Smolarek v McMaster as Administrator of Eznut Pty Ltd
[2008] WASCA 234
•19 NOVEMBER 2008
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: SMOLAREK -v- BRIAN KEITH McMASTER AS ADMINISTRATOR OF EZNUT PTY LTD [No 2] [2008] WASCA 234
CORAM: WHEELER JA
PULLIN JA
LE MIERE AJA
HEARD: 22 AUGUST 2008
DELIVERED : 19 NOVEMBER 2008
FILE NO/S: CACV 90 of 2006
BETWEEN: HANNA SMOLAREK
First Appellant
CHRISTINA SMOLAREK
Second AppellantAND
BRIAN KEITH McMASTER AS ADMINISTRATOR OF EZNUT PTY LTD (ACN 102 508 789)
First RespondentOREN ZOHAR AS ADMINISTRATOR OF EZNUT PTY LTD (ACN 102 508 789)
Second Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram :SIMMONDS J
Citation :BRIAN KEITH MCMASTER AS ADMINISTRATOR OF EZNUT PTY LTD (ADMINISTRATORS APPOINTED) & ANOR -v- EZNUT PTY LTD (ADMINISTRATORS APPOINTED) & ORS [2006] WASC 109
File No :COR 16 of 2006
Catchwords:
Corporations - Appointment of administrators - Whether company should have been represented - Whether directors' opinion as to insolvency was bona fide and genuinely formed - Task of the court in judging whether directors formed the opinion
Legislation:
Corporations Act 2001 (Cth), s 248C, s 435A, s 436A(1), s 437C, s 447A(1) s 447C(1), s 447C(2)
Rules of the Supreme Court 1971 (WA), O 4 r 3(2)
Supreme Court (Court of Appeal) Rules 2005 (WA), r 47(3)(d)
Result:
Appeal dismissed
Category: B
Representation:
Counsel:
First Appellant : In person
Second Appellant : In person
First Respondent : Mr J C Vaughan
Second Respondent : Mr J C Vaughan
Solicitors:
First Appellant : In person
Second Appellant : In person
First Respondent : Christensen Vaughan
Second Respondent : Christensen Vaughan
Case(s) referred to in judgment(s):
Advance Bank Australia Ltd v FAI Insurance Ltd (1987) 9 NSWLR 464
Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447
Goninan & Co Pty Ltd v Direct Engineering Services Pty Ltd [2007] WASCA 10; (2007) 33 WAR 182
In re NIAA Corp Ltd (in liq) (1993) 33 NSWLR 344
Kazar v Duus (1998) 88 FCR 218
Liwszyc v Smolarek [2005] WASC 199
Minogue v Human Rights and Equal Opportunity Commission (1999) 84 FCR 438
Rajski v Scitec Corp Pty Ltd (Unreported, Court of Appeal NSW, Full Court, No CA 146 of 1986, 16 June 1986)
Smolarek v Liwszyc [2006] WASCA 50; (2006) 32 WAR 101
Smolarek v Liwszyc [No 2] [2006] WASCA 50(S); (2006) 32 WAR 129
Smolarek v McMaster [2006] WASC 109; (2006) 58 ACSR 199
Victorian Stevedoring and General Contracting Company Pty Ltd v Dignan (1931) 46 CLR 73
WHEELER JA: I agree with Pullin JA.
PULLIN JA: This is an appeal against the declaration of Simmonds J pursuant to s 447C(2) of the Corporations Act 2001 (Cth) that the respondents were validly appointed as administrators under s 436A of the Corporations Act 2001 on 27 January 2006.
Background
Ms Smolarek developed a new type of commercial fastener. A Mr David Liwszyc was an experienced mechanical engineer who had patented and commercialised a number of technologies. Ms Smolarek approached him in 2002 and the two of them incorporated Eznut Pty Ltd (Eznut). They were the founding directors. The Court of Appeal said in proceedings between Ms Smolarek and Mr Liwszyc, that on the face of the evidence in those proceedings, there seemed to have been an understanding between Ms Smolarek and Mr Liwszyc when Eznut was incorporated, that both would participate in the management of the company. See Smolarek v Liwszyc [2006] WASCA 50; (2006) 32 WAR 101 [77]. Ms Smolarek held 95% of the shares.
During 2002, Ms Smolarek also approached a Mr George Duta for assistance. He too, was an engineer and he agreed to provide engineering advice, and in consideration he was issued with shares. He was appointed a director of Eznut in 2003. Other people were also approached to become shareholders. By early April 2005, Ms Smolarek still held a substantial majority of the shares. Other shareholders were a Mr Henry Zelman on behalf of his superannuation fund, a Ms Agatha Walczuk on behalf of a trust and a company, Cacabon Pty Ltd.
Ms Smolarek then fell out with Mr Liwszyc and Mr Duta. In April 2005, a resolution was passed by the directors of Eznut, with Ms Smolarek objecting, that an amount of $67,500 be raised by issuing 1.5 million shares to existing shareholders pro rata with their existing shareholding. If all shareholders had agreed to take up the proposed allotment, then Ms Smolarek would have remained a majority shareholder. However, Ms Smolarek disputed the proposed share issue and the other shareholders offered to take up the shares Ms Smolarek was entitled to. This meant that upon registration, Ms Smolarek would then no longer be Eznut's controlling shareholder. It seems clear that the company was badly in need of funds but instead of agreeing to contribute her share of $67,000 and maintaining her majority, Ms Smolarek took action which has resulted in the litigation between the parties.
Ms Smolarek decided that her best course of action was to call a meeting of shareholders and resolve to remove Mr Liwszyc as a director and to have her daughter, the second appellant (Christina), appointed as a director. Without telling Mr Liwszyc or Mr Duta of her intention, Ms Smolarek claimed to transfer 1,000 shares held by her to Christina. There is an issue between the appellants and Mr Liwszyc and Mr Duta about whether this was a valid transfer.
Appellants take steps to remove Mr Liwszyc and Mr Duta as directors
On 27 May 2005, a general meeting of shareholders took place. Only Ms Smolarek and Christina were present. Due to a misunderstanding, Mr Liwszyc and Mr Duta did not attend. A quorum was present if Christina was a shareholder, but not so if she was not. Ms Smolarek chaired the meeting and she and Christina, as shareholders, then resolved to remove Mr Liwszyc as director with immediate effect and Christina was appointed as director with immediate effect. Certain proxies from other shareholders were voted by Ms Smolarek. There is an issue between the appellants and Mr Liwszyc and Mr Duta about the validity of the proxy votes.
Earlier on 9 May 2005, Ms Smolarek appointed herself as company secretary without prior consultation with either of Mr Liwszyc or Mr Duta. Whether that was an effective appointment is also an issue.
On 30 May 2005, Ms Smolarek informed ASIC that Mr Duta was no longer a director of Eznut and that its records should be amended accordingly, because his appointment had not been confirmed pursuant to s 201H(2) of the Corporations Act.
Mr Liwszyc and Mr Duta commence proceedings in COR 144 of 2005
On 17 June 2005, Mr Liwszyc and Mr Duta commenced proceedings in the Supreme Court in COR 144/2005 pursuant to ss 181, 182, 1317H and 1324 of the Corporations Act 2001 (Cth) seeking damages and other relief. An application was made by Mr Liwszyc and Mr Duta for an interlocutory injunction. A master granted the interlocutory injunction restraining Ms Smolarek or Christina from binding or purporting to bind Eznut without the approval of Mr Liwszyc and Mr Duta, or without the approval of the court. The injunction was continued until the more substantive hearing of the interlocutory injunction application before Hasluck J (Liwszyc v Smolarek [2005] WASC 199).
His Honour held that a number of serious issues had arisen which were fit to be tried. It is important to a proper understanding of one of the appellant's grounds of appeal in this case to state what the serious questions were held to be. His Honour held that there was a serious question to be tried about:
(a)whether the appointment of Christina on 27 May 2005 as a director was attended by improper purpose;
(b)whether the removal of Mr Liwszyc on 27 May 2005 was invalid and ineffective owing to the absence of a quorum;
(c)whether the resolution for removal of Mr Liwszyc was invalid and ineffective by reason of the invalidity of proxies;
(d)whether Ms Smolarek contravened the Corporations Act by seeking to remove Mr Duta by unilateral action.
His Honour also held that 'It was not open to [Ms Smolarek] to effect her own appointment as secretary by unilateral action' [19]. I assume that by this, his Honour meant that there was also a serious question to be tried about this as well.
It is equally important because of the appellants' argument in this case to note something which was not determined by Hasluck J to be a serious question to be tried. It was the dispute about the validity of the proposed 1.5 million share issue to raise $67,500. Although Hasluck J referred to this dispute he did so merely as one of the background circumstances leading to the issues his Honour had to decide. His Honour made no provisional findings at all concerning the share issue dispute. There was no finding made that there was any serious question to be tried about the validity of the share issue and hence it did not form any foundation for the grant of the orders made by Hasluck J on 2 September 2005.
The orders were that Mr Liwszyc and Mr Duta be 'reinstated forthwith as directors of Eznut' and that Christina be restrained from acting as a director. The reason why the validity of the share issue was irrelevant was because, with Mr Liwszyc and Mr Duta not in attendance, Ms Smolarek was able to pass the resolutions to remove Mr Liwszyc and appoint Christina as director, no matter what the proportion of her shares to the total shares on issue.
Court of Appeal sets aside the order reinstating Mr Duta
The appellants appealed against the orders of Hasluck J and subsequently the appeal was allowed in part, to the extent of setting aside the order made by Hasluck J for the reinstatement of Mr Duta as a director of Eznut: Smolarek v Liwszyc [2006] WASCA 50; (2006) 32 WAR 101. The date from which that order was to take effect was the subject of a further decision of the Court of Appeal which is referred to below.
The directors' meeting on 27 January 2006
However, before the Court of Appeal's reasons for decision in Smolarek v Liwszyc (cited under the previous heading) were published (on 29 March 2006), at a directors' meeting attended by Mr Liwszyc and Mr Duta on 27 January 2006, the respondents passed the resolutions which are under contention in this appeal. They were in the following terms:
1.'That in the opinion of the directors, the company is insolvent, or is likely to become insolvent at some future time, and an administrator of the company should be appointed.'
2.'That the Company appoints Brian McMaster and Oren Zohar of KordaMentha, as Administrators of the Company under Part 5.3A of the Corporations Act 2001.'
3.'That the Company execute the Instrument of Appointment of Administrators.'
Ms Smolarek was not in attendance at the meeting, although she was given notice of the meeting. Ms Smolarek then raised objections to the validity of the appointment of the respondents as administrators which are identified in the originating process referred to in the next paragraph.
The administrators commence proceedings
On 8 February 2006, the respondents commenced the proceedings in the Supreme Court which concluded with the judgment of Simmonds J which is under appeal. The respondent sought relief as follows:
A declaration in accordance with s 447C(2) of the Corporations Act 2001 that the plaintiffs [respondents] were validly appointed as administrators of the first defendant [Eznut] under s 436A of the Corporations Act 2001 on 27 January 2006 despite doubts, on the following specified grounds as raised by the second defendant [Ms Smolarek] (a director of the first defendant), about whether the appointment is valid, namely, that the resolution of the first defendant's directors made 27 January 2006 was invalid in that:
(1)the resolution was outside the powers of the fourth defendants [Liwszyc and Duta] as directors of the first defendant as they were mere caretakers appointed pursuant to an interlocutory order of this Honourable Court made 2 September 2005 in action COR 144 of 2005 which order is the subject of an appeal;
(2)the resolution was not bona fide and genuinely formed;
(3)the resolution was made for an improper purpose;
(4)the second defendant was not given notice of the meeting of the first defendant's directors at which the resolution was passed.
Alternatively, an order in accordance with s 447A(1) of the Corporations Act that Part 5.3A of the Corporations Act 2001 is to operate in relation to the first defendant as if the plaintiffs had been validly appointed as administrators of the first defendant on 27 January 2006 under s 436A of the Corporations Act 2001.
The application was clearly urgent. As a result, the application was listed for hearing on 23 February 2006, but it was adjourned on the application of the appellants who appeared in person. Programming orders of the court were varied to allow additional time to the appellants to file and serve any affidavits in opposition to the application. The hearing commenced on 1 March 2006. The appellants sought an adjournment stating that they wished to have more time to prepare for the hearing and to await the outcome of the decision of the Court of Appeal in relation to the decision of Hasluck J. Simmonds J refused the application to adjourn, but he allowed for the continuation of the hearing into the following day to accommodate the position of the appellants as self‑represented litigants and to allow them time to prepare their closing submissions. His Honour completed the hearing on 2 March 2006 and reserved his decision. During the hearing the administrators had objected to certain paragraphs in the appellants' affidavit. The appellants were further accommodated when the judge allowed the appellants an opportunity to file and serve written submissions in relation to the objections, having taken the time at the hearing to explain the principles on which objections might be taken. His Honour also granted leave to the appellants to make objections to the admissibility of certain parts of the respondents' affidavits after the hearing, even though the time at which the appellants ought normally to have made objections was when the affidavits were read.
As already mentioned above, on 29 March 2006, the Court of Appeal published its reasons concerning the appeal brought by the appellant against Hasluck J's order. The Court of Appeal decided that the appeal should be allowed in part to the extent of setting aside the order made by Hasluck J for the reinstatement of Mr Duta as a director of Eznut.
The Court of Appeal considers whether its order should be backdated
An issue then arose as to whether the Court of Appeal's order should take effect from the date of its pronouncement by the court on 29 March 2006, or from the date of Hasluck J's order, namely 2 September 2005. It was decided by the Court of Appeal that the order setting aside the order made by Hasluck J should take effect from the date on which the Court of Appeal's order was pronounced. See Smolarek v Liwszyc [No 2] [2006] WASCA 50(S); (2006) 32 WAR 129. The Court of Appeal in reaching its decision, took into account the fact that the resolution to appoint administrators had been made while Mr Duta was serving as a director pursuant to the order of Hasluck J.
The application by the appellants to reopen the proceedings before Simmonds J
On 13 April 2006, the appellants filed an application to 'reopen' the proceedings. Simmonds J did so to permit submissions to be made about the effect of the Court of Appeal decision but the application was otherwise dismissed.
Judgment by Simmonds J
On 16 June 2006, Simmonds J delivered judgment; see Smolarek v McMaster [2006] WASC 109; (2006) 58 ACSR 199. His Honour held that the directors of Eznut who voted in favour of the resolution to appoint an administrator to the company had properly formed the opinion described in s 436A(1)(a) of the Act; the resolution for the appointment of an administrator was not made for an improper purpose in contravention of s 435A of the Act; that in the circumstances, notice of the meeting which occurred on 27 January 2006, provided shortly before the meeting itself, was 'reasonable' within s 248C of the Act; and that there was no relevant prejudice to any party from the making of the orders sought under s 447A(1) of the Act.
Simmonds J made orders in the following terms:
1.Pursuant to s 447C(2) of the Corporations Act 2001, the appointment of the plaintiffs as administrators of the first defendant on 27 January 2006 by an instrument of appointment dated 27 January 2006 following resolution of the first defendant's directors made 27 January 2006 validly appointed the plaintiffs as administrators of the first defendant under s 436A of the Corporations Act 2001.
2.The second defendant pay the plaintiffs' costs of the application (including all reserved costs), to be taxed and paid forthwith.
The appellants appeal against Simmonds J's orders
As well as appealing against the final orders made by Simmonds J, the appellants also appealed against the order dismissing the appellants' application to reopen the proceedings to the extent that the application was refused. However, there is no ground alleging any error on the part of the trial judge in relation to that order. As a result, the appeal against the order refusing the application to reopen, to the extent it was refused, must be dismissed.
The appellants as unrepresented litigants
This case reveals some of the difficulties which sometimes arise when the court has before them unrepresented litigants. The errors alleged may be gleaned from some of the 11 grounds of appeal, but others do not identify with any sufficient degree of precision, what errors of fact or law are alleged and some grounds are so vague as to be meaningless. The written submissions filed by the appellants then range outside the points which can be extracted from the grounds of appeal.
The circumstances are further aggravated by the fact that Ms Smolarek having discovered that the appeal was an appeal 'by way of rehearing', formed the view that this gave her the opportunity to add evidentiary material which had not been placed before the trial judge. This material has been included in the appeal books at Ms Smolarek's insistence but it is objected to by the respondents. Much of this material would have been ruled irrelevant if it had been presented to the trial judge. Other material now presented, if relevant, supports an attempt to contradict what had been uncontradicted at the hearing before the trial judge (using material which was available to the appellants at the time of the hearing).
An appeal by way of rehearing requires this court to decide the appeal by applying the law as at the date of the appeal but, save for certain exceptions, on evidence that was before the trial judge. See Victorian Stevedoring and General Contracting Company Pty Ltd v Dignan (1931) 46 CLR 73, 107 ‑ 109. Ms Smolarek was informed about this at the commencement of oral submissions.
Ms Smolarek's oral submissions and her additional written notes handed up during the hearing included many scandalous submissions not supported by evidence which submissions were objected to by the respondents. The respondents in their written submissions to the appellants' grounds of appeal set out what they understand the grounds to mean and then direct their written submissions to those putative grounds. At the hearing Christina said that her mother spoke on behalf of the appellants, she made only brief oral submissions. At times Christina and her mother argued with each other at the bar table about the submissions they wished to make.
Appellants' grounds of appeal and submissions
The appellants' grounds of appeal read:
Ground 1 [Appellants standing and costs]
Administrators were appointed, there was no real question, and there were no circumstances that call for declaration, Appellants, as unrelated individuals, had nothing to contradict and did not have standing.
Proceedings should have been dismissed for want of prosecution unless Appellants challenged as directors, in the name of the Company.
Error of facts and law
Ground 2 [No facts]
Core facts, based on which decision in these proceedings was reached were contentious and even mutually exclusive. The Primary Judge hypothesized on them, while truth finding would require separate hearing.
The Primary Court did not follow due judicial process, an aspect of the hearing limb of natural justice, which is an implied Constitutional right.
Error of facts and law
Ground 3 [Excess of s 447C]
S447C is not a remedial provision. The Court was required to find whether there was prima facie evidence that requirements of s436A have been met and declare accordingly.
The Primary Judge went beyond jurisdiction afforded to him by s447C, when he embarked on resolving contentious facts.
Error of facts and law
Ground 4 [Law applied to vacuum]
Facts, as the Primary Judge ascertained, did not meet requirements of s447C to make a declaration.
If any of the questions posed by requirements of s436A could not be answered in affirmative, the appointment either did not happen and there was nothing to declare or declaration should have been refused.
Error of facts and law
Ground 5 [Protection of litigants]
The Primary Court failed in its duty to protect litigants. COR 16/2006 was a consequence of COR144 2005. It was wrong for the Court as whole to cause massive injury to Appellants, while the originating application of the main case has not even been heard.
Error of law
Ground 6 [Contempt]
After realising that started by them COR144/2005 does not progress according to expectations, the Caretakers appointed administrators as extra curial remedy to kill effect of the Court process and get hold of subject matter of litigation. The Primary Court failed to protect court processes.
Error of law
Ground 7 [Orders unconstitutional]
The orders hinder High Court operation according to s73, and both Primary and the Court of Appeal operation according to s 77(iii), chapter III making outcome of the proceedings in these courts nugatory.
The orders are unconstitutional
Error of facts and law
Ground 8 [Abuse of process]
The order allows loss of the Subject Matter of litigation in pending proceedings.
Court's processes lend itself to oppression and injustice.
Error of law
Ground 9 [Unconscionable deal]
While an order issued without hearing unjustly disabled Appellants' rights, unconscionable dealers pounced to catch the bargain.
The Primary Judge failed to apply the equitable doctrine to protect the vulnerable Appellants.
Error of law
Ground 10 [Objects of Part 5.3A1
It was obvious; the appointment was not to fulfil Part 5.3A objectives. It was a sham, having nothing to do with the intention of the legislators.
The Primary Judge failed to properly evaluate it and prevent the harm to Appellants and the Company.
Error of law
Ground 11 [Natural justice]
The Primary Judge disregarded fundamental procedural fairness principle Audi alteram partem. He did not allow the Company to appear at all and did not allow minimum time for Appellants to prepare the case.
Error of law
The written submissions signed by Ms Smolarek and contained in the appellant's case, ran to 147 paragraphs. These were supplemented by 43 pages of material entitled 'Speech', part of which Ms Smolarek read out to the court and which were the notes received by the court. The first four paragraphs of the former document read as follows:
1.In order to ascertain Appellants' standing Simmonds J quoted from Lord Dunedin, P23 L6, 'The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor; that is to say, someone presently existing who has a true interest to oppose the declaration sought'.
2Lord Radcliffe said in Ibeneweka v Egbuna: [1964] 1 WLR at p 225, 'After all, it is doubtful if there is more of principle involved than the undoubted truth that the power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncements ought not to be issued unless there are circumstances that call for their making.'
3.So, what was the real question? There was none. They were properly appointed, they said. In fact they were appointed even if they were not properly appointed, because s1322 of the Act fixes all the procedural problems.
4.There were no circumstances that call for declaration either and it should be denied. The requirement for a proper contradictor was also unfulfilled, because, 'the dogs bark, but the caravan rolls on', unless, of course, one of them was the Company, or its director, lending her mouth. This fact changes everything.
These paragraphs are set out, not in order to embarrass Ms Smolarek, but to explain the difficulty this court faced in trying to ensure that it has identified the errors the appellants allege that the trial judge made in his reasons for decision. What appears below is a restatement of what appear to be the alleged points or errors the appellants have raised or identified in the grounds. Christina did not file any written submissions.
Identification of issues
Ground 1
(a)Ms Smolarek submitted that the trial judge had no jurisdiction. This point was not the jurisdiction point raised before the trial judge, namely that the Federal Court and not the Supreme Court had jurisdiction to make the order (a point which was dismissed). The argument now seems to be that the court had no jurisdiction because Eznut Pty Ltd was not represented by anyone at the hearing.
(b)Ms Smolarek then submitted, inconsistently with her submission on point (a), but which may be taken as an alternative to issue (a), that the appellants appeared for the company Eznut Pty Ltd and not in their personal capacity. As a result, Ms Smolarek argues that costs orders should not have been made against the appellants.
Grounds 2, 3, 5, 6, 7 and 8
From various angles the appellants in their submissions contended that the trial judge should not have made the orders under s 447C(2) because the resolution passed by Mr Liwszyc and Mr Duta on 27 January 2006, was a resolution passed by them when they were directors only by reason of the interlocutory orders of Hasluck J. Ms Smolarek contends that the resolution that they passed was in some way ineffective.
Ground 4
Ground 4 is so vague as to be meaningless, but by reference to the appellants' written and oral submissions, it appears that the appellants sought to challenge certain findings of fact made by the trial judge. Some of the findings were ultimate findings depending on other underlying findings of fact or conclusions of law which have not been challenged. These matters are discussed below under the detailed discussion about ground 4.
Ground 9
The appellants allege that the equitable doctrine of unconscionability applied and say that this justified a dismissal of the application.
Ground 10
Before declaring the appointment valid, the primary judge had to be satisfied that the objects of pt 5.3A had a reasonable chance of being fulfilled.
Ground 11
The appellants were denied natural justice because the trial judge refused to adjourn the proceedings on 1 March 2006.
Discussion and determination of grounds
Ground 1(a)
The essence of this point is Ms Smolarek's submission that there was no proper contradictor because Eznut Pty Ltd was not represented by anyone at the hearing. Eznut Pty Ltd was properly joined as a party so it would be bound by the decision. The administrators who had management and control of the company could not have appointed a solicitor to act for Eznut and run a case in opposition to the administrators because to do so, would have involved the administrators appointing solicitors to act on behalf of a plaintiff and a defendant. The appellants could not cause the company to defend the proceedings and to represent it for two reasons. First, because s 437C of the Corporations Act provides, in effect, that while a director continues to hold office, the director cannot purport to perform any function or power as an officer of the company while a company is under administration. Thus the appellants could not, as directors, decide to cause the company to defend the proceedings. Secondly, the appellants are not legal practitioners. Rules of the Supreme Court 1971 (WA) O 4 r 3(2) prohibits a corporation from carrying on proceedings other than by a solicitor. These points explain why Eznut was not represented.
The assertion that there was no proper contradictor was of course, not correct. The appellants were opposed to the relief sought under s 447C and it was Ms Smolarek who had raised the specific grounds about whether the appointment of the respondents was valid. Mr McMaster, in an affidavit sworn 8 February 2006, annexed communications received by his firm or his solicitors as to the validity of his appointment and that of Mr Zohar as administrators. The points raised by Ms Smolarek were that the resolution of directors made 27 January 2006 was invalid because the resolution was outside the powers of Mr Liwszyc and Mr Duta as they were 'mere caretakers' appointed pursuant to an interlocutory order of Justice Hasluck on 2 September 2005, that the opinion in the resolution was not bona fide and genuinely formed, that the resolution was made for an improper purpose, and that Ms Smolarek was not given notice of the meeting at which the resolution was passed. Those points having been raised by Ms Smolarek, she was properly joined as a party and was the contradictor in every sense of the word.
Ground 1(a) has no merit.
Ground 1(b)
In the alternative, Ms Smolarek claims to have been representing Eznut. This followed with a submission that the appellants were not therefore appearing in their own capacity, but as representatives of Eznut. This was in turn followed by a submission that, as a result, costs orders should not have been made against Ms Smolarek personally.
For the reasons mentioned above, the appellants could not represent Eznut. In any event, the submission is an assertion against the facts. Ms Smolarek was a party and was not representing Eznut. She was a party named in the proceedings. The order for costs was properly made.
Grounds 2, 3, 5, 6, 7 and 8
These grounds have in effect, been resolved by the Court of Appeal when it considered whether it should backdate the order setting aside the order for the reinstatement of Mr Duta. See Smolarek v Liwszyc [No 2]. The Court of Appeal was aware that the resolution had been passed by the directors on 27 January 2007 and with that knowledge, decided that they should not backdate the order setting aside the reinstatement of Mr Duta.
Ms Smolarek also submitted that the case was determined by the trial judge on hypothetical facts. Ms Smolarek referred in her submissions to Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334 [45] ‑ [47]. Ms Smolarek submitted that because no issues had been determined in the proceedings before Hasluck J, and because the only determination made was that there were serious questions to be tried, that therefore there were 'no concrete and established facts on which to make declaration, it was beyond a judicial power to pronounce the judgment'. This submission confuses the issues in COR 144/2005 (the case before Hasluck J) with the issues in the case before Simmonds J.
It is true that any issues of fact raised in the proceedings before Hasluck J have only been provisionally determined. However, Hasluck J made an order which had legal effect. It reinstated Mr Liwszyc and Mr Duta as directors on 2 September 2005 and the order continued to have effect until the Court of Appeal handed down its decision on 29 March 2006. The Court of Appeal specifically considered the question as to whether the judgment which set aside the order reinstating Mr Duta should be effective as from 29 March 2006 or backdated to 2 September 2005. In Smolarek v Liwszyc [No 2] the Court of Appeal determined that the setting aside of the primary judge's order for the reinstatement of Mr Duta as a director should take effect from 29 March 2006.
Mr Liwszyc and Mr Duta were directors on 27 January 2006. They were directors by order of the court. The only issues for resolution by Simmonds J were those concerning the validity of the resolution which involved consideration about the validity of the opinion formed by the directors and the notice issue, all of which were raised in the originating summons taken out by the administrators in the proceedings under review. Those issues were not in any respect hypothetical.
Grounds 2, 3, 5, 6, 7 and 8 must therefore be dismissed.
Ground 4
This ground is so vague as to be meaningless, but the submissions appear to raise some questions which are dealt with in other grounds. For example, there are headings in the submissions 'Mr Duta was not a director' and that 'Mr Liwszyc was not a director' and submissions made in support. These submissions are dealt with elsewhere.
There is another heading in the submissions; 'They were caretakers'. That point has now been abandoned.
Another heading in the written submissions in relation to ground 4 states that the company 'was never insolvent'. There is also an issue raised by the appellants in the written submissions about a debt to JetCut Pty Ltd and the debt due by Eznut to Mr Liwszyc. As indicated elsewhere, the issue was whether the directors held a bona fide view about whether Eznut was insolvent or might be insolvent in the future, and in reaching that conclusion, they had to also form a view about what liabilities the company had and what readily realisable assets were available to meet those liabilities. That point is dealt with under the next heading.
Whether the opinion formed by Mr Liwszyc and Mr Duta about the insolvency or likely insolvency of Eznut Pty Ltd was bona fide or passed for an improper purpose
The appellants in ground 7 submit in effect that the trial judge erred in concluding that the directors formed a genuine, bona fide opinion as to insolvency or that the resolution was passed for an improper purpose. The formation of the opinion is necessary if an administrator is to be appointed. Section 436A(1) of the Corporations Act reads:
A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:
(a)in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and
(b)an administrator of the company should be appointed.
Solvency is defined in s 95A(1) which provides:
A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
Section 95A(2) provides that:
A person who is not solvent is insolvent.
The opinion referred to in s 436A must be bona fide and genuinely formed. A concluded opinion, rather than a tentative opinion, is necessary. If a bona fide opinion is genuinely formed as to 'actual', 'likely' or 'actual or likely' insolvency, that opinion will satisfy the requirements of s 436A. The requisite opinion is that of the directors voting for the resolution, rather than that of its individual members: Kazar v Duus (1998) 88 FCR 218, 231 (Merkel J).
The ultimate task of the court is to determine, having regard to the actual facts and circumstances, whether on the balance of probabilities the opinion required to be formed by the repository of the power as a condition of its exercise has been formed. Statements as to subjective intention are relevant, but the court must approach its task of classification of the conduct in question objectively. See Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464, 485 (Kirby P) and Kazar v Duus, 232. Kazar v Duus has been followed on several occasions since 1998 and there are no authorities questioning the principles stated above.
Christina's submission on behalf of the appellants was, in effect, that Mr Liwszyc and Mr Duta did not have a genuine belief that the company was insolvent or would become insolvent at some future time or that Eznut had the liabilities Mr Liwszyc referred to in his affidavit and referred to below. Her submission concentrated on the principal liability of Eznut identified by Mr Liwszyc in the formation of the board's opinion about solvency. This was a liability to shareholders. This liability was said to be a debt owing by Eznut to repay those shareholders who had paid $67,500 to Eznut for the 1.5 million shares which had not been issued and allotted. If the company had no such liability or if the directors did not have a bona fide belief that such liability existed, then the company was not insolvent and possibly not likely to be insolvent at least in the near future.
Christina's argument ran as follows. She said that Mr Liwszyc and Mr Duta contended before Hasluck J that the proposed 1.5 million share issue was valid and that they were entitled to the extra shares which the company had resolved to allot in April 2005. Christina's submission was that this contention was the premise, or a premise, on which Hasluck J granted the interlocutory relief reinstating Mr Liwszyc and Mr Duta and restraining Christina from acting as director. Christina submitted that having gained control of the board as a result of the orders made by Hasluck J, Mr Liwszyc and Mr Duta then did a volte-face and accepted that the proposed issue and allotment of the 1.5 million shares was invalid which meant that they then said that the company had a liability to repay the shareholders the $67,500 which meant it was insolvent. Christina submitted that they only changed their view so that they could then form the opinion that the company was insolvent. Christina's submission was that, in effect Mr Liwszyc and Mr Duta were approbating and reprobating when it suited them and that their motive in forming an opinion as to solvency was therefore called into question.
In effect, Christina invited this court to infer that Mr Liwszyc and Mr Duta did not hold a genuine or bona fide belief that the $67,500 was a liability of the company, which meant that they could not have genuinely and bona fide believed that the company was insolvent, and that they must therefore have passed the resolutions for an improper purpose. The appellant submitted that their purpose was to ultimately cause the company to go into liquidation so that they could buy the assets of Eznut cheaply.
Christina's submission is based on a false premise. Hasluck J did not grant the interlocutory relief by provisionally finding that the 1.5 million share issue was valid. His Honour did not find that there was a serious question to be tried in relation to the share issue. The serious questions to be tried and which Hasluck J identified, are set out above. All of those questions were concerned with the events in May 2005 involving the removal of Mr Liwszyc and Mr Duta as directors and the appointment of Christina as a director.
The circumstances as at 27 January 2006
As to the issue about the share issue, the circumstances which were known to Mr Liwszyc and Mr Duta on 27 January 2006 when they passed the insolvency resolution were as follows. Following the April 2005 resolutions, existing shareholders other than Ms Smolarek, made offers to purchase shares as follows (for the consideration set out in the table):
David Liwszyc Family Trust
447,000
$20,137
Cacabon Pty Ltd
267,500
$12,038
Henry Zelman Super Fund
142,500
$6,413
Duta Family Trust
255,000
$11,475
Archimedes Group Pty Ltd
387,500
$17,437
(It might be observed that the total of the shares listed above in column two which is taken from Mr Liwszyc's affidavit in the proceedings under review, totals 1,499,500 shares, but for ease of reference, the reference will continue be made to 1.5 million shares.)
All of the shareholders referred to in the table, remitted the amounts referred to in the table to Eznut which paid the total of $67,500 into its bank account. (If the company did not allot and issue the shares, then it was certainly arguable that the amounts totalling $67,500 and paid by shareholders for shares never issued or allotted, were debts due and owing by Eznut. See In re NIAA Corp Ltd (in liq) (1993) 33 NSWLR 344, 361 (Santow J).
The parlous financial state of Eznut was deposed to by Mr Liwszyc who stated that the only funds the company received after April 2005 (apart from small amounts from the Australian Taxation Office and interest) were these moneys.
To complete the share issue, it was necessary for Eznut to resolve to allot the shares and when allotted to enter the shares in the share register. This did not happen. Mr Liwszyc in his affidavit said that this did not happen as he was 'unaware of the formalities' and that soon after, in the next month, Ms Smolarek took the steps referred to above, namely the calling of a shareholders' meeting at which she voted to remove Mr Liwszyc as director and appointed Christina. She also subsequently took the steps of 'removing' Mr Duta as a director.
In consequence of that action, Mr Liwszyc and Mr Duta commenced proceedings in COR 144 of 2005. As indicated above, the dispute about the 1.5 million proposed share allotment was mentioned only as a background matter which led to the issues which had to be resolved by Hasluck J.
After Mr Liwszyc and Mr Duta were reinstated as directors as a result of Hasluck J's order on 2 September 2005, Mr Liwszyc and Ms Smolarek exchanged emails in which Mr Liwszyc inquired in effect, whether Ms Smolarek would agree to the issue of the 1.5 million shares. If she had agreed, then the share issue and allotment would have proceeded with the consequence that what remained of the $67,500 in Eznut's bank account ($41,000), would have been an asset and without Eznut having a liability of $67,500. The company would not then have been insolvent. Ms Smolarek refused to agree that the shares should be issued or allotted and not surprisingly, Mr Liwszyc and Mr Duta sought legal advice which is referred to below.
By early January 2006, all of the shareholders had made demands for repayment of moneys they had paid to Eznut. So, for example, on 29 December 2005, Mr Henry Zelman, one of the shareholders, sent an email to the directors and other shareholders, which read in part:
I subscribed and provided AUD$6,413 to acquire 142,000 shares, and in view that the shares are not issued to me, I call on the acting directors to refund my money forthwith, or I will notify ASIC and ACCC and all other relevant institutions. … No matter what will happen to this company in the next few days, I will personally report the matters to the relevant statutory authorities and let them decide if the action of this board of directors protected my interests as a shareholder.
On 2 January 2006, Mr Ralph Levy, a director of Cacabon Pty Ltd, sent an email referring to the fact that on 23 May 2005, Cacabon subscribed $14,338 to acquire 267,500 additional shares in Eznut. The email stated that the shares had not been issued and that the company had been a 'non‑functioning entity' and concluded with a demand for repayment within seven days of the money which had been subscribed. Agatha Walczuk, on behalf of Archimedes Group Pty Ltd, also emailed on 4 January 2006, requesting immediate repayment of the moneys subscribed. As a result, Mr Liwszyc also made demand on the company for repayment.
In Mr Liwszyc's affidavit filed in the proceedings under review, he deposed that Mr Duta had also informed him that he required repayment of the money he paid to the company in respect of the proposed share issue and then continued:
29.Mr Duta and I sought legal advice from our then solicitor, Harold Paiker, as to whether the subscribing shareholders had a good claim against the Company in the circumstances. Advice was sought after we were reinstated as directors. Mr Paiker advised us, and I truly believe it to be the fact (and Mr Duta has informed me that he truly believes it to be the fact), that it is more likely than not that the subscribing shareholders have a good claim against the Company for repayment of the $67,500. Further or alternatively, to the extent that the subscribing shareholders can trace their funds into the Company's cash at bank, they may have a proprietary claim against those funds.
According to Mr Liwszyc's affidavit, therefore, he believed that the debts and claims on the company were:
(a)the claim for repayment of $67,500 by shareholders;
(b)a claim by himself for $6,000 in respect of work that he had paid for to Eznut's patent attorneys for work they had done for the company;
(c)claims by JetCut Pty Ltd for $8,005.42 and $1,537.80 in respect of goods and services provided to Eznut;
(d)an estimated $1,500 due to ASIC.
Mr Liwszyc deposed in his affidavit [30]:
In summary as at 27 January 2006 the Company's readily realizable assets consisted solely of approximately $41,000 cash at bank. This asset was subject to a claim by the subscribing shareholders. In any case it was substantially less than the Company's total debts and claims which were then due and payable. Accordingly, as at 27 January 2006 I considered (and Mr Duta had informed me and I truly belief it to be the fact that he also considered) that the Company was then insolvent.
Mr Duta also swore an affidavit deposing to the fact that he held the opinion that given the company's financial position, the company was insolvent or was likely to become insolvent at some future time and that administrators should be appointed. He also deposed it was for those reasons that he joined with Mr Liwszyc in passing the resolutions at the meeting on 27 January 2006.
Simmonds J's reasons
The trial judge correctly appreciated that the issue posed for him was whether there existed a genuine bona fide opinion of the directors about the solvency of the company. His Honour correctly directed himself in accordance with Merkel J's reasons in Kazar v Duus. His Honour did not act solely on the affidavits of Mr Liwszyc and Mr Duta stating what their opinions were. His Honour examined the surrounding circumstances.
In particular, his Honour spent some time (between [104] and [113]) examining the circumstances which prevailed at the time the directors formed the view that the company was insolvent and in doing so paid particular attention to the circumstances relating to the shareholders' claim for repayment of $67,500. His Honour said that the validity of the contract for the issue of the shares was an 'important issue' [109], 'part of the case for' Mr Liwszyc and Mr Duta [111] and a 'central issue' [115] in COR 144/2005, ie the proceedings dealt with by Hasluck J on the interlocutory application. It might be correct that if COR 144/2005 had gone to trial, the validity of the contract for the issue of the shares would have arisen as an issue, but as explained above, Hasluck J did not determine that the issue about the 1.5 million share issue was a serious question to be tried.
The trial judge did not expressly find that Mr Liwszyc and Mr Duta genuinely believed that there was a liability to repay the shareholders' $67,500. However, it seems clear from a number of paragraphs in his Honour's reasons, and his ultimate conclusion about whether the directors genuinely and bona fide held the opinions about solvency that this was his conclusion. So in [107] where his Honour referred to the legal advice which had been obtained by Mr Liwszyc and Mr Duta and then said:
This advice was understood by [Mr Liwszyc and Mr Duta] to have included that there was a possibility of a tracing claim on what all parties appear to have accepted was the company's only readily realisable asset, its cash at bank of approximately $41,000.
At [115] his Honour said:
It is clear, and it seems to have been clear to [Mr Liwszyc and Mr Duta] at the time of the 27 January 2006 resolution that [Ms Smolarek] vigorously resisted any effect being given to the issue … In those circumstances, it appears to me on the evidence that [Mr Liwszyc and Mr Duta] would understand the share issue claimant's position to be that of a demand for the return of their funds for failure to provide them with what they had bargained for.
His Honour's ultimate conclusion was reached at [134] where having referred to all the circumstances said:
In all of those circumstances I consider that the evidence establishes that the directors voting in favour of the resolution on 27 January 2006 had properly formed the opinion described in … s 436A(1)(a).
As to improper purpose, the trial judge said that the appellants had put to him that 'the only object of the administration should be seen to be a winding up' [139]. His Honour concluded at [152]:
I do not conclude that, in respect of dealings with the intellectual property of the Eznut company … it has been shown the administrators were appointed simply to ensure the implementation of the views of [Mr Liwszyc and Mr Duta], rather than to achieve for the Eznut company the purposes of Pt 5.3A.
The appellant's submissions
There is no doubt that Ms Smolarek and Christina believe that there was a false motive on the part of the directors. However, belief about a state of affairs does not prove the state of affairs.
A significant difficulty for the appellants is that they did not cross‑examine Mr Liwszyc or Mr Duta. It would be a very serious matter for a trial judge to conclude that the two directors lacked bona fides, did not genuinely hold the opinions that they expressed and had an improper purpose in passing the resolution without either of them having the opportunity to refute those suggestions.
In my opinion, the conclusion reached by the trial judge at [134] was open to him. No error was made by the trial judge.
Ground 4 should therefore be dismissed.
Ground 9
Ms Smolarek seized upon a passage in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 and then submitted that the jurisdiction of the court to grant certain relief in circumstances where there has been unconscionable conduct should be applied to this case. The short answer to this submission is that the doctrine has no application to the subject of this dispute, namely whether the respondents were validly appointed as administrators of Eznut. There was no relevant dealing or transaction as between the appellants and the respondent. The appellant's submissions also referred to cases in which there had been a discussion about the duty of an administrator to promptly inquire into the validity of his or her appointment. The respondents did so. The respondents acted reasonably and responsibly by moving expeditiously to make an application to the court for a declaration under s 447C.
Ground 10
The appellants seemed to be submitting that before declaring the appointment valid, the trial judge had to be satisfied that the objects of pt 5.3A of the Corporations Act had a reasonable chance of being fulfilled in fact. As a matter of law, there is no need to prove that the objects of pt 5.3A will be met before a declaration of validity will be made under s 447C(2).
Ground 11
The point of this ground is that the trial judge did not allow sufficient time to the appellants to prepare the case. Ms Smolarek, in her 'speech' said that when she was served with the papers she 'did not have a clue about external administration law'. Ms Smolarek submitted that she was not given time to submit evidence and prepare the case.
A court must be astute to see that it does not extend its auxiliary role to provide some assistance to litigants in person so as to confer upon a litigant in person a positive advantage over the represented opponents. See Rajski v Scitec Corp Pty Ltd (Unreported, Court of Appeal NSW, Full Court, No CA 146 of 1986, 16 June 1986) (Samuels JA) referred to in Minogue v Human Rights and Equal Opportunity Commission (1999) 84 FCR 438 [28].
The trial judge did allow extra time to the appellants. The appellants were not encountering court processes for the first time. By then they had been involved in the proceedings before Hasluck J and also in the proceedings in the Court of Appeal. In my opinion the trial judge did not err in refusing to adjourn the hearing.
Additional documents
The affidavits of Ms Smolarek dated 11 August 2006, 29 August 2006, 20 September 2006 and 28 September 2006 filed in relation to the application that was made by Ms Smolarek for a stay pending the hearing of this appeal, are not relevant to the hearing of the appeal itself and the application for leave to refer to those documents is refused.
The affidavit of Ms Smolarek sworn 13 April 2006 which was filed in support of the application to reopen which was made to the trial judge are irrelevant because there is no ground of appeal relating to that issue. Leave to refer to that affidavit should be refused.
Ms Smolarek should be refused leave to rely on an affidavit sworn 20 August 2008 (ie, two days before the hearing of the appeal). This sought to raise an issue about the notice that Ms Smolarek received in relation to a meeting on 11 January 2006 and, more importantly, the meeting of 27 January 2006. The affidavit sought to contradict what was uncontradicted evidence at the hearing before Simmonds J concerning notice that was given to Ms Smolarek. As mentioned above, Ms Smolarek was, at the time of the hearing before the trial judge, an unrepresented litigant who had had experience in litigation in the Supreme Court. She was familiar with the process of the preparation and filing of affidavits and if she wished to dispute the evidence contained in affidavits before the trial judge about the circumstances in which the 27 January meeting was held, then that was the time to file an affidavit. The failure to adduce evidence which was available will be a relevant factor against the exercise of the power conferred by r 47(3)(d) of the Supreme Court (Court of Appeal) Rules 2005 (WA). See Goninan & Co Pty Ltd v Direct Engineering Services Pty Ltd [2007] WASCA 10; (2007) 33 WAR 182 [9] ‑ [12]. Leave to rely on this affidavit should be refused.
The respondents' notice of contention
The respondents contended that if any of the appellants' grounds of appeal should be upheld and that the appeal would, as a result, be upheld in the appointment of the respondents, submitted that this court should now order, under s 447A(1) of the Corporations Act, that Pt 5.3A is to
operate in relation to Eznut as if the appointment of the respondents was valid.
In view of the dismissal of the appeal, it is not necessary to deal with the notice of contention and it would not be appropriate to do so on a provisional basis because assumptions would have to be made about which of the grounds of appeal succeeded in order to do so. Thus, for example, if ground 11 succeeded, there might be justification for an order under s 447A, whereas the upholding of other grounds might create more substantial hurdles for the respondents obtaining an order under s 447A.
The result on the appeal
The appeal should be dismissed.
LE MIERE AJA: I agree with Pullin JA.
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