent possibility of a conflict of interest necessitates that an independent liquidator be appointed in their place. It follows in our view that the appeal should be allowed in part. And the orders of the judge below should be varied to that extent.
74.As was observed in Re National Safety Council,[13] it is of the greatest importance that there should be no possibility of criticism attaching to one of the court’s own officers on the ground of conflict of interest and duty. It would, therefore, be a substantial injustice to the appellant if the administrators’ conduct of the administration, and their relationship with the respondents throughout the administration, could not be fairly, promptly and independently investigated and be seen to be independently investigated.[14]
[12][2007] VSCA 101 (‘Malhotra’).
[13][1990] VR 29, 34.
[14][2007] VSCA 101, [72]-[74].
Although such an approach was given consideration by the parties, it did not find favour as a potential resolution. That is so with the exception of Payments who would have been prepared to accept such an outcome.
The Court clearly has power pursuant to s 447A of the Act and s 90-15 of the IPS to order the removal of the administrators. It has power to order that they be replaced, whether by Mr Downey, or by an administrator who has had no prior dealings with the Company, Payments, or any interested party. For the reasons earlier stated, I do not consider the circumstances here warrant a removal order. That being the case it is not appropriate to make an order for a ‘fresh’ administrator as canvassed during the hearing.
I do not consider that it is appropriate as contended on behalf of the administrators to dispense with the need for the holding of a meeting under s 436E of the Act and to move directly to the s 439A meeting.
I accept that it is in the interests of creditors that any DOCA be finalised and provided to the creditors for their consideration at the earliest opportunity. However the desirability of that objective is not a sufficient reason to deprive the creditors of the opportunity to vote as provided for in s 436E of the Act. That vote should have taken place on 28 April 2021. Whether or not there is benefit to the creditors from the replacement of the administrators is a matter for the creditors to determine pursuant to s 436E. The creditors can no doubt take into consideration cost and delay issues when determining how to vote.
I accept there is a manifest risk if the administrators are removed there may be further litigation, and that application may later be made as contemplated by s 75-41 of the IPS. That prospect might have been avoided by an order that restricted voting at the first meeting in a manner that excludes related party creditors. That was an alternative course proposed on behalf of the administrators. I do not consider it appropriate to impose any restrictions on who can vote at the first meeting. None of the arguments advanced on behalf of Mr Winnett or on behalf of the administrators provide good reason to modify the operation of s 436E in advance of the meeting that is now to be held. Section 436E confers the right to vote on removal on all creditors. All creditors including related creditors should have been given the ability to exercise that right on 28 April 2021. They were deprived of that right for no good reason. If the administrators are removed, and if an application is later made relying on s 75-41, the Court will need to determine that application applying s 75-41(1)(c) based on the factual circumstances existing at that time.
The circumstances here require an order compelling the administrators to convene the first meeting of creditors. At that meeting, which I direct be held within seven days, the administrators are to provide the creditors with the opportunity to vote on their removal and replacement as provided for in s 436E(4). The creditors should also be given the opportunity to determine matters concerning a committee of inspection as provided for in s 436E(1) should they wish to do so.
I will further order that the administrators are restrained from any further adjournment of that first meeting without leave of the Court.
I direct the solicitors for Payments prepare a proposed form of order giving effect to these reasons and provided to chambers as soon as practicable.
The parties should file written submissions as to costs, not exceeding three pages. Those submissions should be filed and served no later than 4.00 pm on 19 May 2021. Costs of the application will be determined on the papers.
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