Sutherland v Johnson Property Holdings

[2007] NSWSC 1331

CITATION:	Sutherland v Johnson Property Holdings [2007] NSWSC 1331
HEARING DATE(S):	19 November 2007
JUDGMENT DATE :	21 November 2007
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Proceedings dismissed
CATCHWORDS:	CORPORATIONS - voluntary administration - application under s 447A for administration to be brought to an end - plaintiff claims that the company is solvent and the provisions of Part 5.3A are being abused - insufficient evidentiary foundation for plaintiff's claims - no issue of principle
LEGISLATION CITED:	Corporations Act 2001 (Cth), s 447A Corporations Regulations, regs 5.6.11, 5.6.16
PARTIES:	Roderick Mackay Sutherland (P) Johnson Property Holdings Pty Ltd (D1) Robert Boyce Moodie (D2) Deborah Pauline Johnson (D3)
FILE NUMBER(S):	SC 5544/07
COUNSEL:	Mr J Ireland QC (P) Mr J Marshall SC with Mr DFC Thomas (D1, D2)
SOLICITORS:	DTA Lawyers (P) Streeter Commercial Lawyers (D1, D2)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

AUSTIN J

WEDNESDAY 21 NOVEMBER 2007

5544/07 RODERICK MACKAY SUTHERLAND V JOHNSON PROPERTY HOLDINGS & ORS

JUDGMENT

1 HIS HONOUR: By his originating process filed on 15 November 2007, the plaintiff (Mr Sutherland) challenges the validity of the appointment of the second defendant (Mr Moodie) as administrator of the first defendant ("JPH"). The third defendant, Mrs Johnson, is the director of JPH.

2 Mr Sutherland seeks an order under s 447A of the Corporations Act 2001 (Cth) that the administration is to end, on the grounds that JPH is solvent (s 447A(2)(a)) and that the provisions of Part 5.3A are being abused (s 447A(2)(b)). Mr Moodie opposes the granting of that relief. Mrs Johnson has filed a submitting appearance.

3 Mr Sutherland has standing to seek relief under s 447A as an interested person (s 447A(4)(f)) because he is the shareholder of 99 of the 100 issued shares in JPH. His shareholding would not give him standing to seek an order declaring whether the purported appointment of Mr Moodie was valid under s 447C, or an order seeking the removal of Mr Moodie from the office of administrator under s 449B, because standing to obtain relief under those provisions is more limited than under s 447A and Mr Sutherland would not qualify under those provisions.

4 JPH was registered in 1997, and from that time until June 2007 it was controlled by Mr Wayne Johnson, who was sole director and the holder of 99 of the 100 issued shares, the remaining share being held by his wife, Mrs Johnson.

5 Mr Philip Franks claimed that Mr Johnson owed him a substantial sum of money, and on 22 May 2007 Mr Franks obtained judgment against Mr Johnson in proceedings No 20042 of 2007 in this court for $788,075.41 plus interest and costs. After obtaining judgment, Mr Franks served a bankruptcy notice on Mr Johnson for the judgment debt.

6 On 18 June 2007 Mr Johnson caused Mrs Johnson to be appointed sole director of JPH in his place. Counsel for Mr Sutherland submitted that Mr Johnson's motive in doing so was to avoid the consequence, when he became bankrupt subsequently, that his trustee in bankruptcy would have been able to replace the board and take practical control of JPH's affairs. But, as was confirmed in the evidence at the hearing, upon the bankruptcy of Mr Johnson his trustee in bankruptcy became entitled to be registered as controlling shareholder of JPH. That meant that the trustee in bankruptcy could promptly replace the director, and take practical control of the affairs of the company, whether or not Mr Johnson had replaced himself with his wife as director. All I am entitled to infer from the evidence is that, by mid-June 2007, Mr Johnson realised that his bankruptcy was imminent, and he took steps to replace himself as director of JPH so as to address the management problem that would arise for the company out of his automatic disqualification from managing corporations once he became an discharged bankrupt, by virtue of s 206B(3) of the Corporations Act 2001 (Cth).

7 Mr Johnson became bankrupt under a debtor's petition presented to the Federal Court on 6 July 2007. Mr Sutherland is his trustee in bankruptcy, although the day-to-day work of the trustee is discharged by his partner Danny Vrkic. Mr Sutherland has become the registered shareholder of the 99 shares in JPH formerly held by Mr Johnson, in his capacity as trustee in bankruptcy, leaving Mrs Johnson with the remaining share. He has not sought to replace Mrs Johnson as the director of the company. He has commenced examination proceedings in the Federal Court, which are part heard and will resume on 11 December 2007. A question that is being investigated in the examination proceedings relates to a unit trust of which JPH is said to be the trustee, and whether Mr Johnson has any entitlement under the trust.

8 At the time of Mr Johnson's bankruptcy JPH owned two properties, at 53 Queens Rd, Asquith, and at 1196 River Rd, Lower Portland. Each of those properties was mortgaged. JPH's substantial equity in them was its principal asset. JPH sold the Asquith property but in proceedings No 20042 of 2007 this court made freezing orders against the company and Mrs Johnson which permitted the sale of the properties but sought to preserve the balance of proceeds of sale. On 29 October 2007 that injunctive relief was extended by the court to the balance of proceeds of sale of the Lower Portland property. The company and Mrs Johnson were represented by Street Commercial Lawyers in relation to these applications.

9 The balance of the proceeds of sale, after discharge of the mortgages over the properties, is held by solicitors subject to the court's orders. Settlement of the Lower Portland sale took place on 16 November 2007, sale of the Asquith property having settled previously. The amount now held is $245,580.60. Security is claimed over that amount by Quantum Leap Associates Pty Ltd, about which I shall say more later.

10 On 29 October 2007 Mrs Johnson, acting as sole director of JPH, passed a resolution, purportedly under s 436A of the Corporations Act, for the appointment of Mr Moodie as administrator of JPH, and she executed a notice of appointment of administrator of the same day. The minutes of her resolution, which are in evidence, are described inappropriately as minutes of a "meeting" of directors. But their substantive effect is to record that Mrs Johnson as sole director considered the financial affairs of the company after reviewing its financial records, and she resolved that in her opinion as director the company was insolvent or likely to become insolvent, and that the company should appoint Mr Moodie as administrator. Mr Moodie's consent to the appointment was noted. The financial records referred to in the minutes are not in evidence.

11 There is evidence indicating that Mr Johnson was actively involved in the administration process. It was Mr Johnson who telephoned Mr Vrkic on the morning of 30 October 2007 to report that Mr Moodie had been appointed administrator of the company. Mr Sutherland and Mr Vrkic had not previously been informed of the proposal to appoint an administrator. Bona Lee, an employee of Mr Moodie who reported to Mr Davis (who in turn reported to Mr Moodie), sent an e-mail to Mr Johnson on 30 October (the e-mail is Ex P4; its header is at the bottom of Ex P2) seeking information to enable her to proceed with the voluntary administration, including details of the company's bank accounts and credit card, and its history. Mr Johnson replied by e-mail on 31 October (Ex P2), supplying names, addresses and telephone numbers of five people whom he said were creditors, namely Debbie Johnson, Mark Streeter, Paul Hetherington, Charles Vowell and Stephen Waite. He did not state the amounts of the debts.

12 A meeting of creditors was convened, to take place at Mr Moodie's office on 5 November 2007. At the appointed time, the only persons initially present were Mr Davis, Mr Vowell (an accountant who had previously done work for JPH and Mr Johnson) and Mr Vrkic (attending as an observer). Accordingly at that stage a quorum was not present (Corporations Regulations, regs 5.6.16(2); 5.6.11(2)). Mr Davis produced a document which he described as a "list of creditors" which had on it the five names that had been supplied to Ms Lee, with the word "unknown" adjacent to each name in the column under the heading "Amount ($)". According to the evidence of Mr Vrkic, Mr Davis said that he had been "introduced to [JPH] by Mark Streeter". The alleged significance of that statement will be considered below.

13 Subsequently Mr and Mrs Johnson arrived at the meeting, though the status in which Mr Johnson attended the meeting was not explained. If Mrs Johnson and Mr Vowell were creditors, as the list of creditors claimed, then the quorum requirement of the Corporations Regulations was satisfied when she arrived. During the meeting Mr Vowell tendered a proof of debt and Mr Davis altered the list of creditors by striking out the word "unknown" adjacent to Mr Vowell's name and substituting the figure $12,017.50.

14 According to Mr Vrkic's evidence, Mr Vowell (who had familiarity with the financial affairs of both Mr Johnson and JPH) said at the meeting "the company is not insolvent". That statement was allegedly made in the presence of Mr Davis, but Mr Davis denied that any such thing was said. According to the defendants' solicitor, Mr Vowell told him that in his opinion at the time, the company was insolvent, and in fact he had said words to the effect:

"in order to avoid the costs of winding up it may be possible for the company to come to an arrangement with its creditors and undertake a members voluntary liquidation".

15 It would be surprising if an accountant who had done work for the company and Mr and Mrs Johnson were to declare, at a meeting of creditors held shortly after the company was placed in administration by Mrs Johnson on the ground of insolvency or likely insolvency, that the company was solvent. Moreover, the evidence indicates that there were substantial claims against the company by the Johnson Family Trust for capital profits and by Mrs Johnson for payment of the redeemed units, which an accountant working for the company and Mr and Mrs Johnson would be likely to have been aware of. It would be easy to mistake the words "not solvent" for "not insolvent" during conversation. The account of Mr Vowell's statement by the defendants' solicitor is more plausible. Additionally, Mr Davis gave evidence denying that Mr Vowell had said what Mr Vrkic attributed to him. In all the circumstances, I do not accept Mr Vrkic's evidence on this point.

16 Mr Vrkic gave evidence that Mr Davis had said at the meeting that Mr Moodie's costs in relation to the administration would be $44,000. That allegation was repeated by Mr Sutherland's solicitor in a letter to the defendants' solicitor. The defendants' solicitor replied saying that this was incorrect, and that Mr Davis had said that the estimated cost of the administration as a whole would be $44,000. It seems to me the latter version is inherently the more plausible, as creditors normally would wish to be told the total cost involved in the process. In his subsequent report, Mr Moodie seeks the approval of creditors to fees of $33,000 including GST, of which he gives particulars.

17 Mr Moodie produced a report to creditors pursuant to s 439A of the Corporations Act on 15 November 2007. The report said that no deed of company arrangement was proposed and that consequently, in Mr Moodie's view, the company should be wound up. The report contained a relatively detailed but not entirely clear account of the company's history, from which it appears that the company was used by Mr Johnson as a trustee for the purpose of various property investments. A Queensland property development, apparently undertaken by Mr Johnson rather than the company, was commenced in 2004 but subsequently failed, and that appears to have led eventually to Mr Johnson's bankruptcy. The extent of the company's liabilities in respect of Mr Johnson's activities is apparently not clear at this stage, and would need to be sorted out if the company goes into liquidation.

18 The report listed Quantum Leap Associates as a secured creditor and asserted that repayment of that company's loan to Mr Johnson is supported by a guarantee over the Lower Portland property. It seems to me there is substantial doubt about this matter, for reasons explained below.

19 The report listed six unsecured creditors totalling $886,054. Four of the six were mentioned in the list of creditors that Mr Davis had at the meeting of 5 November (or, in some cases, their firms). There was no mention in the report of Mr Waite as a creditor but the report identifies WHK Horwath. I do not know whether that is Mr Waite's firm. The sixth creditor on the list in the report was Johnson Family Trust in the sum of $709,753. The report said that this debt was capital profit distributed but not paid, but Mr Moodie stated his expectation that the amount would be reduced by costs of sale of the Asquith and Lower Portland properties.

20 Even if one disregards the claim by Johnson Family Trust, the information in the report shows that the company is, at best, of doubtful solvency. The only significant assets are the net proceeds of sale of the two properties, which have apparently amounted to $245,580.60 subject to a possible claim by Quantum Leap Associates of $96,199.56. If that claim is valid, a matter in respect of which there is considerable doubt, the net balance is a little under $150,000. The unsecured creditors other than Mrs Johnson are external lawyers and accountants and there is no basis in the evidence for querying their claims, which together amount to $46,351. That would leave net assets of a little over $100,000. Mrs Johnson claims $129,950, on the ground that trust units held by her have been redeemed but the proceeds have not been paid to her and have instead been held by the trust and lent to Mr Johnson. There is no basis in the evidence for me to conclude that her claim is a sham that is to be disregarded. If the moneys claimed by Mrs Johnson are due and payable, and the claim by Quantum Leap Associates is valid, then the company is insolvent. If Mrs Johnson was aware of all these facts on 29th October 2007 there was a foundation to her to adopt the resolution for administration that she purported to adopt on that day.

21 Senior counsel for Mr Sutherland submitted that it was significant that, about a week after Mr Johnson's resolution appointing Mr Moodie as administrator of the company, the list of creditors did not contain any amounts, and therefore (according to the submission) the court should infer that no proper consideration of the financial affairs of the company could have taken place at the time of the director's resolution. But according to the minutes supporting that resolution, the director had regard to financial records of the company that are not in evidence.

22 The court cannot draw an inference to the effect that there was no satisfactory evidence of insolvency when the company's financial records, upon which the director is said to have relied, are not before it. Mr Sutherland's solicitor caused a notice to produce to be served on Mrs Johnson on 16 November 2007, requiring her to produce, inter alia, financial documents relating to JPH during the period from 1 October 2007 to 16 November 2007. She did not appear at the hearing but no call was made on that notice to produce. A call was made on a notice to produce (not in evidence) directed to Mr Moodie, during the hearing, and some documents were produced. I do not know whether they included financial records of the company that might have shown that it was insolvent. I would not make any inference adverse to Mrs Johnson on the basis of events at the hearing, in circumstances where she has filed a submitting appearance and was not represented at the hearing, and the notice to produce was served on her on Friday evening 16 November.

23 Quite apart from the possible existence of financial records, the evidence does not enable me to conclude that the creditors and the amounts of their debts were not known to Mrs Johnson when she adopted the resolution for voluntary administration on 29 October. The evidence includes a file note dated 8 November 2007 (Ex P3), apparently prepared by Ms Lee, headed "Wayne advising creditors’ list”. I infer that "Wayne" is Mr Johnson, and that he rang her to provide some quantification of the debts owed to the creditors previously identified by him in his e-mail of 31 October. The information in the file note is incomplete - there is no figure for Mr Streeter and Mr Etherington, and neither Mr Vowell nor his firm is mentioned. Mr Waite is listed for $100,600, a figure not present in Mr Moody's report. But the figures for Mrs Johnson and the Johnson Family Trust are the figures contained in the report.

24 It is consistent with this evidence that Mrs Johnson was well aware of the amount of her own claim and the claim by the Johnson Family Trust on 29 October, and that she was aware that there was substantial claims by the accountants and lawyers though she may not have known the final quantified amounts of those claims. It would not have been unreasonable of her to treat Quantum Leap Associates as a creditor for its claim (indeed, Mr Moodie has done so in his report), even though it emerges that there is some doubt about that matter, as I shall now explain.

25 Mr Sutherland's solicitor, Mr Trodden, gave evidence that he attended the settlement of the sale of the Lower Portland property on 16 November 2007. In attendance was a solicitor called William Vahl, representing Quantum Leap Associates, which claimed to hold an unregistered second mortgage over the property. The amount owed to Quantum Leap Associates was said to be $96,199.56. That sum was retained out of settlement moneys by the solicitors acting for JPH on the sale, pending resolution of the question whether Quantum Leap Associates is a secured or unsecured creditor of JPH.

26 Mr Vahl gave Mr Trodden a copy of the facility agreement in order to substantiate Quantum Leap Associates' claim against JPH. According to the facility agreement, which is in evidence, Quantum Leap Associates provided a financial facility with a commitment limit of $85,810.55 to Mr Johnson as borrower in April 2000. A schedule headed "Details of the Approved Facility" had entries for "Security Interest" and "Security Provider" as follows:

Security Interest A) Personal Guarantee of Borrower and
B) Lot A, River Road Lower Portland 2756

Security Provider Johnson Property Holdings Pty Ltd as trustee for Johnson Unit Trust

27 The printed clauses of the facility agreement contemplate that there may be a Security Provider but as far as I can see the agreement does not, in terms, purport to create security. The definitions of "Security Interest" and "Security Provider" seem to contemplate that any security would be provided by a separate instrument. The facility agreement is signed by Mr Johnson in his own name and there is no signature purporting to be by or on behalf of JPH. In the absence of any instrument expressly creating security, there must be real doubt as to whether Quantum Leap Associates has any security interest in respect of the Lower Portland property or the proceeds of sale, or any claim at all against JPH. But that is a matter to be resolved in the course of administration of the company, or in its winding up if the company passes into liquidation.

28 Senior counsel for Mr Sutherland also submitted that Mr Streeter, identified in Mr Vrkic's evidence as having introduced Mr Moodie's firm to JPH, was a "common thread in all of the dealings between Mr Johnson and his creditors". Mr Streeter's firm, Streeter Commercial Lawyers, have in the past four months acted for Nambour Valley Estates Pty Ltd, Roger Carson, Mr Johnson, Mrs Johnson and JPH, and the firm is now acting for Mr Moodie as administrator. The submission is that Mr Streeter's position shows that Mr Johnson is "the person 'pulling the strings' in the machinations which have occurred in the company's affairs since June this year" (plaintiff's written submissions, para 12). In my opinion, the evidence concerning Mr Streeter's involvement with Mr and Mrs Johnson and JPH and other entities, considered in conjunction with the other evidence that I have set out, does not support any such inference.

29 In the result, Mr Sutherland has failed to prove any factual grounds for questioning Mrs Johnson's resolution to place the company in administration on 29 October. He has not established that I should bring the administration to an end because the company is solvent, or because the provisions of Part 5.3A are being abused, or for any other reason. Nor do I see any ground for otherwise intervening in the administration process.

30 The administrator has recommended that the company be placed in liquidation and that he become the liquidator. The creditors will consider those recommendations on 23 November. Given the uncertainties that have emerged from the evidence about the extent to which Mr Johnson's activities have created liabilities for the company, it would in my opinion be rational for the creditors to take the view that the best course is for the company to be placed in liquidation so that the liquidator can make appropriate investigations.

31 I shall therefore dismiss the proceedings and hear the submissions of the parties on the question of costs.

32 It is unnecessary for me to consider the submission by senior counsel for Mr Moodie that there has been delay on Mr Sutherland's part in bringing these proceedings, during which time Mr Moodie has carried out aspects of the administration.

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