Soia v Internet Tuition College Pty Ltd (Administrator Appointed)
[2003] WASCA 96
•9 MAY 2003
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE FULL COURT (WA)
CITATION: SOIA & ORS -v- INTERNET TUITION COLLEGE PTY LTD (Administrator Appointed) [2003] WASCA 96
CORAM: ANDERSON J
MILLER J
MCKECHNIE J
HEARD: 18 FEBRUARY 2003
DELIVERED : 9 MAY 2003
FILE NO/S: FUL 99 of 2002
BETWEEN: KIM PETER SOIA
DONNA MARIE L'HERPINIERE
PERSONALIZED TUITION SERVICES PTY LTD
AppellantsAND
INTERNET TUITION COLLEGE PTY LTD (Administrator Appointed) (ACN 008 143 917)
Respondent
Catchwords:
Corporations - Deed of company arrangement - Whether power to issue shares to party bearing costs of administration - Whether able to delegate power to conduct litigation - Meeting of creditors - Casting vote of chair - Whether required to cast in a particular way
Legislation:
Corporations Act 2001 (Cth)
Result:
Appeal dismissed
Category: B
Representation:
Counsel:
Appellants: Mr T Galic
Respondent: Mr K L Christensen
Interested Party:
Cityfield Holdings Pty Ltd : Mr K L Christensen
Solicitors:
Appellants: Galic & Co
Respondent: Tottle Christensen
Interested Party:
Cityfield Holdings Pty Ltd : Rebecca Bennett
Case(s) referred to in judgment(s):
Soia & Ors v Internet Tuition College Pty Ltd (Administrator Appointed) [2002] WASC 125
Case(s) also cited:
Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99
Bank of Melbourne v HPM Pty Ltd (In Liq) (1997) 16 ACLC 427
Cresvale Far East Ltd v Cresvale Securities Ltd (2001) 19 ACLC 659; 37 ACSR 394
Hawkwood Holdings & Anor Pty Ltd v Williamson [2000] WASC 73
Jones v Dunkel (1959) 101 CLR 298
Metwally v University of Wollongong (1985) 60 ALR 68
Mulvaney v Wintulich Pty Ltd, unreported; FCA (O'Loughlin J); No SG3184 of 1995; 29 September 1995
Re Bartlett Researched Securities Pty Ltd v Nova Corp (1994) 12 ACSR 707
Re Martco Engineering Pty Ltd (1999) 32 ACSR 487
ANDERSON J: I have read the judgment of McKechnie J and agree with it. There is nothing I can usefully add.
MILLER J: I have had the opportunity of reading in draft the reasons for judgment of McKechnie J. I agree with those reasons and have nothing to add. Accordingly I would dismiss the appeal.
MCKECHNIE J:
Introduction
In 1999, Mr Bennett, a lawyer, and Mr Soia, a tutor, agreed to establish the eponymously named respondent. It was incorporated in June 1999 and ceased business in September 2000.
Mr Bennett contributed money and Mr Soia contributed expertise in developing a website and material for an internet tuition college. To record matters agreed between them in relation to the control and management of the respondent, in October 1999, Mr Bennett and Mr Soia, with their respective companies, entered into a shareholders' agreement. Unfortunately, matters did not work out. Mr Soia resigned as director and petitioned to have the defendant wound up. Before the petition could be heard, Mr Bennett, as remaining director, appointed an Administrator on 27 March 2001. A first creditors' meeting was held on 2 April 2001. On 20 June 2001 a further meeting of creditors was held to consider a proposed Deed of Company Arrangement. This meeting was presided over by Ms Henville, the Administrator's nominee. An essential feature of the Deed of Company Arrangement was that Cityfield Holdings Pty Ltd, Mr Bennett's company, also a creditor, would fund the respondent's actions to recover its intellectual property. Control of the litigation would vest in Mr Bennett. The Deed of Company Arrangement was duly put to the creditors and voted upon. Mr Bennett's group, a majority in value but not in number, voted in favour of the proposed Deed of Company Arrangement, while Mr Soia's group, a majority in number but not in value, voted against it. Ms Henville used the casting vote in favour of Mr Bennett's group and the resolution was carried.
The background facts are set out in more detail in the judgment (Soia & Ors v Internet Tuition College Pty Ltd (Administrator Appointed) [2002] WASC 125 at [5] to [14].
The Soia group sought orders from White AUJ to set aside the Deed of Company Arrangement and to wind the respondent up. White AUJ
dismissed the application and it is from that decision that this appeal is brought.
The proposition on appeal
The appellant relied on what counsel described as three chief propositions:
1.Cityfield is not a creditor;
2.A shareholders' agreement between the Bennett group and the Soia group is binding on the company, and
3.The intellectual property is worthless.
From these, and combination of them, it was then submitted that there is sufficient material to draw the inference of mala fides as against the Administrator such as to conclude that the casting vote in favour of Mr Bennett's group had been wrongly used by Ms Henville, therefore the resolution to enter into the Deed of Company Arrangement should be overturned.
I will deal with each proposition and then consider other grounds of appeal, most of which also attack the propriety of the Administrator's actions.
Cityfield is not a creditor
The appellants' argument is summarised in appeal ground 9.
"9His Honour should have found that Cityfield is a creditor for no more than $80,000 and accordingly found that the casting vote exercised by the Administrator could not be exercised because the Appellants (Plaintiffs) had the majority of debt in both number and value.
Particulars
(a)The evidence was that the first‑named Appellant (Plaintiff) agreed to convert his intellectual property (his tuition materials) into an internet accessible form and Mr Bennett agreed to be responsible for the legal and administrative affairs of the company and to 'provide funding';
(b)Clause 2.1(f)(iv) of the Shareholders' Agreement provided that the Respondent (Defendant) was not authorised to borrow more than $20,000.00 without the written approval of both shareholders. There was no approval and no evidence of any agreement authorising any loans by Cityfield (or by any other entity related to Mr Bennett) to the Respondent (Defendant);
(c)On the evidence, the first‑named Appellant (Plaintiff) worked long and hard yet Mr Bennett's only contribution was to provide funding (his related entity charged the (Respondent) Defendant for its accounting requirements and there was no evidence of any legal or administrative requirements);
(d)The appropriate inference is that Mr Bennett became entitled to his 50% shareholding (through Cityfield) by providing equity funding."
Cityfield, or Mr Bennett, provided funds to the respondent. The appellants argue that these funds were provided as capital. The trial Judge dealt with this argument at [32] and [33] concluding that he did not find the moneys put up by Mr Bennett were other than loans to the respondent.
It was open for the trial Judge to reach this conclusion. No further shares were ever issued to Cityfield or Mr Bennett in respect of the money advanced as might be expected if the advance was intended to be capital.
On the other hand, there was positive evidence that the moneys were a loan. The sum of $532,905.73 is so described in the journals of the respondent. In his first report the Administrator noted:
"Cityfield Holdings is listed as a creditor to the extent of $500,000 the balance being due to Accounting Management Services Pty Ltd."
The minutes of the meeting of 20 June 2001 do not record any challenge being made to the status of the Cityfield debt. In the proceedings before the trial Judge, counsel then appearing for the appellant was asked by the trial Judge: "Is there any evidence to show that it was an equity funding?" and he answered: "No, there's no evidence really one way or the other ..."
The trial Judge did not draw the inference asserted in ground 9(d). On the state of the evidence, as conceded by trial counsel, the trial Judge's decision was correct. The first proposition fails.
The shareholders' agreement is binding on the company
The appellants' argument is outlined in appeal ground 5.
"5.His Honour should have found that the Shareholders' Agreement was binding on the Respondent (Defendant) and that the Respondent (Defendant) was obliged to give effect to it.
Particulars
(a)The shareholders (Cityfield and Jeneva) were in favour of the option to acquire the intellectual property being granted to the first named Appellant (Plaintiff) in clause 3.1(b) of the Shareholders' Agreement and in favour of it being exercised by him if he saw fit;
(b)Clause 3.1(b) provided in the clearest of terms that Cityfield accepted the right of the first‑named Appellant (Plaintiff) to exercise the option for any reason whatsoever, including business failure or fundamental disagreement between the shareholders, which are the circumstances in which it was exercised.
(c)As all unrelated creditors had been paid, His Honour should have found that Cityfield was an equal shareholder that was in favour of the option when it was granted to the first‑named Appellant (Plaintiff) and hence the Administrator should not have exercised his casting vote, thus allowing Cityfield to escape it obligations under clause 3.1(b) for a reason that had nothing to do with Part 5.3A;
(d)The Administrator's stance was that the option represented an uncommercial transaction and not that it was not binding on the Respondent (Defendant);
(e)His Honour should have found that the option was not an uncommercial transaction;
(f)No person could be prejudiced by the exercise of the option;
(g)Cityfield is not prejudiced because it had valued the intellectual property at zero and the intellectual property is in any event worthless without the first‑named Appellant's (Plaintiff's) ongoing involvement;
(h)There was no proceeding or even a motion to somehow declare the option to be unenforceable or in some way not binding on the Respondent (Defendant)."
No authority was cited in support of this ground. Although it had been incorporated by that time, the respondent was not a party to the shareholders' agreement and could not be bound by it. The particulars to ground 5, even if established as facts, do not affect the doctrine of privity of contract which governs the shareholders' agreement. This second proposition is rejected.
The value of the intellectual property
The value of the intellectual property is important in a number of ways. The shareholders' agreement provided that, if matters did not work out, Mr Soia could take possession of the intellectual property on payment of $100. The term "intellectual property" is not defined.
The appellants argue that the intellectual property has no value. The Administrator should have been aware that it had no value. The fact that the Administrator then put forward the proposed Deed of Company Arrangement and voted in favour of it, enables the inference to be drawn that the Administrator failed properly to examine the affairs of the company and acted improperly to such a degree that the resolution must be set aside.
The trial Judge held at [29]:
"As to par 25.9, the fact that neither Mr Bennett nor the administrator was able to place a specific value on the intellectual property does not necessarily mean that it has no value. It is reasonable to suppose, from the fact that it appears that there is a desire to recover and to sell the intellectual property which is manifested in the deed, that the intellectual property is believed to have some significant value, at this stage unidentified. …"
Although the appellants argue it is obvious the intellectual property has no value, an examination of the materials suggest that the question is far from clear cut. Mr Soia asserts that the project is only one per‑cent completed and there is no value in the intellectual property. However, Ms Henville swore an affidavit in the proceedings before White AUJ, no application being made to cross‑examine her. She deposed that, at her request, the company's accountant produced a balance sheet, together with supporting notes of the company, which, to the best of her investigations, is true and correct for the period 1 July 2000 to 9 April 2001.
The balance sheet as at 9 April 2001 shows intangible assets at $500,000. The notes to the accounts particularise the assets as intellectual property.
In his report to creditors, following confirmation of his appointment by the creditors on 2 April 2001, the Administrator summarised the report as to affairs from the Director, Mr Bennett, and noted within the other assets:
Item
Cost
Amount Realisable
…
Intellectual Property (at director's valuation)
500,000
0.00
…
"Mr Soia has advised that he is the owner of the Intellectual property, I make further comment on this aspect in another part of this report.
Mr Bennett has placed no value on the Intellectual Property."
The Administrator's report expressed the belief the shareholders' agreement represented a voidable transaction. His recommendation in that report was:
"… it would appear to be in the best interests of creditors to place the company into liquidation."
Although "intellectual property" was not defined in the shareholders' agreement, there are indications that intellectual property had been produced in the course of the respondent's operations. A document entitled "Kim Soia Achievements November 1999 and December 1999" dated 23 December 1999 indicated the production of further material which may attract ownership of intellectual property.
In a letter to Mr Soia, dated 28 August 2000, Mr Bennett, at p 3, clearly placed a value on the intellectual property.
In a letter written by Mr Soia to Mr Bennett (dated 23 September 2000):
"I am writing and the secretaries are typing two hundred pages of finished typed manuscripts per week.
I have decided 1000 questions with detailed written answers per subject is not enough. Consequently I am producing 2000 questions with detailed written answers per subject …
I would enjoy showing you the quality work we have produced. …"
In an affidavit sworn on 22 June 2001, Mr Soia said:
"35.I maintain that I own the intellectual property and I would vigorously defend any action by Mr Bennett to recover the intellectual property."
It is not there suggested by Mr Soia that the intellectual property is worthless.
On 2 April 2001 no proposed Deed of Company Arrangement had been received by the Administrator so a recommendation was made to put the respondent into liquidation.
On receipt of the proposed Deed of Company Arrangement on 14 May 2001, the Administrator sent a further circular to creditors recommending acceptance:
"From a commercial perspective, I do not believe it would be in the best interests of creditors to place the company into liquidation as it appears that creditors may potentially receive a greater return from the DOCA.
However, to enable the pursuance of the recovery of any voidable transactions and in the event that creditors would like to see an investigation conducted by the liquidator into the company's affairs, it would be necessary to place the company into liquidation.
I note that as liquidator, I will not be in a position to fund any legal actions.
If the proposed DOCA fails, these remedies will still be available to creditors, assuming that funding for any legal actions was obtained.
Accordingly for the reasons outlined above the company should not be placed in liquidation."
There is no basis to draw an inference of impropriety on the part of the Administrator from these facts. Clearly, the question of the value of the intellectual property was in contention and recovery would be difficult, a fact recognised by the Administrator in his second report, and subsequently by White AUJ in his judgment. However, there was material which indicated the intellectual property did have a value, notwithstanding the difficulties in the way of any litigation.
Impropriety by the Administrator asserted in other grounds of appeal
The appellant asserts other matters in support of a broad contention that the actions of the Administrator were improper.
Grounds 1 and 2 are related. The argument is contained in ground 1.
"1.His Honour should have found that the proposed Deed of Company Arrangement (DOCA) is not within the contemplation of Part 5.3A of the Corporations Act. Accordingly, His Honour should have set aside the resolution that the DOCA be executed and ordered the winding up of the Respondent (Defendant).
Particulars
(a)Part 5.3A is not intended to be used when there are no external creditors (only the Appellants and the Joined Party to the application, ie Cityfield Holdings Pty Ltd (Cityfield) and their related entities are creditors);
(b)Nor is it intended to be used as a means of quieting a dispute between the only two (equal) deadlocked shareholders (Cityfield, controlled by Mr Martin Bennett, and Jeneva Holdings Pty Ltd ('Jeneva'), controlled by the first‑named Appellant (Plaintiff))."
The object of part 5.3A is set out in Corporations Act s 435A:
"The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company."
Section 435A(a) is inapplicable as there was no prospect of the company continuing in business.
However, if there is a possibility that litigation in relation to the intellectual property is successful and there is an opportunity for a better return for the company's creditors then the matter falls within s 435A(b) of the Corporations Act.
No authority was cited by the appellants to support particular (a) of ground 1. On the contrary, Part 5.3A is not so constrained. In any event as the trial Judge correctly noted at [24] of his judgment:
"… Accounting Management Services Pty Ltd, Mr Soia, Ms Donna L'Herpiniere and Personalised Tuition Services Pty Ltd, while they are creditors, are not shareholders in the defendant."
As to particular (b) of ground 10, the Deed of Company Arrangement was not a means of quieting a dispute between the two deadlocked shareholders, nor could it be. This dispute concerning intellectual property will continue and is not quiet.
Ground 1 fails and as a consequence ground 2, which attacks the Administrator's exercise of a casting vote, also fails.
Ground 3 attacks the unreasonableness of the Deed of Company Arrangement which, it is argued, is further evidence of the Administrator's impropriety in voting for it. This ground is linked with grounds 6, 7 and 8.
"3.His Honour should have found that the passing of the resolution in favour of the DOCA would prejudice the interests of the Appellants (Plaintiffs) to an extent that is unreasonable, having regard to:
(a)the giving of control (via clause 5 of the DOCA) of the Respondent (Defendant) to Mr Martin Bennett through the issue of the additional share to Cityfield;
(b)the extinguishment of debts owed by the Respondent (Defendant) to the Appellants (Plaintiffs);
(c)the extinguishment of any possibility of a liquidator suing Mr Bennett for insolvent trading;
(d)the contemplation of impossible legal proceedings by the Respondent (Defendant) against the first‑named Appellant (Plaintiff) for the recovery of intellectual property (whatever that expression may mean), the difficulties of which the Administrator had already identified for himself;
(e)the DOCA extinguishes the debts owing to the Appellants (Plaintiffs) by the Respondent (Defendant) but gives the Appellants (Plaintiffs) nothing in return."
The terms of the Deed of Company Arrangement were reasonable in the circumstances. Cityfield was providing the funding for the administration and any legal action to recover the intellectual property. That funding was the consideration for the issue of the share. It is not an unreasonable arrangement, even though the result may be to give control of the company indirectly to Mr Bennett.
The extinguishment of the debts owed by the company to all the creditors after a period of 18 months is of little moment. The company was insolvent and there was no prospect of any payment to creditors. There was no money. It is be open to the creditors to review the issue of liquidation in the future. I note that the clause is unusual but, in the circumstances of this case, no inference of impropriety or prejudice can be drawn from its inclusion in the Deed of Company Arrangement.
Ground 3 fails.
Grounds 6, 7 and 8 advance the argument as to impropriety.
"6.His Honour should have found that the Administrator is not authorised by Part 5.3A to 'vest' control of the proposed 'recovery proceedings' in Mr Bennett.
Particulars
(a)The Administrator may bring proceedings in the name of the (Respondent) Defendant under s 442A(c) but the Administrator does not have the power to 'vest' the proposed proceedings in anybody or at least not in Mr Bennett;
(b)Schedule 8A clause 2(j) of the Corporations Regulations is of similar effect;
(c)There is no power for the Administrator to assign the proposed proceedings;
(d)Even if an assignment were possible, the creditors would have to approve of it by analogy with s 477(2)(c), which cannot happen as the creditors are the deadlocked shareholders (Cityfield and Jeneva);
(e)There is no other possible source of power."
Contrary to the assertion in ground 6, s 442A of the Corporations Act does give the Administrator the power to do what is set out in the Deed of Company Arrangement. The power has not been vested in another. This is clear from the Deed of Company Arrangement. Any money recovered will, after payment of expenses, be distributed to the creditors. The Administrator did not assign the proposed proceeding. All the Administrator did was to delegate some power to Mr Bennett.
Ground 7 reads:
"7.His Honour should have found that the purported share issue to Cityfield was beyond power and improper."
I have dealt with the facts. There is nothing improper in the grant of a share by agreement to a party providing funding.
Ground 8 reads:
"8.His Honour should have found that the main reason put forward by the Administrator for exercising the casting vote was his interpretation of the IPAA Guidelines. His Honour should have found that the unfairness of the DOCA is the prime consideration and hence the resolution should be set aside."
At [29] the trial Judge held:
"… Mr Robson criticised Ms Henville's reasons for casting her vote as she did submitting that she had acted in reliance with a guideline of the Insolvency Practitioners Association of Australia (IPAA) which the decision in Cresvale (supra), par 114, indicates is of doubtful validity. As her report shows, Ms Henville referred to a guideline issued by IPAA which stated that in situations where a deadlock exists in the voting and the chairperson elects to cast a deciding vote, the chairperson should have regard to the wishes of the creditors with the greatest pecuniary interest. Cityfield was the largest creditor and had voted in favour of the resolution. However, her report indicates that Ms Henville gave her casting vote in favour of the resolution, based on the recommendation of the Administrator's report."
The evidence is contained in the minutes of the meeting and was the only evidence before the trial Judge. There is no evidence to support the assertions in ground 8.
Furthermore, it was open for the trial Judge to conclude that the amounts advanced by Cityfield were by way of loan, not equity. This ground fails.
Ground 4 does not raise impropriety by the Administrator but asserts error by the Judge:
"4.His Honour erred in holding that the first‑named Appellant's (Plaintiff's) real complaint was that he would like to avoid being sued for the recovery of the intellectual property. His Honour should have found instead that the above factors (in Ground 3) necessitated an order setting aside the resolution and that the supposed 'real complaint' was logical and irrelevant to the exercise of His Honour's discretion."
This ground relates to an observation by the trial Judge at [17]:
"Mr Soia's real complaint appears to be that he would like to avoid being sued by the defendant for 'recovery' (as it is termed) of the defendant's intellectual property which Mr Soia claimed pursuant to cl 3 of the Shareholders' Agreement. While one can understand that attitude, it would appear that Mr Soia's objection is made in his personal capacity and not as a creditor. A successful action against him for 'recovery' of the intellectual property would cause him loss, but would benefit the other creditors of the defendant. (I express no view as to the prospects of success of such an action which is, on its face, incompatible with the provisions of the Shareholders' Agreement between Cityfield and Jeneva.)"
Mr Soia's complaint is irrelevant to the issues. However, I do not read the trial Judge's comments as more than an observation. It does not form part of his process of reasoning. Although the ground is made out, it is insufficient to allow the appeal in that no miscarriage of justice has occurred.
Conclusion
The appellants' central premise is that Ms Henville, and hence the Administrator, acted unfairly, unreasonably or improperly, in casting a vote in favour of the proposed Deed of Company Arrangement. This premise is not supported by the facts. The Administrator, through Ms Henville, clearly had a discretion whether and how to vote. Nothing has been demonstrated to show that the discretion was exercised for an improper purpose.
I would dismiss the appeal.
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