Re Iris Diversified Property Pty Ltd (in liq)

[2018] NSWSC 834

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Iris Diversified Property Pty Ltd (in liquidation) [2018] NSWSC 834
Hearing dates:	28 May 2018
Decision date:	06 June 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The resolution that the Second Defendant be removed as liquidator of the First Defendant put at a meeting of creditors of the First Defendant held on 16 November 2017 is taken to have been passed at that meeting. Messrs Bailey and Palmer be appointed as joint liquidators of the First Defendant. The Second Defendant to pay the Plaintiff’s costs of and incidental to these proceedings, as agreed or as assessed, without recourse to the assets of the First Defendant.
Catchwords:	CORPORATIONS – application under s 75-41(3)(d) or s 75-43(4) of the Insolvency Practice Schedule (Corporations) for order that resolution to remove liquidator be treated as passed at meeting of creditors of company – where failure to pass that resolution was adverse to the interests of the creditors of the company as a whole – where failure to pass the resolution prejudiced, or is reasonably likely to prejudice, the interests of the creditor which voted against the proposal to an unreasonable extent – whether that resolution to remove liquidator should be treated as passed and order made for replacement liquidators to be appointed.
Legislation Cited:	- Corporations Act 2001 (Cth) ss 503, 600A, Sch 2 ss 75-41, 75-43, 90-15, 90-35
Cases Cited:	- Boral Resources (SA) Ltd v Rick Martin Nominees Pty Ltd (No 2) [2012] SASC 192 - Brisconnections Management Company Ltd v Burness [2009] FCA 626; (2009) 72 ACSR 233 - Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 - James, in the matter of Liquor National Pty Ltd (in liq) v Liquor National Pty Ltd (in liq) (No 2) [2017] FCA 1154 - Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407; (2008) 26 ACLC 497 - Re ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801 - Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079 - Redowood Pty Ltd v Goldstein Technology Pty Ltd [2004] NSWSC 317 - State of Victoria v Goulburn Administration Services (in liq) [2016] VSC 654 - Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642
Category:	Principal judgment
Parties:	The Owners – Strata Plan 84741 (Plaintiff) Iris Diversified Property Pty Ltd (in liquidation) (First Defendant) Henry Peter McKenna (Second Defendant)
Representation:	Counsel: R Glasson (Plaintiff) R D Marshall SC/L Chapman (Second Defendant)   Solicitors: O’Neill Partners (Plaintiff) LAS Lawyers (Second Defendant)
File Number(s):	2017/359162

Judgment

1. By Amended Originating Process filed, by leave, on 28 May 2018 the Plaintiff, The Owners – Strata Plan 84741 (“Owners Corporation”), seeks orders to give effect to a resolution, previously not passed at a creditors’ meeting, for the removal of Mr Henry McKenna as liquidator of Iris Diversified Property Pty Ltd (in liq) (“Company”) and the appointment of Messrs Bailey and Palmer as liquidators of the Company.

Factual background and affidavit evidence

2. The Owners Corporations relied on several affidavits of its solicitor, Mr Michael O’Neill, dated 27 November 2017, 7 December 2017 and 9 February 2018, and the exhibits to those affidavits. Mr McKenna relied on his affidavits dated 30 January 2018, 17 May 2018 and the exhibits to those affidavits. I have drawn on those affidavits for the account of the relevant facts set out below.

3. By way of background, the sole director and secretary of the Company is Mr Wassim Arnaout and two shares in the Company are owned by Iris Diversified Investments Pty Ltd (“IDI”). The Owners Corporation, which is the body corporate of a block of apartments situated in Clovelly, commenced proceedings against the Company and also the builder of those apartments in August 2014. The builder was subsequently placed in external administration and the proceedings continued against the Company. Prior to delivery of judgment against the Company, the Company had sold a substantial property situated at Clovelly. In subsequent correspondence between the solicitors acting for the Owners Corporation and the solicitors acting for the Company, the Company claimed that that sale was unrelated to the claim by the Owners Corporation against it and also that the assets owned by the Company were owned in its capacity as a trustee.

4. By reason of judgments delivered in favour of the Owners Corporation on 29 August 2017 and 15 September 2017, the Owners Corporation is now a creditor of the Company in the total amount of $1,799,937.91. Another entity associated with the Company, Iris Group Management Pty Ltd (“IGM”), also claims to be owed a debt of $207,000 by the Company, although that figure appears to be an estimate only (Ex A1, p 87). Mr Arnaout is also the director and ultimate shareholder of IGM, and he indicated, in his report as to affairs dated 18 October 2017 (Ex A1, 29–38), that the Company’s only creditors were the Owners Corporation and IGM. Following the judgments against it, the Company was placed in liquidation on 11 October 2017 and Mr McKenna was appointed as its liquidator.

5. By letter dated 30 October 2017 from its solicitors, the Owners Corporation directed Mr McKenna to convene a meeting of creditors of the Company and requested that a resolution be put to that meeting to the effect:

“That Mr Henry McKenna of Jirsch Sutherland, Liquidator of the Company appointed on 11 October 2017, be removed as Liquidator of the Company, and that Mr Liam Bailey and Christopher Palmer of O’Brien Palmer be appointed Joint and Several Liquidators of the Company, in accordance with Section 90-35 of Schedule 2 Insolvency Practice Schedule (Corporations) of the Corporations Act 2001 (Cth).”

Section 90-35 of the Insolvency Practice Schedule (Corporations) provides that the creditors may, by resolution at a meeting, remove the external administrator of a company and, by resolution at, relevantly, the same meeting, appoint another person as the company’s external administrator, after at least five business days’ notice of the meeting is given to all persons who are entitled to receive notice of creditors’ meetings.

6. Notice was given, on 1 November 2017, of that meeting of the creditors of the Company to be held on 16 November 2017. Mr McKenna obtained advice from his legal advisers prior to that meeting (Ex R3) which correctly noted that, in the event of a deadlock at that meeting, he could exercise his casting vote in favour of the resolution so that it passed or not exercise his casting vote so that the resolution failed to pass, but also incorrectly advised that Mr McKenna could exercise his casting vote against the resolution so it failed to pass, as he ultimately did. Mr McKenna’s legal advisers also advised him that, in exercising his casting vote, he was not obliged to vote the same way as the major creditor but rightly emphasised that he “should consider what is best for creditors as a whole and vote in a way that is consistent with the interests of creditors as a whole”. Mr McKenna’s legal advisers also drew attention to paragraph 24.7.4 of the ARITA Code of Professional Practice 3rd Edition, and advised that:

“●   In deciding whether to exercise your casting vote (or not as the case may be), you should weigh up all relevant factors to ensure that your decision is made for a proper purpose and is consistent with the interests of creditors as a whole. Accordingly, while you are not obliged to vote in the same way as the major creditor (ie the [Owners Corporation]), you should seriously take into account the fact that the [Owners Corporation] in this circumstance has such an overwhelming interest (compared to the size of the Related Entity Creditor’s] that it may be considered inappropriate to exercise your casting vote against the resolution (or not exercise the casting vote at all);

●   Other factors to consider include the motives of the [Owners Corporation] and the Related Entity Creditor behind their positions on the resolution, whether the purpose for exercising the casting vote is able to be substantiated by independent, objective and impartial reasoning and whether any unfair advantages accrue to the directors by exercising a casting vote in a particular way;

●   It is important to note that you must not be influenced by any direct or indirect opportunity of financial benefit that you will receive as a result of exercising (or not exercising) your casting vote. To this end, you should take care to avoid any negative perception of self-interest swaying the decision.”

7. Mr McKenna’s legal advisers also observed that:

“In our view in light of the fact that the [Owners Corporation] holds at least 85% of the vote (if we exclude the costs and interest components of its claim entirely), and the possible consequences if the resolution is not passed, you will need to have strong reasons supporting any decision to exercise your casting vote against the resolution or to not exercise your casting vote – for example, it is an extremely complex job and your familiarity means that it would not be in the creditors’ best interest for someone else to step in and take over. In addition, given that the reason given for proposing the resolution is because the [Owners Corporation] would be more comfortable having a liquidator that has not been appointed by the director of the Company, you will need to overcome the allegation and perception that you will not, or will likely not, act impartially and independently. This is particularly difficult to overcome when you will in fact derive a financial benefit (ie retain your appointment) from the resolution failing to be passed.”

I note that there was and is no basis for any contention that the liquidation was particularly complex or that Mr McKenna’s familiarity with it was such that it could not be in creditors’ best interests for someone else to step in and take over the liquidation, and those propositions were not sought to be established by Mr McKenna in this application.

8. Mr McKenna’s legal advisers summarised their recommendations as follows:

“●   In the circumstances, you may wish to consider exercising your casting vote in favour of the resolution to replace you unless you consider there to be a compelling, objectively impartially persuasive reason as to why it is in the best interests of creditors as a whole that you not be replaced, in circumstances where 85% value of the creditors require your replacement. As a practical matter, the rationale for your decision to exercise your casting vote (or not as the case may be) must be declared and minuted.

●   Lastly, if you form the view prior to the meeting that there is merit in your being removed earlier in time then those options can also be explored.”

I have not neglected Mr McKenna’s reference in cross-examination, in general terms, to subsequent conversations with his legal advisers.

9. Proofs of debt were admitted for voting purposes at that meeting by the Owners Corporation in the amount of $1,799,937 and for IGM in the amount of $207,000. It is common ground that the debt owed to the Owners Corporation represented nearly 90% of the total creditor claims admitted for voting purposes at that meeting and all of the non-related creditor claims admitted for voting purposes at that meeting. The minutes of that meeting (Ex A2, 3–24) record comments made by Mr O’Neill, the solicitor for the Owners Corporation, and Mr Whatley, the legal adviser to Mr McKenna, at that meeting. The Owners Corporation voted in favour of the resolution for Mr McKenna’s removal and replacement by Messrs Bailey and Palmer; the “Iris Group” voted against that resolution; and the resolution was therefore passed by a substantial majority of the creditors by value, but not by a majority by number of creditors.

10. Mr McKenna then purportedly exercised his casting vote to vote against the resolution, although it is now common ground that he did not have power to do so by reason of r 85-115(5) of the Insolvency Practice Rules (Corporations) 2016 (Cth). He expressed his reasons for doing so at some length. He observed, inter alia, that, where neither creditor had both the majority in number and value, the proposed resolution would only pass if he exercised his casting vote in favour of it; he considered he was not obliged to vote in the same way as the Owners Corporation, being the major creditor, but he said he had taken into account the fact that it had a substantially larger claim than IGM; he noted that the only explanation he had received for the Owners Corporation’s seeking his removal and replacement was that it would prefer that the liquidator not be chosen by the Company’s director; he had identified a number of voidable transactions that he intended to investigate and/or pursue “if sufficient funding is obtained”; and the limited funding he had been provided at the point of his appointment had been largely exhausted with professional fees accrued to date and expenses of the liquidation.

11. Mr McKenna then indicated that:

“I am of the view that I am only obligated to vote in favour of the Proposed Resolution if a reasonable and informed third party on the information available might reasonably form the opinion that I might not bring an independent mind to the administration and thus may not be impartial or may in fact act with bias because of a lack of independence, or a perceived lack of independence. I do not believe this situation has arisen, or will arise, in the current circumstances.

I am also of the opinion that my removal and replacement as Liquidator of the Company would appear to result in duplication of costs incurred in the liquidation and provide no additional utility.

Accordingly, I use my casting vote against the Proposed Resolution and declare that the resolution has not passed.”

The parties agreed (Ex J1) that nobody made reference at that meeting to s 75-115(5) of the Insolvency Practice Rules (Corporations), to which I refer below.

12. Several observations may be made about Mr McKenna’s explanation for his exercising a casting vote against, rather than voting for, the resolution to replace him as liquidator. The first is that Mr McKenna’s expression of an intent to investigate or pursue voidable transactions, if sufficient funding was obtained, should be given little weight where, as I find below, there was little practical likelihood that sufficient funding would be obtained while he remained as liquidator. Second, it seems to me that Mr McKenna’s statement of the circumstances in which he was obliged to vote in favour of the proposed resolution failed to give sufficient weight to the fact that the substantial creditor in the liquidation, and the only creditor not related to the Company, lacked confidence in him and would not fund his further activities. Third, Mr McKenna’s reference to duplication of costs had insufficient regard to the fact that his investigations were not then substantially advanced and there would be little duplication of costs in his replacement. Fourth, Mr McKenna’s exercise of his casting vote against the resolution had an impact upon the passage of the resolution, at least in the sense that it would have passed had he exercised that vote on favour of it.

13. By his subsequent report to creditors dated 10 January 2018 (Ex R2, 31), Mr McKenna noted that:

“The Owners Corporation has questioned how the Company has been left with no assets with which to satisfy the judgment debt. This raises concerns about whether Company assets have been transferred to related parties at below market value; or that Company funds have been transferred to related parties before the judgment was issued.”

14. I note, for completeness, that, by his email dated 23 January 2018 to the Owners Corporation’s solicitor, Mr McKenna stated that:

“The reality is that, regrettably, the limited funding that I have received has for the most part been depleted addressing your client’s application to remove me. Had that funding instead been applied to further pursuing investigations, I would have been able (but have not been) in a position to progress those inquiries further. It is plainly unreasonable for your client to maintain a position where they are prepared to fund an alternative liquidator yet refuse to meet with me (the incumbent) to discuss a mutually satisfactory way ahead.” (Ex A3, 6)

That statement was not correct, because that funding had previously been depleted by the costs of the liquidation. The proposition that, but for the application, Mr McKenna could have further pursued investigations was therefore also not correct. It also seems to me that it was not to the point for Mr McKenna to debate whether the Owners Corporation was acting reasonably or unreasonably, where there was little likelihood that its position would change simply because Mr McKenna disagreed with it. The suggestion that the Owners Corporation had refused to meet with Mr McKenna also requires substantial qualification, where its legal representative had met with Mr McKenna on several occasions and there may be every reason for individual proprietors of units who comprise an Owners Corporation to prefer to leave such dealings to their legal representative.

15. By a further report to creditors dated 16 May 2018 (Ex R2, 36), Mr McKenna recognised that, prior to the liquidation, the Company appeared to have ceased receiving rental income that it had previously received and noted that he had not been provided with the Company’s bank statements or other information to clarify how that had occurred. He also noted that he had not identified, from investigations into the general ledgers, any transactions to defeat creditors but that further investigations into the sale of the Company’s various properties may be required to confirm if those transactions were at fair market value.

16. In his second affidavit, Mr McKenna also expressed the view that it may be appropriate to conduct public examinations at least of Mr Arnaout and a former accountant to the Company, but rightly recognise that funding would also be needed for such examinations. He also noted the possibility of avenues of recovery available to a liquidator of the Company, and noted that it could not be known if such action was realistic prior to further investigations and public examinations, and that additional funding would be required for that step. Mr McKenna fairly accepted in cross-examination that his investigations to date were probably not sufficient to permit an approach to funders (T17), that he could “only take it so far” without funding (T19) and that his investigations to date were “very preliminary” (T24). Mr McKenna’s second affidavit also indicated that his employment with his former firm is to cease on or about 10 June 2018, and his evidence was that:

“Notwithstanding, and subject to the Court’s determination of the [Owners Corporation’s] application, I do not propose to relinquish or retire my appointment. Instead, I propose, subject to appropriate funding, to continue in my present role to undertake the work that I outlined below.”

17. Mr McKenna’s reference in that affidavit to his further activities being “subject to appropriate funding” is of considerable significance, where the present position is that his employment with his current firm will cease, he has obtained no employment with another firm, he rightly accepts that there are limits to his capacity to fund investigations from his personal funds and the Owners Corporation will not fund him, as distinct from another liquidator, to undertake such investigations. It appears that Mr McKenna has not yet secured a position with a new firm.

18. Mr McKenna was cross-examined at length about these matters, the terms of the contractual arrangements between him and his firm and whether he was or is obliged, by those arrangements, to seek to facilitate a transition of his appointment as liquidator of the Company to another liquidator in the firm. Mr McKenna’s affidavit evidence did not elaborate on those matters. I do not consider it necessary to address those matters further, given the findings that I have reached on other grounds. In any event, it appears that Mr McKenna’s former firm is now content for him to continue to act as liquidator of the Company, if he is not replaced as liquidator by an order of the Court.

Whether Mr McKenna had power to exercise a casting vote against the resolution for his removal

19. First, the Owners seek a declaration that Mr McKenna had no power, by reason of r 75-115(5) of the Insolvency Practice Rules (Corporations), to exercise a casting vote against the resolution that he be removed as liquidator of the Company and that Messrs Bailey and Palmer be appointed as replacement liquidators put at the meeting of the Company’s creditors held on 16 November 2017. Rule 75-115 of the Insolvency Practice Rules (Corporations) relevantly provides for the circumstances in which a resolution is passed at a meeting of creditors after a poll is demanded and provides that, if no result is reached by a majority in number and in value of creditors voting in favour or against the resolution, and the resolution relates to the removal of an external administrator of a company, then the external administrator may exercise a casting vote in favour of the resolution, in which case the resolution is passed, or, if that paragraph does not apply, the resolution is not passed. That rule does not contemplate the external administrator exercising a casting vote against the resolution to remove him or her.

20. It was common ground between the parties that Mr McKenna did not have power to vote against the resolution to remove him as liquidator by reason of r 75-115(5) and that that resolution was not passed by reason that the Owners Corporation had voted for it, IGM had voted against it and Mr McKenna had failed to exercise a casting vote in favour of it. I am content to proceed on that basis, and it is not necessary to determine whether the effect of that rule is that Mr McKenna had, in the language of the declaration sought, no “power” to exercise a casting vote or if its effect is merely that his vote against the resolution was to be disregarded. Mr McKenna’s error in considering that he was permitted to exercise that casting vote against that resolution (as distinct from his decision to do so) appears to have reflected the legal advice he had received, and it does not seem to me that that, in itself, supports his replacement as liquidator. It is not necessary or appropriate to make a declaration as to that matter where it will have no impact on the outcome of the resolution or this application.

Application for order that the resolution to remove Mr McKenna be taken to have been passed at the meeting

21. The Owners Corporation seeks an order under s 75-41(3)(d), or s 75-43(4) or s 90-15(1) of the Insolvency Practice Schedule (Corporations) that Mr McKenna’s decision to exercise his casting vote against the resolution be set aside; that the resolution for his removal as liquidator be taken to have been passed at the meeting; and that Messrs Bailey and Palmer be appointed as joint liquidators of the Company.

22. Section 75-41 of the Insolvency Practice Schedule (Corporations) applies if, on the application of a creditor of a company under external administration (relevantly, the Owners Corporation), the Court is satisfied that a proposal has been voted on by creditors; and, if the vote that a particular related creditor of the company (relevantly, IGM) cast on the proposal had been disregarded for the purposes of determining whether the proposal was passed, the proposal that had not been passed would have been passed; and the failure to pass the proposal is contrary to the interests of creditors as a group or has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposal to an extent that is unreasonable having regard to specified matters. The matters to be taken into account in determining whether prejudice to the relevant creditors is unreasonable are specified in s 75-41(2) as the benefits resulting to the related creditor from the failure to pass the proposal; the nature of the relationship between the related creditor and the company; and any other relevant matter. Where the requirements of that section are satisfied, the Court may make specified orders, including such other order as the Court thinks fit.

23. Mr Glasson, who appears for the Owners Corporation, submits that the resolution to remove Mr McKenna would have passed had IGM’s vote been disregarded, because Mr McKenna could not have exercised a casting vote against it. Mr Glasson also submits that the failure of the resolution was contrary to the interests of IDP’s creditors, because of the lack of funding available to Mr McKenna, without which he cannot investigate the transactions that he says have been identified and that he would pursue if he had such funding.

24. Mr Marshall, who appeared with Mr Chapman for Mr McKenna, fairly accepted that s 75-41 of the Insolvency Practice Schedule (Corporations) may be engaged on the present facts, where the resolution would have passed, if IGM’s vote had been discounted. However, Mr Marshall submits that the Owners Corporation has failed to satisfy the test in s 75-41(1)(c), to which I will refer below, and the Court should decline to grant the relief sought on that basis. Mr Marshall submits that it is not a relevant prejudice, for the purposes of s 75-41, that the Owners Corporation proposes to fund an alternative liquidator and that there is no evidence that IGM has received any identifiable benefit and no evidence of any claim made against it or any financial gain that would accrue to it. It seems to me, however, that there is prejudice to the Owners Corporation if it is left in the position that a liquidator remains in place without funding to pursue an investigation or proceedings, or that it must fund Mr McKenna, in whom it lacks confidence, in order to have such an investigation or proceedings conducted.

25. In making that observation, I have not neglected Mr Marshall’s further submission that the Owners Corporation may change its mind as to funding Mr McKenna, if he remains in office. It seems to me that that proposition is speculative, and there is also little attraction in any implication (which Mr Marshall wisely did not put expressly) that the Owners Corporation should be left with have no practical choice other than to do so, despite its expressed lack of confidence in Mr McKenna, or lose any practical prospect of a recovery in the liquidation. In supplementary submissions by leave, Mr Marshall points to efforts that had been made by Mr McKenna to secure funding, including from the Owners Corporation. While that may be an answer to any criticism of inactivity by Mr McKenna in that respect, it does not address the practical unlikelihood of Mr McKenna achieving such funding in the present circumstances. I have also not neglected Mr Marshall’s further submission, in supplementary submissions by leave, that the Owners Corporation has not lost confidence in Mr McKenna, but never had such confidence and always wished to replace him. It seems to me that the Court must have regard to the Owners Corporation’s attitude as it exists, and the question of how long it has existed is of limited significance in that respect. Mr Marshall also submits that an existing liquidator should not be removed merely because a particular creditor, for whatever reason, will not fund work by that liquidator. It seems to me that that matter is of lesser weight where the question here is whether effect should be given to the resolution to replace Mr McKenna with another liquidator, which failed by reason of an associated entity’s vote, and Mr McKenna’s failure to exercise the casting vote for his replacement.

26. The first requirement of s 75-41(1) is satisfied in this case, where the proposal to remove Mr McKenna was voted on and defeated at a meeting of creditors. The second requirement of s 75-41(1) is satisfied, since, if the vote of IGM had been disregarded for the purpose of determining whether the proposal was passed, the proposal to remove Mr McKenna would have passed by the vote of the Owners Corporation. I am also satisfied that the failure to pass the resolution for the removal of Mr McKenna as liquidator was contrary to the interests of the creditors as a whole, satisfying the requirement in s 75-41(1)(c)(i) of the Insolvency Practice Schedule (Corporations).

27. At the time the resolution was put to the creditors’ meeting, the Owners Corporation had expressed its lack of confidence in Mr McKenna, whether that lack of confidence was justified or not, and indicated that it was not prepared to fund further investigations by Mr McKenna, and it was plain that IGM and other entities within the Iris Group would not fund such investigations where they were adverse to the interests of the Iris Group. It does not seem to me that the Owners Corporation’s preference to fund another liquidator can be said to be irrational, where at least some of the case law, to which Mr Glasson referred, also indicates a preference that a liquidator not be the appointee of the directors of a company, although I recognise that that result will commonly arise where a company is placed in voluntary liquidation or passes from voluntary administration to voluntary liquidation: see, for example, Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642 at [6]–[7]; Redowood Pty Ltd v Goldstein Technology Pty Ltd [2004] NSWSC 317; Boral Resources (SA) Ltd v Rick Martin Nominees Pty Ltd (No 2) [2012] SASC 192 at [16].

28. The Owners Corporation’s unwillingness to fund further investigations by Mr McKenna and Iris Group was relevant to the assessment of creditors’ interests, as has been recognised in the context of applications for the appointment of a special purpose liquidator, although I note that the Court may give less weight to that matter in an application for an incumbent liquidator’s removal: Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407; (2008) 26 ACLC 497; Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079; State of Victoria v Goulburn Administration Services (in liq) [2016] VSC 654; James, in the matter of Liquor National Pty Ltd (in liq) v Liquor National Pty Ltd (in liq) (No 2) [2017] FCA 1154 at [6]; compare Re ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801 at [44]. Mr McKenna had not taken any substantial steps to obtain third party litigation funding for such investigations or subsequent proceedings, and (as I noted above) he accepted in cross-examination that his investigations were not sufficiently far advanced that he was likely to be able to obtain such funding and that he could not further advance those investigations or proceedings without funding that was not available to him. It seems to me that the failure to pass that resolution would therefore prevent such further investigations and proceedings and that was, in the relevant circumstances, adverse to the interests of the creditors of the Company as a whole.

29. I am also satisfied that the failure to pass the resolution prejudiced, or is reasonably likely to prejudice, the interests of the Owners Corporation as the creditor which voted against the proposal, to an extent that is unreasonable having regard to the matters specified in s 75-41(2). The case law in respect of former s 600A of the Corporations Act 2001 (Cth) suggests that unreasonable prejudice and not merely prejudice is likely required to satisfy this paragraph: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 at [89]–[92]. The benefit to IGM from the failure of the resolution is the reduction in the practical likelihood that proceedings that would be bought against its associated entities, as a result of the Owners Corporation’s lack of confidence in Mr McKenna and its unwillingness to fund his further investigations, and the absence of alternative funding available to Mr McKenna. It is apparent that IGM believes that benefit exists, because it provided an indemnity to Mr McKenna against any adverse costs order made against him by reason of his opposition to this application, and there is no commercial explanation for that course other than a perception that IGM is advantaged by Mr McKenna remaining in office, by comparison with the position if another liquidator were appointed. The conclusion that the failure to pass the resolution has unreasonably prejudiced, or is likely to prejudice, the interest of the Owners Corporation as the creditor which voted against the proposal is reinforced by the nature of the relationship between IGM and the Company, since IGM is a relatively small creditor of the Company, at least in proportionate terms, which exercised its vote to preserve its associates’ choice of liquidator, against the objection of a creditor to whom a substantial part of the debt owed by the Company was due. I am satisfied that prejudice is unreasonable in the relevant circumstances.

30. For these reasons, I am satisfied that the orders that the resolution for Mr McKenna’s removal be treated as passed and that Messrs Bailey and Palmer should be appointed as liquidators of the Company should be made under r 75-41(3)(d) of the Insolvency Practice Schedule (Corporations). That is sufficient to determine the application in the Owners Corporation’s favour.

Whether orders should be made by reason of Mr McKenna’s failure to exercise a casting vote in favour of the resolution for his removal

31. Alternatively, the Owners Corporation sought an order to similar effect under s 75-43(4) of the Insolvency Practice Schedule (Corporations) which applies where a resolution is not passed at a meeting of creditors of a company under external administration, and the resolution is not passed because the person presiding at that meeting relevantly refuses or fails to exercise a casting vote. In this case, the resolution to remove Mr McKenna as liquidator was not passed by reason of his refusal or failure to exercise a casting vote in favour of that resolution. As I noted above, Mr McKenna went further to exercise a casting vote against it, notwithstanding r 75-115(5) of the Insolvency Practice Rules (Corporations) to which I have referred above. In that situation, the Court may order that the proposed resolution is taken to have been passed at the meeting, where the Owners Corporation had voted for the resolution of Mr McKenna’s removal.

32. Mr Glasson submits that Mr McKenna could only have exercised his casting vote in favour of the resolution, by reason of r 75-115(5) of the Insolvency Practice Rules (Corporations) but failed to do so and, had he done so, the resolution would have passed. Mr Glasson also submits that s 75-43(1) of the Insolvency Practice Schedule (Corporations) therefore applies and that an order should be made that the resolution is taken to have passed, because the resolution was in the best interests of the Company’s creditors and by reason of other factors on which the Owners Corporation relied on to support Mr McKenna’s removal. Mr Marshall accepts that s 75-43 of the Insolvency Practice Schedule (Corporations) may be engaged on the facts, but contends that the Court should not grant the relief sought.

33. There are some similarities between this aspect of this application and the position considered by Gordon J in an application to remove a liquidator, under s 503 of the Corporations Act, in Brisconnections Management Company Ltd v Burness [2009] FCA 626; (2009) 72 ACSR 233, on which Mr Glasson relies. In that case, her Honour removed a liquidator, although there was no suggestion that he was not competent or had a prior relationship with the relevant company, on the application of a creditor which accounted for 99.8% of the company’s debt and was the “only truly independent creditor” (at [10]). Her Honour observed at [12] that:

“The exercise of the casting vote is most appropriate in circumstances where a creditor with a majority in value (such as the Applicant) has such an overwhelming interest that it is inappropriate to allow a majority in number who do not have the same monetary interest to carry the day. As the case law and the Code makes abundantly clear, there is no presumption in favour of the majority in value. However, where there is large disproportion between the values of the debts of the numerical minority and the numerical majority (as is the position here) it must be a factor to be taken into account.”

Her Honour there set aside the liquidator’s decision not to exercise the casting vote in favour of his removal in that case and then exercised the discretion in favour of the resolution that the liquidator be removed.

34. Mr Marshall seeks to distinguish Brisconnections above on the basis that there is here no concern as to the competence or independence of Mr McKenna, and that he had addressed the issue of the relative size of the creditors’ claims at the creditors’ meeting. While I accept that Mr McKenna addressed the latter matter at that meeting, it seems to me that it should have been given substantially greater weight than Mr McKenna allowed to it, both in his explanation of his casting vote and the way in which he cast it. It does not seem to me the decision can be sufficiently distinguished on these bases, where it is plain that her Honour considered that substantial weight should be given to the view expressed by an independent creditor owed a substantial portion of the debt. These factors are also present in this case. Although I recognise that Brisconnections above was a particularly strong case, where the creditor’s debt was there 99.8% of the debt, the 90% proportion of the debt owed to the Owners Corporation is still a very substantial component of the debt owed by the Company.

35. Had I not found that the Court should make the orders sought by the Owners Corporation under s 75-41 of the Insolvency Practice Schedule (Corporations), I would have made those orders under s 75-43(4) of the Insolvency Practice Schedule (Corporations). I am satisfied that the proper order under s 75-43(4) of the Insolvency Practice Schedule (Corporations) would be an order that the resolution be taken to have been passed at the meeting and that Messrs Bailey and Palmer be appointed as joint liquidators of the Company. There would be no useful purpose in ordering a further meeting to consider the resolution for Mr McKenna’s removal and directing that IGM not be entitled to vote at that meeting, where the inevitable result of that further meeting would be the passage of the proposed resolution and the consequent appointment of Messrs Bailey and Palmer as liquidators of the Company.

36. The Owners Corporation alternatively sought the relevant orders under s 90-15(1) of the Insolvency Practice Schedule (Corporations), which allows the Court to make such orders as it thinks fit in relation to the external administration of a company. Mr Marshall accepts that s 90-15 may be engaged on the facts, but again submits that the Court should not grant the relief sought. It is not necessary to make orders under that section, where the orders sought are properly made under ss 75-41 or 75-43 of the Insolvency Practice Schedule (Corporations).

Whether Mr McKenna should be removed as liquidator of the Company

37. In the further alternative, the Owners Corporation sought an order that Mr McKenna be removed as liquidator of the Company. The Owners Corporation initially did not contend that there was any actual lack of independence or actual misconduct of Mr McKenna warranting misconduct, and I did not understand that position to have been substantially altered by several further criticisms made by Mr Glasson of Mr McKenna’s evidence in cross-examination. The Owners Corporation submitted that Mr McKenna should be removed because the Owners Corporation was concerned that he will favour the interests of the Company’s director or its related parties who appointed him, paid an initial contribution for his costs and indemnified him for adverse costs orders in respect of this application; that funding is only available from the Owners Corporation for another liquidator, so that it is objectively in creditors’ best interests that he be replaced; and that he exercised a casting vote against the resolution when he had no power to do so and preferred the interests of IGM in doing so.

37. Mr Marshall responded that there is no basis for concerns of conflict of interest or lack of independence on Mr McKenna’s part. That submission finds support in the fact that Mr McKenna had identified claims that may be available to the Company against Mr Arnaout or companies associated with him, and the Owners Corporation did not put a claim for actual conflict on his part. Mr Marshall also draws attention to factors which are relevant in determining whether to remove a liquidator, including those specified in s 90-15(4) of the Insolvency Practice Schedule (Corporations). Mr Marshall also submitted that public policy considerations tended against a removal of an incumbent liquidator, and Mr McKenna should not be removed unless allegations against him or her are reasonably proven. I give less weight to that submission, where I have held above that effect should be given to a creditors’ resolution under s 90-35 of the Insolvency Practice Schedule (Corporations) to replace a liquidator, as that section permits.

38. Given the conclusions that I have reached above on other grounds, it is not necessary to determine the application for removal of Mr McKenna as a liquidator, on any wider basis than that effect should be given to the resolutions for his removal and the appointment of replacement liquidators. It seems to me to be preferable not to determination any wider question that is not necessary to the determination of the application.

Application for appointment of special purpose liquidator

40. Alternatively, the Owners Corporation applied under s 90-15 of the Insolvency Practice Schedule (Corporations) for the appointment of Messrs Bailey and Palmer as joint special purpose liquidators of the Company, with specified powers. Both parties ultimately accepted in oral submissions that there was likely to be little utility in Mr McKenna remaining as general purpose liquidator, if the Court would otherwise be satisfied that a special purpose liquidator should be appointed, since there would be little to be done in the liquidation beyond the matters to be dealt with by the special purpose liquidator. It was common ground that, in those circumstances, the preferable course was likely to be to remove Mr McKenna as liquidator, or not to do so, rather than to leave him in place without any significant functions to perform, and with a potential for duplication of costs.

41. I have referred above to several cases in which a creditor’s unwillingness to fund a particular liquidator has supported an order for the appointment of a special purpose liquidator, particularly if the Court is satisfied, as a matter of fact, that investigations will otherwise not be pursued. Had I not found that the Court should make the orders sought by the Owners Corporation under r 75-41 of the Insolvency Practice Schedule (Corporations), I would have been satisfied that a special purpose liquidator should be appointed, where the Owners Corporation are not prepared to fund Mr McKenna, and would have removed Mr McKenna as liquidator consequential on the parties’ recognition of the lack of utility in his then remaining in place. It is not necessary to take that course given the conclusions that I have reached on other grounds.

Orders and costs

42. Mr McKenna took an active role in opposing the application, in his personal capacity, and he must pay the costs of the application, without recourse to the assets of the Company.

43. For these reasons, I make the following orders:

1.   Order that a resolution that the Second Defendant be removed as liquidator of the First Defendant and that Messrs Bailey and Palmer be appointed as replacement liquidators of the First Defendant put at a meeting of creditors of the First Defendant held on 16 November 2017 be taken to have been passed at that meeting.

2.   Order that Messrs Bailey and Palmer be appointed as joint liquidators of the First Defendant.

3.   The Second Defendant pay the Plaintiff’s costs of and incidental to these proceedings, as agreed or as assessed, without recourse to the assets of the First Defendant.

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Decision last updated: 07 June 2018