Robert Allan Jacobs as liquidator of Necessary Holdings Pty Ltd (In Liq) v Lenton Brae Ltd Partnership (A Firm) - [2021] WASC 10

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   ROBERT ALLAN JACOBS as liquidator of NECESSARY HOLDINGS PTY LTD (In Liq) -v- LENTON BRAE LTD PARTNERSHIP (A FIRM) [2021] WASC 10
CORAM:   HILL J
HEARD:   21 DECEMBER 2020
DELIVERED          :   21 JANUARY 2021
FILE NO/S:   COR 129 of 2020
MATTER:   IN THE MATTER OF NECESSARY HOLDINGS PTY LTD (In Liq)
BETWEEN:   ROBERT ALLAN JACOBS as liquidator of NECESSARY HOLDINGS PTY LTD (In Liq)
Plaintiff
AND
LENTON BRAE LTD PARTNERSHIP (A FIRM)
First Defendant
OFFA PTY LTD as trustee for GRAYLING TRUST
Second Defendant
NECESSARY HOLDINGS PTY LTD (In Liq)
Third Defendant

Catchwords:

Corporations - Winding up - Application by liquidator for directions for sale of assets of limited partnership - Direction given

Partnership - Limited liability partnership - Proper construction of s 88 of the Limited Partnerships Act 2016 (WA) - Whether leave obtained to act as general partner of the limited partnership

Corporations - Winding up - Whether liquidator should be replaced - Turns on own facts

Legislation:

Companies (Co-Operative) Act 1943 (WA) (repealed)
Corporations Act 2001 (Cth)
Insolvency Law Reform Act 2016 (Cth)
Interpretation Act 1984 (WA)
Limited Partnerships Act 2016 (WA)
Partnership Act 1895 (WA)

Result:

Direction given
Second defendant's application for replacement of liquidator dismissed

Category: B

Representation:

Counsel:

Plaintiff	:	C K Pearce & M Hamid
First Defendant	:	No appearance
Second Defendant	:	J M Healy
Third Defendant	:	C K Pearce & M Hamid
Interested Party	:	K L Christensen

Solicitors:

Plaintiff	:	Blackwall Legal LLP
First Defendant	:	No appearance
Second Defendant	:	Thomson Geer
Third Defendant	:	Blackwall Legal LLP
Interested Party	:	C X Law

Case(s) referred to in decision(s):

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27
Barboutis v The Kart Centre Pty Ltd [No 2] [2020] WASCA 41
Beckwith v The Queen [1976] HCA 55; (1976) 135 CLR 569
Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84; (2016) 50 WAR 84
Handberg, in the matter of Greight Pty Ltd (in liq) [2006] FCA 17
Nilant v Shenton [2001] WASCA 421
Re Altim Pty Ltd [1968] 2 NSWR 762
Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409
Re GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR 674
Re GGA Lifestyle Pty Ltd (Administrators Appointed); ex parte Woodhouse [2019] WASC 167
Re St Gregory's Armenian School (in Liq) [2012] NSWSC 1215; (2012) 92 ACSR 588
Resource Equities Ltd (subject to Deed of Company Arrangement) v Garrett [2009] NSWSC 1385
Tay Bok Choon v Tahanson Sdn Bhd [1987] 1 WLR 413

HILL J:

This matter concerns the Lenton Brae Limited Partnership (LBLP) and the consequences that arise from a voluntary administrator and, subsequently, a liquidator being appointed to its general partner, Necessary Holdings Pty Ltd (Necessary Holdings).
The plaintiff, as liquidator of Necessary Holdings, filed an originating process on 26 October 2020 seeking an order or direction that he would be acting properly and is justified in selling assets of the LBLP in exercising Necessary Holdings' contractual, alternatively statutory, right of indemnity. In the alternative, the plaintiff seeks orders that he be appointed as receiver and manager of the assets of the LBLP.
On 23 November 2020, the second defendant (Offa) filed an interlocutory process seeking orders for the plaintiff to be replaced as liquidator of Necessary Holdings.
On 17 December 2020, shortly prior to the hearing of these applications, the Department of Mines, Industry Regulation and Safety (Department) gave leave under s 92 of the Limited Partnership Act 2016 (WA) (Act) for Necessary Holdings to continue as general partner of the LBLP.
The plaintiff and the interested parties contend that this letter resolves the issue that required urgent determination, namely whether the plaintiff has power to sell the assets of the LBLP. Offa denies that the letter resolves this issue and says that it is necessary for a receiver to be appointed to sell the assets of the LBLP. In any event, Offa maintains that the plaintiff should be replaced as liquidator of Necessary Holdings.
For the reasons that follow, I consider that the letter from the Department gave leave under s 92 of the Act for Necessary Holdings to continue as the general partner of the LBLP. Under the limited partnership agreement of LBLP, on 21 days' prior written notice being given, Necessary Holdings has a contractual right to sell or dispose of the whole or a substantial portion of the assets of LBLP.
In respect of the second defendant's interlocutory application, in my view, the second defendant has not discharged its onus to support an order being made for the replacement of the liquidator. Accordingly, the second defendant's application will be dismissed.

Factual Background

Necessary Holdings is the general partner of the LBLP.[1] As general partner, it is responsible for the operation and management of the LBLP.[2] On behalf of the LBLP, it leases land on Caves Road, Willyabrup, on which a winery business is run under the name of Lenton Brae Estate (Business).[3] The land is owned by the same people and entities that comprise the limited partners of the LBLP as tenants in common.[4]
[1] Affidavit of Robert Allan Jacobs filed 27 October 2020 [9], 'RAJ6'.
[2] Affidavit of Robert Allan Jacobs filed 27 October 2020 [10], 'RAJ6' cl 9.1.
[3] Affidavit of Robert Allan Jacobs filed 27 October 2020, 'RAJ7'.
[4] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ11'.
From the evidence before me, it is apparent that a dispute arose between the limited partners in 2019 or 2020. On 11 May 2020, the directors of Necessary Holdings appointed Mr Jacobs as voluntary administrator.[5]
[5] Affidavit of Robert Allan Jacobs filed 27 October 2020 [3], 'RAJ2'; Affidavit of Andrew Roy Went Jackson filed 9 November 2020 [22].
After his appointment, Mr Jacobs engaged solicitors, who reviewed the Act and, on 11 May 2020, made initial enquiries to the Associations Branch of the Department.[6] On 17 August 2020, Mr Jacobs' solicitors contacted the Department to enquire whether there was a process for applying for leave under s 92 of the Act.[7] On 20 August 2020, they received advice there was no particular process.[8]
[6] Affidavit of Christopher Kingsley Pearce filed 26 October 2020 [6] - [7].
[7] Affidavit of Christopher Kingsley Pearce filed 26 October 2020 [8].
[8] Affidavit of Christopher Kingsley Pearce filed 26 October 2020 [9], 'CPK1'.
Mr Jacobs' evidence is that in August 2020, he was informed by his solicitors that an externally administered body corporate could not, without leave of the Department, be a general partner in a limited partnership or manage a limited partnership.[9]
[9] Affidavit of Robert Allan Jacobs filed 27 October 2020 [20].
On 8 September 2020, an application was made to the Department on behalf of Mr Jacobs as voluntary administrator of Necessary Holdings Pty Ltd for leave for 'Necessary Holdings to continue as general partner of the partnership' (Application).[10] Specifically, the Application stated:
Our client seeks leave from the Commissioner under s 92 of the [Act] with effect 21 days after the date of this application (in accordance with s 92(2)), that Necessary Holdings continues as general partner of the partnership, for the purpose of an orderly completion of the voluntary administration and then, as appropriate, liquidation of the company.
[10] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ19'.
The Application set out the reasons that the plaintiff contended that leave ought to be granted, including that if Necessary Holdings was to proceed into liquidation it would allow time for the business to be sold or for a new general partner of LBLP to be appointed without Necessary Holdings committing an offence in the interim.
A query was raised at the second creditors' meeting as to whether Necessary Holdings was in breach of the Act and the meeting was informed that an application for leave had been lodged.[11]
[11] Affidavit of Robert Allan Jacobs filed 27 October 2020 [22].
On 16 September 2020, Mr Jacobs was appointed as liquidator of Necessary Holdings.[12]
[12] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ5'.
As a consequence of leave having not been obtained under the Act, Offa disputes that the plaintiff is entitled to sell the assets of the LBLP.[13] The remaining members of the LBLP consent to the plaintiff selling the assets of the LBLP.[14]
[13] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ23'.
[14] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ24'.
Given the dispute between the members of the LBLP, the plaintiff filed the originating summons which was programmed through to an urgent hearing on 21 December 2020.
Shortly before the hearing, on 17 December 2020, Mr Jacobs' solicitors received a letter from the Department in response to the Application (Letter).[15] Relevantly, the Letter stated that:
I refer to the Necessary Holdings Pty Ltd's (NH Pty Ltd) application for approval for leave to continue as a general partner of Lenton Brae Ltd partnership (the Partnership), received by the Department of Mines, Industry Regulation and Safety – Consumer Protection Division (Consumer Protection) on 8 September 2020.
… After having consider[ed] the available information, the Commissioner formed the view that the leave should be granted to allow NH Pty Ltd to continue as the general partner of the Partnership.
[15] Affidavit of Christopher Kingsley Pearce filed 18 December 2020 'CPK4'.

Statutory Regime

The Limited Partnership Act 2016 (WA) sets out the applicable statutory regime in Western Australia for both limited partnerships and incorporated limited partnerships. A limited partnership enables the liability of one or more partners for the debts and obligations of the business to be limited. Under the Act, a limited partnership comprises one or more general partners and one or more limited partners.[16] The general partners have unlimited liability in respect of the partnership, whereas a limited partner's liability is limited to their agreed contribution to the limited partnership.[17]
[16] Limited Partnership Act 2016 (WA), s 11(1).
[17] Limited Partnership Act 2016 (WA), s 18.
Subject to the modifications set out in s 6 of the Act, the Partnership Act 1895 (WA) applies to a limited partnership.[18] This includes the right of a partner to be indemnified for any liabilities incurred in the ordinary and proper conduct of the partnership.[19]
[18] Limited Partnership Act 2016 (WA), s 6.
[19] Partnership Act 1895 (WA), s 34(2).
Division 5 of Pt 3 the Act sets out the circumstances in which a limited partnership can be dissolved, ceases or is wound up. Unless otherwise provided for by the partnership agreement, a limited partner cannot dissolve a limited partnership (s 25) or wind it up; this needs to be done by the general partner unless the court otherwise orders (s 30). A partnership will cease being a limited partnership if the partnership ceases to have at least one general partner and one limited partner (s 27(1)). Any continuation of the partnership that may occur if the partnership ceases to have one general partner is not a partnership under the Act but is governed by the Partnership Act (s 27(2)). The general partner is obliged to inform the Commissioner of the dissolution or cessation of the limited partnership (s 28) or, if the Commissioner is satisfied the limited partnership has dissolved or ceased, the Commissioner can give a notice requiring the limited partnership to satisfy the Commissioner within 28 days that the limited partnership has not been dissolved or ceased (s 29(2)). If the Commissioner is not satisfied, the Commissioner will record the dissolution or cessation of the limited partnership in the register (s 29(3)).
A public register of limited partnerships is maintained by the Commissioner (s 78). If court proceedings are pending against a person under s 88, s 89 or s 90 of the Act, this may be noted in the register (s 79(4)).
Division 4 of Pt 5 of the Act restricts who can be a general partner of a limited partnership. Relevantly, s 88 of the Act provides that:
(1)In this section -
insolvent means -
(a)in relation to an individual — an insolvent under administration as defined in the Corporations Act section 9; and
(b)in relation to a body corporate — an externally‑administered body corporate as defined in the Corporations Act section 9; and
(c)in relation to a partnership — a partnership that has an insolvent general partner.
(2)An insolvent must not, except with the leave of the Commissioner -
(a)be a general partner in a limited partnership or incorporated limited partnership; or
(b)manage a limited partnership or manage an incorporated limited partnership.
Penalty for this subsection: a fine of $10 000 and imprisonment for 1 year.
The application for leave is governed by s 92 of the Act. An application must be made in writing and lodged with the Commissioner (s 92(1)). The application may request that leave be granted from a day that is specified in the application (s 92(2)), which must be at least 21 days after the date of the application (s 92(3)). The Commissioner may either grant leave, subject to any condition or limitation thought appropriate, or refuse the application (s 92(4)).
The Commissioner's decision on an application for leave can be reviewed in the State Administrative Tribunal (s 95 and s 96).
A contravention of s 88 does not affect any liability imposed by or arising under another provision of the Act (s 91).
Any proceedings for an offence under the Act must be commenced within 3 years after the date on which the offence is said to have been committed (s 99).

Lenton Brae Limited Partnership Agreement

On 2 January 1991, Necessary Holdings entered into a limited partnership agreement with Offa, Jeanette Elizabeth Tomlinson as trustee for the Jeanette Tomlinson Family Trust, Porbic Pty Ltd as trustee for the GMA Engineering Trust, Ancla Nominees Pty Ltd as trustee for the R J and M Lewis Family Trust, Winegrower Pty Ltd as trustee for the C and G Walker Family Trust and Bruce Tomlinson (Limited Partnership Agreement).[20]
[20] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ6'.
Under the express terms of the Limited Partnership Agreement, Necessary Holdings is appointed as general partner (cl 2.1.1 and cl 4.1). No other general partner is appointed. The process for the replacement of the general partner is set out in Appendix 1 (cl 4.2). Appendix 1 provides a number of circumstances in which the general partner can be replaced. These include that the general partner will promptly retire if and when requested to do so by special resolution of the limited partners where, inter alia, the general partner goes into liquidation (cl 1.1), or the general partner voluntarily resigns and has made arrangements with a substitute general partner to fulfil the obligations under the Limited Partnership Agreement (cl 1.4).
As general partner, Necessary Holdings has the sole right to manage the business of the limited partnership and to exercise all of the powers and act on behalf of the limited partnership as it, in its discretion, sees fit (cl 9.1). Necessary Holdings cannot sell or dispose of the whole or a substantial portion of the limited partnership's assets unless 21 days' prior notice in writing has been given to each of the limited partners (cl 9.2).
Clause 7 of the Limited Partnership Agreement sets out the term of the limited partnership. It expressly provides that the limited partnership continues until determined in accordance with Appendix 2 (cl 7.2) and that bankruptcy or liquidation, in the case of a corporate limited partner, does not determine the limited partnership (cl 7.3).

Application for directions

The plaintiff's application for directions is made pursuant to s 90‑15(1) of Sch 2 to the Corporations Act 2001 (WA). Section 90‑15(1) is in wide terms and allows the court to make such orders as it thinks fit in relation to the external administration of a company.
The approach of the court on an application for directions by an external administrator is well‑established. As Goldberg J stated in Re Ansett Australia Ltd (No 3):[21]
There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, that decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.
[21] Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 [65].
Subject to the liquidator making full and fair disclosure of the material facts, the effect of a direction is to protect the liquidator from claims that they have acted unreasonably, inappropriately, or in breach of their duties; it does not determine rights and liabilities that arise out of the proposed transaction.[22] Put another way, the order of the court sanctions a proposed course of conduct by the liquidator.[23]
[22] Re GB Nathan & Co Pty Ltd (In Liq)(1991) 24 NSWLR 674, 679 ‑ 680.
[23] Re GB Nathan & Co Pty Ltd (In Liq), 679 - 680.
In this case, an order or direction is sought that the plaintiff would be acting properly and is justified in causing Necessary Holdings to sell the assets of the LBLP in the exercise of Necessary Holdings' right of indemnity.
As was noted by Vaughan J in Re GGA Lifestyle Pty Ltd (Administrators Appointed); ex parte Woodhouse:[24]
A direction that an external administrator may properly and justifiably carry out a proposed course of conduct is used to signify that it is appropriate that he or she do so. It is a conventional form of direction in common use. It is implicit in such an order that the court is approving the proposed conduct. Often a proposed direction in this form will raise an issue of propriety or reasonableness. Directions are available and appropriate on that basis. (citations omitted)
[24] Re GGA Lifestyle Pty Ltd (Administrators Appointed); ex parte Woodhouse [2019] WASC 167 [23].
In determining whether a direction should be given in these terms, it is necessary to determine whether Necessary Holdings has leave to act as general partner of the LBLP.

Does the plaintiff or Necessary Holdings have leave to act as general partner of the LBLP?

Submissions of the parties

The plaintiff contends that the effect of the Letter is that at least from 17 December 2021, Necessary Holdings has leave to act as general partner of LBLP. If this is correct, it is not necessary for an order to be made appointing the plaintiff as receiver and manager of the assets of the LBLP as the plaintiff has power to sell or otherwise dispose of the assets under the express terms of the Limited Partnership Agreement.
Counsel for the plaintiff submitted that the Application was made on behalf of Necessary Holdings (rather than Mr Jacobs in any specific capacity) and that Necessary Holdings had been given leave to continue to act as general partner of the LBLP.
The plaintiff submitted that, on its proper construction, s 88 of the Act did not remove Necessary Holdings nor deem that Necessary Holdings was removed as general partner of the LBLP. Instead, this section creates an offence for an insolvent company continuing to act as general partner without leave from the Department.
Counsel for the interested parties submitted that Necessary Holdings is and at all times was the general partner of the LBLP. They contended that the company, Necessary Holdings, had been granted leave to continue as general partner of the LBLP, not Mr Jacobs in his capacity as administrator of Necessary Holdings. In their submission, Necessary Holdings did not cease to be general partner on the appointment of an external administrator under s 88 of the Act; it remained general partner and continued to have unlimited liability but committed an offence under the Act, until leave was obtained.

The second defendant does not accept the Letter has remedied the question as to whether the plaintiff has power to sell the assets of the LBLP. Counsel for the second defendant submitted that s 88 of the Act creates a statutory prohibition against an externally administered company acting as a general partner unless and until leave is granted by the Commissioner under s 92 of the Act. In this regard, the second defendant relied on the words 'must not act', which, counsel contended, on its proper construction meant an externally administered company was disqualified from acting as general partner. In counsel's submission, this construction was consistent with the purpose and policy of the section, which was to exclude insolvent companies from acting as a general partner of a limited partnership.
In any event, the second defendant says that the issue has not been resolved by the Letter as the application for leave was made by Mr Jacobs in his capacity as voluntary administrator of Necessary Holdings and leave was granted to him in that capacity and not to Necessary Holdings or Mr Jacobs in his capacity as liquidator of Necessary Holdings.

Legal principles

The starting point in considering the meaning of s 88 of the Act is to consider the ordinary and grammatical sense of the statutory words to be interpreted, having regard to their context and legislative purpose.[25]
[25] Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 [4].
The proper approach to statutory construction was summarised by Buss JA in Caratti v Mammoth Investments Pty Ltd as follows:[26]
The modern approach to statutory construction is purposive. The statutory text is the surest guide to Parliament's intention. A decision as to the meaning of the text requires consideration of the context, in its widest sense, including the general purpose and policy of the provision.
The context includes the existing state of the law, the history of the legislative scheme and the mischief to which the statute is directed.
The purpose of legislation must be derived from the statutory text and not from any assumption about the desired or desirable reach or operation of the relevant provisions. The intended reach of a legislative provision is to be discerned from the words of the provision and not by making an a priori assumption about its purpose. (citations omitted)
[26] Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84; (2016) 50 WAR 84 [390] - [392].
Extrinsic materials can be considered to confirm the ordinary meaning conveyed by the text of the provision, or to determine the meaning of a provision where the provision is ambiguous or obscure, or where the ordinary meaning gives rise to a result that is manifestly absurd or unreasonable.[27]
[27] Interpretation Act 1984 (WA), s 19(1).
A construction that promotes the purpose or object of the law is to be preferred to a construction that does not promote that purpose or object.[28]
[28] Interpretation Act 1984 (WA), s 18.
It is not in dispute that s 88 creates an offence and, as such, is a penal provision. Previously, a strict approach was adopted for the construction of penal provisions. That is, if two reasonable constructions were open to the court, the court would adopt the more lenient construction. The current approach to statutory construction of penal provisions is that the ordinary rules of statutory construction apply. That is, the court should ascertain and give effect to the purpose of Parliament as expressed in the specific terms and language used. However, if any ambiguity or doubt remains, this may be resolved by 'refusing to extend the category of criminal offences'.[29]

Disposition

[29] Beckwith v The Queen [1976] HCA 55; (1976) 135 CLR 569, 576. See also D Pearce, Statutory Interpretation in Australia, 9^th ed (2019), [9.10] ‑ [9.11].

Each of the states of Australia, as well as the Commonwealth, has enacted legislation which enables the creation of a limited partnership.[30] The legislative purpose of these acts is to create a statutory form of partnership which limits the liability of some of the partners. This form of partnership facilitates investment by investors, and in particular, venture capitalists because of the taxation treatment of such investments.[31] Under these acts, the general partner is the only partner with unlimited liability, is the only partner who has the capacity to bind the partnership or who can be involved in the management of the partnership. The liability of all other partners is capped to their capital contribution. However, these partners cannot be involved in management.
[30] Venture Capital Act 2002 (Cth); Partnership Act 1963 (ACT); Partnership Act 1892 (NSW); Partnership Act 1997 (NT); Partnership Act 1891 (QLD); Partnership Act 1891 (SA); Partnership Act 1891 (TAS); Partnership Act 1958 (VIC); Limited Partnership Act 2016 (WA).
[31] Second reading speech, Legislative Council, 21 September 2016, p 6420.
The restrictions as to who can be a general partner of a limited partnership are unique to Western Australia. These restrictions were not in the original legislation (Limited Partnership Act 1901 (WA)) but were introduced in the current Act. The Explanatory Memorandum, which accompanied the Limited Partnerships Bill 2016 (WA), stated that the purpose of the division was to 'minimise the risk to limited partners and outside persons who deal with the limited partnership or incorporated limited partnership'.[32]
[32] Explanatory Memorandum, Limited Partnerships Bill 2016 (WA) cl 86.
Similar provisions regarding restrictions as to who might be a director of a company have been part of the Corporations Act (and its preceding co-operative legislation) since the Companies (Co-Operative) Act 1943 (WA).[33] In respect of these restrictions, Street J (as he then was) in Re Altim Pty Ltd held, in relation to an application for leave under s 117(1) of the Companies Act 1961 (NSW) to take part in the management of a company, that:[34]
The section under which this application is made proceeds upon the basis that a person who is an undischarged bankrupt is prima facie not to be permitted to act as a director or to take part in the management of a company. The Court is given jurisdiction to grant leave for such activities to be carried on, but an applicant who comes to the Court seeking leave must bear the onus of establishing that the general policy of the Legislature laid down in this section ought to be made the subject of an exception in his case. It should be borne in mind that the section is not in any sense a punishment of the bankrupt. Nor should a refusal to grant leave under that section be regarded as punitive. The prohibition is entirely protective, and the power of the court to grant leave is to be exercised with this consideration in the forefront.
[33] Companies (Co-Operative) Act 1943 (WA), s 148 (repealed).
[34] Re Altim Pty Ltd [1968] 2 NSWR 762, 764. See Nilant v Shenton [2001] WASCA 421 [25] ‑ [26] and the authorities cited there.
Section 88 is in div 4 of pt 5 of the Act. Division 4 restricts who is entitled to be a general partner of a limited partnership. The Act 'restricts' three groups from being a general partner of a limited partnership unless leave is obtained from the Commissioner, namely, insolvents (s 88), convicted persons (s 89) and disqualified persons (s 90). These restrictions or prohibitions are not absolute. Each of these provisions enable leave to be sought from the Commissioner for the restricted person or insolvent to be a general partner. By restricting who can be a general partner of a limited partnership, these provisions provide protection for creditors of the limited partnership as well as for those who invest in the limited partnership.
It is in this context that s 88 of the Act has to be construed. Section 88 provides that 'an insolvent' must not be a general partner or manage a limited partnership unless leave of the Commissioner has been obtained (emphasis added).
An insolvent is defined in s 88(1) as meaning, in relation to a body corporate, 'an externally‑administered body corporate as defined in the Corporations Act section 9'.
At present, s 9 of the Corporations Act does not define 'externally‑administered body corporate'. The definition of this phrase was deleted from s 9 of the Corporations Act and a definition of a similar term inserted in s 5‑15 of the Insolvency Practice Schedule with effect from 1 March 2017.[35]
[35] Insolvency Law Reform Act 2016 (Cth), No 11 of 2016.
The equivalent definition in the Insolvency Practice Schedule provides that:[36]
A company is taken to be under external administration if:
(a)the company is under administration; or
(b)a deed of company arrangement has been entered into in relation to the company; or
(c)a liquidator has been appointed in relation to the company; or
(d)a provisional liquidator has been appointed in relation to the company.
[36] Corporations Act 2001 (Cth), sch 2 (Insolvency Practice Schedule) s 5-15.
I accept the second defendant's submission that by reason of s 16 of the Interpretation Act 1984 (WA), the reference to the definition in the Corporations Act should be construed as a reference to the equivalent definition in the Insolvency Practice Schedule.
The word 'must' on its ordinary meaning means a command, duty or obligation.[37] Where the word is used in relation to a function, it means that the function conferred is required to be performed.[38] Accordingly, the ordinary meaning of the phrase 'must not' is that the function is not to be performed.
[37] Oxford English Dictionary.
[38] Interpretation Act 1984 (WA), s 56(2).
On the ordinary and natural meaning of the express words of s 88 of the Act, a company which is under administration or where a Deed of Company Arrangement (DOCA) has been entered into in relation to that company or where a liquidator or provisional liquidator has been appointed is required not to be a general partner of a limited partnership, unless leave is obtained from the Commissioner. That is, the section creates a point in time restriction on an insolvent company from being a general partner of a limited partnership and describes what a restricted party cannot do without leave of the Commissioner.
On their face, the legislative purpose of s 88 to s 90 of the Act is to prohibit certain parties, including a company under external administration, from being a general partner or otherwise managing a limited partnership, to protect the interests of creditors and investors from actions which could cause the public to suffer loss. These sections are penal provisions which can be enforced by the Commissioner.
Accordingly, unless leave was obtained from the Commissioner, from the date of the appointment of an external administrator, Necessary Holdings was prohibited from acting as general partner of the LBLP.
However, the fact that Necessary Holdings was prohibited from acting as general partner of the LBLP did not, of itself, mean that Necessary Holdings ceased to be the general partner. There is no equivalent provision in the Act to s 206A(2) of the Corporations Act which provides that a person ceases to be a director if they become disqualified and leave has not been obtained.
This was accepted by all parties, including the second defendant.[39] The reason for this is plain. If Necessary Holdings ceased to be the general partner of the LBLP, under s 27(1) of the Act, the LBLP ceased to be limited partnership. Given that an application for leave cannot be brought until at least 21 days after the appointment of an external administrator, if this was not the position, all limited partnerships which only had one general partner would cease prior to any application for leave being able to be made. The parties submitted, which I accept, that this was not the intention or purpose of the Act. This construction is supported by other sections of the Act, including s 79(4).
[39] Second defendant's submissions [3], [4], fn 10.
For these reasons, on a proper construction of s 88 of the Act, I find that on the appointment of an external administrator, Necessary Holdings did not cease to be the general partner of the LBLP, although it was prohibited from that date from acting as general partner unless leave was obtained.
I turn then to consider the terms of the Application and the subsequent Letter. Relevantly, the Application stated, inter alia, that:[40]
(a)Blackwall Legal act on behalf of Robert Allan Jacobs as voluntary administrator of Necessary Holdings;
(b)the purpose of the Letter was to seek leave under s 88 for Necessary Holdings to continue as general partner of the LBLP;
(c)Necessary Holdings has been the only general partner of the LBLP since its formation on 2 January 1991;
(d)as general partner, Necessary Holdings has had the sole right to manage the business of LBLP for almost three decades;
(e)leave was sought for Necessary Holdings to continue as general partner of the LBLP.
[40] Affidavit of Robert Allan Jacobs filed 27 October 2020 'RAJ19'.
That is, the Application distinguished between 'our client', namely Mr Jacobs as administrator of Necessary Holdings, and Necessary Holdings.
The Letter refers to the application having been made on behalf of Necessary Holdings and grants leave to 'allow [Necessary Holdings] to continue as the general partner of the Partnership'. On its face, the Commissioner granted leave to Necessary Holdings, as opposed to Mr Jacobs as administrator of Necessary Holdings, to act as general partner of the LBLP. This construction is further supported by the use of the word 'continue' which means to 'carry on' or 'maintain'. The only entity which could carry on or maintain being a general partner of the LBLP is Necessary Holdings Pty Ltd as the administrator had never been general partner of the LBLP.
In this case, I find that leave was granted to Necessary Holdings to continue as general partner of LBLP. Leave was not granted to Necessary Holdings (Administrator appointed) or to Mr Jacobs as administrator of Necessary Holdings. Further, the Commissioner did not impose any condition that limited the grant of leave to the time period when Necessary Holdings was under administration or require that the application be renewed if creditors voted to wind up the company at the second creditors meeting.
For these reasons, I find that from 17 December 2020, Necessary Holdings has leave to continue to act as general partner of the LBLP. As general partner, Necessary Holdings can manage, sell or otherwise deal with the assets of the LBLP under cl 9.1 of the LBLP. Accordingly, it is not necessary for a receiver or manager to be appointed to LBLP to sell the assets of the limited partnership.

Should orders be made under s 1318 of the Corporations Act?

It was accepted by all parties that the failure of the plaintiff to obtain leave to continue as general partner of the LBLP until December 2020 was a breach of the Act.[41]
[41] Plaintiff's submissions [13]; Second defendant's submissions [3].
However, the plaintiff maintained that he has not done anything which gives rise to a breach of duty owed to Necessary Holdings, alternatively that the court should make orders excusing any breach under s 1318 of the Corporations Act.
Section 1318(1) of the Corporations Act relevantly provides that:
If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.
The discretion under s 1318(1) can be exercised if two conditions are met: first, the court is affirmatively satisfied the person acted honestly; second, the court forms a value judgment that in all the circumstances, the person should be excused.[42]
[42] Resource Equities Ltd (subject to Deed of Company Arrangement) v Garrett [2009] NSWSC 1385 [119].
Relief can also be granted in relation to anticipated proceedings.[43]
[43] Corporations Act 2001 (Cth) s 1318(2).
In this case, there are no civil proceedings currently on foot which allege that the plaintiff has breached any duty (emphasis added), nor did the evidence before me disclose that any proceedings were anticipated. For this reason, I consider that the application is premature and that the court, at present, does not have power to grant any relief under s 1318 of the Corporations Act.

Is the plaintiff entitled to an indemnity from the assets of the LBLP?

It was not in dispute that as general partner, Necessary Holdings had a right of indemnity for all payments made or liabilities incurred in the ordinary and proper conduct of the LBLP or for the preservation of the business or property of the LBLP.[44]
[44] Partnership Act 1895 (WA), s 34(2); Second defendant's submissions [2].
The plaintiff submitted that at all times Necessary Holdings remained the general partner of the LBLP. As general partner, it was entitled to rely on the indemnity under s 34(2) of the Partnership Act to recover all costs which it has incurred in relation to the LBLP.
The second defendant contended that:
(a)Necessary Holdings had a bare right of indemnity to recover its costs;
(b)after the appointment of an external administrator, Necessary Holdings had no capacity to act as general partner and, as a result, could not seek an indemnity for any costs that it incurred after this date unless and until leave was obtained under s 92 of the Act;
(c)on obtaining leave under s 92 of the Act, Necessary Holdings could enforce its bare right of indemnity for the costs which were properly incurred while it was authorised to act as general partner.
While counsel for both the plaintiff and the second defendant addressed me on this issue at some length during the course of the hearing, ultimately, both agreed the issue did not need to be finally determined in the present application.[45]
[45] ts 16; Second Defendant's supplementary submissions [4].
I agree that it would be premature at this stage to express any view in relation to the extent and nature of the plaintiff's and/or Necessary Holdings' right of indemnity. In my view, this issue should not be resolved without evidence being adduced and factual findings made as to the assets of the LBLP, who holds the assets and the costs that are sought to be recovered and by whom.
For these reasons, I decline to make any orders as to the entitlement of the plaintiff or Necessary Holdings to an indemnity at this stage.

Should the plaintiff be replaced as liquidator of Necessary Holdings?

In its interlocutory application, Offa contended the liquidator of Necessary Holdings should be replaced on a number of grounds. The factual basis for a number of these grounds was credibly denied in the affidavits filed by Mr Jacobs. For that reason, in determining the application, I have had to ignore the disputed allegations.[46]
[46] Barboutis v The Kart Centre Pty Ltd [No 2] [2020] WASCA 41 [7] approving the approach in Tay Bok Choon v Tahanson Sdn Bhd [1987] 1 WLR 413, 419.
At the hearing before me, the sole ground relied upon by Offa for the removal of the liquidator was the failure by him to seek leave for Necessary Holdings to continue as general partner until September 2020 or obtain leave until 17 December 2020.

Submissions of the parties

The basis for the application was that the failure to obtain leave from the Commissioner to act as general partner of the LBLP was a breach of the Act and exposed Necessary Holdings to a penalty. For this reason, counsel for the second defendant contended there was now a conflict of interest between Mr Jacobs and Necessary Holdings and a new liquidator should be appointed.

Counsel for the interested parties objected to the removal of Mr Jacobs as liquidator. They submitted that Mr Jacobs was not necessarily in a position of conflict and that there was no benefit to the limited partners of LBLP in his removal as any replacement was likely to cause additional costs to be incurred and delay the sale of the LBLP assets.

Standing to bring application

Offa seeks orders for the removal and replacement of the liquidator of Necessary Holdings under s 90‑10, s 90‑15 and s 90‑20 of the Insolvency Practice Schedule. These sections give the court broad powers in respect of a company under external administration including to make orders for the replacement of a liquidator.[47]
[47] Corporations Act 2001 (Cth), sch 2 (Insolvency Practice Schedule) s 90-15(3)(b) and (c).
I accept that Offa, as a shareholder of Necessary Holdings and as a limited partner of the LBLP, has a financial interest in the external administration of Necessary Holdings and has standing to bring the application.

Legal principles

In Re St Gregory's Armenian School (in Liq),[48] Brereton J summarised the principles to be applied on an application to replace a liquidator in the following terms:
(a)the test for the removal of a voluntary liquidator is 'on cause shown'. This does not require the court to go through each of the particulars relied upon by an application and determine whether each is made out. Fairness will require that there be particularised allegations which provide the framework for the examination of the liquidator's conduct;
(b)the burden of showing cause is on the applicant which is not discharged lightly, as it should not be seen to be easy to remove a liquidator merely because it can be shown that in one or possibly even more respects, their conduct has fallen short of the ideal;
(c)an order for removal will be made only if it is demonstrated that it would be 'for the better conduct of the liquidation', or 'to the general advantage of persons interested in the winding up' or 'in the best interests of the liquidation'. This is to be measured by reference to the 'substantial and real interest of the liquidation'. Before removing a liquidator from office, the court will normally need to be satisfied of 'cause shown' going beyond a particular instance;
(d)the court should not overlook the professional consequence for the liquidator of an order for removal and must afford 'fair play' to the liquidator. The court is entitled to ask 'What actual advantage would accrue to creditors by the removal of the liquidator?';
(e)the court may be more reluctant to remove a liquidator towards the end of the winding‑up than early in the winding up. In determining the application, the duration and stage of the winding up, and the potential for wasted costs and delay are relevant considerations;
(f)a 'mere loss of confidence', without more, does not justify removal of a liquidator;
(g)in evaluating the liquidator's conduct, it is important to remember that a liquidator is required to make practical commercial judgments. Even if a decision is not fully reasoned or supported by the fullest investigation, this does not mean that it should be second-guessed by the court;
(h)in an environment in which there are usually insufficient funds fully to pay all the claims of creditors, it is desirable that liquidators be 'frugal in incurring expenditure'.
[48] Re St Gregory's Armenian School (in Liq) [2012] NSWSC 1215; (2012) 92 ACSR 588 [23] - [35].
In considering the application for the removal of a liquidator, it is necessary for the court to find out the wishes of the persons really interested in the winding up.[49]

Disposition

[49] Handberg, in the matter of Greight Pty Ltd (in liq) [2006] FCA 17 [18].

The question in this case is whether the failure of the plaintiff to seek leave for Necessary Holdings to continue to act as general partner until September 2020 and obtain leave until 17 December 2020 is a sufficient basis to order the removal and replacement of the liquidator. Offa contends that it is for two primary reasons: first, the plaintiff's failure has exposed Necessary Holdings to a penalty for the commission of an offence; and second, the failure to obtain leave was a breach of the plaintiff's fiduciary duties to Necessary Holdings for which there is no explanation, alternatively, no sufficient explanation.
It is not in dispute that the plaintiff, as liquidator of Necessary Holdings, owes fiduciary duties to the company.
However, for the following reasons, I do not consider that on the evidence before me, Offa has discharged the burden for removal of the plaintiff as liquidator of Necessary Holdings.
First, while I accept that the failure to obtain leave from the Commissioner has exposed Necessary Holdings to a penalty, at this stage, no action has been taken by the Department in relation to the offence and there is no evidence before me as to whether this is likely to occur. While this failure gives rise to a possibility of a conflict of interest, at this stage, I consider that it is only a possible conflict; the conflict has not arisen. A conflict of interest may arise if the Department prosecutes Necessary Holdings and the liquidator seeks to recover the costs of the prosecution and any penalty imposed from the assets of Necessary Holdings. Given that the plaintiff's remuneration requires court approval, any objections by Offa or the Interested Parties as to these costs (if they arise) can be addressed at that stage.
Second, this was the only matter that was relied upon at the hearing before me. As noted above, before orders are made for the removal and replacement of a liquidator, it will generally be necessary for an applicant to demonstrate there has been a course of conduct by the existing liquidator which evidences a lack of impartiality or that it is in the best interests of the liquidation that the liquidator be removed. There is no evidence before me of any lack of impartiality by the existing liquidator nor a course of conduct that would justify his removal.
Third, under the terms of the Limited Partnership Agreement, Necessary Holdings could not remove itself as general partner. The two options for removal were for a special resolution of limited partners to be passed requiring the removal of Necessary Holdings, which did not occur, or for Necessary Holdings to find another party to consent to act as general partner, which also did not occur. The only unilateral action that Necessary Holdings could take was to seek leave from the Commissioner to continue to act as general partner, which it has done, albeit almost four months after the appointment of Mr Jacobs as voluntary administrator. While I accept that Mr Jacobs delayed in causing this application to be made, I do not consider that this delay in and of itself is a sufficient reason for his removal.
Fourth, Mr Jacobs was appointed as voluntary administrator in May 2020 and liquidator in September 2020. Mr Jacobs is familiar with the Business and is well advanced in the winding up of Necessary Holdings. I accept that if he is replaced, there will be wasted expenditure and that it will inevitably cause delay in the winding up. Any replacement of the plaintiff at this stage is likely to have particular impact on the Business as decisions are required to be made in relation to imminent harvest.

Conclusion

For the reasons set out above, I consider it is appropriate to make a direction, pursuant to s 90‑15 of the Insolvency Practice Schedule, that the Plaintiff will be acting properly and is justified in causing Necessary Holdings to sell the assets of the LBLP.
In relation to the second defendant's interlocutory application, I would dismiss the application.
I will hear from the parties as to the costs of the applications.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
HW
Research Associate to the Honourable Justice Hill
21 JANUARY 2021