Re: James Dev. P/L (Administrators Appointed)

[1998] QSC 283

IN THE SUPREME COURT
OF QUEENSLAND

Brisbane  No. 10905 of 1998

Before the Hon. Mr Justice Mackenzie

[re: James Dev. P/L (Administrators Appointed)]

IN THE MATTER of the Corporations Law

and

IN THE MATTER of JAMES DEVELOPMENTS PTY LTD (ADMINISTRATORS APPOINTED)

ACN 074 173 470

JUDGMENT - MACKENZIE J.

Judgment delivered 17 December 1998

CATCHWORDS: CORPORATIONS - Management & Administration - application for administration to be brought to an end - conflict of interest - mortgagee’s power of sale.

Corporations Law ss.435A, 436C, 447A(2)

Aloridge Pty Ltd v Christianos (1994) 13 ACSR

Nambucca Investments Pty Limited v Star (1995) 13 ACLC 1

re Chilia Properties Pty Ltd (1997) 15 ACLC 966

Counsel:Mr P Hack for the applicant

Mr K Varley for the respondent

Solicitors:Primrose Cuper Cronin Rudigin for the applicant

Burwicks Wisewoulds for the respondent

IN THE SUPREME COURT
OF QUEENSLAND

Brisbane  No. 10905 of 1998

Before the Hon. Mr Justice Mackenzie

[re: James Dev. P/L (Administrators Appointed)]

IN THE MATTER of the Corporations Law

and

IN THE MATTER of JAMES DEVELOPMENTS PTY LTD (ADMINISTRATORS APPOINTED)

ACN 074 173 470

JUDGMENT - MACKENZIE J.

Judgment delivered 17 December 1998

1. This is an application by James Developments Pty Ltd (“James Developments”) for its administration under the Corporations Law to be brought to an end. It seeks an order pursuant to s.447A, which gives the court wide discretion to make orders in relation to companies under administration. Examples of situations where the power might be exercised to bring administration to an end, according to s.447A(2), are where the company is solvent or because the provisions of part 5.3A of the Law are being abused.

2. A brief history of relevant events is that on 29 September 1997, James Developments which owned land at Airlie Beach entered into a building contract with Nu-Steel Homes Australia Pty Ltd (“Nu-Steel”) for the construction of home units on the land for an agreed price of $M4.34.  The contract price included a $100,000 management fee to James Developments Pty Ltd to be paid at the rate of $8,000 a month for 9 months and a final payment of $28,000 upon practical completion. 

3. On 18 November 1997 James Developments entered into a loan agreement with Nu-Steel, which agreed to advance $M1.675.  In return for this James Developments gave a fixed and floating charge over all of its assets and undertaking in favour of Nu-Steel and granted a mortgage over the land in its favour.  The mortgage in favour of Nu-Steel ranks after mortgages in favour of McLaughlins Nominee Mortgage Pty Ltd (“McLaughlins”) and Ferraland Pty Ltd (“Ferraland”). 

4. Construction of the units commenced in April 1998 but ceased in late July or early August 1998.  To that point Nu-Steel had completed work to the value of $M1 and the estimate of the cost of completion was about $M3.63. 

5. The heads of agreement also provided that Nu-Steel would progress the construction of 30 per cent complete before the first draw.  On 6 July 1998 Rider Hunt Queensland Pty Ltd, the superintendent under the contract, confirmed that Nu-Steel had completed $M1 worth of construction works and asked for moneys to be drawn down.  On 23 July 1998 the question of payment was raised by Nu-Steel’s solicitor.  On 24 July James Developments’ solicitor drew attention to, inter alia, the requirement that Nu-Steel would progress the construction of 30 per cent complete (i.e. $1,302,000) before the first draw, and that that had not occurred.

6. Prior to the cessation of work there had been an agreement between Mr Relph, the Director of James Developments, and Erik Hipwood, the Managing Director of Nu-Steel, that Nu-Steel would pay the interest payments due by James Developments to McLaughlins under McLaughlins’ mortgage.  At about the time building work ceased Nu-Steel ceased making those payments.  In consequence of that  McLaughlins gave notice dated 13 October 1998 of a default having occurred under the McLaughlins mortgage and gave notice to remedy.  The default was not remedied and on or about 21 September 1998, McLaughlins purported to exercise power of sale as mortgagee and executed a contract for the sale of the development site to Ferraland. 

7. An action was commenced by Nu-Steel and James Developments seeking relief in respect of  the mortgagee sale.  On 21 October 1998, Mr Schmierer and Mr Richards were appointed voluntary  administrators to Nu-Steel.  Mr Schmierer in his capacity as administrator wrote to James Developments concerning the proceedings.  In the context of seeking litigation funding he requested confirmation of the debt owed by James Developments to Nu-Steel.  He said it was necessary for that to occur in order that insurance funding could be obtained to proceed with the application to overturn the sale contract.  He also said that should James Developments not confirm the debt he would only be prepared to seek damages from McLaughlins.  In those circumstances the sale contract would proceed and James Developments would no longer be the owner of the property and able to develop it. 

8. When a draft deed was forwarded to James Developments the absence of any provision for James Developments to have input into settlement negotiations was raised.  It was asserted that it was unreasonable and that the outcomes for James were extreme between the damages case and the case to set aside the sale.  It was argued that the deed ought to contain some mechanism for the administrator  to consult James Developments in relation to any settlement and for there to be agreement between James Developments and the administrator before any settlement could be made.  In the absence of that, the administrator must commit to the case to set aside the sale rather than abandon that case in favour of a damages settlement or the damages case alone. 

9. On 17 November 1998 the voluntary administrators of Nu-Steel purported to appoint Mr Schmierer and Mr Offermans, a Townsville accountant, as voluntary administrators of James Developments. 

10. The application by James Developments for an order to bring to an end the administration of James Developments is based on four propositions.  The first is that the charge in favour of Nu-Steel was not enforceable.  The second is that the appointment of administrators was not made bona fide.  The third is that there was a conflict of interest involved in the appointment.  The fourth was that Mr Schmierer was not permitted to appoint himself, nor be appointed, without the leave of the court. 

11. With respect to the last point it was accepted by the respondents that by virtue of s.448C and s.82A of the Corporations Law it was necessary to seek leave of the court if Mr Schmierer was to be validly appointed since he was an officer of Nu-Steel by virtue of his office as administrator. An application for leave nunc pro tunc was made on his behalf. I will return to that issue later.

12. With respect to the issue of whether the charge enlivened the right to appoint an administrator, reliance was placed on the failure to give notice under cl.14.1 of the debenture prior to appointing the administrators. The appointment was said to be made pursuant to s.436C of the Corporations Law, which permits such a course where a charge has become and is still, at the time of the appointment, enforceable. Clause 14.1 does not purport to derogate from other rights, powers and remedies conferred on a mortgagee by law and does not, on its proper construction, require notice to be given of the proposed appointment of an administrator. Clause 14.2 requires any non-waivable notice of intended exercise of a right, remedy or power, required to be given by law, to be given. This does not require notice to be given prior to appointment of an administrator.

13. Then it was submitted that none of the clauses of the debenture relied on by the respondents was sufficient for that purpose.  Clauses 12(a), 12(n), 12(o) and 12(w) were relied on in argument.  The last mentioned does not appear to be appropriate since it refers to an Act of a similar kind to those in the other paragraphs being done outside the jurisdiction.  So far as cl.12(a) is concerned it describes one of the Events of Default as an event where default  is made in the payment of any secured amounts.  In view of the outcome reached it is unnecessary to analyse in detail whether this has occurred.

14. With respect to cl.12(o) there are matters in the evidence which strongly suggest that James Developments is insolvent or unable to pay its debts or would be deemed, if the Corporations Law applied to determine the matter, to be unable to pay its debts. However, once again it is unnecessary to resolve that issue finally in view of the outcome reached. Clause 12(n) provides that if any encumbrancer takes possession of or exercises or attempts to exercise a power of sale over the whole or any of the mortgagor’s undertaking, property or assets there is an event of default.

15. McLaughlins was an encumbrancer and took possession of and exercised the power of sale over the land of James Developments.  The sale has been impugned by James Developments on the ground that it was sold at an undervalue to such an extent that the mortgagee’s duty had been breached.  It was argued that because the sale had been impugned on these grounds, the event of default had not occurred.  To read the clause in that way disregards the words of the clause.  Even if the exercise of the power of sale was ultimately set aside the acts of taking possession of the property and attempting to exercise the power of sale had occurred.  To interpret the clause otherwise would have no regard to commercial realities.  I am satisfied the charge was enforceable on the basis of cl.12(n).

16. With respect to the next ground that there was a conflict of interest or lack of good faith involved in the appointment there were ongoing disputes between Nu-Steel and James Developments with respect to aspects of the contractual relationship particularly with respect to responsibility for cost overruns and solutions thereto.  The correspondence also indicates that there was a dispute between Mr Schmierer and Mr Relph over the terms of a deed for litigation financing for the action.  It was submitted that Mr Schmierer was in a conflict of interest situation because of this. 

17. The respondents’ argument with regard to this was that because examination of James Developments’ financial position showed that it was insolvent, it would either be wound up or execute a deed of company administration.  Both Nu-Steel and James Developments had only one substantial asset, the cause of action pending in respect of the alleged sale at an undervalue.  It was unlikely that the claim to set aside the mortgagee sale would be proceeded with because neither James Developments nor Nu-Steel could fund completion of the project or buy back the property at any subsequent auction.  A potential judgment of about $800,000 was the only major asset.  Litigation insurance was necessary to pursue that.  It was submitted that James Developments and Nu-Steel had the same interest in the determination of the action and that there was therefore no conflict.

18. It was further submitted that if the actions were successful James Developments and Nu-Steel could litigate over any fruits of the litigation available to them.  At that point an independent administrator or liquidator could act for James Developments.  It was asserted that it had never been intended that the present administrator would act for both parties at that time.

19. The applicant’s argument was that there was both actual and potential conflict between James Developments and Nu-Steel. It was submitted that that conflict could not be avoided by the device of engaging an independent third party to investigate the issue of what course the action should take nor by the appointment by Mr Offermans as one of the joint and several administrators. It was also submitted that the appointment was not a bona fide appointment, because the only inference to be drawn from the facts and circumstances of the appointment of the administrators to James Developments was that it was perceived as being of assistance to Nu-Steel. It was submitted that it was not done in pursuit of the purposes specified in s.435A. Reliance was placed upon the notion that the appointment had been made for the purpose of wresting control of James Developments away from Mr Relph (c.f. Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99, 102).

20. It is not the correct approach to place too much emphasis on Mr Relph’s concern, in the correspondence about the litigation insurance, that it did not require James Developments to be consulted.  By saying that he was no doubt referring to the fact that it did not require consultation with him.  However, so far as Mr Schmierer is concerned his dual role does give rise for some concern.  There is some evidence suggesting that finance was being sought by James Developments from particular financiers and that one area of contention between James Developments and Nu-Steel was the further financing of the project if action to set aside the sale was successful. 

21. The possibility of James Developments becoming able to discharge its liability for moneys owing under the security is speculative.  However, the existence of the issue demonstrates that the dual role of Mr Schmierer as administrator of the two companies carries with it the real, not theoretical, potential for conflict (Nambucca Investments Pty Limited v Star (1995) 13 ACLC 1,814), even accepting that he will perform his functions appropriately.

22. The case is not one where removal of an administrator who has been regularly appointed is sought since the requirement that leave of the court be sought before his appointment was not complied with.  There is authority that leave may be given retrospectively and nunc pro tunc (re Chilia Properties Pty Ltd (1997) 15 ACLC 966), but for the reasons developed, I refuse leave for Mr Schmierer to be appointed administrator of James Developments.

23. So far as Mr Offermans is concerned there is no formal defect in his appointment.  He is a joint and several administrator.  The evidence is that he is from the firm of Knights Offermans, Townsville.  That firm practises under the general banner of Knights Insolvency Administration.  Mr Schmierer practises in Brisbane under the banner of Knights Insolvency Administration.  The precise nature of the connection between Mr Offermans and Mr Schmierer is unclear from the material except  to the extent just mentioned.  There is an onus on the applicant to demonstrate that there is at least a prima facie case that an administrator should be removed.  I am not satisfied that the applicant has discharged this and therefore I decline to bring the administration of James Developments Pty Ltd to an end.

24. Mr Bradley Vincent Hellen of Calabro Partners, who is both qualified and not disqualified according to the material before me, has consented to be appointed as joint administrator of James Developments.  There is no impedient to his being appointed in that capacity.

    The orders are:

    1.Leave is refused for Trevor John Schmierer to be appointed as an administrator of James Developments Pty Ltd.

    2.It is declared that Bradley Vincent Hellen may be appointed as joint and several administrator of James Developments Pty Ltd.

    3.Except in the respect referred to in para.  1, the application to have the administration of James Developments Pty Ltd brought to an end is dismissed.

    4.Each party shall bear his or its own costs.