Re Tomi-Sasha Holdings Pty Ltd (rec and mgr apptd)(adm apptd)
[2020] VSC 595
•16 September 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2020 03224
| WAYNE ANDREW LESLIE CREWES and EILEEN FRANCES CREWES | First Plaintiff Second Plaintiff |
| v | |
| TOMI-SASHA HOLDINGS PTY LTD | First Defendant |
---
JUDGE: | Delany J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 4 September 2020 |
DATE OF JUDGMENT: | 16 September 2020 |
CASE MAY BE CITED AS: | Re Tomi-Sasha Holdings Pty Ltd (rec and mgr apptd)(adm apptd) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 595 |
---
CORPORATIONS – COMPANY RECEIVER AND MANAGER – Application to restrain receiver and remove for misconduct – Letter from receiver making baseless allegations of dishonest and unprofessional conduct and collusion against fellow professional – Misconduct for purposes of s 434A – Discretion to remove receiver – Private nature of communication – Reciprocal undertakings – Application dismissed – Pham v Legal Services Commissioner [2016] VSCA 256, Allinson v General Council of Medical Education and Registration [1894] 1 QB 750 applied – Rees v Bailey Aluminium Products Pty Ltd [2008] VSCA 244; (2008) 21 VR 478, Prothonotary of the Supreme Court of New South Wales v Costello [1984] 3 NSWLR 201, Cook v Northoak Holdings Pty Ltd (Recs and Mgrs Apptd) (1997) 25 ACSR 517 considered – Corporations Act 2001 (Vic), ss 9 and 434A.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr A Herskope with Mr S Freire | Kalus Kenny Intelex |
| For the First and Second Defendant | No appearance | |
| For the Third Defendant | Mr D Clough | Lennon Lawyers |
| For the Fourth Defendant | Mr I Upjohn QC with Ms V Holt | Aitken Partners |
HIS HONOUR:
The proceedings and the parties
There are two related proceedings before the Court that concern Tomi-Sasha Holdings Pty Ltd (ACN 076 376 308) (Receivers and Managers Appointed) (Administrators Appointed) (‘the Company’). The first in time is proceeding S ECI 2020 02306 (‘Administrators Proceeding’). The second in time is this proceeding (‘Crewes Proceeding’).
There is some, but not a complete overlap between the parties to the two proceedings.
The plaintiffs in the Crewes proceeding are Wayne Andrew Leslie Crewes and Eileen Frances Crewes (‘the Crewes Parties’).
The Company is the first defendant in the Crewes proceeding. The Company was incorporated on 13 November 1996. The directors of the Company at that time, and now, are Mr and Mrs Crewes. Mr and Mrs Crewes each hold 50 shares in the Company.
Mr Ian Grant and Mr Paul Langdon (in their capacity as Administrators of the Company) (‘the Administrators’) are the second defendants in the Crewes Proceeding.
NTM Super Holdings Pty Ltd (ACN 609 675 774) (‘NTM’) is the third defendant in the Crewes Proceeding. The directors of NTM are Anton Gaudry, James Gaudry, Jenny Gaudry and Janet Tait.[1]
[1]Plaintiffs, Affidavit of Wayne Andrew Leslie Crewes, dated 7 August 2020, exhibit WC-2 (‘Crewes Affidavit’).
Simon Patrick Nelson, the receiver and manager appointed to the Company by NTM is the fourth defendant in the Crewes Proceeding. Mr Nelson is a chartered accountant and a registered liquidator.
The first plaintiff in the Administrators Proceeding is the Company, and the second plaintiff is NTM.
The first and second defendants in the Administrators Proceeding are Mr and Mrs Crewes.
The fourth and fifth defendants in the Administrators Proceeding are the daughters of Mr and Mrs Crewes, after whom the Company is named; Sasha Elma Mort, and Tomi Regent-Crewes.
The sixth defendant in the Administrators Proceeding is 3 Stanhope Street Pty Ltd (ACN 155 225 237) (‘Stanhope Street’), appointed as trustee of the National Property Trust (‘the Trust’) by deed of appointment dated 27 May 2020.[2]
[2]Ibid, exhibit WC-5.
National Property Trust
The National Property Trust is a discretionary trust established by deed dated 16 November 1996.[3] The appointor is Eileen Crewes. The original trustee of the Trust was the Company. The primary beneficiaries are Eileen Crewes and Wayne Crewes.
[3]Ibid, exhibit WC-3.
The Trust deed provides that the appointor may by notice in writing appoint a new Trustee (clause 7.1). It provides for the ipso facto removal of the trustee if a receiver is appointed to the trustee (clause 7.4).
On 18 May 2020, NTM gave notice of the appointment of Mr Nelson as receiver and manager of the Company, triggering the operation of the ipso facto clause in the Trust deed. The Crewes Parties dispute the validity of Mr Nelson’s appointment.
It was following the contested appointment of Mr Nelson to the Company that Stanhope Street was appointed as the new trustee of the Trust by Eileen Crewes.
On 14 July 2020 the Administrators were appointed to the Company by NTM. The Crewes Parties dispute the validity of the Administrators’ appointment.
The first meeting of creditors of the Company convened by the Administrators pursuant to s 436C of the Corporations Act 2001 (Cth) (‘Act’) took place on 24 July 2020. NTM claimed to be owed $2,237,289.75.
Mr Nelson and Mr Crewes were participants in the first meeting. The Crewes Parties complain of Mr Nelson’s conduct both in relation to the appointment of the Administrators and at that meeting. The second meeting of creditors was scheduled for 18 August 2020.
The Crewes Parties contend that the Company acted both in its capacity as trustee of the Trust and in its own capacity. The evidence of Mr Crewes is that:
(a) Prior to mid-June 2020 separate financial accounts had never been prepared for the Company and the Trust.[4]
[4]Ibid, [73].
(b) There was only ever one bank account of the Company and the Trust prior to the appointment of Mr Nelson as receiver and manager.[5]
(c) On 4 August 2020, Mr Mascaro of Kenworthy & Associates, accountants, (‘K&A’) informed Mr Crewes that amended financial statements had been prepared for the Company for the period from 30 June 2017 to 30 June 2020 ‘to accord with bank statements and my instructions’.[6]
(d) On 6 August 2020, Mr Mascaro of K&A said that he had started work on preparing amended financial statements for the Trust.
[5]Ibid, [83].
[6]Ibid, [77].
The 2017 transactions involving the Company and NTM and the Millennium Services shares
On about 19 December 2017, the Company, NTM and the Crewes Parties entered an agreement titled Loan & Charge Agreement (‘LCA’).[7] There are various disputes between the parties concerning the LCA.
[7]Ibid, exhibit WC-9.
In December 2017, the Company and NTM entered into a General Security Agreement (‘GSA’).[8] There are various disputes between the parties concerning the GSA.
[8]Ibid, exhibit WC-8.
NTM and Mr Nelson allege that in around December 2017, pursuant to the LCA and the GSA, NTM lent $1,400,000 to the Company (‘Loan’). Pursuant to the LCA, the Loan was repayable (together with any accrued interest owing at the relevant time) on 1 July 2018, or earlier by mutual agreement between the parties (clause 4).
The evidence of Mr Crewes regarding the Loan is that a third party, Mr Darren Rogers, Mr Crewes’ bank manager at the time, told him that he had organised a $1.3 million loan through Mr Anton Gaudry, to allow Mr Crewes to purchase a property in Hawaii. The borrower was to be the Company. The loan was to be guaranteed by Eileen and Wayne Crewes and the loan was to be secured by a charge or unregistered caveat over Mr Crewes’ house at 12 The Cups Drive, Cape Schanck.[9] Mr Crewes says that to ‘get the funds out of for [sic] Mr Gaudry’s superannuation fund’ he had to agree to Mr Gaudry receiving $100,000, to be transferred by him to Mr Gaudry when the loan advance of $1.4 million was received by the Company.[10]
[9]Ibid, [18].
[10]Ibid, [30]-[31].
On 19 December 2017, NTM registered security on the Personal Property Securities Register (‘PPSR’) over ‘All present and after-acquired property – No exceptions’ of the Company.[11] The registration was against the Company’s Australian Company Number, ACN 076 376 308. The Trust has its own ABN number, against which the GSA is not recorded as registered on the PPSR.
[11]Ibid, exhibit [40].
In the Administrators Proceeding it is alleged that the GSA extends not only as security over the assets of the Company, but also as security over the assets of the Trust. Those matters are disputed by the Crewes Parties.
The substantive relief claimed by the Crewes Parties in this proceeding includes:
(a)an order pursuant to s 418A of the Act declaring that the purported appointment by the third defendant, NTM, of Mr Nelson as receiver and manager of the Company was invalid;
(b)a declaration that the Company entered into the following agreements in its own right and not as trustee of the Trust:
(i)the LCA entered into in or about December 2017 between NTM, the Company and the Crewes Parties; and
(ii)the GSA entered into in or about December 2017 between NTM and the Company;
(c)a declaration that the ‘secured or security property’ (as that expression is defined in the GSA) does not include the assets of the Trust; and
(d)further or alternatively, a declaration that any security interest which NTM had in any of the assets of the Trust has vested pursuant to s 267 of the Personal Property Securities Act 2009 (Cth).
In 2017 the assets of the Trust included 6.9 million shares in Millennium Services Group Ltd (‘MIL’), an ASX listed company. If the GSA extended to the Trust assets, at the time it was registered on the PPSR, it extended to those shares.
It is the evidence of Mr Crewes that although he mentioned the MIL shares in his email to Mr Rogers on 31 October 2017, there was no further mention of the MIL shares, or of the Trust, in any of his subsequent dealings with Mr Rogers.
On 12 May 2020, notice of default was issued by NTM to the Company pursuant to the GSA (‘Notice of Default’).[12] The Notice of Default did not specify the event of default relied upon. It was not preceded by any demand or notice to pay under the LCA. Whilst that may be so, by 12 May 2020, the date for repayment of the Loan had well and truly passed.
[12]Ibid, exhibit WC-13.
The Notice of Default provided for 48 hours to remedy the default. It was sent to accountants for the Company, K&A, whose offices were closed due to the COVID-19 pandemic. The Notice of Default was not sent to the solicitors acting for the Crewes Parties, Kalus Kenny Intelex Lawyers (‘KKI Lawyers’), even though there had been prior communications with those lawyers.
The validity of the Notice of Default, and whether necessary steps as a precondition to an entitlement to appoint a receiver as required by the LCA and the GSA were taken by NTM, is in issue in this proceeding.
On 18 May 2020 Mr Nelson was appointed as receiver and manager of the Company by NTM, by a notice, the validity of which is disputed by the Crewes Parties.[13]
[13]Ibid, exhibit WC-16.
If the GSA extends to the assets of the Trust, the security extends to the books and records of the Trust and to the Company in its capacity as (now former) trustee of the Trust. If so, Mr Nelson as receiver, is entitled to those books and records. The entitlement of Mr Nelson to the books and records of the Trust is disputed by the Crewes Parties.
Shortly after his appointment Mr Nelson commenced to make demands for delivery up of books and records. Specifically, for delivery up of books and records of the Company in email exchanges with K&A on 26 and 27 May 2020 and in communications with the former accountants for the company, Shadford Business Advisory Services on 1 and 2 June 2020.[14] It appears that following receipt of information from the former accountants, being copies of the 2015 – 2018 accounts of the Company in its capacity as trustee of the Trust, as prepared by those accountants, Mr Nelson became aware of the activities of the Company as trustee of the Trust.[15]
[14]Fourth defendant, Affidavit of Simon Patrick Nelson, dated 28 August 2020, [12]-[14], [18]-[19] and [26]-[28] (‘Nelson Affidavit’).
[15]Ibid, [28].
On 22 July 2020 Mr Nelson demanded payment of $3,299,889 from Mr and Mrs Crewes within seven days.[16]
[16]Crewes Affidavit, exhibit WC-29.
In the Administrators Proceeding various allegations are made concerning the validity of certain dealings concerning the MIL shares:
a) On 25 January 2018, 750,000 shares in MIL were sold on-market. It is alleged that the sale and the disposition of the proceeds by the Company was in breach of director’s duties, and constituted an improper use of position to gain advantage (‘First Transfer’).
c) Between 10 September and 4 October 2018, 40,000 shares in MIL were transferred to Mr and Mrs Crewes as trustees for the W and E Crewes Superannuation Fund (‘WECSF’) (‘Second Transfer’).
d) On 7 March 2019, 519,516 shares in MIL were transferred to Mr and Mrs Crewes as trustees for the WECSF (‘Third Transfer’).
e) Between 7 March and 7 October 2019, 2.5 million shares in MIL were transferred by the Company to Mr and Mrs Crewes as trustees for the WECSF (‘Fourth Transfer’).
f) On or after 19 May 2020, 662,606 shares in MIL were transferred to Ms Mort at an undervalue of $133,521 (market value of $240,000) (‘Fifth Transfer’).
g) On or after 19 May 2020, 662,607 shares in MIL were transferred to Ms Tregent-Crewes at an undervalue of $133,521 (market value $240,000) (‘Sixth Transfer’).
h) In June 2020, Ms Mort and Ms Tregent-Crewes transferred shares, which were subject of the Fifth and Sixth Transfers, to Stanhope Street (‘Seventh and Eighth Transfers’).
An abbreviated history of the proceedings
The Administrators Proceeding was commenced by Originating Process filed on 25 May 2020.
The Crewes Proceeding was commenced by Originating Process filed on 7 August 2020.
On 13 August 2020 an application filed in the Crewes Proceeding by the Crewes Parties to restrain the Administrators from taking any step as administrators of the Company, and for other orders, was resolved by agreement between the parties. Resolution was on the basis that the Administrators were restrained from taking action as administrators including holding the second meeting of creditors scheduled for 18 August 2020, in exchange for undertakings given by the Crewes Parties. Those undertakings include, in substance, the following:
A. The Crewes Parties giving the usual undertaking as to damages.
B. The Crewes Parties, in their capacity as directors and shareholder of Stanhope Street as the trustee for the Trust, undertaking not to take any step to cause Stanhope Street to transfer, encumber or otherwise deal with the assets of the Trust without first giving seven days written notice to the Administrators.
C. The Crewes Parties, in their capacity as directors and shareholder of Stanhope Street as the trustee for the Trust, undertaking not to take any step to cause Stanhope Street to be removed as trustee of the Trust until further order. Eileen Crewes, as the appointor of the Trust, undertaking that she will not take any step to remove Stanhope Street as the trustee of the Trust, or appoint any other person or entity as trustee for the Trust until further order.
D. The Crewes Parties undertaking that they will not take any step to remove themselves as directors of Stanhope Street, or to appoint any other person as director of Stanhope Street until further order.
E. The Crewes Parties undertaking that at the settlement of the sale of the property situated at Unit 18, Alani Loop, Kohanaiki, Hawaii they will pay the net proceeds of the sale into the trust account of KKI Lawyers to be held until further order, and will not direct KKI Lawyers to transfer the net proceeds of sale to any person or entity until further order.
On 13 August 2020 Orders were made including:
(a) restraining the Administrators from taking any step in furtherance of their purported role as Administrators of the Company, pursuant to ss 1322(4)(d) and 439A(6) of the Act; and
(b) extending the time for convening the second meeting of creditors of the Company pursuant to s 439A(5)(b) of the Act to a date within 20 business days after the date of the determination of the Crewes Proceeding.
On 21 August 2020, the Crewes Parties were granted derivative leave to bring substantive claims in the name of the Company and to join Mr Nelson as a defendant to this proceeding. That application was resolved by consent between the parties, upon undertakings being given by the Crewes Parties. As a condition of the grant of derivative leave, the Crewes Parties gave an undertaking to indemnify the Company in respect of any adverse costs orders made against the Company in this proceeding.
The application to restrain or remove Mr Nelson as receiver, brought pursuant to the grant of derivative leave, was listed for hearing on 4 September 2020.
The application
On 26 August 2020, Mr and Mrs Crewes filed an amended application under s 447A of the Act, claiming relief including:
2.Pursuant to the Court’s inherent jurisdiction, leave to bring a proceeding on behalf of, and in the name of, the Company for:
(a)….
(b)an injunction, pending the hearing and determination of the proceeding, restraining Simon Patrick Nelson from taking any step in furtherance of his purported role as receiver and manager of the Company; and
(ba)an order pursuant to s 434A of the Act that Simon Patrick Nelson forthwith cease to act as the purported receiver and manager of the Company, or give up his control of the property of the Company, on the ground that he has been guilty of misconduct in connection with performing or exercising his functions and powers;
(f)an order that the costs of the proceeding be paid by Simon Patrick Nelson on an indemnity basis
3.…
4.Costs, further or alternatively, that the costs of the interlocutory process be paid by Simon Patrick Nelson, Anton Jerome Frederick Gaudry and NTM on an indemnity basis.
5.…
There are two limbs to the application. The first, an application to remove Mr Nelson as receiver and manager of the Company for misconduct, relying upon s 434A of the Act. The second, only necessary to be decided if the first application fails, an application for injunctive relief restraining Mr Nelson from taking any step as receiver and manager until the hearing and determination of the two proceedings.
In support of the application the Crewes Parties relied on:
a) affidavits of Mr Crewes dated 7 August 2020 (‘Crewes Affidavit’) and 1 September 2020 (‘Second Crewes Affidavit’); and
b) affidavits of Mr Michael Jonathan Kenny, solicitor of KKI Lawyers, dated 11 August 2020, 12 August 2020, 17 August 2020 and 1 September 2020.
The Crewes Parties relied on written submissions dated 17 August 2020 (‘Crewes’ August Submissions’) and 2 September 2020 (‘Crewes’ September Submissions’). During the hearing on 4 September 2020 they also referred to and relied on the affidavit of one of the Administrators, Mr Paul William Langdon dated 12 August 2020, and upon the affidavit in opposition made by Mr Nelson dated 28 August 2020 (‘Nelson Affidavit’).
NTM opposed the application to remove and/or restrain the receiver and manager appointed by it. NTM did not file evidence. It relied on submissions dated 13 August 2020 and 2 September 2020. It also referred to correspondence between the solicitors for the parties between 24 August 2020 and 26 August 2020.
In opposition to the application Mr Nelson relied on the Nelson Affidavit, submissions dated 2 September 2020 (‘Nelson’s Submissions’) and a chronology and bundle of documents filed on 2 September 2020.
During the hearing counsel for each of the parties proffered various undertakings on behalf of their respective clients as a suggested basis of resolving the application for injunctive relief without an injunction being granted.
The determination of the application for injunctive relief is informed both by the existing undertakings in the two proceedings, and by the fresh undertakings proffered by the parties on the hearing of the application.
There have been a number of demands made by or on behalf of Mr Nelson for delivery up of the books and records, not only of the Company, but of the Trust. However, those demands have not resulted in the delivery up of books and records of the Trust. As a result, the asserted entitlement of Mr Nelson as receiver to the books and records assumed significance on the hearing of the application.
Mr Nelson and NTM rely upon the charging provision, clause 3(a), of the GSA concerning their asserted entitlement to the books and records of the Trust. That clause provides:
To secure the due and punctual payment or repayment of the secured moneys, the grantor charges in favour of the secured party all its right title and interest in, to, under or derived from the secured property.
‘Secured or security property’ is defined in clause 2 of the GSA to include non-circulating property. In turn, ‘non-circulating property’ is defined to include ‘books of account’ (clause 2(l)(i)).[17]
[17]Crewes Affidavit, exhibit WC-8.
Mr Nelson, supported by NTM, submits that having regard to these provisions, it is clear that a secured party has a right to ask for and inspect the books of account, and a receiver appointed over the secured property has rights over the books of account, by virtue of the books of account being included within the definition of secured property. In addition those parties rely upon s 420(1) of the Act, which provides that a receiver has a broad power to do ‘all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed’ including the specific powers in s 420(2) of the Act. It is submitted that given the receiver has such broad powers under the Act, the requests by Mr Nelson for delivery up to him of the books and records of the Trust were appropriate.
What those submissions fail to grapple with is whether the security in favour of NTM, assuming its validity for these purposes, extends to the books and records of the Trust, as opposed to those of the Company, and similarly, whether in this case, s 420 of the Act has application to the books and records of the Trust.
The Crewes Parties contend that the GSA does not extend to the Trust or to its assets. They contend that as a result, there is no security held by NTM over the books and records of the Trust, as distinct from the books and records of the Company, and whatever powers the receiver might have under s 420 of the Act, they do not extend to property of the Trust, including its books and records.
By reason of the proposed undertakings offered by the Crewes Parties and by Stanhope Street, even if it were appropriate to determine the entitlement to the books and records of the Trust on the injunction application, which it is not, it is unnecessary to do so.
Undertakings offered by the parties and by Stanhope Street
Through their counsel NTM and Mr Nelson contended that the application ought be dismissed upon their respective clients giving undertakings in substance as follows:
[I]n the event that the Court is minded to make reciprocal restraints upon the parties pending trial, Mr Nelson and NTM would undertake to the Court not to take any steps to dispose of, or cause the Company to dispose of any of its property pending the determination of this proceeding and proceeding S ECI 2020 02306, unless otherwise ordered by the Court.[18]
[18]Fourth Defendant, Letter from Aitken Partners to the Court, dated 8 September 2020; Third Defendant, Letter from Lennon Lawyers to the Court, dated 8 September 2020. The undertaking offered by Mr Nelson was in accordance with paragraph [58] and the undertaking offered by NTM read as follows ‘In the event that the Court is minded to order reciprocal restraints upon the parties pending trial, the Third Defendant would undertake to the Court not to take any steps to cause the Second Plaintiff to dispose of any of its property pending the determination of this proceeding and proceeding number S ECI 2020 02306 unless otherwise ordered by the Court.’
The reciprocal restraints to which the proposed undertaking refers include undertakings offered during the course of the hearing by both the Crewes Parties and by Stanhope Street, a non-party to the proceeding, to maintain the integrity of the books and records of the Trust. Taken together with undertakings earlier offered by the Crewes Parties, the combined undertakings proposed are as follows:
A.The first plaintiffs will abide by any order which this Court might make as to damages, in case this Court shall be of the opinion that any person shall have sustained any loss by reason of this order, which the party giving the undertaking ought to pay.
B.The first plaintiffs, in their capacity as directors and shareholder of 3 Stanhope St Pty Ltd as the trustee for the National Property Trust, will not take any step to cause 3 Stanhope St Pty Ltd to transfer, encumber or otherwise deal with the assets of the National Property Trust without first giving 7 days written notice of any intention to do so, which written notice shall be provided to the solicitors for the third and fourth defendants.
C.The first plaintiffs, in their capacity as trustees for the W and E Crewes Superannuation Fund, will not take any step to cause the Fund to transfer, encumber or otherwise deal with the shares referred to in paragraphs 35, 46 or 57 of the proposed statement of claim in S ECI 2020 02306 (as exhibited at ex. “AAL-4” to the affidavit of Adam Alexander Lopez dated 20 July 2020 and filed in that proceeding) without first giving 7 days written notice of any intention to do so, which written notice shall be provided to the solicitors for the third and fourth defendants.
D.3 Stanhope St Pty Ltd as the trustee for the National Property Trust, by the first plaintiffs who are its directors and shareholders, will maintain the integrity of the books and records of the National Property Trust and will not, by its directors, servants or agents, take any steps to destroy, delete, erase or alter any such books and records.
Before dealing with the injunction application and whether any and if so what orders ought to be made in light of the undertakings reproduced at paragraphs 58 and 59, it is necessary to deal with the application to remove Mr Nelson for misconduct.
Application to remove the receiver, Mr Nelson, for misconduct
Grounds relied upon
Four matters are relied upon as constituting misconduct, both separately and in combination. At my request, counsel for the Crewes Parties ranked the alleged misconduct of which complaint was made:
(1) first, the 14 August 2020 letter from Mr Nelson to Mr Kenworthy and Mr Mascaro of K&A (‘14 August Letter’);
(2) second, the lack of candour with the Court on affidavit;
(3) third, abuse of process concerning the appointment of the Administrators and the first meeting of creditors; and
(4) fourth, the behaviour of the receiver in relation to a potential s 418A application.
Given the significance placed upon the 14 August Letter it is appropriate to set out the substantive parts of the letter in full:
As indicated, the records that the Company is required to retain under section 286 of the Corporations Act includes those records related to its activities as trustee.
As you are fully aware, the Company acted as trustee of the National Property Trust from the date of the trust’s formation until 27 May 2020.
I originally contacted your office prior to 27 May 2020 at time when the Company was still the trustee of the National Property Trust.
The fact that you have elected not to produce records of the Company as trustee to me is simply dishonest and highly unprofessional.
You are now suggesting that I am only entitled to original records and not copies of records in your firm’s possession.
I suggest that you revisit your proposed response to my request.
I will be referring your unprofessional and dishonest conduct to the Chartered Accountants Australia New Zealand and the Australian Securities and Investments Commission.
It appears that you have colluded with Mr Crewes to hinder both the Receiver and the administrators in the discharge of their duties.
Your behaviour has added significantly to the cost of the Receivership. The inability of the Receiver to obtain records has resulted in my appointor having to appoint administrators to the company at further expense.
The direct time cost of the Receivership to date are in the region of $100,000. Your actions have added to these costs.
My appointor and I expressly reserve our legal rights as against your firm.
I recommend that you make the appropriate notification to your professional indemnity insurers.
The Crewes Parties’ complaints concerning the 14 August Letter can be summarised as follows:
(a) it contains serious allegations of dishonest and unprofessional conduct for which Mr Nelson had no factual basis or foundation;
(b) it alleges collusive behaviour with Mr Crewes without any basis for such an allegation;
(c) it contains threats to report Mr Kenworthy and Mr Mascaro to their professional association and to the Australian Securities and Investments Commission (‘ASIC’) for such conduct and behaviour as alleged – again, without any proper basis for such threatened reporting;
(d) it contains a threat of instituting legal proceedings for damages said to be sustained due to such alleged behaviour on the part of Mr Kenworthy and Mr Mascaro; and
(e) the allegations and threats were made to blackmail Mr Kenworthy and Mr Mascaro into doing as Mr Nelson pleased.[19]
[19]Crewes’ September Submissions, [63]-[66].
Nelson’s Submissions deny that the sending of the 14 August Letter constitutes misconduct. Given the seriousness of the allegations against Mr Nelson, it is appropriate to set out the submissions made on his behalf in answer to the allegations concerning the letter (citations omitted):
38.Fourth, in respect of paragraph 53(d) of the plaintiffs’ submissions, the plaintiffs submit that the contents of the letter dated 14 August 2020 constitute blackmail or coercion and therefore, misconduct within the meaning of s 418A of the Act. This submission cannot be sustained. Blackmail is a criminal offence under the Crimes Act 1958 (Vic). The Court would need to be satisfied that the relevant elements of the offence are made out beyond reasonable doubt. Section 87(1) of the Crimes Act 1958 (Vic) provides: “a person is guilty of blackmail if, with a view to gain for himself or another or with intent to cause loss to another, he makes any unwarranted demand with menaces; and for this purpose a demand with menaces is unwarranted unless the person making it does so in the belief— (a) that he has reasonable grounds for making the demand; and (b) that the use of the menaces is proper means of reinforcing the demand.”
39. The allegation of blackmail has been made on the basis of the 14 August 2020 letter and this is wholly insufficient evidence to make out any of the elements of the offence. Even if it were sufficient to amount to an unwarranted demand or to menaces, the exceptions in 87(1)(a) and (b) make it clear that conduct does not constitute blackmail if a person had reasonable grounds for making a “demand” and that the demand was necessary. By requesting information in his letter of 14 August 2020, the receiver was making a request for information which was reasonable in the circumstances because the General Security Agreement gave the receiver a right to that information. Further, such information was fundamental to his role as a receiver.
…
42.The letter of 14 August 2020 must be understood in the context in which it was sent. By 14 August 2020, Mr Nelson had been the receiver of TSH for approximately three months and despite repeated requests to the plaintiffs’ accountants, the plaintiffs and others, the relevant documentation had not been forthcoming. Such delay meant that Mr Nelson’s ability to perform his obligations as a receiver was being hampered. The limited information that had been provided to Mr Nelson was inconsistent and questionable. For a significant period of Mr Nelson’s appointment the plaintiffs and K&A have maintained the position that they have no books and records pertaining to TSH. Various sets of financial statements have now been prepared for K&A for the purposes of this litigation presumably using information obtained from the books and records of TSH. Those books and records, in particular, the information that would have been used to enter the opening balance figures in the financial statements prepared by K&A have not been provided to Mr Nelson.
…
44. In this context, the contents of the 14 August 2020 letter reveal the frustrations experienced by Mr Nelson. Further, the letter sets out a series of facts and simple propositions of law namely that:
(a) TSH is required to retain the documents listed under s 286 of the Act, including records relating to the activities of TSH as trustee of the National Property Trust;
(b) Mr Nelson contacted the plaintiffs’ accountants as early as 26 May 2020 at the time when TSH was the trustee of the National Property Trust;
(c) no documents have been produced;
(d) Mr Nelson considered that the accountants’ conduct was dishonest and unprofessional and that he would be referring the plaintiffs’ accountants to the Chartered Accountants Australia New Zealand and the Australian Securities and Investments Commission;
(e) failure to produce the requested documentation has added to the cost of the Receivership;
(f) administrators have been appointed by NTM better to protect their position;
(g) Mr Nelson expressly reserved his legal rights against them; and
(h) Mr Nelson recommended that they make appropriate notifications to their professional indemnity insurers.
45. That Mr Nelson advised the plaintiffs’ accountants that he would be referring them to their regulatory body does not constitute blackmail or coercion. He was merely putting them on notice that that was what he was intending to do. This can also be said in relation to Mr Nelson’s indication that he was reserving his legal rights, which he is entitled to do. Further, in respect of the recommendation that the plaintiffs’ make notifications to their professional indemnity insurers, this recommendation cannot be construed as blackmail or coercion. There is no “or else” component to coerce the accountants.
The second matter, lack of candour, is based upon the response on affidavit by Mr Nelson to the misconduct allegations levelled against him. The Crewes Parties submit that:
(a) The response to the 14 August Letter in the Nelson Affidavit in opposition lacks candour.
(b) On 27 August 2020 the solicitors for Mr Nelson said that his affidavit would respond setting out facts, matters and circumstances relied upon in support of the allegations made in the 14 August Letter,[20] as earlier requested by the solicitors acting on behalf of the Crewes Parties, but it failed to do so.
(c) The critical paragraphs of the Nelson Affidavit that ‘summarise’ the 14 August Letter are significant for what they do not say. They do not refer to the claims in the 14 August Letter that the accountants had engaged in dishonest behaviour and ‘unprofessional conduct’ and had colluded with the Crewes Parties.
(d) Separately, a lack of candour is also present on the part of Mr Nelson so far as his account of the events of the first meeting of creditors is concerned.[21]
[20]Plaintiff, Affidavit of Michael Jonathan Kenny, dated 1 September 2020, exhibit MJK-13.
[21]Nelson Affidavit, [45]-[48].
Once again, it is appropriate to set out in full what the Nelson Affidavit says concerning the 14 August Letter:
50.As a consequence of the inconsistencies I identified between the information that Mr Crewes and K&A provided to me and Mr Crewes’s affidavit, I asked Mr Kennedy to write to K&A on 11 August 2020 to clarify what documentation they had to prepare the new set of accounts referred to in paragraph 78 of Mr Crewes’ affidavit. At page 150 of exhibit “SPN-1” is a copy of this email dated 11 August 2020.
51.In this email, Mr Kennedy raised four matters. First, he asked K&A to confirm whether it held any records for TSH as trustee for the Trust at the date of the receiver and manager’s appointment. Second, Mr Kennedy said that if K&A had any records of TSH as trustee for the Trust, he would be grateful if K&A could please specify what records they held. Third, Mr Kennedy asked if K&A could confirm if they had provided any records where TSH acted as trustee of the Trust to Kalus Kenny Intelex Lawyers. Fourth, Mr Kennedy asked if K&A could confirm if they had provided any records to the new trustee of the Trust, 3 Stanhope Street Pty Ltd.
52.On 13 August 2020, Mr Kennedy received a reply email from Mr Kenworthy. The four matters raised in Mr Kennedy’s email of 11 August 2020 were not addressed in Mr Kenworthy’s reply. The only matter which Mr Kenworthy vaguely addressed was Mr Kennedy’s second query, where he requested that K&A specify what records they held. In this regard, Mr Kennedy stated that:
(a)he suspects he only has copies of “financial statements and tax returns etc”;
(b)he does not think they have any original records of the Trust;
(c)he will check if he can obtain an exemption to attend his office to review what physical documents he has in his possession for the Trust;
(d)he has some copies of documents for the Trust in electronic form but that he is not sure if they constitute “records” because they are in electronic format.
53.At page 151 of exhibit “SPN-1” is a copy of that email dated 13 August 2020.
54.Mr Kenworthy’s representations in this email are inconsistent with his representations made to me on 27 May 2020 that K&A hold no records for TSH or the Trust. I was concerned about the falsity of the representations or, if they were not false at the time they were made, then K&A’s failure to update me that they had come into their possession. I was likewise concerned about the risk of losing original records as Mr Crewes had deposed in his affidavit, at paragraphs 73 to 78, that K&A was re-writing and amending accounts of TSH including the Trust.
55.It was then almost three months since my appointment and, despite repeated requests I was not getting the important documents and information that I am entitled to as a receiver and manager appointed by NTM and which are critical to doing that job. I was concerned about what appeared to me to be delaying tactics and obfuscation by the directors of TSH.
56.Consequently, I wrote the letter dated 14 August 2020 to K&A:
(a)querying why K&A refused to provide me with electronic records;
(b)querying why K&A were making a distinction between original records and copy or electronic records and implying that I was only entitled to the former;
(c)suggesting that they revisit their response to my request for information and records;
(d)informing them that I would be referring them to their regulatory body;
(e)informing them of my belief that their actions have hindered me in the discharge of my duties to my appointor;
(f)informing them that their conduct has added to the cost of the receivership;
(g)informing them that my inability to obtain records has resulted in an administrator being appointed to TSH; and
(h)informing them that I would be reserving my legal rights against them.
57.At pages 152 to 153 of exhibit “SPN-1” is a copy of my letter dated 14 August 2020.
58.I still have the concerns referred to in paragraphs 54, 55 and 56 above, which I am pursuing by my solicitors’ correspondence.
The third ranked allegation of misconduct is in substance that Mr Nelson procured or was improperly involved in the appointment of Administrators to the Company and that when he attended the first meeting of creditors his participation, which involved him questioning Mr Crewes was improper and outside the purposes of such a first meeting as provided for in s 436E of the Act.
The fourth ranked matter concerns the initial indication from Mr Nelson that he would make an application to the Court as to the validity of his appointment under s 418A of the Act in light of the matters the Crewes Parties had raised and his subsequent refusal/failure to make such an application.
It is not necessary to set out the competing arguments relied upon by the parties concerning the third and fourth matters. To the extent material, those arguments are discussed below.
‘Misconduct’: the principles to be applied
Section 434A of the Act provides:
Where, on the application of a corporation, the Court is satisfied that a controller of property of the corporation has been guilty of misconduct in connection with performing or exercising any of the controller’s functions and powers, the Court may order that, on and after a specified day, the controller cease to act as receiver or give up possession or control, as the case requires, of property of the corporation.
Section 9 of the Act defines ‘misconduct’ to include ‘fraud, negligence, default, breach of trust and breach of duty’. The parties are agreed that the definition is not an exhaustive list of what constitutes ‘misconduct’ for the purposes of s 434A.
As noted in the submissions filed on behalf of the Crewes Parties, s 434A has been subject to limited judicial attention.[22] At the invitation of the Court, following the conclusion of the hearing, the Crewes Parties and Mr Nelson filed further submissions as to the meaning of ‘misconduct’.
[22]Crewes’ September Submissions, [39].
The Crewes Parties’ Supplementary Submissions included the following (citations in original, emphasis in original):
3.The word ‘includes’ is ordinarily non-exhaustive.[23] It is principally used to expand the ordinary and natural meaning of the defined term or to remove doubt that certain things fall within the meaning of the defined term. In such cases, it does not restrict the ordinary and natural meaning of the defined term.[24]
[23]See, eg, Horsell International Pty Ltd v Divetwo Pty Ltd (2013) 18 ANZ Insurance Cases 61-991; [2013] NSWCA 368, [166] (McColl JA; Beazley P agreeing).
[24]Herzfeld, P & Prince, T, Interpretation, 2nd ed. Lawbook Co (2020), 478 [21.40].
4.In Cook v Northoak Holdings Pty Ltd (Receiver & Manager Appointed),[25] the Full Court of the Supreme Court of Western Australia did not criticise the observations of the Master, below, that the list of matters falling within the definition of ‘misconduct’ in s 9 was not exhaustive and included impropriety and bad faith resulting in a breach of duty owed by the receiver to the company agent pursuant to the debenture.
[25](1997) 25 ACSR 517; (1997) 15 ACLC 1656.
5.In O’Connor v Palmer and Others (No 1),[26] the Commonwealth Industrial Court said:
[26](1959) 1 FLR 397 (Spicer CJ and Dunphy J).
Without attempting to define exhaustively the word “misconduct” it involves something more than mere negligence, error of judgment or innocent mistake.[27]
[27]Ibid, 401.
6.A more expansive definition of the term ‘misconduct’ is found in Pillai v Messiter (No 2),[28] which concerned an appeal from a medical tribunal in respect of a decision that the appellant’s name be removed from a register of medical practitioners for misconduct:
[28](1989) 16 NSWLR 197.
The words used in the statutory test (“misconduct in a professional respect”) plainly go beyond that negligence which would found a claim against a medical practitioner for damages: Re Anderson, (at 575). On the other hand gross negligence might amount to relevant misconduct, particularly if accompanied by indifference to, or lack of concern for, the welfare of the patient: cf Re Anderson (at 575). Departures from elementary and generally accepted standards, of which a medical practitioner could scarcely be heard to say that he or she was ignorant could amount to such professional misconduct: ibid. But the statutory test is not met by mere professional incompetence or by deficiencies in the practice of the profession. Something more is required. It includes a deliberate departure from accepted standards or such serious negligence as, although not deliberate, to portray indifference and an abuse of the privileges which accompany registration as a medical practitioner: cf Allinson (at 760-761). These are the approaches which have been taken in our courts. They have been taken in the courts of England where such misconduct is alleged. And they have similarly been taken in the courts of the United States. The entry in Corpus Juris Secundum, vol 58, (1948) at 818, reads:
“Both in law and in ordinary speech the term ‘misconduct’ usually implies an act done willfully with a wrong intention, and conveys the idea of intentional wrongdoing. The term implies fault beyond the error of judgment; a wrongful intention, and not a mere error of judgment; but it does not necessarily imply corruption or criminal intention, and, in the legal idea of misconduct, an evil intention is not a necessary ingredient. The word is sufficiently comprehensive to include misfeasance as well as malfeasance, and as applied to professional people it includes unprofessional acts even though such acts are not inherently wrongful. Whether a particular course of conduct will be regarded as misconduct is to be determined from the nature of the conduct and not from its consequences.”
Reference to much United States authority is provided to support this passage. In the 1988 supplement to the Corpus, reference is made to Beaunit Mills Inc v Board of Review, Division of Employment Security, Department of Labor and Industry 128 A 2d 20 (1956). In that case, the New Jersey Superior Court held that “misconduct” does not mean mere mistakes, errors in judgment or in the exercise of discretion or minor but casual or unintentional, carelessness or negligence. It did not mean mere inefficiency, unsatisfactory conduct, failure of performance as a result of inability or incapacity inadvertent in isolated instances or errors of judgment which were not made in bad faith or some other ingredient. Numerous other recent cases are cited to support the proposition that, in the United States, “misconduct” generally means wrongful, improper or unlawful conduct, motivated by premeditated or intentional purpose or by obstinate indifference to the consequences of one's acts. Similar approaches to the meaning of the word “misconduct” have been taken in Australia, outside the context of professional discipline: see, eg, O'Connor v Palmer (No 1) (1959) 1 FLR 397. The primary dictionary meanings confirm that this is also the way “misconduct” is used in everyday speech.[29] [emphasis added]
7.In Rees v Bailey Aluminium Products Pty Ltd,[30] the Victorian Court of Appeal cited Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council[31] and White Industries (Qld) Pty Ltd v Flower & Hart (A Firm)[32] as authorities for the proposition that the making of an allegation of fraud, when there is no factual basis for it, constituted a serious dereliction of duty and misconduct (in Rees, by reference to counsel).
8.Nikolaidis v Legal Services Commissioner[33] was a case concerning alleged misconduct by a solicitor. In that case, Hodgson JA said that, for conduct to amount to professional misconduct according to general law principles, there must be significant personal misconduct, either deliberate or negligent.[34] Beazley JA (albeit dissenting in the result) noted that the word ’deliberate’ is a word of ordinary English meaning. The Australian Concise Oxford Dictionary defines its meaning as ‘intentional’; ‘fully considered’ and ‘not impulsive’. The Macquarie Dictionary definition is the same.[35]
[29]Ibid, 200-1 (Kirby P).
[30](2008) 21 VR 478, [32].
[31](1990) 71 LGRA 201.
[32](1998) 156 ALR 169.
[33][2007] NSWCA 130.
[34]Ibid, [93].
[35]Ibid, [77].
Cook v Northoak Holdings Pty Ltd (Recs and Mgrs Apptd)[36] is the only case identified by the parties which directly involved s 434A of the Act. At first instance, the Court constituted by a Master, found impropriety on the part of the receiver amounting to misconduct. The facts concerned whether a decision by the receiver not to prosecute a proposed action on behalf of the company of which he was appointed receiver was misconduct. The Western Australian Court of Appeal allowed an appeal. The Court was not satisfied that the receiver had engaged in misconduct. The Court rejected the finding by the Master that the receiver’s failure to seek directions from the Court constituted misconduct. Steytler J, with whom Kennedy and Heenan JJ agreed, said as follows (citations omitted):
The decision whether or not to discontinue the action was a commercial one which might well have been regarded as one in respect of which an application for directions was inappropriate.[37]
[36](1997) 25 ACSR 517 (‘Cook’).
[37]Ibid, 526.
In Nelson’s Submissions, Mr Nelson submits (citations in original):
16.The type of conduct the definition of “misconduct” under s 9 of the Act envisions is of a serious nature. This is evidenced by the inclusion of the term “fraud”. In determining whether or not a claim of misconduct is made out, the Court should have regard to the “gravity of the matters alleged.”[38] Mere oversight or excess of zeal would not suffice. It is submitted that there must be compelling evidence before the Court before a finding of misconduct can be made.[39] This is consistent with the inclusion of the term “guilty” in s 434A of the Act. Further, a controller’s job often calls for robust and persistent efforts. A receiver is there to protect the property rights of the secured creditor which are not lightly interfered with.
17.Whether or not conduct is “misconduct” within the meaning of s 434A will depend on the circumstances of each case.[40] In determining whether or not a receiver has engaged in misconduct, regard should be had to the power and obligations of a receiver, which in this case arise under the General Security Agreement.[41] One of the primary duties of a receiver is to take the steps required to ensure that the secured creditor who appointed him or her is repaid.[42] In the case of Sheahan v Carrier Air Conditioning Pty Ltd the High Court referred to the decision of the Court in Re B Johnson & Co (Builders) noting that:
[A] person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realise the security; that is the whole purpose of his appointment; and the powers which are conferred upon him, and which I have to some extent recited, are … really ancillary to the main purpose of the appointment, which is the realisation by the mortgagee of the security.[43]
[38]Evidence Act 2008 (Vic) s 140(2)(c).
[39]Briginshaw v Briginshaw (1938) 60 CLR 336, 362-3 (Dixon J); Basser v Medical Board of Victoria [1981] VR 953, 969 (O’Bryan J); Mair v Public Accountants Registration Board (1989) 17 ALD 153, 2.
[40]F Assaf, ‘The privately-appointed receiver’ in LexisNexis, Australian Corporation Law Principles & Practice (June 2012) [5.2.0090]. Within the meaning of s 333 of the Act but went on to consider the concept of “misfeasance” within the section and concluded that misfeasance could not be made out. The Court held that the not every type of wrongful act will be misfeasance and that an ordinary claim for damages for negligence would simply not be covered by that section (at 781).
[41]And to some extent will be regulated by Part 5.2 of the Act. Also see clause 16(b) of the General Security Agreement at WC-8 of the Crewes Affidavit.
[42]F Assaf, ‘The privately-appointed receiver’ in LexisNexis, Australian Corporation Law Principles & Practice (June 2012) [5.2.00990].
43Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407, 436 (Dawson, Gaudron and Gummow JJ) citing with approval Re B Johnson & Co (Builders) [1955] Ch 634, 644-645.
In Re B Johnson & Co (Builders) Ltd,[44] an allegation of misfeasance was made against a receiver, which was a statutory offence under s 333(1) of the Companies Act 1948. The case concerned the meaning of ‘misfeasance’ in that statutory context. ‘Misfeasance’ is not included within the definition of ‘misconduct’ in s 9 of the Act. It is however referred to in s 423(2) of the Act as one of the matters upon which ASIC may found a report to the Court, should it appear to ASIC that a controller, including a receiver has not or is not faithfully performing the controllers functions pursuant to his or her order appointment. Given the express reference to ‘misfeasance’ in s 432 of the Act and the lack of any express reference to misfeasance in the definition of misconduct in s 9, the decision in Re B Johnson[45] is of little assistance in the task of statutory construction concerning s 434A.
[44][1955] Ch 634 (‘Re B Johnson’).
[45]Ibid. Re B Johnson [1955] Ch 634 has been cited with approval by the High Court in Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407. As reported in their submissions dated 8 September 2020, counsel for Mr Nelson did not locate any further cases which cite Re B Johnson and elucidate the concept of misconduct.
On behalf of Mr Nelson it was submitted that it is clear from the language of s 434A of the Act and the decision in Cook,[46] that there is an element of guilty intent, or moral turpitude, including bad faith or impropriety, involved in a finding of ‘misconduct’. Applying such an approach, Mr Nelson maintains that he is not by his pursuit of the Company books, guilty of wrongdoing, let alone misconduct.
[46](1997) 25 ACSR 517.
Misconduct: consideration
Section 434A involves two steps. First, the determination of whether the relevant conduct in which the controller is said to have engaged constitutes ‘misconduct’. Second, if so, how the discretion embedded in the language of the section, including the power to order that the receiver cease to act as receiver should be exercised.
When s 434A of the Act is read in conjunction with the inclusive definition of ‘misconduct’ in s 9, it may be accepted that in cases of fraud or breach of trust, irrespective of the seriousness or the extent of the offending behaviour, misconduct is likely to be made out for the purposes of s 434A. It cannot be said that the same applies to every case where there is either negligence, default or breach of duty on the part of the controller, (as defined in s 9) including a receiver acting as controller. As held in O’Connor v Palmer (No 1), ‘the word “misconduct”… involves something more than mere negligence, error of judgement or innocent mistake’.[47]
[47](1959) 1 FLR 397 (Spicer CJ and Dunphy J), 401.
A trivial breach of duty or negligence which results in minimal damage is unlikely to constitute ‘misconduct’ for the purposes of a section that requires the court be satisfied that the controller has been ‘guilty of misconduct in connection with performing or exercising … the controller’s functions and powers’.[48]
[48]Corporations Act 2001 (Vic), s 434A. See the discussion in Pillai v Messiter (No 2) (1989) 16 NSWLR 197 in paragraph [73] above.
I accept the submission on behalf of Mr Nelson that the reference to ‘guilty of misconduct’ suggests a level of impropriety or bad faith.[49] Here the alleged misconduct has taken place in the performance by Mr Nelson of his role as receiver and manager of the Company. Whether or not impropriety is established is to be considered in that context and against the standards of behaviour expected of a receiver properly carrying out his or her functions and duties in a professional manner befitting that role.
[49]Cook (1997) 25 ACSR 517.
Pham v Legal Services Commissioner,[50] a case involving a solicitor, required the Court of Appeal to consider the meaning of ‘professional misconduct’ at common law (citations in original):
[50][2016] VSCA 256 (‘Pham’).
77.The common law meaning of the term ‘misconduct’, in the context of behaviour alleged against a professional person, has been well settled for more than one century. Its origins are in the judgment of Lopes LJ in Allinson v General Council of Medical Education and Registration.[51] In that case, the Court of Appeal was concerned with a statutory phrase ‘infamous conduct in any professional respect’ in the context of disciplinary proceedings against a medical practitioner. Lopes LJ held that that phrase denoted conduct by a professional person ‘... which would be reasonably regarded as disgraceful or dishonourable by his professional brethren of good repute and competency’.[52] Subsequently, in Re a Solicitor; ex parte Law Society,[53] the Court of King’s Bench Division applied that definition to a solicitor in a case involving the meaning of the phrase ‘professional misconduct’ in the Solicitors Act 1888 (UK).[54] Subsequently, that meaning has gained currency in a number of Australian decisions.[55]
[51][1894] 1 QB 750.
[52]Ibid 763.
[53][1912] 1 KB 302.
[54]See Myers v Elman[1940] AC 282, 288–9 (Viscount Maugham).
[55]See, eg, In re A Solicitor [1932] ArgusLawRp 113; [1933] VLR 103, 105 (Mann J); Re A Solicitor [1960] VicRp 96; [1960] VR 617, 620, 622 (Dean J); Re Mayes v the Legal Practitioners Act[1974] 1 NSWLR 19, 24–25; Prothonotary of the Supreme Court of New South Wales v Costello[1984] 3 NSWLR 201, 203 (Glass JA and Samuels JA), 207 (Priestley JA).
78.The present case involves the meaning of the phrase ‘professional misconduct’. In Cummins,[56] the New South Wales Bar Association issued a summons in the Court of Appeal seeking an order that the name of the respondent, an experienced member of senior counsel, be removed from the roll of legal practitioners, on the ground that the respondent had failed to lodge a taxation return for 38 years. Spigelman CJ (with whom Mason P and Handley JA agreed) held that the court should declare that the respondent was not a fit and proper person to remain on the roll of legal practitioners. His Honour was satisfied that the respondent’s complete disregard of his legal and civic obligations, relating to the payment of income tax, was of such magnitude that he must be regarded as permanently unfit to practise.[57] The Bar Association also sought declarations that the respondent had been guilty of professional misconduct, and that he was not a fit and proper person to be on the roll of legal practitioners. The Chief Justice held that it was appropriate in the case to make both declarations.
[56](2001) 52 NSWLR 279.
[57]Ibid [28].
79.In reaching that decision, Spigelman CJ considered, at some length, the meaning of the term ‘professional misconduct’. His Honour noted:
There is authority in favour of extending the terminology ‘professional misconduct’ to acts not occurring directly in the course of professional practice. That is not to say that any form of personal conduct may be regarded as professional misconduct. The authorities appear to me to suggest two kinds of relationships that justify applying the terminology in this broader way. First, acts may be sufficiently closely connected with actual practice, albeit not occurring in the course of such practice. Secondly, conduct outside the course of practice may manifest the presence or absence of qualities which are incompatible with, or essential for, the conduct of practice. In this second case, the terminology of ‘professional misconduct’ overlaps with, and usually it is not necessary to distinguish it from, the terminology of ‘good fame and character’ or ‘fit and proper person’.[58]
[58]Ibid 289 [56].
80.Spigelman CJ then examined a number of cases in which conduct by a professional, while not occurring directly in the course of professional practice, was considered to be sufficiently closely connected with practice to be characterised as professional misconduct. His Honour concluded:
The preparation and filing of tax returns is closely related to the earning of income, including professional income. The link is ‘sufficiently close’ to justify a finding of professional misconduct on the basis of Mr Cummins’ failure to lodge returns for 38 years.[59]
[59]Ibid 291 [66].
81.That passage, from the judgment of Spigelman CJ in Cummins, was cited with approval by the High Court in its decision in A Solicitor v Council of the Law Society of New South Wales.[60] In that case, a solicitor had pleaded guilty to four counts of aggravated indecent assault on persons under the age of 16 years. He was convicted and sentenced to three months’ imprisonment. Subsequently, following a further complaint by one of the victims, further similar charges were laid against the solicitor. While those charges were pending, the Law Society of New South Wales notified the solicitor it was considering disciplinary action in respect of the four offences the solicitor had admitted to committing. Subsequently, the solicitor was convicted of the further charges, but did not inform the society of the convictions.
[60](2004) 216 CLR 253.
82.The Law Society commenced proceedings in the inherent jurisdiction of the Court of Appeal of the Supreme Court for an order that the solicitor be removed from the roll of legal practitioners, on the ground that he had been involved in professional misconduct. The Law Society alleged that the conduct, constituted by the four admitted offences, was professional misconduct. It also alleged that the subsequent failure of the solicitor to disclose the later convictions was a breach of his duty of candour that amounted to professional misconduct. The New South Wales Court of Appeal found that both matters, relied on by the Law Society, constituted professional misconduct by the solicitor, and that accordingly the solicitor was not a fit and proper person to be a legal practitioner.
83.On appeal, the High Court held that the conduct of the solicitor, in committing the criminal offences, was not sufficiently connected to his practise as a solicitor to amount to professional misconduct. On the other hand, it held that the solicitor’s conduct, in failing to disclose his subsequent convictions to the Law Society, constituted professional misconduct. In reaching those conclusions, the Court[61] stated:
[61]Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ.
The dividing line between personal misconduct and professional misconduct is often unclear. Professional misconduct does not simply mean misconduct by a professional person. At the same time, even though conduct is not engaged indirectly in the course of professional practice, it may be so connected to such practice as to amount to professional misconduct.[62]
[62]Ibid 267 [20], citing New South Wales Bar Association v Cummins[2001] NSWCA 284; (2001) 52 NSWLR 279, 291 [66].
84.Their Honours noted that the solicitor’s duty of candour in his dealings with the Law Society was a professional duty, so that breach of that duty, by the solicitor failing to inform the Law Society of the further convictions, constituted professional misconduct by him.[63] On the other hand, the conduct of the solicitor, in committing the acts of indecency upon the two victims, did not occur in the course of the practice of his profession, and had no connection with that practice. Accordingly it did not amount to professional misconduct.[64] Their Honours concluded:
It is true that the conduct involved a form of breach of trust, being the trust reposed in the appellant by the mother of the children ... and the children themselves. However, the nature of the trust, and the circumstances of the breach, were so remote from anything to do with professional practice that the characterisation of the appellant’s personal misconduct as professional misconduct was erroneous.[65]
85.The principles, discussed in the foregoing cases, can be summarised shortly for the purposes of the issues arising in this application. First, in order that the conduct, alleged against the applicant, constitute ‘misconduct’, it must be conduct that would reasonably be regarded as disgraceful or dishonourable by solicitors of good repute and competency. Secondly, to constitute ‘professional misconduct’, as alleged in the first charge brought by the Commissioner, the conduct of the applicant, as found by the Tribunal, must have been sufficiently closely connected with legal practice by the applicant, notwithstanding that it did not take place in the course of that practice.
[63]Ibid 272–3 [30].
[64]Ibid 273–4 [32]–[34].
[65]Ibid 274 [34].
In NSW Bar Association v Cummins,[66] Spigelman CJ, with whom Mason P and Handley JA agreed, before concluding as quoted in Pham at paragraph 79 above, discussed what is meant by ’professional misconduct’:
49.The term “professional misconduct” has sometimes been limited to misconduct in the course of professional work (see e.g. Re Wheeler[1991] 2 Qd R 690 at 697; Queensland Law Society Incorporated v Smith [2001] 1 Qd R 649 at [10]). (The case relied on by the Queensland Court of Appeal in Smith for this proposition, Ex parte Attorney General (Cth); Re A Barrister and Solicitor (1972) 20 FLR 234 at 240, does not appear to me to support it. The judgment of the Supreme Court of the Australian Capital Territory uses the words “speaking generally” and refers to Lord Atkin in Myers v Elman at 302, where his Lordship used the formulation “At times”.)
50.It has not generally been useful or necessary to distinguish the terminology of “professional misconduct” from other phrases such as a “fit and proper person”, “good fame and character”, “unprofessional conduct”, “unsatisfactory professional conduct” etc. Statutory formulations differ from one jurisdiction to another. Some of the terminology, originally based on statute, has been adopted in cases decided under the inherent jurisdiction. In the exercise of this jurisdiction, it is not appropriate that the Court should indulge in the splitting of fine hairs on terminology.
51.The words “professional misconduct” are broad and general words. Their meaning may vary from one context to another. Their interpretation involves what is often referred to as an “ambiguity”, although I prefer to describe this kind of difficulty for an interpreter as one of “inexplicitness” rather than “ambiguity” (see Repatriation Commission v Vietnam Veterans’ Association of Australia NSW Branch Inc (2000) 48 NSWLR 548 at [116]).
52.It is possible to confine the words “professional misconduct” to apply only to conduct in the course of actual professional practice narrowly defined. In a context where a court must construe a document, such as a statute, such an interpretation may be entirely appropriate in order to maintain fidelity to the text as compiled by the authors of that text. In the present context the Court is not confined by issues of fidelity of this character. The present case does not raise an issue of interpretation. It raises an issue of usage.
[66][2001] NSWCA 284; (2001) 52 NSWLR 279.
In Prothonotary of the Supreme Court of New South Wales v Costello,[67] the Court was required to determine whether a barrister was guilty of professional misconduct and whether he was fit to remain a barrister. Particulars were given of professional misconduct relating to 12 incidents, eight of which were in the years 1983 – 1984 and four of which related to the period 1975 – 1978. The Court found professional misconduct on five occasions but did not go on to find the defendant unfit to remain a barrister.
[67][1984] 3 NSWLR 201.
The unreported record of the decision of the Court of Appeal includes details of the 12 incidents relied upon by the Prothonotary. One of the incidents found to constitute misconduct occurred in the course of a criminal trial. The accused made a statement from the dock. During the course of that statement an exchange took place between Mr Costello, appearing for the accused, and counsel appearing for the Crown. Rightly or wrongly Mr Costello believed that other members of counsel had behaved badly towards him. After the jury had retired and the judge had left the bench Mr Costello expressed his sense of grievance to his fellow member of counsel as follows:
Listen you little turd. I know you’re wet behind the ears but if you ever do that again I’ll personally take you outside and punch you in the nose.[68]
[68]Prothonotary of the Supreme Court of New South Wales v Costello (Unreported, New South Wales Court of Appeal, Glass, Samuels and Priestley JJA, 13 December 1984) 278, 35 (‘Costello’).
Other persons connected with the case but no members of the public were present when this was said. When cross-examined Mr Costello accepted that his manner to the other member of counsel was abusive, threatening, intemperate and improper.[69]
[69]Ibid, 57.
The Court found that the incident did not constitute an interference with the proper administration of justice but equally, it was a breach of the conventional standards by which the great majority of barristers regard themselves as bound, and constituted misconduct applying the Allinson definition.[70]
[70]Ibid, 57 referring to Allinson v General Council of Medical Education and Registration [1894] 1 QB 750 cited in the quote from Pham [2016] VSCA 256 above.
A second of the incidents in question occurred during the course of a criminal trial where Mr Costello appeared for the accused and senior and junior counsel appeared for the Crown. The principal Crown witness had female friends of Asian appearance. Mr Costello noticed a lady of Asian appearance in the public gallery nod in the direction of the bar table where counsel for the prosecution were sitting. This raised in his mind the possibility that the lady might be connected with some of the persons accused in the trial and that she might repeat evidence to persons outside the courtroom connected with those having a different interest in the trial than the accused for whom Mr Costello appeared. During an adjournment he approached the lady in question. It was her evidence, and she was cross-examined before the Court of Appeal, that Mr Costello approached her in an aggressive and offensive manner. Both the fact that he spoke to her at all and the manner in which he spoke to her were relied upon as constituting professional misconduct. Unknown to Mr Costello, the lady in question was the wife of junior counsel for the Crown. The conversation between Mr Costello and the lady became sufficiently heated for it to attract the attention of those at the bar table following which junior counsel for the Crown said ’back off Patrick’. The reply by Mr Costello was to the effect that if junior counsel wanted to be aggressive it would be possible to get into a boxing ring for round two. Mr Costello referred to him as ’a little twerp‘, an allegation of fact contested by Mr Costello, but evidence which the court accepted.[71]
[71]Ibid, 48–9.
The Court of Appeal found the second incident to be the most serious of those arising for consideration. It was found to constitute professional misconduct applying the Allinson definition. It also found the first incident to constitute misconduct.
Both of the incidents took place in public. Both clearly involved unprofessional behaviour; conduct by a professional person which could reasonably be regarded as disgraceful or undesirable by professional persons of good repute and competency practising in the same field. The incident which involved two barristers was regarded as less serious misconduct than the incident that involved the wife of the other barrister, an outsider to the Court process, attending Court as she was entitled to do, without interference or intimidation by any of the barristers involved in the case she was observing.
In the present context, the 14 August Letter is a private communication between professionals, sent to Mr Kenworthy and Mr Mascaro at their accounting practice. The evidence does not disclose whether other persons at K&A had direct access to the 14 August Letter, sent and received by email. The second matter relied upon, conduct concerning the affidavit of Mr Nelson, is of a different character. It concerns the conduct of Mr Nelson vis-a-vis the Court. The argument on behalf of the Crewes Parties is that having determined to file an affidavit to answer the allegations of misconduct, Mr Nelson was obliged to make full and complete disclosure to the Court and to address all matters, which he failed to do. The failure to do so is said to involve a lack of candour amounting to misconduct.
If either of these matters, or the third and fourth matters relied upon constitute misconduct for the purposes of s 434A, the Court retains a discretion as to how it ought proceed.
The misconduct of which the Crewes Parties complain in this case is alleged misconduct of a professional person, an accountant and registered liquidator, in the conduct of his professional practice, an accountant experienced in insolvency administration acting as a receiver. Applying Pham,[72] the question for determination is whether one or more of the four matters relied upon, alone or in combination, constitutes conduct reasonably regarded as disgraceful or dishonourable by receivers of good repute and competency.
[72][2016] VSCA 256, [85].
In other statutory contexts, a distinction is sometimes drawn between ‘serious misconduct’ and other forms of misconduct regarded as less serious. The Legal Profession Uniform Law Application Act 2017 (Vic) draws a distinction between professional misconduct and unsatisfactory professional conduct. The Health Practitioner Regulation National Law 2009 (Qld) separately defines ‘professional misconduct’ and ‘unprofessional conduct’. No such distinction is made in s 434A. However, if the misconduct in question, whilst constituting a contravention of s 434A is not appropriately regarded as serious misconduct, but rather misconduct of a lesser order, this would tend in favour of an exercise of the discretion falling short of removal of a controller, including a receiver. Other considerations relevant to the exercise of the discretion where misconduct is proved might include the number of instances of proven misconduct, the utility of making an order for removal assessed in all the circumstances, and whether there are other factors, external to the behaviour on the part of the receiver, that mean that removal is either inappropriate or unnecessary.
The 14 August Letter
The 14 August Letter was unprofessional in its terms and threatening in its tone. It was written by the receiver to a fellow professional. Whilst a private communication directed to the accounting firm, it contained very serious allegations. It was addressed to both Mr Kenworthy and to Mr Mascaro. It accused both Mr Kenworthy and Mr Mascaro of dishonest conduct and of ‘highly unprofessional’ conduct.
The letter invited Mr Kenworthy and Mr Mascaro to ‘revisit’ their proposed response to the request for production of records of the Company in its capacity as trustee of the Trust. What would occur, if that request was not satisfied, was that their ‘unprofessional and dishonest conduct’ would be referred to the Chartered Accountants Australia New Zealand and to ASIC.
As will be seen, neither in the Nelson Affidavit nor in Nelson’s Submissions, is any basis whatsoever identified which either provides or might even arguably provide a proper factual basis for the serious allegations of dishonesty and ‘highly unprofessional’ behaviour contained in the 14 August Letter. Such allegations should never have been made.
I reject the submission on behalf of Mr Nelson that the terms of the 14 August Letter did not constitute a threat to report Mr Kenworthy and Mr Mascaro, both to their professional organisation and to ASIC, if they did not comply. It was not necessary, as submitted on behalf of Mr Nelson, that the letter include an express ’or else’, if the documents requested were not provided. The structure and tone of the 14 August Letter are such that the threat to report dishonest and highly unprofessional conduct, unless the documents are provided, and the nature of what is threatened to be reported, are clear.
The 14 August Letter further alleges that Mr Kenworthy and Mr Mascaro ‘colluded with Mr Crewes to hinder both the receiver and the administrators in the discharge of their duties’. There is no basis set out in the letter itself and none is provided in the later Nelson Affidavit for the allegation of ’collusion’.
In Rees v Bailey Aluminium Products Pty Ltd,[73] the Court of Appeal considered that allegations made during cross-examination, of the appellant’s key witness that the witness and Rees (to whom the allegation had not been put) had fraudulently colluded for the witness to give false evidence, had no evidentiary foundation and should not have been put. The Court made the following statement regarding such conduct:
An allegation of fraud, when there is no factual basis for it, constitutes a serious dereliction of duty and misconduct by counsel.[74]
[73][2008] VSCA 244; (2008) 21 VR 478 (‘Rees’).
[74]Ibid, 490 [32] citing Minister Administering the Crown Lands (Consolidation) Act and Western Lands Act v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201, 203–4; White Industries (Qld) Pty Ltd v Flower & Hart (A Firm) (1998) 156 ALR 169.
In the present case the allegation of collusion was not made by a member of counsel in open court, it was made by Mr Nelson, a chartered accountant in a letter to K&A, another accounting firm about two of the members of that firm, accompanied by allegations of dishonest and ‘highly unprofessional’ conduct.
The letter concluded with an implied threat of legal action against Mr Kenworthy and Mr Mascaro. It said that the direct time costs of the receivership are already in the region of $100,000 and that the actions of Mr Kenworthy and Mr Mascaro have added to those costs. Mr Nelson stated that he and his appointor expressly reserved their legal rights as against K&A. The threat of legal proceedings implicit in that reference is followed by a ‘recommendation’ that Mr Kenworthy and Mr Mascaro notify their professional indemnity insurers.
On 27 August 2020, the solicitors for the plaintiffs wrote to Aitken Partners, the solicitors for Mr Nelson. Their letter inquired whether Mr Nelson maintained there was a proper factual basis for the allegations contained in the letter and requested particulars of each act, fact, omission, matter or circumstance upon which Mr Nelson relied (as were available to him on 14 August 2020) in support of the allegations of dishonest and highly unprofessional misconduct and of collusion. The response, sent later that day by Aitken Partners, said that the matters would be addressed in Mr Nelson’s answering affidavit. The Nelson Affidavit provides the following explanation:
54.Mr Kenworthy’s representations in [his 13 August 2020 email] are inconsistent with his representations made to me on 27 May 2020 that K&A hold no records for TSH or the Trust. I was concerned about the falsity of the representations or, if they were not false at the time they were made, then K&A’s failure to update me that they had come into their possession. I was likewise concerned about the risk of losing original records as Mr Crewes had deposed in his affidavit … that K&A was re-writing and amending accounts of TSH including the Trust.
55.It was then almost three months since my appointment and despite repeated requests I was not getting the important documents and information that I am entitled to as a receiver and manager appointed by NTM and which are critical to doing that job. I was concerned about what appeared to me to be delaying tactics and obfuscation by the directors of TSH.
In view of the seriousness of a finding of misconduct and the standard of proof required in order to establish ‘guilt’ for the purposes of s 434A, it is important to look carefully at the earlier communications that took place between Mr Nelson and his office on the one hand and K&A, the accounting firm, on the other to which paragraph 54 of the Nelson Affidavit refers. That is, in order to see whether the earlier dealings might provide a basis or even an excuse for the making of such allegations.
On 26 and 27 May 2020, email communications took place between the respective offices. The letter of 26 May 2020 requested books and records of the Company.[75] It did not mention the Trust. The reply from K&A on the same day advised that due to COVID-19 related restrictions, there was no one in attendance at the office and simply noted the need for additional time before being able to respond.[76]
[75] Nelson Affidavit, exhibit SNP-1, 5-6.
[76]Ibid, exhibit SNP-1, 7.
On 27 May 2020, the office of the receivers sent a further email, this time to Mr Kenworthy, referring to a conversation with Mr Crewes earlier that day. The letter referred to demands made upon Mr Crewes for records of the Company and the advice from Mr Crewes that he has no records in his possession, that all records of the Company were held by K&A and that K&A will provide those records electronically by close of business that day. The letter records Mr Nelson’s expectation that such records will include banking records, financial statements and a general journal.[77]
[77]Ibid, exhibit SNP-1, 12.
Mr Nelson, in his affidavit, refers to learning of the Trust when provided with accounts by the former accountants for the Company, Shadforth Business Advisory Services on 2 June 2020.[78]
[78]Ibid, [28].
The next communication sent by the receiver’s firm to the accounting firm, was an email of 11 August 2020 sent on Mr Nelson’s behalf by his colleague, Mr Kennedy. The email was sent after receipt in late May of the Company register, and no other documents, not the banking records, financial statements nor the general journal, as requested on 27 May 2020. The email, which for the first time in communications sent to K&A referred to the existence of the Trust relevantly stated as follows:
We are aware that you only held the secretarial file for Tomi-Sasha Holdings Pty Ltd.
I would now be grateful if you could confirm that Kenworthy and Associates did not hold any records for Tomi-Sasha Holdings Pty Ltd as trustee of the National Property Trust as at the date of my appointment. Should you hold records where Tomi-Sasha Holdings Pty Ltd as trustee of the National Property Trust, I would be grateful if you could specify the records that you hold.
Can you also please advise if you have provided any records where the Tomi-Sasha Holdings Pty Ltd acted as trustee of the National Property Trust to Mr Jonathan Kenny of Kalus Kenny Intelex Lawyers or the new trustee of the National Property Trust being 3 Stanhope Street Pty Ltd.
As you would be aware, pursuant to section 286 of the Corporations Act, a company is obligated to keep financial records of transactions undertaken as trustee.
The reply from Mr Kenworthy, on 13 August 2020, whilst not directly responding to each item in the Kennedy email, was not, one might think, an unreasonable response in the context of Stage 4 COVID-19 related restrictions. That response was as follows:
I am in the process of trying to seek an exemption so that I can go into the office to review what physical documents we received from the previous accountants for the National Property Trust. I suspect we only have copies of financial statements and tax returns etc and don’t think we will have any original records of the trust. But I will double check assuming I can obtain the necessary approval from the Chief Health Officer.
We received some copies of documents for the trust in electronic form the previous accountants but am not sure if they constitute records of the trust as they were provided to us as copies.
Mr Nelson’s Submissions assert that ‘the responses from the plaintiffs and K&A to Mr Nelson’s request … were unsatisfactory, even dissembling’.[79] Whatever might be the position concerning communications emanating from Mr Crewes, it cannot be said of the communications from K&A reproduced above that they are ’dissembling’.
[79]Nelson’s Submissions, [23].
It was not until 11 August 2020 that any request was made that the accounting firm provide documents of the Trust to Mr Nelson or his office. The response on 13 August 2020 was objectively reasonable having regard to the COVID–19 related restrictions in place at that time.
There is nothing in the communications passing between the two accounting firms that provides even an arguable basis for the allegations of dishonesty, unprofessional misconduct and collusion made by Mr Nelson in the 14 August Letter.
It may be accepted that Mr Nelson had genuine concerns as outlined in paragraph 54 of the Nelson Affidavit that the ‘representations’ in the 13 August 2020 email from K&A were inconsistent with those in the 27 May 2020 email. On 27 May 2020, K&A said they had no records and on 13 August 2020, the email said, in substance, that K&A might have some copy documents.
However, as the evidence reveals, as at 5 August 2020 Mr Mascaro was in the process of preparing fresh accounts. It would not be surprising that in the context of that activity he had copy documents of the Company and/or the Trust for that purpose. Indeed, that is exactly what the 13 August 2020 email says; physical documents, probably copy documents only, received from the previous accountants.
Whatever Mr Nelson’s concerns and no matter how legitimate his fears that original records may be lost, or tampered with, they provide no justification for the tone and content of the 14 August Letter directed to the accounting firm.
Similarly, whatever Mr Nelson’s concern about delaying tactics and obfuscation by the directors of the Company to which he referred in his affidavit,[80] such concerns do not provide a basis for allegations of dishonesty or highly unprofessional conduct or collusion against other persons, namely, the external accountants, Mr Kenworthy and Mr Mascaro.
[80]Nelson Affidavit, [55].
It is also important to observe that whatever might have been the position on 26 May 2020 when the first request was made of K&A to deliver up books and records of the Company, by 14 August 2020, whether or not the GSA was effective to extend to the books and records of the Trust, first requested on 11 August 2020, as non-circulating property (clause 2(l)(i) of the GSA),[81] was a matter very much in issue. If the security did not attach to the ‘books of account of the Trust’ because the security was only registered, as appears to be the case, over the assets and undertaking of the Company, then, Mr Nelson had no right to request those books and records. The fact there was a fundamental contest as to entitlement, a matter that Mr Nelson must have been aware of, should have caused Mr Nelson to temper his language when making demand of K&A for delivery up.
[81]Crewes Affidavit, exhibit WC-8.
Returning to s 434A of the Act, if a receiver makes baseless allegations of dishonest and unprofessional conduct, threats to report chartered accountants to their professional institute and to ASIC for such conduct, and threatens legal proceedings for damages where there is no basis for those allegations, in my opinion such conduct amounts to ‘misconduct’ for the purposes of the section.
Measured against what would reasonably be regarded as disgraceful or dishonourable conduct, by chartered accountants and registered liquidators of good repute and competency, sending such a letter constitutes misconduct. It is no excuse for such conduct that Mr Nelson might have been frustrated in his attempts to get in the books and records of the Trust. He might understandably have also been frustrated by the appointment of Stanhope Street as trustee of the Trust by document dated 27 May 2020, but any such frustration does not justify the tone and content of the 14 August Letter.
Misconduct alleged to be constituted by a lack of candour
There are two matters in the Nelson Affidavit that are relied upon by the Crewes Parties as the basis of the alleged lack of candour, said to amount to misconduct contrary to s 434A of the Act. The first concerns the 14 August Letter, the second concerns the events of the first meeting of creditors.
In certain settings, a lack of candour will constitute professional misconduct. In A Solicitor v Council of the Law Society of New South Wales[82] the High Court held that a lack of candour on the part of a solicitor who failed to disclose previous criminal convictions to the Law Society constituted misconduct. The High Court agreed with Giles JA in the New South Wales Court of Appeal, that the solicitor had a positive duty to disclose his convictions to the Law Society, even though he regarded them as unjust and hoped they would be overturned on appeal. His duty of candour in his dealings with the Law Society was a professional duty and breach of it was professional misconduct.[83]
[82][2004] HCA 1; (2004) 216 CLR 253.
[83]Ibid, [30].
Here the lack of candour alleged concerns the affidavit made by Mr Nelson in opposition to this application.
The Nelson Affidavit, at paragraph 56 sets out eight sub-paragraphs in which Mr Nelson appears to seek to paraphrase the contents of the 14 August Letter. What is staggering about that paragraph of the Nelson Affidavit is that not once does it refer to the allegations of dishonest behaviour, of highly unprofessional misconduct or of collusion contained in the 14 August Letter itself. It also fails to engage with the allegation that the 14 August Letter contained improper threats to report such asserted behaviour to the Chartered Accountants Australia New Zealand and to ASIC.
Whilst those are the facts, I do not accept that the failure to address those matters is properly regarded as a lack of candour amounting to misconduct. It is in quite a different category to that considered by the High Court where there was a positive obligation to disclose such convictions. Here there was no obligation for Mr Nelson to go on affidavit. However, he did choose to file an affidavit. The Crewes Parties submit that having decided to do so, he was obliged to give a fulsome account concerning his behaviour.
One explanation for the failure to refer to the assertions of dishonesty and highly unprofessional misconduct in the 14 August Letter and to provide an explanation for having made them in the Nelson Affidavit, is that nothing could be said by Mr Nelson in defence of making baseless allegations and threatening to report to the Chartered Accountants Australia New Zealand and ASIC based on such allegations.
In the circumstances I do not regard the lack of reference to the serious allegations in the Nelson Affidavit as only consistent with a lack of candour. I am conscious that where serious allegations are made, as submitted on behalf of Mr Nelson, the Briginshaw approach to proof is to be adopted.[84] The lack of any reference to these matters and the absence of any explanation in the affidavit can equally be explained by the absence of any tenable explanation for the conduct in question.
[84]Briginshaw v Briginshaw (1938) 60 CLR 336, 362-3 (Dixon J).
The lack of candour concerning the first meeting of creditors, is said to arise because the Nelson Affidavit does not exhibit the minutes of the meeting, and it is alleged that what is said in the affidavit as to what occurred at the meeting reflects an unacceptable lack of candour.
The critical paragraph in the Nelson Affidavit, paragraph 48, is a response to the substantive allegation that Mr Nelson used his participation in the meeting for an improper purpose. That paragraph reads:
I did not use this meeting as an opportunity to publicly examine Mr Crewes. I simply asked him to provide me with a financial records and documents of TSH which I had been asking him to provide me for almost 2 months.
The minutes of the meeting are exhibited to the Langdon affidavit.[85] It is fair to say that paragraph 48 of the Nelson Affidavit seeks to play down the degree of questioning of Mr Crewes by Mr Nelson. However that is not the same as exhibiting a lack of candour with the Court, let alone a lack of candour amounting to misconduct for the purposes of s 434A.
[85]Second Defendants, Affidavit of Paul William Langdon, dated 12 August 2020, exhibit PWL-4.
The third and fourth allegations of misconduct
The third allegation involves a complaint as to the fact of questioning of Mr Crewes during the first meeting. I accept the submission that such questioning falls outside the purposes specified in s 436E of the Act. Those purposes are to determine whether to appoint a committee of inspection and, if so, who are to be the committee’s members. Section 436B(4) of the Act also provides that at the first meeting the company’s creditors may pass a resolution removing the administrator and appoint someone else as administrator of the company.
Section 436B does not contain a prohibition in terms, against any other business taking place during the course of the first meeting of creditors. The person in control of the meeting is the administrator, not a participant such as, in this case, Mr Nelson, in his capacity as receiver and as representative at the meeting of NTM. It may be that there is a legitimate basis for complaint on the part of Mr Crewes about what occurred at the meeting. However, now is not the proper time to determine the validity of that complaint, that is a matter for trial. In any case, it seems to me that the questioning by Mr Nelson as recorded in the minutes of the meeting represented legitimate questioning in pursuit of the objects of the receivership rather than ’misconduct’ even if a meeting properly conducted by the administrator as chair should have prevented such questioning from taking place, rather than inviting Mr Nelson to ask questions of Mr Crewes as in fact occurred.
The fourth allegation concerns the failure on the part of Mr Nelson to apply to the Court pursuant to s 418A of the Act to determine the validity of his appointment. It is unnecessary to go into the detail of what occurred. It is sufficient to note that initially, when represented by the same solicitors as act on behalf of NTM, Mr Nelson indicated that he would apply to the Court pursuant to s 418A. Upon obtaining advice from his own legal advisers, Mr Nelson, determined he would not make such an application.
Determining not to make an application to the court as to the validity of the appointment as receiver is not dissimilar conduct to the decision by the receiver not to conduct litigation as discussed in Cook.[86] One aspect of the criticism of Mr Nelson’s behaviour relied upon by the Crewes Parties is that in the first place Mr Nelson said he would seek advice, and then he changed his mind. The inference that he did so on the basis of legal advice, for which privilege is not waived, is open. In the circumstances the allegation of misconduct is not made out.
[86](1997) 25 ACSR 517.
The discretion
In circumstances where the Court has found one allegation of misconduct made out, should the Court exercise its discretion to remove Mr Nelson as receiver pursuant to s 434A of the Act?
Section 434A confers a broad discretion. It does not list criteria to be considered in the exercise of that discretion. It does not distinguish between a court-appointed receiver or one who is privately appointed. It does not offer guidance as to how the discretion should be exercised and whether, if the insolvency practitioner concerned is a registered liquidator, that should be taken into account, and if so, how.
I consider the misconduct constituted by sending the 14 August Letter, a private communication to two fellow professionals, whilst constituting misconduct, is less serious than would be the case if such allegations were made publicly or were made or communicated to persons other than Mr Kenworthy and Mr Mascaro.
The threat to report both practitioners to their professional body and to ASIC contained in the 14 August Letter was not acted upon. Had it been acted upon by Mr Nelson, given that there was no basis whatsoever for the serious allegations made, I would have had no hesitation in removing him as receiver.
There are a number of circumstances present in this case which I consider make it inappropriate to remove Mr Nelson as receiver notwithstanding the finding of a single count of misconduct. Those circumstances are as follows:
(a) first, the private nature of the misconduct. Whilst the allegations made were entirely without foundation, they were made in what was essentially a private communication directed to Mr Kenworthy and Mr Mascaro. Unlike the two incidents in Costello discussed above, and the baseless cross-examination which occurred in Rees, they did not take place in public, or in the presence of other professionals;
(b) second, the undertaking offered on behalf of Mr Nelson and on behalf of NTM that they will not take any steps to cause the company to dispose of any of its property pending hearing and determination of the two proceedings. The consequence of that undertaking is that no action, of substance, can be taken by Mr Nelson in his capacity as receiver until the Court has heard and determined all disputes between parties, including all disputes relating to Mr Nelson’s appointment and his conduct as receiver;
(c) third, the reciprocal undertakings on the part of the Crewes Parties concerning the books and records of the Trust have the effect of putting on hold any action that the receiver might otherwise be minded to take to seek to get in those books and records and to ’freeze’ the question of entitlement to those books and records until the hearing and determination of the two proceedings;
(d) fourth, by reason of the reciprocal undertakings there is no real or appreciable risk of the repeat of such misconduct;
(e) fifth, given the proposed undertakings, which limit what Mr Nelson might do pending the hearing and determination of the proceedings, there is little practical utility in making an order for removal of Mr Nelson; and
(f) sixth, if Mr Nelson were to be removed, it may be anticipated, in circumstances where the Administrator is prevented by the 13 August 2020 Orders from taking action and where the second meeting of creditors is not to be held until after the determination of this proceeding, that steps would be taken by NTM to appoint another receiver in his place. Any such steps would likely be met with opposition on the part of the Crewes Parties, including possibly an application for injunctive relief. To bring about such an environment as a result of removal with potential to result in even more litigation between the parties than is already the case would be contrary to the Court’s power to further the overarching purpose as provided for in ss 9(1)(c), (d), (e) and (f) and 23 of the Civil Procedure Act (2010) (Vic).
For those reasons, in the exercise of the discretion in s 434A, no order will be made that Mr Nelson cease to act as receiver of the Company, notwithstanding that by sending the 14 August Letter he has been found guilty of misconduct.
The Injunction Application
The Principles
The principles to be applied to an application for interlocutory injunctive relief are well-settled and are conveniently summarised in the Crewes’ Parties September Submissions (citations in original):
4. The principles to be applied for interlocutory relief are well-settled: [87]
[87]The principles were summarised recently in Link v Gannawarra Shire Council [2020] VSC 511, [35]-[37] (Delany J).
(a) First, the granting of interlocutory relief is discretionary.
(b) Secondly, in exercising its discretion, the court must be satisfied that there is a serious question to be tried, in the sense that an applicant must show a sufficient likelihood of success to justify the preservation of the status quo pending trial in the circumstances. The requirements of a serious question to be tried and the balance of convenience need to be examined together.[88]
[88]Bradto Pty Ltd v State of Victoria (2006) 15 VR 65, 74 [39], 82 [84] (Maxwell P and Charles JA).
(c) Thirdly, the court ’should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ”wrong”, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial’.[89]
[89]Ibid, 73 [35].
(d) Fourthly, an injunction will not be granted if damages would be an adequate remedy.[90]
(e) Finally, as the relief is discretionary, the court may consider any other factors relevant to the exercise of the court’s discretion, such as delay.[91]
[90]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, 68 [19] (Gleeson CJ and Crennan J).
[91]Bradto, 81–82 [81].
Prima facie case / serious question to be tried
In support of the existence of a prima facie case/serious question to be tried, the Crewes Parties rely on a number of issues in the proceeding including, in no particular order:
(a) The contention that the Company has operated in dual capacities; in its own right, and, until 27 May 2020, in its capacity as trustee of the Trust.[92]
[92]Crewes’ Parties September Submissions, [6].
(b) The contention that the GSA only operates as security over the Company and not the Trust, and the registration on the PPSR is over the ACN of the Company only. If so, there was never any security over the Trust assets, including its books and records.
(c) NTM is the Company’s sole creditor.[93] NTM has four directors, only one of whom, Anton Gaudry, executed the LCA and the GSA.[94] Execution by one director only is said to be defective; s 127 of the Act is relied upon. It is submitted that even if the Court determines the true character of the LCA is in the nature of a deed, s 127(4) of the Act does not cure the defective nature of the execution of that document.
[93]Ibid, [7].
[94]Ibid, [10].
(d) The same argument is advanced in relation to the execution by Anton Gaudry, one director only of NTM, of the notice of appointment of Mr Nelson as receiver dated 18 May 2020.[95]
(e) It is argued that as there was no seven day demand made as required under the LCA, the result that the appointment of Mr Nelson as receiver is invalid. The argument is that clause 6 of the LCA provides that ‘in the event of any default by the Borrower pursuant to this Deed, the Lender shall be entitled upon providing seven days’ notice in writing to demand repayment of the entire amount of the Secured Moneys plus any costs associated with such demand’. The effect of clause 6 is that the provision of a ‘7 day’ written notice is a pre-condition to liability to repay the Secured Monies (as defined in the LCA). No such notice was served.[96]
(f) Separately, the Crewes Parties contend that the Notice of Default that was served, asserted that the Company had committed an event of default pursuant to clause 12(a)(i) and (ii) of the GSA. The event of default relied upon was not identified or stated. Clause 12(a)(ii) of the GSA provides that an event of default arises if the Company or any other person ‘defaults in the performance of an obligation on that person’s part under the security agreement, any other security, the transaction documents or a loan agreement’. It is unclear from the face of the Notice of Default what event of default was relied upon by NTM. An issue thus arises as to whether an event of default, for the purpose of the GSA, had in fact occurred. If there was no event of default for the purpose of clause 12 of the GSA there was no entitlement to appoint Mr Nelson.
[95]Ibid, [11].
[96]Ibid, [22].
It should immediately be noted that neither Mr Nelson, nor NTM accept there is validity in the various arguments advanced on behalf of the Crewes Parties as summarised above. It is unnecessary to rehearse the various arguments of substance relied upon in answer to the Crewes Parties’ contentions. That is the case because NTM, by its counsel, accepted that there is a serious question to be tried.
Given that in the Administrators Proceeding, the relief sought includes a claim in the alternative for rectification of the GSA to clarify that the Company entered into the GSA in both its own capacity and as trustee of the Trust, the position adopted by counsel for NTM was appropriate. There is clearly a serious question to be tried.
The real issues on the injunction application concern the balance of convenience, and whether, in any case, damages is an adequate remedy.
Balance of convenience
The Crewes Parties’ submit that absent a restraint, Mr Nelson will continue to conduct himself on the assumption that his appointment is valid. Reliance is placed on Mr Nelson’s evidence that, if he were restrained, there would be no independent party supervising the affairs of the Company for potentially a significant period of time.
Mr Nelson submits that the ‘balance of convenience’ weighs heavily against the grant of the injunction. This is said to be so because Mr Nelson has advanced the receivership to a significant extent. Valuable property of the Trust, in the form of the shares in MIL, have been frozen by mutual undertakings. The only outstanding item of importance is the delivery of the Trust’s books and records to Mr Nelson so that he can perform his role as a receiver. Mr Nelson submits that if he is restrained from acting, as the voluntary administration has been stayed by the consent Orders made 13 August 2020 there will be no independent oversight of the Trust’s management and finances until the determination of these proceedings.[97]
[97]Nelson Affidavit, [68]-[71].
Mr Nelson further submits that, it would not be just in all the circumstances to grant the injunction in view of the unsatisfactory responses of the Crewes Parties and their agent, the accountants K&A, to the legitimate demands made for the books over the last three months. Mr Nelson points to what he contends to be a litany of delay and obfuscation on the part of the Crewes Parties and their agents.[98]
[98]Ibid, [7]-[20], [30]-[43] and [50]-[58].
In written submissions Mr Nelson pointed to the risk of destruction or loss of records of the Trust (whether deliberate or not) and asserted that the risk is far too great, particularly in light of the Crewes Parties’ accountants stated intention of rewriting the accounts.[99]
[99]Crewes Affidavit, [77]-[78], exhibits WC-42 and WC-43. Also note Mr Nelson’s concerns about destruction or loss of documents in the Nelson Affidavit, [54]-[58]. The requests for books and records were made again by Mr Nelson’s solicitors on 27 August 2020 via letter. Copies of the letters from Mr Nelson’s lawyers and the reply from the plaintiffs’ lawyers dated 27 August 2020 are at pp 160–2 of the Chronology filed by Mr Nelson. On 1 September 2020, the plaintiffs’ lawyers wrote a letter to the solicitors for Mr Nelson. This letter is at pages 163–4 of the Chronology. Included in the letter was a link to a ShareFile folder, which the plaintiffs say are records belonging to the Trust.
It will be noted that some of the arguments on behalf of Mr Nelson, such as the need for independent oversight of the Trust’s management and finances appear to presuppose that the GSA extends as security to those Trust assets and to ignore the presence of Stanhope Street as the new trustee of the Trust.
Is damages an adequate remedy?
The Crewes Parties’ written submissions argue that damages are an inadequate remedy. They submit that the effect of the receivership is to take control of the Company away from its directors and that absent a restraint, Mr Nelson will continue to take steps to gather in, manage and realise the Company’s asset and the assets of the Trust (principally shares in MIL) which the Crewes Parties contend are not charged assets.
They further contend that the matters upon which the Company relies in support of its application to remove Mr Nelson for misconduct demonstrate that Mr Nelson is a singularly unsuitable person to act as receiver and that the Court can have no confidence that he would, in the future, faithfully or in good faith perform or exercise his functions and powers as receiver.
Injunction: consideration
There are strongly diverging views between the parties as to the relative strengths of the prima facie case/serious issues to be tried. I have identified a number of the contentions upon which the Crewes Parties rely. As mentioned above, all of the matters relied upon are in contest. As is obvious, it is entirely inappropriate to make any observations at this stage as to the acceptance or otherwise of each of the propositions for which the respective parties contend. NTM accepts that there is a serious issue to be tried and there can be no real contest that such a concession is appropriately made.
Much of the oral argument was directed to the question of balance of convenience. To a large extent, that issue has resolved itself by reason of the undertakings offered on behalf of the parties.
On behalf of the Crewes Parties, and Stanhope Street, those undertakings are set out above at paragraph 59.
On behalf of the third defendant, NTM, and the fourth defendant, Mr Nelson, those undertakings are substantially set out above at paragraph 58.
Upon the proffering of undertakings by Mr Nelson, not to dispose of, or cause the Company to dispose of any of its property pending the determination of the proceedings, the only potential risk to the Crewes Parties from Mr Nelson continuing as the receiver and manager concerns steps that he might take to get in the books and records of the Trust.
As I indicated in the course of argument, it is in the interests of all parties to this dispute that the integrity of the books and records of the Trust is preserved. The undertakings offered on behalf of the Crewes Parties and Stanhope Street achieve such an outcome on an interim basis.
Whilst helpful, what the undertakings offered concerning the books and records of the Trust do not do, is to expose those books and records to all parties who have a legitimate interest in inspecting them.
It is important when there are live issues concerning the capacity in which the Company acted and also where its accounts are in the process of being rewritten that all relevant parties have an opportunity to inspect and access those books and records, including metadata that enables an identification of the date of creation of all relevant entries. It seems likely, at least, that the new trustee, Stanhope Street, is the person who has the control of the books and records of the Trust. It has helpfully given undertakings in relation to those books and records.
Unless persuaded to the contrary, I will make orders on 18 September 2020, when all relevant parties will be before the Court, including Stanhope Street, for the delivery up to the Court of the books and records of the Trust. Arrangements can then be made to facilitate inspection.
In circumstances where detailed undertakings have been offered by the parties which, upon being given, will be effective to preserve the books and records of the Trust, and which will prevent any sale or disposition of property of the Trust by Mr Nelson as receiver until trial and where there are existing undertakings in place concerning the shares in MIL, I am not persuaded that the balance of convenience favours the grant of injunctive relief, whether as framed on behalf of the Crewes Parties or in a more limited form.
Given both the undertakings that have been proffered on behalf of the receiver and manager and on behalf of NTM, coupled with the potential scope of action remaining available to the receiver and manager in light of those undertakings, this is also clearly a case where damages is an adequate remedy. It is very difficult to see what damages might flow to the Crewes Parties in light of the reciprocal undertakings.
The Crewes Parties asserted that one of the reasons damages is not an adequate remedy is because of the absence of any evidence as to the financial position of Mr Nelson. I do not consider that argument to have any force in a case where no potential monetary damages of consequence have been identified by the Crewes Parties as likely to result if an injunction were not to be granted.
Disposition and Costs
Upon the giving by the parties of the undertakings referred to in paragraphs 58 and 59 of these reasons, the application for orders pursuant to s 434A and for injunctive relief is dismissed.
The application has been dismissed on the basis of undertakings which, in the case of both Mr Nelson and NTM were not offered prior to the hearing. With the exception of the undertaking concerning the preservation of books and records of the Trust, the undertakings which were offered on behalf of the Crewes Parties form part of a draft order provided at the commencement of the hearing.
Whilst the application for relief pursuant to s 434A of the Act has not resulted in an order for removal, Mr Nelson, the receiver, has been found guilty of misconduct contrary to s 434A of the Act in relation to the 14 August Letter.
Although only one of the four matters relied upon by the Crewes Parties to constitute misconduct has been proven, and although I have not granted injunctive relief, because it has not been necessary to do so, in substance the Crewes Parties have succeeded on their application. In those circumstances, subject to any submissions that might be made to the contrary, it seems to me the appropriate order as to costs is that the Crewes Parties should have their costs of the application on the standard basis.
This proceeding is currently listed for further directions on 18 September 2020. Any argument that is necessary in relation to cost issues can take place on that day.
SCHEDULE OF PARTIES
| WAYNE ANDREW LESLIE CREWES EILEEN FRANCES CREWES - AND - TOMI-SASHA HOLDINGS PTY LTD (ACN 076 376 308) (Receivers and Managers Appointed) (Administrators Appointed) IAN GRANT and PAUL LANGDON (in their capacity as Administrators of TOMI-SASHA HOLDINGS PTY LTD) NTM SUPER HOLDINGS PTY LTD (ACN 609 675 774) SIMON PATRICK NELSON | First plaintiff Second plaintiff First Defendant Second Defendant Third Defendant Fourth Defendant |
3
6
0