Velkovski, Dimce v Ryan, Morgan John
[1996] FCA 283
•23 APRIL 1996
CATCHWORDS
CORPORATIONS - company under administration - purported appointment of administrator by chargees - earlier acts of enforcement by chargees' agent - serious question to be tried as to the validity of administrators' appointment and a whether they should be removed from office - interlocutory orders replacing administrators.
Corporations Law, ss 438A(a), 439A(4)(a), 447C and 449B
Dallinger v Halcha Holdings Pty Ltd (1995) 134 ALR 178
Deputy Commissioner of Taxation v Pddam Pty Ltd (unreported, Heerey J, 15 April 1996)
DIMCE VELKOVSKI & ORS v MORGAN JOHN RYAN & ORS
No. NG 3140 of 1996
Coram: Whitlam J
Place:Brisbane (Heard at Sydney)
Date: 23 April 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) NG 3140 of 1996
)
GENERAL DIVISION )
DIMCE VELKOVSKI
First Applicant
"ATTIA" IMPORTS PTY LIMITED
Second Respondent
COBE INTERNATIONAL PTY LIMITED
Third Respondent
MORGAN JOHN RYAN
First Respondent
ROBERT WILLIAM WATERHOUSE
Second Respondent
STEPHEN WINSTON LEWIS
Third Respondent
PETER JOHN RYAN
Fourth Respondent
GEOFFREY DAVID McDONALD
Fifth Respondent
TIMOTHY PAUL HEESH
Sixth RespondentDISCOUNT ACCEPTANCE CORPORATION PTY LIMITED
Seventh Respondent
NITRAM INVESTMENTS PTY LIMITED
Eighth Respondent
Coram:Whitlam J
Place:Sydney
Date:19 April 1996
MINUTES OF ORDER
Upon the Applicants by their Counsel undertaking to pay to any party adversely affected by any of the following orders such compensation (if any) as the Court thinks just and in such manner as the Court directs.
THE COURT ORDERS THAT:
Until further order Geoffrey David McDonald and Timothy Paul Heesh be removed as administrators of the Second Applicant.
Until further order Maxwell William Prentice be appointed as administrator of the Second Applicant.
Until further order Maxwell William Prentice be appointed as receiver and manager of the Third Applicant.
AND THE COURT DIRECTS THAT:
All parties have liberty to apply on two days notice.
Proceedings stood over for further directions on 30 April 1996 at 9.30 am
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) NG 3140 of 1996
)
GENERAL DIVISION )
DIMCE VELKOVSKI
First Applicant
"ATTIA" IMPORTS PTY LIMITED
Second Respondent
COBE INTERNATIONAL PTY LIMITED
Third Respondent
MORGAN JOHN RYAN
First Respondent
ROBERT WILLIAM WATERHOUSE
Second Respondent
STEPHEN WINSTON LEWIS
Third Respondent
PETER JOHN RYAN
Fourth Respondent
GEOFFREY DAVID McDONALD
Fifth Respondent
TIMOTHY PAUL HEESH
Sixth RespondentDISCOUNT ACCEPTANCE CORPORATION PTY LIMITED
Seventh Respondent
NITRAM INVESTMENTS PTY LIMITED
Eighth Respondent
Coram: Whitlam J
Place: Brisbane (Heard at Sydney)
Date: 23 April 1996
REASONS FOR JUDGMENT
On 19 April 1996 I made interlocutory orders:
(1)removing Geoffrey David McDonald and Timothy Paul Heesh as administrators of "Attia" Imports Pty Limited ("Attia");
(2)appointing Maxwell William Prentice as administrator of Attia; and
(3)appointing Mr Prentice as receiver and manager of Cobe International Pty Limited ("Cobe") .
These are my reasons for making those orders.
The applicants in this proceeding are Dimce Velkovski, Attia and Cobe. Mr Velkovski is a director and shareholder of both Attia and Cobe. In respect of both companies the applicants seek a variety of relief under Pts 5.2 and 5.3A of the Corporations Law ("the Law").
Attia operated a business as liquor importers and distributors from premises owned by Cobe in the Sydney suburb of Chipping Norton. Another company of which Mr Velkovski was a director, Venia Co. Pty Limited ("Venia"), also used to operate from the same premises.
The administration of Attia began on 16 January 1996 upon a purported appointment by chargees. On 19 February 1996 the administrators sent a notice to Attia's creditors stating that the creditors' meeting on 21 February 1996 should be adjourned to allow them "time to attempt to sell the business operations of the company". At that meeting the administrators' nominee undertook to give Mr Velkovski 24 hours' notice before signing a contract for the sale of the business. The meeting was adjourned to 20 March 1996. On 23 February 1996 the administrators arranged to advertise the business for sale. On 27 February 1996 the administrators furnished Mr Velkovski with a copy of the information provided to interested parties, which required offers by 1 March, signed contracts by 5 March and settlement on 19 March.
On 29 February the administrators gave an undertaking to Mr Velkovski that the "assets of the company will not be sold, disposed of or otherwise dealt with, other than in the ordinary course of business" for at least one week. The chargees also gave an undertaking not to take any action to sell the business. On 5 March the administrators withdrew that undertaking. They informed Mr Velkovski's solicitors that, if his client was interested in purchasing the business, he should make an offer "by 5.00pm Wednesday 6 February [sic] 1996".
The applicants commenced this proceeding on 12 March 1996. On 15 March 1996 Sackville J made orders effectively restraining the administrators and the chargees from disposing of Attia's business and the administrators from putting to the vote of the creditors' meeting a resolution that Attia be wound up. These injunctions were continued by Beaumont
J "on an emergency basis" and by me pending the determination of the applicants' claim for interlocutory relief.
Amongst the final orders sought by the applicants is an order under s 447C(2) of the Law. The chargees who purported to appoint the administrators of Attia are Morgan John Ryan and Robert William Waterhouse. They are registered as the holders of a charge created by Attia on 9 August 1994. This charge was originally provided to Discount Acceptance Corporation Pty Limited ("DAC") as security for financial accommodation to be afforded Attia by DAC pursuant to a debt factoring facility. The property charged comprises Attia's "present and future book debts, goods, wares and merchandise trade goods, stock-in-trade". Attia also guaranteed the payment to DAC of moneys payable by Cobe. The charge secures all moneys owing to DAC by Attia. The charge was evidently assigned to Mr Morgan Ryan and Mr Waterhouse on 12 September 1994.
The question of the entitlement of Mr Morgan Ryan and Mr Waterhouse to enforce this charge as at 16 January 1996 is greatly complicated by the events that occurred a year earlier in January 1995. On 4 January 1995 these chargees appointed Stephen Winston Lewis as their agent to enter into possession and assume control of the property charged by Attia. On the same day DAC appointed Mr Lewis as its agent to take possession of property charged by Venia, and Nitram Investments Pty Ltd ("Nitram") appointed him as its agent to take possession of property charged by Cobe. The Cobe charge had evidently also been assigned by DAC to Nitram. Mr Lewis entered into possession of the assets of all three companies. He established bank accounts for all of them in his name as agent for the chargees into which debtors' cheques were deposited, and he purported to take physical
possession of their stock. On 5 January 1995 Mr McDonald was appointed administrator of Cobe under s 436A of the Law. That administration ended on 21 April 1995 when a deed of company arrangement was executed. Mr McDonald was and remains the deed's administrator. On 29 June 1995 an order was made by the Supreme Court of New South Wales for the winding up of Venia and Mr McDonald was appointed its liquidator.
Mr McDonald and Mr Heesh prepared a report to Attia's creditors dated 2 February 1996. It purported to be a report pursuant to s 439A of the Law. It was not. The Corporations Regulations make it clear that the report required by s 439A(4)(a) of the Law is to follow Form 507 and to contain the detailed information there set out. The report is completely unhelpful about whether any amount is owing under the charge held by Mr Morgan Ryan and Mr Waterhouse. This is perhaps not surprising since they evidently claim Attia is liable to them for sums payable by Cobe and Venia. All three companies have been under the control of their agent, although it appears that Mr Lewis may have been replaced with effect from 1 September 1995 by Peter John Ryan, the son of Mr Morgan Ryan.
In any event, on 28 March 1996 Beaumont J made an order for the taking of an account by the Registrar under O 39 of the Federal Court Rules of the amount payable to or by Mr Morgan Ryan and Mr Waterhouse under the charge given by Attia. Directions have been given concerning the manner of taking that account. The terms of the order acknowledge the possibility of a surplus belonging to Attia from moneys received by DAC under the factoring arrangements.
The evidence adduced by the applicants has convinced me that there is a serious question to be tried whether any moneys were owing by Attia to Mr Morgan Ryan and Mr Waterhouse when they purported to appoint the administrators. It is not necessary to refer to that evidence in detail. The state of the accounts between them depends on the utilization of the debt factoring facility by Attia at a time when it was under the control of those financiers. Without more, however, that would not require replacement of the administrators on an interlocutory basis.
Importantly, however, the applicants also seek an order under s 449B of the Law. They point to the administrators' involvement in the events of January 1995, the failure of the agents of the chargees in possession to observe the requirements of Pt 3.2 of the Law, the relationship between the administrators and the Ryan/Waterhouse interests and circumstances surrounding the proposed sale of Attia's business.
When Mr McDonald became administrator of Cobe, the employment of Mr Velkovski was terminated. However, Mr Velkovski continued to be employed by Attia. On 17 January 1995 Mr McDonald's firm wrote to Mr Velkovski confirming Mr Lewis's requirements about banking debtors' cheques, ordering stock, and controlling stock in the warehouse. On 31 March 1995 Cobe's creditors resolved that that company execute a deed of company arrangement. On 20 April 1995, the day before the deed was executed and his administration brought to an end, Mr McDonald executed on behalf of Cobe a mortgage of the Chipping Norton premises in favour of DAC.
The administration of Attia is critically affected by the enforcement action taken in January 1995. The controllers of Attia appear to have completely ignored their reporting obligations under the Law. When Mr McDonald wrote to Mr Lewis at DAC on 5 January 1996 advising on enforcement of the Attia charge, he merely observed that the "records at the Australian Securities Commission do not indicate that any action has been taken pursuant to the charge at this time". Yet he would appear to have known that such action had been taken. Indeed, by 5 March 1996 Mr McDonald was able to write to Mr Velkovski's solicitors stating: "In fact, the charge had been enforced by the secured creditor many months before the appointment of the Administrators, when on 4 January, 1995, Mr Stephen Lewis was appointed agent for the Mortgagee in Possession."
Mr McDonald's letter of 5 January 1996 advised Mr Lewis on the advantages in appointing an administrator of Attia, rather than a receiver. In particular, he referred to an administrator's ability to continue trading and realise assets "at a going concern price". He offered to prepare the documents to enable such an appointment to take place. After he and Mr Heesh had been appointed administrators of Attia, Mr McDonald wrote on 19 January 1996 to Mr Morgan Ryan and Mr Waterhouse. In this letter, where he again went through the formula of noting the position "according to the records of the Australian Securities Commission", Mr McDonald solemnly confirmed both the continuation of the factoring arrangements put in place whilst Attia was under the control of the chargees and the appointment as manager of the business of Mr Peter Ryan (who may have already been the agent of the chargees in possession for some months past). Mr McDonald also wrote:
"You have had the right, for some time, to close the company down and collect the outstanding debtors and sell off the balance of stock. However, it is understood that your security document does not entitle you to trade the business whilst realising those assets."
Later on 6 February 1996 Mr McDonald wrote to Mr Waterhouse referring to his firm's involvement in attempting to recover moneys owed to DAC "and its investors" by Attia, Cobe and Venia.
The administrators first mentioned the proposed sale of Attia's business in a report to creditors on 19 February 1996. Yet, when Mr Peter Ryan asked Mr McDonald for advice about how to reply to an inquiry from an overseas supplier for whom Attia was a sole distributor, one of Mr McDonald's employees noted that on 16 February 1996 he spoke to Mr Ryan and advised him to "stall" until after the creditors' meeting and they "sort out who buys business". The information forwarded to interested parties by the administrators included trading figures for Attia's business and referred to the value of the stock at the Chipping Norton premises and under bond. No reference was made in the information sheets to the stock being already controlled by the chargees' agent. (Curiously on 16 January 1996 DAC appears to have notified one of Attia's trade creditors of an alleged default under Attia's charge on that day and purported to have exercised rights under the charge. Whether this notification occurred before or after the purported appointment of the administrators is not clear.) On 13 March 1996 Mr McDonald wrote to his then solicitors as follows:
The Administrators reached an agreement on Friday 8 March, 1996 to sell the business of Attia to a nominee company of the Ryan/Waterhouse group. The sale price was initially set at $25,000 for the intellectual property and other intangibles, however, it was increased at the insistence of the Administrators, to equate with the reasonable fees of this firm, estimated to be $45,000 in the end."
The administrators have given no evidence of the details of the proposed sale. Mr McDonald pointed out in a letter to his solicitors on 14 March 1996 that "the sale does not include any stock which is subject to a charge, nor any debtors which are also subject to that charge".
The administrators furnished to the "major meeting" of Attia's creditors reports dated 2 February 1996, 19 February 1996 and 15 March 1996. The last of those reports was obviously prepared after the orders made by Sackville J. It blandly states that "the Administrators have agreed to sell the business operations of the company". None of these reports refer to the fact that the enforcement of the charge began before the administration or to the extent of such enforcement. This raises important questions under Div 7 of Pt 5.3A of the Law. It is certainly not sufficient or accurate to refer, as the administrators do, to DAC as the "secured creditor" and to describe DAC as having taken an "active interest in Attia". The administrators statement in their first report that they, their staff and their firm have not had "any previous involvement" with Attia is also arguably misleading.
Having regard to Mr McDonald's previous knowledge of the affairs of Attia, Cobe and Venia, in my opinion, there is a serious question to be tried whether the administrators failed to carry out the investigation required by s 438A(a) of the Law. I have already mentioned that their report of 2 February 1996 was not in the prescribed form. I respectfully agree with the view expressed by Heerey J in Deputy Commissioner of Taxation v Pddam Pty Ltd (unreported, 15 April 1996) that this constitutes a substantial breach of the requirements of the Law.
In Dallinger v Halcha Holdings Pty Ltd (1995) 134 ALR 178 Sundberg J considered (at 182-184) the grounds upon which an order under s 449B of the Law can be made. The authorities are there collected. Whether the appropriate test be that favoured by Hayne J in Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 or that explained in the case of a liquidator by Santow J in Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230, there must in the circumstances of this case be a serious question to be tried that the administrators should be replaced. On an interlocutory hearing it is not necessary or desirable that findings of fact be made on the kind of issues canvassed by Sundberg J. It is sufficient to record that the applicants' allegations about the administrators' suitability, competence and partiality raise serious questions to be tried in the light of the events that I have chronicled above.
The balance of convenience required, in my view, that a new administrator should be appointed. The reports to Attia's creditors do not suggest that any advantage has been derived from Mr McDonald's involvement in the liquidation of Venia or the earlier administration of Cobe. On the contrary, the financial position of Attia has not been clarified after three months and remains confused. There would appear to be little advantage to be derived from incumbency. Further, there is a strong case as to reasonable apprehension of lack of impartiality by reason of the prior connexion of Mr McDonald's firm with the chargees. That is always a relevant consideration on the balance of convenience. In particular, a new administrator may take a less sanguine view of the chargees' earlier acts to enforce their charge.
On 4 April 1996 the administrators filed in court in this proceeding a document described as an "application" whereby they sought an order under s 447A of the Law permitting the adjournment of the creditors' meeting convened under s 439A until 11 June 1996. Interim orders have since extended that time up to and including 3 May 1996, and I am informed that the meeting has now been adjourned to that day. This "application" was heard with the applicants' claim for interlocutory relief in the proceedings and should, as a consequence of the interlocutory orders, be dismissed. Mr Prentice or any other interested person may, if they wish, make an application in relation to the adjourned meeting.
After the interlocutory orders were pronounced on the morning of 19 April, an application for a stay was made after lunch that day on notice to the applicants. Mr PM Fordyce informed me that he had now received instructions to act as solicitor for Mr McDonald and Mr Heesh. He sought a stay at least until the publication of these reasons. He submitted that his clients would have to notify the Australian Securities Commission of their replacement, that the interlocutory orders would effectively be final because the administration of Attia would probably end before such orders could be set aside, and that his clients' reputation would be tainted. The application was opposed by counsel for the applicants, and I refused the stay. I accept, of course, that the course of an administration under Pt 5.3A of the Law is designed to be quick and that the administration might end before a final order under s 449B of the Law can be made. However, that is why I have declined to make findings of fact that could have the effect suggested by Mr Fordyce. The interlocutory orders were, in my view, required to take immediate effect in the interests of all the creditors for the good administration of Attia.
I certify that this and the preceding pages are a true copy of the reasons for judgment herein of the Hon. Mr Justice A.P. Whitlam
Associate:
Date: 23 April 1995
Counsel for the applicants: S.D. Epstein
Solicitor for the applicants: Holman Webb
Counsel for the respondents: B.A.J. Coles QC and A.G. Todd
Solicitor for the respondents: Brock Partners
Dates of hearing: 16, 17 and 19 April 1996
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