Re St Gregory's Armenian School (in liq)
[2012] NSWSC 1215
•09 October 2012
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of St Gregory's Armenian School (in liq) [2012] NSWSC 1215 Hearing dates: 26,27,28 June & 5 July 2012 Decision date: 09 October 2012 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Interlocutory process for removal of liquidator dismissed, with costs
Catchwords: CORPORATIONS - external administration - removal of liquidator - grounds for removal of liquidator - whether "cause shown" - whether removal of liquidator would be for the better conduct of the liquidation or the best interests of the liquidation - mere loss of confidence is insufficient - whether liquidator is required to be a "model litigant" - need for particularised allegations - whether reasonable apprehension that the liquidator would not approach making decisions about the Plaintiffs' proofs objectively and impartially
CORPORATIONS - external administration - removal of liquidator - whether liquidator improperly failed to defend proceedings by first ranking mortgagee to recover property - where no tenable defence was available - where property was the only asset of value to satisfy debts - whether liquidator obstructed attempts to avert mortgagee sale
CORPORATIONS - external administration - removal of liquidator - where liquidator commenced proceedings for an account of the plaintiff's mortgage - where evidence as to quantum and basis of claimed debt was scanty
CORPORATIONS - external administration - Inquiry into liquidator's conduct - where liquidator took possession of plaintiff's chattels located on association property - where plaintiff was required to prove ownership of chattels - whether liquidator treated property of others as property of the association - whether liquidator entitled to insist on proof of ownership of chattels on association property - whether liquidator improperly sold property of the plaintiff
CORPORATIONS - external administration - application for inquiry into liquidator's conduct - whether there are sufficient matters prima facie calling for further investigation - Corporations Act, s 536
CORPORATIONS - external administration - leave to sue liquidator for damages for conversion - whether applicant's claim has sufficient merit - where evidence does not rise above mere assertionLegislation Cited: (NSW) Associations Incorporation Act 1984, s 51(1)(c), s 53
(Cth) Corporations Act 2001, s 471B, s 473, s 503, s 542, s 563, s 1321Cases Cited: Vartanians v St Gregory's Armenian School (Inc) [2010] NSWSC 701
Commonwealth Bank of Australia v St Gregory's Armenian School [2010] NSWSC 191
Sutherland v Ghougassian [2012] NSWSC 125
Sutherland v Ghougassian (No 2) [2012] NSWSC 325
Sutherland v Ghougassian (No 3) [2012] NSWSC 334
SingTel Optus Pty Limited v Weston [2012] NSWSC 674
Termicide Pest Control Pty Ltd, in the matter of Granitgard Pty Ltd (in liq) v Albarran [2011] FCA 1410
Re Keypak Homecare Ltd [1987] BCLC 409
AMP Music Box Enterprises Ltd v Hoffman [2002] BCC 996
Re Biposo Pty Ltd; Condon v Rogers (No 3) (1995) 17 ACSR 730
Apple Computer Australia Pty Ltd v Wily [2003] NSWSC 719; (2003) 46 ACSR 729
Network Exchange Pty Ltd v MIG Communications Pty Ltd (1994) 13 ACSR 544
Domino Hire Pty Ltd v Pioneer Park Pty Ltd (in liq) [2003] NSWSC 496; (2003) 21 ACLC 1330
Accord Pacific Holdings Pty Ltd v Gleeson (as liquidator of Accord Pacific Land Pty Ltd (in liq)) [2011] NSWSC 1021
Re Adam Eyton Ltd; ex parte Charlesworth (1887) 36 Ch D 299
Re George A Bond & Co Ltd (1932) 32 SR (NSW) 301
Multi-Core Aerators Limited v Dye and Rennie [1999] VSC 205
City & Suburban Pty Ltd v Smith (1998) 28 ACSR 328
Commissioner for Corporate Affairs v Harvey [1980] VR 669
LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90
Gray v Bridgestone (1986) 10 ACLR 677
Bacich v Australian Broadcasting Corporation (1992) 29 NSWLR 1
QBE Insurance (International) Ltd v Cycand Pty Ltd [2009] NSWSC 1177
Burns Philp Investment Pty Ltd v Dickens (No.2) (1993) 11 ACLC 525
Pinklillies Pty Ltd (trustee), in the matter of Northwest Motel Group Pty Ltd (in liq) v Huxtable [2011] FCA 1543
Armitage v Gainsborough Properties Pty Ltd [2011] VSC 419
Re Siromath Pty Ltd (No 1) (1991) 9 ACLC 1580
Mamone v Pantzer [2001] NSWSC 26; (2001) 36 ACSR 743
Sydlow Pty ltd (in liq) v T G Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234Category: Interlocutory applications Parties: Vahanoush Vicki Vartanians & ors (plaintiffs)
St Gregory's Armenian School Inc (in liq) (defendant)
Michael Ghougassian (first applicant)
Nareg Bookshop P/L (second applicant)
Nareg Internet P/L (third applicant)
Roderick Mackay Sutherland (respondent)Representation: Counsel:
J Johnson (applicants)
J Lockhart SC w J Taylor (respondent)
Solicitors:
Robert Balzola & Associates (applicants)
Addisons (respondent)
File Number(s): 2010/66795
Judgment
Until 21 June 2010, St Gregory's Armenian School Inc, an Association incorporated under the (NSW) Associations Incorporation Act 1984, conducted a school in premises on property owned by it at 1 Mungerie Road, Beaumont Hills. The first applicant Mr Michael Ghougassian and his brother Dr Daniel Ghougassian (together, "the Ghougassians") were committee members of the Association; Michael Ghougassian was its public officer and Daniel Ghougassian was its Chairman. The second and third applicants Nareg Internet Pty Ltd and Nareg Bookshop Pty Ltd, which are companies owned or controlled by Michael Ghougassian and his wife, are said to have operated businesses from the same premises. The respondent Mr Sutherland is the court appointed liquidator of the Association pursuant to an order made on 21 June 2010 that the Association be wound up under (NSW) Associations Incorporation Act 1984, s 51(1)(c), on the ground that the Association was insolvent; White J found that the plaintiffs, who were teachers at its school, were owed $185,688.32 for unpaid redundancies and salaries, and that the Association was unable to pay those debts [Vartanians v St Gregory's Armenian School (Inc) [2010] NSWSC 701 (White J)]. An application to set aside the winding-up order was dismissed on 29 June 2010.
By Interlocutory Process filed on 14 December 2011 (and amended at the hearing on 28 June 2012), the applicants apply under (Cth) Corporations Act 2001, s 473, for the removal and replacement of Mr Sutherland as liquidator; alternatively, under Corporations Act, s 536, for an inquiry into the liquidator's conduct; and, for leave to commence proceedings against the liquidator for damages for conversion of goods.
Background
The Association's principal asset was the real property at Beaumont Hills, on which the school buildings were located ("the Property"), and which was subject to a registered mortgage to the Ghougassians ("the Ghougassian mortgage") and a registered mortgage to the Commonwealth Bank of Australia ("the CBA mortgage"). The Ghougassian mortgage secured moneys advanced under a Deed of Loan dated 6 May 2005 between the Ghougassians and the Association ("the Deed of Loan"), which the Court has, in subsequent proceedings, certified to amount to $560,705 plus interest in the case of Michael Ghougassian and $296,239.29 plus interest in the case of Daniel Ghougassian. The CBA mortgage secured advances of in excess of $1 million, and a Deed of Priority dated 12 October 2006 between the Ghougassians and CBA gave priority to the CBA mortgage.
As well as the secured debts, as at 21 June 2010, when the winding-up order was made, the Association owed the Australian Taxation Office ("ATO") approximately $1.2 million; and it owed its employees and former employees approximately $300,000. As a result of the winding-up proceedings, it also incurred the costs of the winding up application. Further, it owed the Ghougassians additional sums advanced by them that were not covered by their mortgage; while the quantum of these advances has not yet been established, the Ghougassians claim that they amount to a further $8 million approximately.
The CBA proceedings for possession of the Property
In proceedings commenced by Statement of Claim filed in the Common Law Division on 7 September 2009, and subsequently amended on 22 April 2010, CBA sought judgment against the Association in the amount of $854,900.21 and possession of the Property ("the Possession Proceedings"). Before the winding-up order was made, CBA had on 14 December 2009 obtained a default judgment - the Association not having filed a Defence - which the Association had successfully applied to have set aside [Commonwealth Bank of Australia v St Gregory's Armenian School [2010] NSWSC 1919 (Harrison AsJ)]. Directions had been made - but not complied with - on four further occasions for the filing of a Defence and any Cross-Claim.
On 1 July 2010, after taking advice from his solicitor and reviewing various documents in relation to the Possession Proceedings, the liquidator consented to orders to the effect that the judgment in favour of CBA be re-instated, and that CBA have leave to issue of a writ of possession forthwith.
CBA sells the Property
CBA sold the Property at auction on 14 December 2010 for $9.2 million. The sale settled on 22 January 2011, after the Court ordered, on CBA's application on 18 January 2011, that the Ghougassians provide a discharge of their mortgage by 5.00pm on 19 January 2011 (to facilitate completion of the sale), and that all surplus proceeds of the sale be paid into Court. After discharging the debt owed to it, CBA paid into court surplus proceeds of $7,687,728.53.
The proceedings for an account of the Ghougassian mortgage
The liquidator sought and obtained, ultimately by consent, orders that an account be taken of the amount secured by the Ghougassian mortgage. Subsequently, the liquidator moved for payment out of Court of the surplus proceeds to the secured creditors (including the Ghougassians), in such amounts as may be determined by the Court, and of the balance to the liquidator.
These proceedings were heard by White J on 30 June and 1 July 2011, followed by further short hearings in respect of interest and costs [Sutherland v Ghougassian [2012] NSWSC 125; Sutherland v Ghougassian (No 2) [2012] NSWSC 325; Sutherland v Ghougassian (No 3) [2012] NSWSC 334]. As recorded in his Honour's primary judgment [[2012] NSWSC 125, [10]], it was common ground that some debt was secured by the Ghougassian mortgage, and the liquidator accepted that a debt the subject of the Deed of Loan was secured; the issue was the amount secured. Ultimately, his Honour held that $560,705 was secured to Michael Ghougassian (at [24]), and $296,239.29 to Daniel Ghougassian (at [95]), plus interest. Those amounts have now been paid out of Court to the Ghougassians, and the remainder of the surplus proceeds - a total of approximately $6.5 million - has been paid to the liquidator.
Realisation and storage of chattels
Prior to the sale of the Property by CBA, the liquidator set about realising the Association's non-fixed assets. Most of these were sold in an online auction conducted by Grays, which concluded on 7 September 2010, generating total proceeds, less expenses and commission, of $171,566.96. The liquidator removed from the auction computers, Armenian books and liturgical vestments, which the applicants claimed were property not of the Association but of one or other of them. These goods are presently in storage, at the Association's expense, at a Kennard's storage facility at Castle Hill, whence the liquidator has invited Michael Ghougassian to retrieve them.
Current state of the liquidation
From the proceeds of the Property paid into Court, the liquidator has received $4.6m on 10 May 2011, and a further $1.65m in April 2012, so that there are divisible assets of about $6.25 million, less costs. The ATO has lodged a proof of debt for $1.221m. Other "arms length" creditor claims do not appear to exceed a total of about $800,000. However, Mr Ghougassian has lodged a proof for $5.897m, Dr Ghougassian one for $2.436m, and their associate Mr Megaloconomos one for $2.695m.
The main remaining matters to be attended to in the liquidation are the adjudication of proofs of debt, the conclusion of public examinations (already commenced) of the Ghougassians, the finalisation of the remaining issues in litigation already on foot (including costs and a possible appeal in the Ghougassian mortgage accounting proceedings), and the payment of creditors and distribution of any surplus. The extent to which the Ghougassians' claims are admitted will have a marked influence on whether other creditors will be paid in full, and on whether or not there is a surplus. Accordingly, it is fair to say that determination of the Ghougassians' proofs of debt will be a critical aspect.
The evidence
The evidentiary framework of the case is largely provided by documentary material. However, it is necessary to make some observations about certain of the witnesses who were cross-examined.
Mr Michael Ghougassian
The chief protagonist and principal witness in the applicants' case is Mr Michael Ghougassian. There are considerable difficulties with his evidence. He was consistently inclined to place on circumstances the most sinister interpretation where it pertained to the liquidator, and the most favourable when it pertained to the applicants. While this is to an extent not unnatural, in this case it was extreme. One instance was his refusal to accept that he was aware that the company was indebted to the ATO for in excess of $1 million - on the basis that he believed that the ATO would allow various discounts or remissions from the tax debt because the Association operated a school. He denied knowledge that the ATO debt was in the order of $1 million, despite there being a judgment dated 11 February 2008 in favour of the Deputy Commissioner for $908,000, and despite his having been party to discussions with the ATO in respect of a payment plan during 2008 and 2009. Ultimately, he conceded that, as public officer of the Association, he was well aware that there was a sizeable debt owed to the ATO, but said that this did not perturb him "because it was going to be paid". He continued to deny that he was aware that this debt was in the order of $1 million, "because I have papers that says it was $170,000". He apparently inferred that the ATO had waived penalties and interest to reduce the debt to its capital amount of $170,000. Similarly, he maintained that as at 21 June, the Association "owes bank nothing" - apparently on the basis that it was contended that CBA was obliged not to require repayment until the works that its advances were intended to fund were completed.
His deep distrust of the liquidator meant that he was disposed to say that he was unaware of matters - notwithstanding that they were referred to in reports to creditors that he had read - because he did not believe the liquidator's assertions. On several occasions he denied knowledge of matters that he was subsequently shown to have known, which he sought to explain away essentially on the basis that he did not necessarily believe what he had been told. One example is his persistence in the allegation that he had not been given access to his and the Nareg companies' personal chattels, notwithstanding evidence from the liquidator's agent that they were available for collection, and notwithstanding absence of any attempt, until a few days before the hearing commenced, even to inspect them. Another example of his willingness to assume the worst is his presumption that the company's financial records were "in the trash" left at the time that goods were removed from the Property.
From the outset, on 22 June 2010, Mr Ghougassian's response to the liquidator was less than co-operative. He refused to answer questions concerning the number of teachers or the number of students, on the basis of privacy laws - a position which he now concedes was misconceived - except that he said that it was classified as a small school, meaning less than fifty students; in fact it had six. Nor would he reveal the number of staff, nor the size of CBA's claim or the basis of any counterclaim, nor even whether the Association had a bank account. In response to an inquiry from Mr Samarasinghe as to the amount that was owing under the Ghougassian mortgage, he said "I can't tell you". He says that he did not know, but would have thought at the time that it was in the millions, say $10 million. He did not complete a Report as to Affairs ("RATA") until after application was made to the Court to compel him to do so.
He was cross-examined about his affidavit evidence in response to a Notice to Produce addressed to him and dated 21 June 2012. His answers in cross-examination, to the effect that his affidavit was referring to an Order for Production and not the Notice to Produce, were quite incompatible with the terms of the Order for Production, the Notice to Produce, and his affidavit.
Ultimately, on matters of controversy, I regard his evidence as unreliable.
Mr Samarasinghe
Mr Samarasinghe was the manager primarily responsible for the conduct of the liquidation, under the supervision of Mr Sutherland. He is neither a registered liquidator nor a member of the Insolvency Practitioners Association, but has graduate and post-graduate degrees in accounting, finance and law, and nine years' experience in insolvency practice, including more than 500 insolvency administrations. His evidence appeared generally to be given carefully and accurately, although there were some minor discrepancies, which did not seriously detract from his reliability. It is true that he maintained that he had checked the serial numbers of the computers located on the Property against those on the auction list, while no list could be identified or produced that recorded serial numbers; in this respect I think he was mistaken and has probably inaccurately reconstructed the circumstances in which the computers were withdrawn from auction; but it is of little moment as, in any event, all the computers were withdrawn.
Mr Sutherland
The liquidator, when taxed with the correspondence emanating from his solicitors of 8 and 10 December 2010, referred to later, placed on it a more benevolent interpretation than it objectively bears. However, this was correspondence drafted not by him but by his lawyers (though approved by him), and sent to the Ghougassian's lawyers. Nothing else arose in his cross-examination that cast doubt on the reliability of his evidence.
Application for removal of liquidator
The applicants seek an order removing the liquidator on the basis that his conduct in several respects demonstrates a lack of the impartiality, diligence and competence expected of a liquidator. Four grounds were pleaded, namely:
(1) The liquidator's conduct in connection with the CBA Possession Proceedings (as referred to and particularised in paragraphs 24-43 of the Points of Claim). This concerns the actions of the liquidator in consenting to the reinstatement of the judgment for possession in favour of the CBA, and its consequences, namely the mortgagee sale of the Property, and extended to the liquidator's alleged obstruction of, or failure to facilitate, a proposed pay-out of CBA to avoid the sale of the Property;
(2) The liquidator's conduct in connection with the Ghougassian mortgage (as referred to and particularised in paragraphs 44-54 of the Points of Claim). This concerns the alleged refusal of the liquidator to acknowledge the validity of the Ghougassian mortgage;
(3) The liquidator's conduct in dealing with property claimed by Michael Ghougassian, Nareg Bookshop and Nareg Internet, without their consent and with notice of their claim, without proper regard for their interests, and converted their property; and
(4) The liquidator's conduct in the instant proceedings (as referred to and particularised in paragraphs 55-64 of the Points of Claim). This concerns the alleged failure of the liquidator to comply with a Notice to Produce served by the applicants requiring him to produce documents (including photographs) of the chattels claimed by them and situated on the Property when the CBA took possession.
In the course of cross-examination of the liquidator and his witnesses, and in closing submissions, a number of additional matters were invoked. In the context of proceedings that impugn the conduct and propriety of a liquidator, for reasons of procedural fairness, I would not permit allegations first raised at so late a stage to be relied on as founding an order for removal. However, to the extent that it is possible to address them, I do so, below.
Principles
A liquidator appointed by the Court may be removed by the Court "on cause shown" [Corporations Act, s 473(1)]. The principles relating to the analogous removal of a voluntary liquidator under Corporations Act, s 503 - which also uses the test "on cause shown" - have recently been summarized in SingTel Optus Pty Limited v Weston [2012] NSWSC 674, [149]-[165] (Bergin CJ in Eq) and Termicide Pest Control Pty Ltd, in the matter of Granitgard Pty Ltd (in liq) v Albarran [2011] FCA 1410, [10]-[11] (Reeves J).
The burden of showing cause for removal rests with the applicant [SingTel, [155]; Re Keypak Homecare Ltd [1987] BCLC 409]. This onus is not lightly discharged, as it should not be seen to be easy to remove a liquidator merely because it can be shown that in one or possibly even more respects, his or her conduct has fallen short of the ideal. Otherwise, applications for removal by creditors who have not had their preferred liquidator appointed, or who are for some other reason disgruntled, would be encouraged [SingTel, [164], citing AMP Music Box Enterprises Ltd v Hoffman [2002] BCC 996 (Neuberger J)]. As Young J (as he then was) observed in Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 (at 734):
There is a popular sport these days of challenging judges and arbitrators and endeavouring to put off the evil day by directing the attack at the judge rather than the wrongdoer. Great care must be taken that the same tactic is not used against liquidators to stop them doing their duty. ...
An order for removal will be made only if it is demonstrated that it would be "for the better conduct of the [liquidation]" or "to the general advantage of persons interested in the winding up" or "in the best interests of the liquidation" [SingTel, [156]-[161]; Apple Computer Australia Pty Ltd v Wily [2003] NSWSC 719; (2003) 46 ACSR 729 (Barrett J); Network Exchange Pty Ltd v MIG Communications Pty Ltd (1994) 13 ACSR 544 (Hayne J, in relation to section 449B of the Corporations Act); applied in Domino Hire Pty Ltd v Pioneer Park Pty Ltd (in liq) [2003] NSWSC 496; (2003) 21 ACLC 1330, [59] (Austin J); Accord Pacific Holdings Pty Ltd v Gleeson (as liquidator of Accord Pacific Land Pty Ltd (in liq)) [2011] NSWSC 1021, [24] (Ward J); Re Biposo]. The relevant "cause" to be shown is to be measured by reference to the "real, substantial, honest interest of the liquidation, and to the purpose for which the liquidator is appointed ... the measure of due cause is the substantial and real interest of the liquidation" [Re Adam Eyton Ltd; ex parte Charlesworth (1887) 36 Ch D 299, 306 (Bowen LJ) (in that case, "due cause"); applied in SingTel, [157]]. As Barrett J explained in Apple Computer Australia v Wily (at [37]), "cause shown" is a broad concept concerned not so much with a search for particular instances of wrong or inappropriate conduct (although a particular event of that kind may suffice), but a more general enquiry into what is for the benefit of the administration and the body of persons interested in it, as well as the maintenance of confidence in the integrity, objectivity and impartiality of that administration, so that removal is warranted "if, taken as a whole, the conduct of the liquidator can be seen to be such as to ground in the mind of a reasonable observer a perception of lack of impartiality as among the interests he is committed to serve and lack of objectivity in serving those interests". Before removing a liquidator from office, the Court will normally need to be satisfied of "cause shown" going beyond a particular instance. If the complaint relates to a particular decision of the liquidator, the appropriate course is an appeal to the Court under s 1321, even if the substance of the complaint is that the decision demonstrates incompetence or bias or other unfitness for office [Domino Hire, [66]].
The Court should not overlook the professional consequences for the liquidator of an order for removal [SingTel, [229]], and must afford "fair play" to the liquidator [Re Adam Eyton Ltd, cited in Domino Hire, [58]; see also Re Biposo, 738, citing Re George A Bond & Co Ltd (1932) 32 SR (NSW) 301, 311, which emphasises that the Court is entitled to ask, "What actual advantage would accrue to creditors by the removal of [the liquidator]"?].
The duration and stage of the winding up, and the potential for wasted costs and delay in the conclusion of the winding up which may be occasioned if another liquidator is appointed to complete it, are important considerations, as Bergin CJ in Eq explained in SingTel (at [165]):
It has been said that the 'onus of proof will not be easy to discharge if the liquidator has become well acquainted with the business and affairs of the company, or the process of winding up has almost reached completion' ... The length of time that a liquidator has been in office and the nature of the liquidator's specific obligations obviously need to be taken into account in determining whether in all the circumstances an order for removal is justified or appropriate.
Courts may therefore be more reluctant to remove a liquidator towards the end of the winding-up, after he or she has become acquainted with the affairs of the company, than early in the winding-up [Re Biposo, 734; see also Accord Pacific Holdings Pty Ltd, [32]].
A mere loss of confidence, without more, does not justify removal of a liquidator. In Multi-Core Aerators Limited v Dye and Rennie [1999] VSC 205 at [48], Warren J (as her Honour then was) explained (in a passage quoted in SingTel at [223] though considered "inapt" to the extraordinary circumstances of that case):
[I]n my view it is not sufficient that a court remove a liquidator merely because of levels of feeling and rancour between parties especially where the hostility has at all times emanated from the party seeking the removal of a liquidator. To do so would provide a creditor with an opportunity to manipulate the liquidation of the company.
However, a loss of confidence based on reasonable grounds by the creditors or committee of inspection may, but not necessarily will, justify or be relevant to removal [SingTel, [162]; City & Suburban Pty Ltd v Smith (1998) 28 ACSR 328, 338].
A liquidator is an officer of the Court, entrusted with the reputation of the Court, and is expected to discharge the relevant functions with impartiality and proper dispatch [SingTel, [151]; Commissioner for Corporate Affairs v Harvey [1980] VR 669]. The applicants submitted that a liquidator's office and duties were such as to incur the obligations of a model litigant, as described by the Full Court of the Federal Court of Australia in LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90 (22 June 2012):
Speaking generally and without reflecting on counsel who appeared before us, being a model litigant requires the Commonwealth and its agencies, as parties to litigation, to act with complete propriety, fairly and in accordance with the highest professional standards. This obligation may require more than merely acting honestly and in accordance with the law and court rules. It also goes beyond the requirement for lawyers to act in accordance with their ethical obligations: see notes 2 and 3 to clause 2 of Appendix B to the Legal Services Directions 2005 made under section 55ZF of the Judiciary Act 1903 (Cth)). That statutory instrument reflects an expectation the courts in our system of justice have of the executive government and its emanations but this is no new subject owing its origin just to that statutory instrument. Instead, as Melbourne Steamship Limited v Moorhead [1912] HCA 69; (1912) 15 CLR 333 at 342 reveals, that expectation, even a century ago, was of long standing. To bring the matter up to the present we note that in Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 286 ALR 501, Heydon J said ASIC accepted that there was, in the words of Griffith CJ in Moorhead, an "old-fashioned traditional, and almost instinctive, standard of fair play to be observed by the Crown in dealing with subjects". Its powers are exercised for the public good. It has no legitimate private interest in the performance of its functions. And often it is larger and has access to greater resources than private litigants. Hence it must act as a moral exemplar: see [239] per Heydon J. ASIC accepted what was said on these points in P & C Cantarella Pty Ltd v Egg Marketing Board for New South Wales [1973] 2 NSWLR 366 at 383; Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 197; and Scott v Handley (1999) 58 ALD 373; [1999] FCA 404 at [43]-[45]. In our opinion, counsel representing the executive government must pay scrupulous attention to what the discharge of that obligation requires, especially where legal representatives who are independent of the agency are not involved in the litigation.
However, in my judgment it goes too far to extend to a liquidator the expectation that he or she will be a "model litigant" in that sense. Courts expect liquidators to make commercial judgments and to act commercially, and to pursue vigorously the interests of the company. Liquidators have a private interest apart from the public good - not their own personal interest, but that of the creditors or contributories. It adds an unnecessary layer to the inquiry into whether there is "cause shown" to superimpose an expectation that the liquidator be a model litigant. That is not to say that a liquidator's conduct in litigation may not be relevant to a judgment as to whether there is "cause shown".
In evaluating the conduct of a liquidator, it is important to remember that a liquidator is required to make practical commercial judgments. Much of a liquidator's decision-making involves the application of business acumen. That a decision is not fully reasoned or supported by the fullest investigation does not mean that it should be second-guessed by the Court.
Moreover, in an environment in which there are usually insufficient funds fully to pay claims, it is desirable that liquidators be frugal in incurring expenditure. It is usually preferable that scarce resources be preserved for the benefit of creditors and contributories, rather than expended in chasing all hares down every burrow. It is not unusual for liquidators to be criticised for incurring excessive expenditure or remuneration; SingTel is an obvious illustration. It is undesirable that the court adopt a policy that is calculated to encourage further expenditure by liquidators on investigations out of more abundant caution, rather than a practical commercial judgment that further exploration is "not worth the candle".
The words "cause shown" do not require the court to work through each of the particulars of misconduct relied upon, and determine one by one whether they are made out [Re Biposo, 734; Domino Hire, [60]]. Nonetheless, fairness to the liquidator will usually require that there be particularised allegations, and these will usually provide the framework for examination of the liquidator's conduct, as they do here.
The CBA Possession Proceedings
This concerns the actions of the liquidator in consenting to the reinstatement of the judgment for possession in favour of the CBA, and its consequences, namely the mortgagee sale of the Property, including the alleged obstruction of, or failure to facilitate, a proposed pay-out of CBA to avoid the sale of the Property.
Consenting to judgment
First, the applicants complain that the liquidator consented to the default judgment in favour of CBA for debt and possession being reinstated, without due investigation of the merits of the defence and a potential cross-claim.
In the context of the pursuit of litigation, a liquidator is bound to act with the skill and care appropriate to his office, to weigh the costs involved against the amounts at stake, to take appropriate legal advice, to form a careful professional judgment, and not to waste the entity's assets in dubious litigation [Gray v Bridgestone (1986) 10 ACLR 677, 682; Bacich v Australian Broadcasting Corporation (1992) 29 NSWLR 1, 11-12].
The liquidator made a commercial judgment to consent to orders disposing of the proceedings in favour of CBA, having reviewed the relevant documents - including a file received from CBA's solicitors containing the pleadings and evidence that was before the Court in the proceedings to set aside the default judgment, and Harrison AsJ's reasons for setting aside the default judgment - and having taken legal advice from his solicitor. Although the default judgment had previously been set aside, the defence and cross-claim had never been articulated in pleaded form - despite the Association having been afforded at least four opportunities to file and serve a Defence and Cross-Claim prior to the liquidator's appointment, of which it had failed to take advantage. While the applicants place considerable reliance on the decision of Harrison AsJ to set aside the default judgment [Commonwealth Bank v St Gregory's Armenian School [2010] NSWSC 191], her Honour was not considering the same issue, nor from the same perspective, as the liquidator: the question for her Honour was whether to permit the Association a proper opportunity to put its case on the merits (at [19]). In the course of determining to set aside the default judgment, her Honour held (at [43]) that there had been an adequate explanation for the delay, and that the defence was bona fide. But apart from a comment (at [32]) that the Association's first proposed defence (relating to an implied term) was "not a strong one", her Honour did not comment on the strength of the proposed defences. On the other hand, in order to determine whether to assume the defence of the proceedings, the liquidator had to evaluate many factors including (but not limited to) the likelihood of success, the Association's ability to prove at a factual level the case that was proposed, and the practical utility in proceeding.
The liquidator did not form a view that there were reasonable prospects of successfully defending the proceedings, and his conclusion in that respect was not unreasonable. Early indications were that the Ghougassians were not likely to be highly co-operative: the liquidator considered that the Ghougassians had failed to provide his staff with any substantial cooperation during their initial meetings in connection with financial records and the litigation with CBA. Moreover, and decisively, in light of the winding up order and dismissal (on 29 June) of the subsequent application to set it aside, there could no longer be any tenable defence: an application having been filed and an order made that the Association be wound up were each events of default under the CBA security documentation, entitling CBA to take possession and call up the secured debt. Insofar as it is suggested that the proceedings were the subject of a statutory stay under Corporations Act, s 471B, the better view is that a claim for possession against a company (and by extension an incorporated association) in liquidation is outside the scope of the proof of debt system, and in such a case leave would be granted as a matter of course [cf QBE Insurance (International) Ltd v Cycand Pty Ltd [2009] NSWSC 1177 (Barrett J)].
Quite apart from the merits of any defence of the CBA proceedings, there were practical considerations. As things then appeared, regardless of the outcome of the proceedings, the Property would have to be sold to pay debts: the Association was in liquidation, was without funds, was not functioning as a school (it had only six students, and no funds), had substantial creditors (as well as CBA, there were unsecured creditors, including employees and the ATO, amounting to $1.5 million), and only one asset of substance from which creditors could be satisfied, namely the Property. There were therefore no other available means to pay the CBA and other creditors than sale of the Property.
There is an associated complaint that the liquidator did not further investigate dealings between Association and CBA. Presumably, the suggestion is that further investigation may have resulted in the CBA debt being reduced, and thus the return to other creditors increased. However, CBA had previously obtained a default judgment, for which (presumably) an affidavit of debt had been required. The amount of the debt appears from an apparently regular bank statement. There is nothing to suggest that the payout figure provided by CBA was incorrect. Nothing has been advanced to show that that there was reason for doubting the amount of its claim, or that further investigation was otherwise warranted. On the other hand, it would have incurred substantial costs and delay to pursue these matters against CBA. In those circumstances, it was reasonable for the liquidator to conclude that the costs that would be incurred by further investigation and disputation of the quantum of the CBA debt would be disproportionately high to the prospects of any benefit emerging from it.
Further, it was complained that the liquidator failed to make further inquiries in respect of moneys that the Association had received by way of Commonwealth grant, which Mr Ghougassian contended were for the special purpose of funding teachers' salaries - and if not applied to fund teachers' salaries reverted, on a Quistclose trust, to the Commonwealth - but had wrongly been applied by CBA to the reduction of the CBA debt. As the teachers have now been paid in full from the proceeds of the Property, it is not apparent how pursuing this line of inquiry could benefit the Association or its creditors, as its logical consequence would have been that assets otherwise available for creditors were held on resulting trust for the Commonwealth.
The liquidator's primary duty was to realize the Association's assets as soon as possible, pay the creditors and conclude the winding up. The liquidator was entitled to form the view that the only way creditors other than CBA could be paid was from the balance of the proceeds of sale of the Property, after the secured creditors had been paid, and that no useful purpose would be served in defending proceedings, escalating legal costs (on both sides), and incurring further delay while interest would continue to accrue on the CBA debt. In those circumstances, a decision to consent to judgment in favour of CBA was well open to the liquidator as within the range of a reasonable commercial judgment, and casts no doubt on his skill, competence, diligence, impartiality or propriety.
The CBA mortgagee sale
The applicants submit that the liquidator might be "liable for the consequences of consenting to the bank's judgment" (cf Points of Claim at [42]-[43]), which is apparently a reference to the mortgagee sale.
As the first ranking secured creditor, CBA was entitled to conduct the sale. If it was at an undervalue, then any complaint or remedy lies against CBA, not against the liquidator. In any event, there is no basis for concluding that the liquidator would have obtained a higher price had he engaged agents to conduct the sale himself. While the sale price was at the lower end of the valuation range, evidence has not been adduced to establish that a better price could have been obtained with reasonable endeavours.
The applicants also complain that the liquidator failed to embrace a proposal advanced on their behalf to procure a discharge of the CBA mortgage before the sale. This requires examination of the relevant course of correspondence in some detail.
On 6 December 2010, Mahony Dominic (for the Ghougassians) made a "without prejudice" offer to Gadens (for CBA), as follows:
Our clients have obtained funding approval sufficient to redeem your client's mortgage over the property.
Our clients propose redeeming that mortgage on or prior to Monday, 13 December 2010.
For that purpose, would you please confirm the amount required to redeem your client's mortgage as at 13 December 2010, such that upon payment of those monies your client will provide a Discharge of its mortgage, in registrable form.
Further, would you please confirm that subject to payment of the monies required to redeem your client's mortgage on or prior to 13 December 2010, your client will on that date provide a Discharge of its mortgage on 13 December 2010 and at that time of course cancel the proposed auction scheduled for 14 December 2010 ...
On the same day, Gadens responded to Mahony Dominic, as follows:
In respect of your clients proposed resolution of the dispute we are instructed to advise you that, subject to:
the liquidator confirming that he has no objection to a third party seeking a discharge of the mortgage between the School and CBA;
provision of an unendorsed bank cheque, on or before 13 December 2010, for an amount (to be advised) to satisfy the debt owed by CBA under its loan facility with the School; and
your clients and the liquidator entering into a satisfactory Deed of Release and Indemnity with CBA in respect of this matter,
CBA will agree to:
provide your clients with a duly executed Discharge of Mortgage; and
cancel the public auction of the Property scheduled for 14 December 2010.
Please advise us by return whether your clients will agree to enter into a Deed of Release and Indemnity that is satisfactory to CBA.
On 7 December 2010, Mahony Dominic wrote to Addisons (for the liquidator), enclosing a copy of their 6 December letter to Gadens, emphasising that it was not intended to convey a settlement of the Ghougassians' dispute with the CBA, and stating:
Despite the heading on the last page of that letter, the letter was not intended to convey a settlement of the dispute between the CBA and our clients ...
Accordingly, our clients do not propose to provide any releases or indemnities to the CBA nor are they supportive of the liquidator doing the same.
... As to our clients' attempts to "save" the school we confirm as follows:
1. Our letter to Gadens of yesterday was not copied to you as there were a number of variables still to be confirmed, being specifically:
(a) Final confirmation that our clients' incoming mortgagee will be ready to payout the CBA next Monday, 13 December 2010;
(b) Confirmation from the CBA as to what the payout figure is (which we are still yet to receive); and
(c) Agreement by the CBA to take a redemption of the mortgage rather than proceed with the sale. Failure to accept a redemption would of course necessitate urgent injunction proceedings.
2. The manner in which our client is proposing to raise sufficient capital to redeem the CBA bank loan, is an assignment of their mortgage over the school's property, to the incoming lender such that the incoming lender will effectively be substituted as mortgagee for our clients.
3. At the same time, we would appreciate confirmation from the liquidator that upon our clients' redemption of the CBA mortgage, the liquidator will acknowledge those monies as being owing by the school to our clients, effectively in substitution for the CBA mortgage.
4. Assuming that the CBA's mortgage can be redeemed in time so that the auction sale is cancelled, our clients will work with the liquidator to help him clarify the debts of the company.
5. Thereafter, it is proposed that further monies will be advanced by our clients to the liquidator to enable all debts of the school to be paid, on the basis that the liquidator will support an Application to have the Incorporated Association reincorporated, with our clients or their nominees being installed as directors.
Please confirm that your client accepts that proposed course of action as being the best way in which the creditors of the Incorporated Association can be paid as soon as possible and at the same time the assets of the Association be protected from waste through unnecessary sale.
Addisons responded to Mahony Dominic on 8 December 2010, relevantly as follows:
With respect to your email:
(a) the liquidator, on behalf of the school, does not agree to any incoming lender "effectively being substituted" as mortgagee for your clients... Any arrangements for the advance are between your clients and the lender; the liquidator does not agree to any arrangement which purports to increase the level of your clients' security;
(b) if the CBA mortgage is discharged, the liquidator does not acknowledge that any payment of monies to the CBA is owing by the School to your clients nor that it is in substitution for the CBA mortgage. Indeed, your correspondence indicates that the monies are being advanced by a third party lender, not your clients. We fail to see how there can be a sum accordingly owing to your clients for the payment-out of the CBA debt.
Addisons also pointed out that it would be up to the Court to determine, if all debts of the School were paid out and all liquidator's fees and expenses paid, whether to revoke the existing orders; and that it was for the Association's membership to determine who were to be its officers.
In a reply dated 9 December 2010, Mahony Dominic, referring to the passage quoted above, asserted that the liquidator was seeking to treat the Ghougassians as volunteers, and added:
The transfer of indebtedness owing by the School to our clients, together with the transfer of the accompanying mortgage securing same, actually decreases our clients' security and simply replaces our clients as lender and mortgagee with another party.
Mahony Dominic also communicated the Ghougassians' expectation "that the liquidator will acknowledge [them] as a creditor of the School for the amount paid by them to discharge the CBA mortgage", and foreshadowed an application to the Court if the liquidator maintained his position.
Addisons replied on the following day, 10 December 2010, noting that the liquidator had been provided with no information as to the terms of the third party advance to pay out the CBA - including quantum, duration, interest rates, default provisions, insurance obligations, and the identity of the lender - and sought elaboration of the statement that the proposed payment "actually decreases your clients' security", "who it is proposed will repay the proposed new secured lender and on what terms", and explanation of other aspects of the proposal, including the likely timeframe in which the Ghougassians proposed to pay out the School's indebtedness, adding that "your clients must be volunteers in the absence of a formal agreement by the liquidator".
On the same day, 10 December 2010, Mahony Dominic responded that "the fight to save the sale of the School's real estate appears to have been lost". In their affidavit evidence, the Ghougassians explained that they were informed that the CBA was rejecting their advance, now wanted $1.4 million on account of increased costs, interest and costs of sale, but would only accept it as a donation, and refused to allow them a further seven days. These were not matters within the liquidator's control.
The essence of this complaint is that the liquidator at worst obstructed, or at best did not facilitate, the Ghougassians' endeavours to "save the school" through refinancing the CBA debt and thereby averting the sale. In this respect, the applicants particularly rely on:
The assertion, in Addisons' letter of 8 December, on behalf of the liquidator, that he did "not acknowledge that any payment of monies to the CBA is owing by the School to [the Ghougassians] nor that it is in substitution for the CBA mortgage" (notwithstanding that both the liquidator and his solicitors were aware that the Ghougassians were secured creditors);
The statement, in Addisons' response of 10 December 2010, that "your clients must be volunteers in the absence of a formal agreement by the liquidator";
The liquidator's failure to offer any alternative when the solicitors for the Ghougassians again took up the purpose of refinancing and the benefits to the members of the ongoing maintenance of the integrity of the "school" in their letter of 10 December 2010; and
The liquidator's endeavours in cross-examination to explain away these matters in a manner that could only be described as "flying in the face" of the express words contained in the letters approved by him before they were sent.
It must be said that Addison's responses of 8 and 10 December 2010 appear more confrontational and obfuscatory than helpful. Although I agree that the liquidator's answers in cross-examination seemed to reflect an unduly benevolent view of the letters, they were not the liquidator's own drafting, and he not unreasonably relied on his lawyers. Moreover, they must be evaluated in their context, which includes the following features.
First, the proposal emerged at the eleventh hour, seven days before the mortgagee sale. To think that a refinance could be effected in a period of seven days in the face of an impending mortgagee sale in the context of a company in liquidation is, to say the least, optimistic.
Secondly, the liquidator was not in a position to stop the mortgagee sale, of which CBA had conduct and control, even if he was persuaded that it was in the interests of the company to do so. That was entirely in the hands of CBA. CBA was not prepared to do so unless the Ghougassians gave a release and indemnity, which they were not prepared to do, and which they opposed the liquidator giving.
Thirdly, the Ghougassians did not need the liquidator's concurrence - nor for that matter the concurrence of CBA - if they were proposing simply, as subsequent mortgagees, to redeem the CBA's prior ranking mortgage. Mahony Dominic knew this. However, in the available time before the auction, the Ghougassians were likely to encounter great difficulties in doing so, as the CBA itself was purporting to insist on releases which the Ghougassians were not prepared to give.
Fourthly, the proposal did not address in any detail how or when the Association's creditors other than CBA would be paid. There was scant information as to the proposal to advance additional funds for this purpose. In order for any proposal to have been workable, an amount of at least $2.8 million was required to achieve payment of the CBA debt in the amount of approximately $1.3 million, and payment of other creditors of at least $1.5 million, plus the liquidator's fees and expenses. Otherwise, the liquidator would not be able to pay creditors if the Property (being the Association's only substantial asset) were not sold.
Fifthly, how any new loan would be serviced was entirely unclear, as was how it could be repaid - other than by sale of the Property.
Sixthly, the correspondence from Mahony Dominic sought "confirmation from the liquidator that upon our clients' redemption of the CBA mortgage, the liquidator will acknowledge those monies as being owing by the school to our clients, effectively in substitution for the CBA mortgage", and acceptance of the proposed course of action "as being the best way in which the creditors of the incorporated Association can be paid as soon as possible and at the same time the assets of the Association be protected from waste through unnecessary sale". Whether such confirmation and acceptance could appropriately be given was not a straightforward matter, given the lack of clarity in precisely what was being proposed, and would depend on how any refinance was to be implemented, and what provision was to be made for payment of other creditors. On the one hand, it seemed to be proposed that a new lender was to pay out CBA, taking as security the Ghougassian mortgage; and it is not at all clear that that course would result in the Ghougassians becoming subrogated to the CBA mortgage. On the other, it was proposed that the Ghougassians "redeem" the CBA mortgage, which might well have resulted in their becoming entitled to be subrogated to the CBA mortgage, but it was unclear how this redemption could be financed other than by resort to assets of the Association as security. The proposal remained unclear after Mahony Dominic's letter of 9 December: it was now apparently proposed that the Ghougassian mortgage would be transferred to a new lender, but how this would make the Ghougassians creditors of the Association in respect of the CBA mortgage was not apparent.
The liquidator's evidence was to the effect that he was quite prepared to engage in discussions and, if appropriate, implement a solution that would avoid the sale of the Property - a position that he had communicated to the Ghougassians and their representative, Mr Dewhurst, on 21 July and 9 August 2010. However, when the proposal was ultimately raised - at a time when the sale, to be conducted by CBA and not the liquidator, was impending within 7 days - it faced considerable practical difficulties. There was a very short time frame in which to consider and implement the Ghougassians' proposal. The options available to the liquidator were limited: (1) to proceed with the liquidation, realise the assets and pay the creditors, or (2) to approach the court to terminate the winding up. A fundamental obstacle to the latter would be satisfying the court that the winding up should be terminated where extensive debt remained, the Association's business appeared to be not commercially viable, and a refinance would effectively substitute one creditor for another in respect of a debt that still could not be serviced, except by sale of the Property. There would remain a significant body of unpaid creditors other than CBA - including the ATO and employees - and there was scant information as to the time frame, financial basis and financial viability of the Ghougassian's proposal to advance further moneys to enable their payment.
This was truly an eleventh hour proposal, which was unclear, and critically would not clearly enable payment of creditors other than CBA, but would apparently effectively replace one unserviceable debt with an equivalent unserviceable debt, that in turn could only be repaid by sale of the Property. Mahony Dominic ultimately did not respond to the clarification that was sought. Absent sale of the Property, no means of repaying any new debt, nor of servicing it, was apparent. Having regard to the CBA's own attitude (requiring an indemnity and release), it is most unlikely that the sale could have been avoided in any event. The liquidator was himself in no position to stop the sale, of which CBA had conduct and control. The proposed refinance appears to have failed for reasons unassociated with the liquidator's response.
It was also suggested, at one stage, that the liquidator failed to suggest to the Ghougassians that a Deed of Company Arrangement ("DOCA") might be proposed in respect of the Association - presumably in aid of "saving the School". However, in submissions, it was conceded that there was at least reasonable doubt as to whether a DOCA could be proposed in respect of an incorporated association. In any event, the Ghougassians had the benefit of legal advice, and were represented throughout this period by Mahony Dominic. In those circumstances, it was not the duty of the liquidator to provide such advice to the directors, at least unless he had come to the view that such a course would be in the interests of the Association.
Where the mechanism of the proposed refinance remained unclear, and there was no clear proposal for the manner and timing of paying other creditors, it was not unreasonable for the liquidator to decline to give the open-ended acknowledgements and agreements sought, in the absence of greater detail than was provided. Although the liquidator could have adopted a more conciliatory and co-operative approach to the Ghougassians' proposal, this must be seen in the context that the Ghougassians had solicitors acting for them, that it was not unreasonable for the liquidator to be sceptical of the proposal, and that as the Ghougassians (or at least their solicitors) well knew, redemption by them of the CBA mortgage did not require the consent of the liquidator. In all the surrounding circumstances, his response did not manifest any such lack of skill, diligence, integrity, objectivity or impartiality as would justify his removal.
The Ghougassian mortgage
The applicants complain that the liquidator refused to acknowledge the validity of the Ghougassian mortgage, and put them to proof of it in the mortgage account proceedings, and that this was in marked contrast to the manner in which he dealt with other creditors' claims, in particular CBA.
CBA paid the surplus proceeds of sale of the Property into Court, on or shortly after 22 January 2011. The proceedings before White J involved the taking of an account of the Ghougassian mortgage, and determination of the liquidator's motion seeking orders for payment out of Court of the surplus proceeds of sale of the Property to each of the Ghougassians, Fraser Clancy (a caveator), and the Association. There was no issue in those proceedings as to the existence and validity of the Ghougassian mortgage: the only issue was the amount that it secured, which involved questions of construction, and of calculation. Ultimately, the liquidator relied on the Court's determination of the amounts that were secured.
The proceedings for an account of the Ghougassian mortgage were commenced after the liquidator encountered difficulties in determining what moneys it secured. On 22 June 2010, in response to an initial inquiry by Mr Samarasinghe as to the amount that was owing under the Ghougassian mortgage, Michael Ghougassian said, "I can't tell you". He says that he did not know the amount, but would have thought at the time that it was in the millions - say $10 million. On 23 June 2010, the liquidator wrote to the Ghougassians requesting evidence of the loan moneys, the balance outstanding, and accounts and related documents.
On 18 October 2010, the liquidator filed an Interlocutory Process seeking, inter alia, production of documents relevant to, and an account of, the Ghougassian mortgage. On that application, on 8 November 2010, orders were made, by consent, including for the taking of an account. On 22 November 2010, the Ghougassians eventually provided to the liquidator a RATA, and documents pertaining to the mortgage. On 8 December, Addisons wrote to the Ghougassians' solicitors, asserting their view of the mortgage and advising that the liquidator was undertaking a calculation of the amounts he believed to be secured by it. Mahonys responded on 9 December, to the effect that if agreement could not be reached on the amount secured, it would have to be referred to the Court for determination.
On 13 December, consent orders were made for the Ghougassians to file and serve accounts, and for the liquidator to serve notice of falsifications. Michael Ghougassian provided a verified account that concluded that $2.328m was secured to him, and Dr Daniel Ghougassian provided an account that showed $624,289 to be secured to him. The liquidator's notice of falsification contended that the amounts secured were $142,016 and $54,894 respectively.
Notwithstanding the amounts referred to in their verified accounts, evidence was adduced before White J, from the Ghougassians' accountant, that they were owed $7.190m and $1.278m respectively. As White J observed, the parties were "widely apart" ([2012] NSWSC 125, [9]), and the evidence of advances made by Dr and Mr Ghougassian was "scanty" (at [23]). While accepting that they gave their evidence honestly, his Honour found that "[i]n some respects their evidence was not satisfactory" (at [24]), and did not accept it. They were unsuccessful in several respects, including in respect of claims advanced for amounts allegedly loaned to the Association prior to the Deed of Loan, and moneys advanced to the Association by third parties. Other aspects of their claim were abandoned during the course of final submissions (at [9]); indeed, the gap was very substantially reduced, in final submissions, by a concession that the mortgage debt was limited to $1m plus interest, which accorded with what had been the liquidator's position from the outset. Ultimately, White J certified that the amounts secured by the mortgage in favour of the Ghougassians were respectively $560,705 plus interest, and $296,239 plus interest.
Although an aspect of the Ghougassians' complaint was that the liquidator disputed that the Ghougassian mortgage was valid or secured any debt at all, the evidence does not establish that, after initial inquiries, the liquidator has ever disputed that the Ghougassians held a valid registered mortgage. Two particular episodes were relied on by the applicants: first, a statement attributed to Mr Stern on 21 July 2010, to the effect that the Ghougassians were not creditors and that there would be nothing for them; and secondly, a statement attributed to counsel at the hearing before White J, to the effect that there may be a dispute as to the validity of the mortgage.
However, as to the first, Mr Stern deposed to a quite different version, which is not only more probable in the circumstances, but was unchallenged. Mr Megaloconomos - a witness in the Ghougassian camp, who was present on the occasion in question and made a file note of the conversation, and might have been expected to corroborate Mr Ghougassian's version - did not do so, nor did his file note. Mr Kaura, who was in the liquidator's camp, also made a file note, which does not assist Mr Ghougassian. As both Mr and Dr Ghougassian accepted, Mr Stern might have said something to the effect that they would have to prove their debt like anyone else.
As to the second, examination of the context of Counsel's statement demonstrates acceptance, rather than rejection, of the proposition that there was a valid mortgage securing a debt, and that the only issue was construction and quantification of what was secured.
Once the surplus proceeds of the Property after discharge of the CBA mortgage had been paid into court, claimants on the fund necessarily had to apply for payment out, and prove the amount of their entitlement. In circumstances where Michael Ghougassian had himself been unsure as to the amount of the secured debt, and where the evidence was scanty, it is difficult to understand what else it is contended that the liquidator should or could have done, rather than bring the mortgagee accounting proceedings.
There was no inappropriately discriminatory approach to the Ghougassians' claim vis-a-vis CBA's. The differential approaches were amply justified by differences between the claims: whereas CBA's claim was one by an external creditor, clear, documented, and un-defendable (at least once the winding-up order was made and confirmed), the Ghougassians' was by insiders, unclear, poorly documented, and highly debatable as to quantum.
There is nothing in this aspect of the liquidator's conduct to warrant the slightest concern as to his skill, competence, diligence, integrity, impartiality or propriety.
Dealings with chattels
The applicants complain that the liquidator, in dealing with property claimed by Michael Ghougassian, Nareg Bookshop and Nareg Internet, did so without their consent and with notice of their claim and without proper regard for their interests, and converted their property. As well as being one of the grounds relied upon in support of the application for removal, the conversion allegation is also the subject of the application for leave to sue the liquidator personally for damages.
Michael Ghougassian informed members of the liquidator's staff that some of the items stored at the School belonged to him, and pointed out to them items that he said did not belong to the Association. Mr Samarasinghe said, "You'll need to substantiate ownership of items that you claim to be yours", and "If you substantiate it, arrangements can be made for you to collect them". Mr Ghougassian agrees that this was said, but complains that Mr Samarasinghe never stuck to his word; but he does not say that he ever endeavoured to collect any of the chattels.
The liquidator's staff responded to Michael Ghougassian, from at least 2 August 2010, that he could collect personal belongings, but could not remove assets such as cabinets, computers or other equipment which were perceived to be assets of the Association, without first providing proof of ownership.
Steps were then taken by the liquidator with a view to realisation of the chattels located on the Property. However, the claims of the applicants were not disregarded. On 3 September 2010, the liquidator's staff raised with the Ghougassians' representative that he had not received any documentation in respect of any items over which the Ghougassians were claiming personal ownership. On the same day, Michael Ghougassian threatened to seek an injunction to prevent the on-line auction of goods, and the liquidator's staff responded that the Ghougassians would not be permitted access to the premises without providing a list of items over which they were claiming ownership, together with supporting documentation. However, in what he characterised as a show of good faith, the liquidator withdrew all books from the auction - despite the lack of any proof of ownership. The liquidator's staff stated: "[p]rovided that you provide us with the proper documentation, we are more than happy to arrange for a time for you (within business hours) to collect what is rightfully yours".
The request for proof of ownership was repeated in subsequent correspondence and conversations, on 6 September 2010. Mr Michael Ghougassian provided some receipts for computers on 7 September 2010. Mr Samarasinghe said that he crosschecked the serial number on these invoices - which were addressed to an unknown entity called "Michael's Engineering Services" - against the auction listing and could not match them. When shown the various auction lists, however, Mr Samarasinghe was unable to identify any computer equipment with serial numbers, and the liquidator was unable to produce the listing that he said he relied upon for the purposes of verification, and as I have already recorded, I think his evidence in this respect was mistaken. But this establishes no relevant default on behalf of the liquidator because, regardless, the computers were removed from the auction, and they remain available for collection by the Ghougassians, together with other items.
On 7 September 2010, Michael Ghougassian offered to purchase all the items in the auction for $55,000. The liquidator rejected this offer, a decision that could not be criticised prospectively in that he had already obtained a valuation of the Association's non-fixed assets from Grays Online, who advised that the market value on an existing use basis was $166,899, and the estimated online auction realization $66,753; and even less so retrospectively, given that the sale realised total proceeds (less expenses and commission) of $171,566.96.
Later that day, at 1:44pm, Michael Ghougassian advised that various items in the auction were "private". Mr Samarasinghe responded that proper proof of ownership was required, and that while as a show of good faith he had instructed the auctioneers to remove the computers from the auction, as the auction was to close within an hour he could not remove any further items. Despite another threat by Michael Ghougassian to approach the Court for injunctive relief to prevent the auction proceeding, in fact no action was taken, and the auction ultimately concluded on 7 September 2010. The liquidator's staff allowed Michael Ghougassian and his daughter to retrieve personal items from the Property on 9 September 2010.
On 18 November 2010, Mr Samarasinghe sent Mr Ghougassian an email requesting that he collect his goods from the storage facility, without qualification. Mr Ghougassian said that he ignored the 18 November email, that he could not do anything about it, and that he did not contact anyone about it. The liquidator cannot reasonably be criticised for not thereafter repeatedly pressing Mr Ghougassian to attend and collect the goods.
Very shortly prior to the hearing, arrangements were made for an inspection of the goods in the storage facility on behalf of Michael Ghougassian, on 25 June 2012. A request to do so was initiated on 20 June, and these exchanges led to advice to contact the liquidator's employee Chris Brereton. This was done by email after 6 pm on Friday 22 June, and was renewed on Monday 25 June. Arrangements were made on the Monday morning, and two members of the liquidator's staff attended at the storage facility at Castle Hill. The Ghougassians' solicitor, Mr Norrie, attended; he was particularly interested in three specific boxes, one of which could not be found. In the context of the time frame in which this inspection was arranged, this cannot be seen as obstruction on the part of the liquidator. It is unrealistic to suggest that the Ghougassians were prevented on this occasion from removing their goods: their solicitor, who attended unaccompanied, was never going to collect 600 boxes. It was not put to Mr Brereton that collection, if sought, would have been refused. Affidavits sworn and served in March 2012 confirmed that the goods remained available for collection, without any requirement for substantiation.
The liquidator's duty was, as soon as practical, to cause the Association's property to be collected and applied in discharging the Association's liabilities [Corporations Act, s 478; see also Associations Incorporation Act 1984 (NSW), s 53]. He was not entitled to treat property of others as property of the Association. However, in respect of property that was in the custody and on the premises occupied by the Association, he was entitled to insist on some proof of ownership before relinquishing any claim to it. If he sold it with notice of a competing claim, he did so at his own risk.
There is no basis for the contention that the liquidator dealt with the chattels without proper regard to the applicants' claims. To the contrary, the liquidator and his staff gave due consideration to the applicants' position, and made substantial efforts to accommodate them. Indeed, in an effort to cooperate and as a show of good faith, where possible the liquidator removed disputed items (including computers, books and liturgical vestments) from the auction, and placed them in storage, ultimately for collection by the applicants. Although attention was given in cross-examination to the failure to verify ownership of various computers, or to establish the identity of the purchaser named on the invoices supplied by Mr Ghougassian, this was immaterial in circumstances where all computers were withdrawn from the auction and the liquidator decided to allow Mr Ghougassian to retrieve them - although he has not yet availed himself of that opportunity. Moreover, there was objective evidence that told against the claim that the majority of the disputed chattels were property of Nareg Bookshop: its accounts for the year ended June 2010 disclose "stock on hand" at cost NIL, and furnishings and fittings at depreciated value $1100.
Complaint was also made that the liquidator failed to make an adequate inventory, or to maintain an adequate document trail, of the chattels to which the applicants made claim - in particular, the Armenian books, liturgical vestments and computers that had been located on the Property, and were removed from the auction - such that there was no evidence of what happened to any equipment that was removed from the auction. However, the items in question were removed from the auction on the basis that substantiation was no longer required, and that Mr Ghougassian could collect them; they were then stored separately, and later removed to a secure storage facility, where they remain available for collection. Further itemisation or documentation would have involved further cost. These items were of a kind that, by their nature, were likely to have been property of the School; in those circumstances it was not unreasonable for the liquidator initially to insist on substantiation of any claim that they were personal property of one of the applicants. Equally, it was not unreasonable for the liquidator later to withdraw those items from the auction and abandon his claim to them, on the basis of a commercial judgment that it was not worth pursuing. It is difficult to appreciate what the real substance of this complaint is.
The evidence reveals no instance of the liquidator having converted any item of property of any of the applicants. Mr Ghougassian concedes that for all he knows, the books and the CDs about which he makes complaint are in the Castle Hill storage facility. If there has (inadvertently) been a conversion, in the context of the correspondence and discussions that took place prior to the on-line auction or disposal of the relevant chattels - in particular the repeated request for substantiation of the applicants' claims - and the nature of the chattels (such as books, computers and classroom furniture) being such that objectively it was likely to be property of the Association for use in its school, the liquidator has not been shown to have acted other than honestly, reasonably, and with objectivity, for the benefit of the administration and the body of persons (including creditors) interested in it.
Conduct in the proceedings - the notice to produce photographs
The applicants complain that, in the instant proceedings, in response to a Notice to Produce served by them, which required him to produce documents (including photographs) relating to the chattels claimed by them and situated on the Property when the CBA took possession, the liquidator first failed to produce an inventory of the items, including any photographs, claiming that they were held by a former employee, Mr Ravi Kaura, who was overseas; then (by email of 1 March 2012) incorrectly asserted that Michael Ghougassian had been permitted to take photographs and should be in possession of them; and ultimately produced photographs that failed to show all of the chattels that were sold in the online auction.
The liquidator in fact ultimately produced, and tendered, a bundle of photographs, which had been on Mr Kaura's mobile phone, from which they were obtained. It is apparently suggested that the liquidator has failed to keep a proper accounting of items improperly sold, in breach of his duties under Corporations Act, s 542, and that this bespeaks significant incompetence. However, the evidence does not establish that any item has been improperly sold, and in any event ss 531 and 542 do not require a liquidator to compile or retain any such inventory. Even if it be the case that not every item has been photographed and catalogued, that does not evidence incompetence or impropriety; nor do elements of confusion in the initial production of photographs, or as to whether Mr Ghougassian had been allowed to take photographs.
Other matters said to indicate bias
I mention here some other matters that arose in the course of the proceedings and were suggested to illustrate lack of impartiality on the part of the liquidator. As previously mentioned, these were not pleaded, and first arose in cross-examination and/or closing submissions, by reason of which the liquidator was denied an adequate opportunity to respond to them, accordingly I would not in any event make an order for removal on their account.
First, it was alleged that the Liquidator had "falsely and without proper cause" stated that he had not been provided with the books and records of the Association, whereas the books and records were at all material times on the School premises or otherwise in the custody and control of the Liquidator, and access to them was denied by the Liquidator to the Ghougassians. The applicants' case in this respect - as articulated in their closing submissions - was that in a Report to Creditors dated 28 October 2010, the liquidator stated that the directors of the Association had not assisted the liquidator nor provided him the books and records of the Association, whereas in cross-examination before White J on 2 July 2011, and again in the present case, Mr Samarasinghe admitted to having had and having received the books and records of the Association but never having examined them, leaving their examination to subordinates. However, while in those parts of the relevant Report to Creditors that were particularised as supporting this allegation [namely, the extracts at pages 23-25 of the affidavit of Michael Ghougassian sworn 16 February 2012] do contain complaints that the Ghougassians were not co-operative, they do not contain a complaint that the Ghougassians had not provided the liquidator with the books and records of the Association. A complaint that the Ghougassians were not co-operative was not unreasonable in circumstances where they had refused to answer many of the liquidator's questions and requests for information, and the liquidator was compelled to resort to court process to obtain a RATA. The complaint that the liquidator made no offer of financial assistance to assist Mr Ghougassian prepare a Report as to Affairs betrays a fundamental misconception of the relevant obligations of the directors and the liquidator. Accepting that Mr Samarasinghe did not himself inspect the files maintained at the offices of the liquidator in relation to financial records, but left it to other personnel who then reported to him, and did not invite Mr Ghougassian to assist, this does not establish a want of impartiality.
Secondly, it was at one stage suggested - though I do not think it was pressed in final submissions - that the liquidator excessively delegated his functions to his staff. However, in insolvency practice in this day and age, delegation is essential and unavoidable. It also reduces costs, which would be increased if a principal were required to take every step of significance in the liquidation. Mr Samarasinghe and the liquidator's other staff had appropriate qualifications and experience for the tasks that were entrusted to them.
Thirdly, another subject of complaint was that the liquidator had commenced proceedings for the public examination of the Ghougassians. The purpose of these examinations included the investigation of certain transactions by which funds in an amount of $1.647 million had been paid from the Association to the Ghougassians and their associates. Such investigation might lead to recoveries, enhancing the divisible assets. In circumstances where there is at least potentially a deficiency, such a course would plainly be in the interests of the creditors.
These matters provide no basis for concluding that the liquidator so lacks impartiality as to justify his removal.
Conclusion
The liquidation is well-advanced. Other than the Ghougassians, no other creditor of the Association is seeking or supporting the liquidator's removal. Thus, this is not a case in which a majority of creditors (none of whom were officers or former officers of the Association) have supported the liquidator's removal. Given the accumulated knowledge and information in the possession of this liquidator and his team, there would be inefficiencies and waste in replacing the liquidator at this stage. From the proceedings before White J, the liquidator has gained extensive information, evidence and knowledge in respect of the Ghougassian's claimed debt, which will facilitate and expedite consideration of their proofs of debt, which efforts would require duplication by a new liquidator.
Nonetheless, I have given particular consideration to whether in the light of all that has passed, there is a sufficient basis for reasonable apprehension that the liquidator would not approach making decisions about the Ghougassians' proofs objectively and impartially. The existence of such an apprehension, reasonably based, given the centrality of that decision to the future of the administration, would be a ground for serious concern.
However, as already explained, the differential treatment of the Ghougassians and CBA as creditors was reasonable, and does not bespeak lack of impartiality. Further, the liquidator's decision to conduct examinations of the Ghougassians is an entirely reasonable one. While there has been a degree of hostility between the Ghougassians and the liquidator, it does not appear that it has been predominantly of the liquidator's making. The mere existence of hostilities between the liquidator and a creditor or contributory is insufficient to found the removal of a liquidator; such is the nature of a liquidator's role. That is particularly so where the creditor or contributory in question is also a director, whose interests may well in some respects be inconsistent with those of the administration.
Despite Mr Ghougassian's strong feelings of distrust towards him, the evidence does not objectively demonstrate anything in the liquidator's conduct of the liquidation, or his decisions in connection with it, indicative of a lack of impartiality, or of unreasonableness, in his dealings with the Ghougassians. Finally, it is also to be borne in mind that if they are dissatisfied with any rejection, in whole or part, of their proofs of debts, the Ghougassians will have a right of appeal, de novo, to the Court.
In those circumstances, the evidence does not reveal conduct on the part of the liquidator such as to ground in the mind of a reasonable observer a perception of lack of impartiality as among the interests he is committed to serve, lack of objectivity in serving those interests, or lack of competence. Further, it would be contrary to the interests of due administration for the liquidator now to be removed. Cause for removal of the liquidator is not shown.
Application for s 536 inquiry
In the pleadings, the applicants sought an inquiry into the liquidator's conduct, pursuant to Corporations Act, s 536. An inquiry into the conduct of a liquidator may be ordered pursuant to s 536 where there are sufficient matters prima facie calling for further investigation [Burns Philp Investment Pty Ltd v Dickens (No.2) (1993) 11 ACLC 525, 531; Pinklillies Pty Ltd (trustee), in the matter of Northwest Motel Group Pty Ltd (in liq) v Huxtable [2011] FCA 1543].
The conduct invoked in support of the application for removal is relied upon in the alternative to justify an inquiry. For the reasons set out above, none of that conduct gives sufficient cause to think that there are matters requiring inquiry related to the liquidator's performance of his duties, whether in respect of his skill, diligence or propriety.
Moreover, where there has been, in these proceedings, an opportunity for a full examination of the allegations against the liquidator, and they have not been established, it is inappropriate that there be resort to an inquiry as a fall-back position to enable those same allegations to be examined yet again.
It would therefore be inappropriate to order an inquiry into the liquidator's conduct under s 536.
Leave to sue the liquidator
The applicants seek leave to sue the liquidator for damages for conversion in respect of his alleged sale of their personal property.
Principles
A court-appointed liquidator cannot be sued without the leave of the court [Armitage v Gainsborough Properties Pty Ltd [2011] VSC 419, [34]-[35] (Almond J); Re Siromath Pty Ltd (No 1) (1991) 9 ACLC 1580 (McLelland J)]. This is because the Court, while vigilant to insist that its officers and delegates are held to proper standards, in return protects its officers from spurious or vexatious litigation and preserves the integrity of the winding up process [Armitage, [35]; Mamone v Pantzer [2001] NSWSC 26; (2001) 36 ACSR 743, [4] (Santow J)].
The discretionary power of the Court to grant leave must be exercised having regard to all the circumstances of the particular case and bearing in mind the need to protect the integrity of its process [Sydlow Pty ltd (in liq) v T G Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234, 241 (Tamberlin J)]. An applicant for leave must demonstrate that its claim has sufficient merit. What is "sufficient" is affected by the circumstances and timing in which that leave is sought, and does not necessarily mean a prima facie case [Mamone v Pantzer, [4]]. There is no specific threshold applicable to every case, but there must be more than mere assertion. The court's discretion may be exercised on many grounds, including, but not limited to, the sufficiency of the evidence adduced as to the prospects of success of the action [Sydlow, 242; Mamone, [5]]. Courts recognize that liquidators often have to make decisions on the run, and that to expect perfection in those circumstances is unrealistic [Mamone v Pantzer, [4]].
Leave should be refused
I would refuse to grant the leave sought, for two main reasons.
The first is that the proposed claim has not been shown to have sufficient prospects of success to justify a grant of leave. There is no evidence of a single act of conversion. Evidence of the applicants' title or right to possession of the chattels in question does not rise above mere assertion. In the light of the liquidator's repeated invitations to the applicants to provide proof of their title to the chattels, and their failure to do so, there is little prospect of their ever being able to do so. Mr Ghougassian, on his own evidence, cannot prove ownership of any item that he alleges has been converted. Moreover, the evidence does not establish that the liquidator has actually sold any property of any applicant. Whether there is any basis for a claim is entirely speculative: as Michael Ghougassian conceded, in effect, he wishes to sue the liquidator for conversion of chattels which, for all he knows, are sitting in storage at Castle Hill, which he has not inspected, and to which even today he still cannot prove title. No sufficient basis for the claim has been demonstrated to justify granting leave to sue the liquidator.
The second reason is that discretionary considerations tell against permitting the proposed action to be brought now. Michael Ghougassian knew that the liquidator was proposing to sell the items by auction, and corresponded with him on numerous occasions, but despite repeated invitation to do so failed to provide proof of title to the chattels - other than some invoices relating to computers, which did not constitute proof of title, but in any event the liquidator did not sell them. The applicants twice threatened to commence urgent proceedings to prevent the liquidator from selling the goods before the auction was completed, but did not do so. Both these considerations tell against granting leave over 18 months later, when the matter could have been clarified and resolved before any sale.
Conclusion
My conclusions may be summarised as follows.
The evidence does not reveal conduct on the part of the liquidator such as to ground in the mind of a reasonable observer a perception of lack of impartiality as among the interests he is committed to serve, lack of objectivity in serving those interests, or lack of competence. Further, it would be contrary to the interests of due administration for the liquidator now to be removed. Cause for removal of the liquidator is not shown.
In those circumstances, and where there has been an opportunity in the removal proceedings for the allegations against the liquidator to be fully examined, it would be inappropriate to order an inquiry into the liquidator's conduct under s 536.
Leave to sue the liquidator for damages for conversion should be refused, as the proposed claim has not been shown to have sufficient prospects of success to justify a grant of leave, and discretionary considerations tell against permitting the proposed action to be brought now.
My order is, therefore, that the Interlocutory Process be dismissed, with costs.
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Decision last updated: 11 October 2012
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