Viscariello v Macks - [2014] SASC 189

Supreme Court of South Australia
(Civil)
VISCARIELLO v MACKS
[2014] SASC 189
Judgment of The Honourable Chief Justice Kourakis
9 December 2014
CORPORATIONS - VOLUNTARY ADMINISTRATION - ADMINISTRATOR - FUNCTIONS, POWERS, RIGHTS AND LIABILITIES GENERALLY
CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - PROCEEDINGS ON BEHALF OF COMPANY BY MEMBER
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - OF CARE, SKILL AND DILIGENCE
TORTS - NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - DUTY OF CARE - SPECIAL RELATIONSHIPS AND DUTIES - PROFESSIONAL PERSONS
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS
The plaintiff is a director, principal shareholder and creditor of two Companies, Bernsteen Pty Ltd and Newmore Pty Ltd (the Companies), which are in liquidation. The defendant was appointed an administrator of the Companies on 5 December 2001. On 21 December 2001 the Companies’ creditors voted to wind the Companies up and appoint the defendant as the liquidator. Plaintiff alleged defendant, as administrator of the Companies, wrongfully failed to negotiate and put in place a Deed of Company Arrangement which would have allowed the Companies to continue to trade under a changed ownership structure. Plaintiff claims damages for loss of employment and having to honour personal guarantees he gave to the Companies’ creditors.
Held:
1. As between a voluntary administrator on the one hand and the creditors, contributories and directors of the company on the other, an administrator does not engage in trade or commerce in exercising his or her statutory functions, powers and duties under Part 5.3A of the Corporations Act.
2. It is manifestly inconsistent with the statutory regime of the Corporations Act regulating the duties of voluntary administrators to superimpose up on it a common law duty of care owed by the administrator to individual creditors, directors or shareholders to protect them from financial loss by the exercise of reasonable care in discharging his or her statutory powers. That inconsistency is at its greatest when an administrator must form an opinion and frame a recommendation to the creditors, about whether to trade on, enter into a deed of company arrangement, sell the business and/or wind up the company.
3. There was no evidence that the valuations undertaken by the defendant as administrator were inadequate. Nor was evidence adduced as to the values which would have been assigned to the business and stock if other steps had been taken.
4. The winding up of the Companies was inevitable. The proposed Deeds of Company Arrangement were doomed to failure when major secured creditor of the Companies refused to agree to them.
5. The defendant’s conduct was not causative of the failure of the companies to enter into the proposed Deeds of Company Arrangement and his decision to recommend that the Companies be wound up was reasonable in the circumstances.

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - OFFICERS OF INSOLVENT CORPORATIONS - GENERALLY
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - OFFENCES - CONTRAVENTION OF PROVISIONS OF ACT
CORPORATIONS - WINDING UP - LIQUIDATORS - SUPERVISION OF LIQUIDATORS
CORPORATIONS - WINDING UP - LIQUIDATORS - REMOVAL - IN VOLUNTARY WINDING UP - GROUNDS
CORPORATIONS - WINDING UP - LIQUIDATORS - DUTIES AND LIABILITIES - IN VOLUNTARY WINDING UP
Plaintiff alleged defendant, as liquidator of the Companies, breached his statutory duties by engaging in expensive litigation which was not in the interests of the Companies but benefited him personally.
Held:
1. The Corporations Act does not expressly or by negative implication limit the Court’s power under s 31 of the Supreme Court Act to make a declaration of breach of the statutory duties created by the Corporations Act.
2. The defendant breached his statutory duties under the Corporations Act by unreasonably continuing to pursuing litigation for a collateral purpose where it became clear that it would be of no benefit to the Companies and by failing to properly inform the Committee of Inspection of the way in which that litigation was conducted and its cost.
3. The defendant’s breach of statutory duties is sufficient to consider his removal as liquidator. Parties to be given opportunity to be heard on that issue in light of findings.
4. Further matters raised by plaintiff are matters properly to be considered by another liquidator, if one is appointed.
Corporations Act 2001 (Cth) s 9, s 126, s 143, s 180, s 181, s 182, s 184, s 236, s 435A, s 435C, s 436A, s 436E, s 437B, s 438A, s 438B, s 439A, s 439C, s 443A, s 443B, s 443E, s 447A, s 447E, s 448B, s 448C, s 449B, s 503, s 536, s 595, s 1282, s 1311, s 1317E, s 1317H, s 1317J, s 1317G and s 1321; Corporations Regulations 2001 (Cth) reg 5.6.12 and reg 5.6.18; Fair Trading Act 1987 (SA) s 56; Supreme Court Act 1935 (SA) s 31; Federal Court of Australia Act 1976 (Cth) s 21, referred to.
Brovis v Lenleys Pty Ltd & Wily (2003) 45 ACSR 612; Smarter Way (Aust) Pty Ltd v D’Aloia (2000) 35 ACSR 595; Cusson v Signature Resorts Pty Ltd (2000) 18 ACLC 341; Re Eisa Ltd (2000) 34 ACSR 394; Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1999) 30 ACSR 38; Supervac Australia Pty Ltd v Australasian Memory Pty Ltd (unreported) FCA 6 June 2007; Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270; Re Vouras (2003) 47 ACSR 155; McVeigh v Linen House Pty Ltd [2000] 1 VR 31; Deputy Commission of Taxation v Portinex (2000) 156 FLR 453; Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139; Hill v David Hill Electrical Discounts Pty Ltd (2001) 37 ACSR 617; Commission for Corporate Affairs v Harvey [1980] VR 669; Central Springworks Australia Pty Ltd v McClellan (2000) 34 ACSR 169; Commonwealth v Irving (1996) 65 FCR 291; Citric Systems Inc v Telesystems Learning Pty Ltd (In Liq) (1998) 28 ACSR 529; Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; Yates v Whitlam [1999] NSWSC 976; NRMA Ltd v Yates [1999] NSWSC 859; Cleary v Australian Cooperative Foods (No 2) [1999] NSWC 991; Cap Reinsurance Corporation Ltd v Daya [2008] NSWSC 64; Rozenblit v Vainer [2014] VCS 510; Baxter v Hamilton [2005] TASSC 64; Nominees Ltd v McGoldrick [2014] VSC 152; Mills v Sheahan (2007) 99 SASR 357; Yango Pastoral Co Pty Ltd v First Chicago (Australia) Limited (1978) 139 CLR 410; Brownbill v Kenworth Trucks Sales (NSW) Pty Ltd (1982) 39 ALR 191 ; Alexander v Rayson [1936] 1 KB 169; McCarthy Rose (Milk Vendors) Pty Ltd v Dairy Farmers Coop Milk Co Ltd (1945) 45 SR(NSW) 266; Mason v Clarke [1955] AC 778; Re Chevron Furnishers Pty Ltd (in Liq) (1993) 12 ACSR 565; National Safety Council of Australia [1990] VR 29; Deputy Commissioner of Taxation v ACN 080122587 Pty Ltd [2005] NSWSC 1247; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434; Naumoski v Parbery (2002) 171 FLR 332; Re Edennote Ltd [1996] 2 BCLC 389; Yeomans v Walker (1986) 5 NSWLR 378; Westpac Banking Corp v Totterdell (1998) 20 WAR 150; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667; Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; Ibeneweka v Egbuna [1964] 1 WLR 219; Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421; Talylor Holdings Ltd (In Liq) v Bond (1993) 59 SASR 432; Law Society (NSW) v Weaver [1974] 1 NSWLR 271; Hall v Poolman (2009) 75 NSWLR 99; Kennards Hire Pty Ltd v RMGA Pty Ltd [2010] NSWSC 1387; MSP Nominees Pty Ltd v Commissioner of Stamps (1999) 198 CLR 494, considered.

VISCARIELLO v MACKS
[2014] SASC 189
Civil
KOURAKIS CJ:
Part I
The Companies’ financial position in 2001
A rescuer is found
A summary of Mr Viscariello’s claims
Voluntary administration – the statutory scheme
Does an administrator engage in trade or commerce?
The Administrator’s duties
No misrepresentations – no disqualifying conduct
Failure to obtain independent valuation of the business or the assets of the company
Failed negotiation of the proposed Bart DOCA
Failure to continue trading after rejection of Bart DOCA
Conclusion on claims against Mr Macks as an administrator
Part II
A simple debt recovery
The litigation commences
The Hamilton-Smith dossier – exhibit 279
The ASIC enquiry and the dossier
The Bernsteen Action – a mire of delay and cost
The Heidi George strategy
The warfare continues
The 14 November 2005 Committee meeting
The parallel strategy
Denials of Mr Macks’ interest in the George proceedings
The denouement
Suing for peace
Legal costs arrangements revisited
The pursuit of Ms Hamilton-Smith was unreasonable and not in the interests of the Companies
Validity of arrangements indemnifying Ms George
Retrospective approval to enter into the George indemnity
Declarations of breach
Statutory relief not available to Mr Viscariello
Removal of a liquidator
Section 536 Enquiry
Miscellaneous claims against Mr Macks as liquidator
Mr Viscariello, a creditor, secured or otherwise?
Addendum – the production of privileged documents
Part I

Since May 1993 the plaintiff, Mr John Viscariello (Mr Viscariello), has been a director and principal shareholder of Bernsteen Pty Ltd (Bernsteen) and Newmore Pty Ltd (Newmore). I will refer to Bernsteen and Newmore together as “the Companies”. Bernsteen was incorporated on 3 June 1988 and Newmore on 30 June 1992. Both Bernsteen and Newmore are now in liquidation. From 1988 to December 2001, Bernsteen conducted a business of retailing manchester and other products under the trading name “Bedroom Mazurka”. It operated 18 retail outlets primarily in the Adelaide metropolitan area but also in regional South Australia, Victoria and the Northern Territory. From 1992, Newmore also operated as a retailer of manchester under the trading name “Faulty Towels and Sheets”. Newmore had 15 retail outlets in shopping centres in the Adelaide metropolitan area.
The defendant, Mr Peter Ivan Macks (Mr Macks), is a registered liquidator and an official Liquidator pursuant to the provisions of the Corporations Act 2001 (Cth) (Corporations Act). At all relevant times Mr Macks was a principal of the firm PPB.
Mr Macks was appointed an administrator of the Companies on 5 December 2001. On 21 December 2001 the Companies’ creditors voted to wind each company up and to appoint Mr Macks as the liquidator of the Companies.
Mr Macks engaged the firm Minter Ellison to perform work in relation to the administration and subsequent liquidation of the Companies.
Mr Viscariello brings this action against Mr Macks claiming declarations, damages and statutory remedies for what he alleges was Mr Macks’ wrongful conduct as voluntary administrator and then liquidator of the Companies, and seeking orders removing Mr Macks as the Companies’ liquidator.
Mr Viscariello’s primary claim against Mr Macks as administrator is, in essence, that he wrongfully failed to negotiate and put in place a Deed of Company Arrangement which would have allowed the Companies to continue to trade under a changed ownership structure. Mr Viscariello contends that but for Mr Macks’ failure he would have remained in employment as a manager of the Companies and that he would not have been called on to honour guarantees he had given to the Companies’ creditors.
Mr Viscariello’s claims against Mr Macks as a liquidator are, in essence, that he sold the Companies’ assets too cheaply and that he breached his statutory duties by engaging in expensive litigation which was not in the interests of the Companies and which benefitted him personally. The litigation comprised proceedings against Ms Hamilton-Smith, the romantic partner of Mr Viscariello, for stock she had purchased from Bernsteen. The debt was for $28,000 but Mr Macks incurred costs in the order of $400,000 pursuing it. Mr Viscariello also claims that Mr Macks sacrificed some of the Companies’ assets.
Mr Viscariello graduated in law in December 2001. He commenced practice in Adelaide. He had previously worked in the building industry.
Mr Viscariello’s standing to prosecute some of the claims in this action and his entitlement to damages for any wrongful conduct is a major issue in these proceedings. So too is the question of whether Mr Macks’ conduct of the liquidation has deprived Mr Viscariello of a distribution of any part of the Companies’ assets which he would otherwise have received. Over and above his interest as a director and shareholder, Mr Viscariello relies on his status as creditor of the Companies and as a secured creditor of Newmore.
Mr Viscariello took a 15 per cent interest in the Companies in 1993. He testified that shortly after he became a director he personally borrowed money from the Commonwealth Bank which he then on-lent to the Companies.
Mr Viscariello claims that he entered into a loan agreement with Bernsteen in 1993 (the Bernsteen loan agreement) and that during November and December 1993 he advanced $270,000 to Bernsteen pursuant to the loan agreement. I will refer to the monies so advanced as “the Bernsteen advances”. Mr Viscariello claimed that he entered into a loan agreement with Newmore in November 1993 (“the Newmore loan agreement”) and that $60,000 was advanced to Newmore pursuant to the Newmore loan agreement. I will refer to those advances as “the Newmore advances”. The advances to both Companies were secured by a charge over the assets of Newmore (the Newmore charge). Mr Viscariello also claims that he became subrogated to a charge held over Newmore’s assets by the Commonwealth Bank of Australia (CBA) when he later discharged Newmore’s indebtedness to the CBA.
Within two years of Mr Viscariello acquiring his interest in the Companies, Bernsteen and Newmore experienced financial difficulties and were placed in administration in 1995. In the course of that administration each company entered into a deed of company arrangement (respectively referred to as the Bernsteen and Newmore 1995 DOCA). Mr Macks was the administrator of each of the Companies. The Bernsteen and Newmore 1995 DOCAs bound Mr Macks, Mr Viscariello and the former principals of the Companies, Mr and Mrs Stupos. The Bernsteen and Newmore DOCAs were completed on 28 July 1998.
Bernsteen traded at a loss of about $400,000 in the first part of its administration from 1 November 1995 to 30 June 1996. It made a profit of approximately $150,000 in the following financial year. Newmore also traded at a loss of about $160,000.00 in the period to 30 June 1996 and returned to a profit of approximately $188,000 in the following financial year.
The Companies came out of the 1995 administration in July 1998 carrying forward substantial losses in the order of about $3.5 million.
The Bernsteen 1995 DOCA provided that Mr Viscariello would be paid substantial remuneration as that company’s manager. The Newmore 1995 DOCA made similar provision for the employment of Mr Viscariello. Mr Viscariello claims that his entitlements under the Bernsteen and Newmore DOCAs are cumulative. He asserts that he was not paid the remuneration to which he was entitled under those provisions between October 1995 and December 2001 and that the Companies were therefore indebted to him to the extent of that under payment at the time of their liquidation. Mr Viscariello claims that if Mr Macks had put in place a deed of company arrangement his entitlements as an employee would have been paid to him by the proposed purchaser of the businesses.
Mr Viscariello and Mr Macks continued to meet from time to time after the 1995 administrations had come to an end. Mr Viscariello testified that in casual conversations with Mr Macks, Mr Macks told him that the National Australia Bank (“NAB”) was unhappy with the way in which Mr Macks had conducted the 1995 administrations of Bernsteen and Newmore. According to Mr Viscariello, Mr Macks said that NAB officers had informed him that NAB and other banks would not appoint Mr Macks as a liquidator, an administrator or a receiver because of the way in which he had conducted the administration. Mr Viscariello did not testify that Mr Macks had raised his loss of work as a complaint, or that Mr Macks blamed him in any way for his predicament. According to Mr Viscariello, the loss of work was nonetheless a recurring theme of the conversations with Mr Macks. Mr Macks testified that he had not been boycotted by NAB or any other bank and denied that he ever made such an allegation to Mr Viscariello.
Associated Retailers Limited (ARL) is a wholesaler of manchester and other goods. ARL supplied products to Bernsteen and Newmore from 1995. The chief executive of ARL was at all relevant times Mr Yeomans. Mr Viscariello described the business relationship with ARL as one in which ARL imported stock from overseas to supply to the Companies which would “share the import margin” with ARL. ARL supplied something in the order of 25 to 30 per cent of the Companies’ product. ARL supplied most of the stock on credit terms which included a clause that property did not pass until payment (the ROT stock and ROT clause respectively). It also supplied some stock on consignment. The stock supplied on credit was accounted for as an asset but with a corresponding liability for its cost. Stock on consignment was only brought into account on sale. ARL held a first registered mortgage debenture over Bernsteen as security for credit advanced to Bernsteen and Newmore and a second registered mortgage debenture, ranking below a charge held by the CBA, over Newmore securing those advances. The CBA charge was given on 14 February 1994 and the ARL charge on 29 November 1996. I will refer to the debentures as the “ARL security”. It was a term of the ARL security that the Companies could not borrow against their stock without ARL’s consent. Mr Viscariello and ARL entered into a Deed of Priority which, subject to certain specified conditions, gave ARL priority over Mr Viscariello’s earlier charge.
Mr Viscariello explained that from about July 2000 the Companies experienced trading and financial difficulties even though their annual turnover was in the order of $8 million.
In August 2001, Mr Viscariello explored with ARL a plan to franchise the Bernsteen and Newmore stores.
On 6 September 2001, ARL agreed with Bernsteen that:
·a separate consignment account would be opened;
·the stock would remain the property of ARL;
·fortnightly reports as to sales were to be provided, accompanied by a cheque for the amount of the sales; and
·at no time would the pool of consignment stock exceed $57,443.30.
ARL’s exposure to Bernsteen had grown from $116,694.22 in January 2001 to $445,393.01 by December 2001. In 2001 ARL entered into an arrangement with Mr Viscariello for two repayments of $40,000 to be made on 20 and 27 August 2001, followed by a further three payments of the same amount on 3, 10 and 17 September 2001.
Mr Luigi Viscariello is the father of Mr Viscariello. On 27 August 2001, Luigi Viscariello advanced $88,000 to the Companies and made a further advance of $70,000 on 5 September 2001, allegedly to meet wage commitments. Mr Macks’ investigations showed that the money was used to pay other operating costs and not wages.
The Companies’ financial position in 2001
The following information about the financial solvency of the Companies is obtained from reports prepared by Mr Macks for the purposes of an action to recover preference payments from the Commissioner of Taxation. I find that for the purpose of giving an overview of the Companies’ financial position, the reports are generally reliable.

At the time an administrator was appointed in 2001, Bernsteen employed 30 sales staff and five administrative staff. The monthly wages bill was $110,000, with an associated income tax (PAYG) liability of $20,200, and an employer’s superannuation contribution of $8,000.
As of Mr Macks’ appointment as administrator, Bernsteen had failed to remit $345,000 to the Federal Commissioner of Taxation on account of its PAYG obligations. In addition, Goods and Services Tax (GST) and Superannuation Surcharge payments were overdue. Bernsteen’s total liability to the Commissioner was in the order of $370,000. Bernsteen’s monthly rent bill was $55,000. At the time it went into administration, Bernsteen’s rental arrears were in the order of $157,000. On 1 November 2001, the landlord of a Bernsteen store in the Westfield Shopping Centre, Marion, distrained goods on account of unpaid rent in the sum of $32,463.17. On 2 November 2001, the landlord of a Bernsteen store in Westfield Shopping Centre, Tea Tree Plaza, distrained goods on account of unpaid rent in the sum of $41,078.94.
Bernsteen’s net profit before income tax for the year ending 30 June 1999 was $131,820 but in the financial year ending 30 June 2000, it suffered a loss of $16,271. A trial balance by Bernsteen’s accountants for the year 30 June 2001 showed a loss of $622,215. Removing the depreciation expense of $139,980 left a trading loss in the order of $500,000. A trial balance prepared by Mr Macks’ office showed a cash loss of $463,084 for the five months to the end of November 2001. Bernsteen experienced a substantial fall in sales from $7,330,907 in the year ending June 2000 to $6,128,493 for the year ending June 2001. Its sales in the months of September and October 2001 preceding the commencement of the administration were substantially down on the sales for September and October 2000.
Bernsteen’s financial statements for the year ending 30 June 2000 claimed an inventory of $1,828,423, property, plant and equipment of about $700,000 and intangible assets of $343,010. In the same year, the current liabilities of $1,961,302 exceeded the current assets by around $61,000.
On 10 December 2001 the Companies filed returns as to their affairs in accordance with Form 507 of the Corporations Act. Mr Viscariello gave evidence that the returns were prepared by the Companies’ external accountants and the Companies’ accounts staff. I will refer to them as the Bernsteen and Newmore RATA.
The Bernsteen RATA showed total assets of $1,350,004 with an estimated realisable value $1,088,285 as at 5 December 2001. At that time, Bernsteen’s inventory was estimated to be $766,638. Of that, inventory goods to the value of $257,179 were realised during the period of trading conducted by Mr Macks as administrator. Plant and equipment was valued at $469,529 by Mr Viscariello with an estimated realisable value $200,000. Mr Macks obtained $25,094 for that plant in the course of the liquidation. The current ratio for Bernsteen, being the ratio of its current assets to current liabilities, was 0.97 in 2000, down from 1.02 in the year 1999. The quick ratio, which is the ratio of the current cash or cash equivalent assets to current liabilities was 0.03 for the year 2000, down from 0.07 for the year 1999.
The Bernsteen RATA estimated employee claims in the sum of $154,000 but they were in fact closer to $233,000. The Bernsteen RATA listed unsecured creditors in the sum of $2,254,806, but the claims of unsecured creditors in the liquidation amounted to $2,985,950. Taxation liabilities were estimated by Bernsteen’s accounts staff to be $234,691 but were in fact in the order of $482,922 in the liquidation. The Bernsteen RATA mentioned secured creditors in the sum of $597,014 but in the liquidation the total claimed was $861,660. As at the date of Mr Macks’ appointment as liquidator, of the total trading liability of $2,794,000, $317,921.33 was current and $1,093,337.82 was overdue by more than 180 days.
As of 5 December 2001 Bernsteen’s net liabilities were recorded as $1.9m. The claims of creditors amounted to $2.8m. Forty per cent of that debt was six months or more overdue and a further 20 per cent of the debt was between four and six months overdue.
Newmore’s typical monthly wages bill in 2001 was $75,400 with PAYG deductions of $13,000 and superannuation payments of an additional $5,700. Newmore fell behind in its remittances of taxation deductions and superannuation payments to the Federal Commissioner of Taxation. At the time it entered into administration, the outstanding remittances were $103,000. Newmore was not separately assessed for GST. Total liabilities to the Commissioner were in the order of $129,000.
Newmore’s monthly rent bill was $44,000. At the time of Mr Macks’ appointment arrears of rent were about $120,000. On 1 November 2001, the landlord of Newmore’s store in the Westfield Shopping Centre, Arndale, distrained goods for unpaid rent of $13,784.49. On 2 November the landlord of Newmore’s store at Tea Tree Plaza distrained goods on account of unpaid rent of $15,064.
In the year ending 30 June 1999, after deduction for the costs of goods sold from sales of $4,213,761, Newmore’s total revenue was $1,925,794. Employment costs were $883,000 and costs of premises $480,000. Together with other costs, including depreciation, the total operating expenses were $1,746,923 resulting in a small profit of $178,871. In the year ending 30 June 2000, total revenue was $2,170,090 (from sales of $4,861,003 after deducting costs of goods sold of $2,722,166). Total operating costs were $2,403,896 of which employment costs were $1,040,040. Costs of premises were $648,790, and depreciation $112,834. The net loss before income tax was $223,806.
A trial a balance for the year ending June 2001 showed total income of $1,807,275 derived largely from sales in the amount of $3,784,652 with costs of goods sold at $1,993,801. Employment costs were $1,142,024 and premises costs $670,178. Total operating costs (including a significant advertising expense) were $2,579,224, resulting in a net loss before income tax of $771,949. The loss was due in large part to a drop in sales in the order of 20 per cent.
A trial balance for the five months to the end of November 2001 showed sales of $890,661 with the costs of goods sold at $462,252. Together with some other income the total revenue for that period was $430,856. Employment costs were $372,732 and premises costs $223,790. Advertising costs were much reduced from the preceding financial year. Total operating expenses were $751,855. The net loss was $320,999. Newmore’s net liabilities as at 5 December 2001 were $1.1m. At that date the claims of trade creditors amounted to $1.4m, about a third of which was six months or more overdue.
Mr Macks estimated current assets for the year ending 30 June 2000 based on the balance sheets prepared by the company and the Newmore RATA. The value of the inventory of goods was estimated to be $1,338,941 as at 30 June 2000. Receivables were $187,139. The value of non-current assets including property, plant and equipment was estimated to be $400,000 and intangible assets to be $3,321. Current liabilities, included a bank overdraft of $169,965 and trade creditors of $1,073,598. Other creditors including accruals and unsecured loans were put at $103,560. Together with other miscellaneous liabilities, the total current liabilities were $1,473,774. The current ratio for Newmore was 1.04, a reduction from 1.44 in 1999. The quick ratio was 0.15, a reduction from 0.65 in 1999.
The Newmore RATA indicated sundry debtors of $181,557 and an inventory of $318,846. Plant and equipment was valued at $263,329. Total assets were shown to be $795,915 at book value. The RATA estimated a full realisable value for the assets, other than for plant and equipment, of $130,000. In fact, they proved to have no value in the course of the liquidation. Newmore’s inventory was run down during the administration. The balance of the stock remaining after that period of trading was sold by the liquidator for $130,335.
The Newmore RATA listed employee claims at $58,310 but they actually amounted to $93,051 in the liquidation. Secured creditors were listed at $144,858 and unsecured creditors at $1,540,031. There was a shortfall on the face of the Newmore RATA of assets over liabilities in the sum of $1,108,990.
In the winding up of Newmore, trade creditors in the sum of $1,444,156 were admitted. Of that amount, $246,983 was current and $472,338 had been outstanding for 180 days or more.
As I earlier recorded, ARL commenced to provide goods to the Companies on consignment from about October/November 2001 because the Companies were trading outside of the ordinary terms of credit allowed by ARL.
A rescuer is found
During 2001, if not before, Mr Viscariello became concerned about the Companies’ solvency. As a result, Mr Viscariello entered into discussions with Mr Bart, a businessman and entrepreneur who operated from offices situated in Sydney, New South Wales. Mr Viscariello testified that he first met Mr Bart during the 1995 company administrations. At that time, Mr Bart had expressed interest in purchasing the business of the Companies. Mr Viscariello testified that Mr Bart had told him that he had a business importing manchester and that:
his family had been in the manchester, or as they call it, the rag trade, for many years and he was interested in acquiring some sort of interest in the business so he could get distribution for his products.
No arrangements were made with Mr Bart with respect to the 1995 administrations.
Late in 2001, Mr Viscariello contacted Mr Macks to discuss making arrangements to address the financial difficulties faced by the Companies.   Mr Viscariello, accompanied by Mr Bart, met with Mr Macks on 27 November 2001. I will refer to that meeting in more detail below but for now it suffices to say that Mr Viscariello and Mr Bart outlined a proposed deed of company arrangement to Mr Macks. That outline was reduced to writing in a document entitled “Heads of Agreement” which was sent to Mr Macks later on that day. I will refer to the proposal and its subsequent refinements as the proposed Bart DOCA. I set out the document sent to Mr Macks below:
Proposal for Heads of Agreement
JV means Mr John Viscariello the sole director and secretary of Bernsteen & Newmore Diveni means a company owned and controlled by Fred Bart
1.Diveni to payout Commonwealth Bank Facilities provided for Newmore Pty Ltd which includes a $50,000 overdraft facility and contingent liabilities in the form of Bank Guarantee’s for store rents.
à    Diveni to acquire the Banks security over Newmore.
2.JV and his family trust to sell to FB his shares in Bernsteen & Newmore for a dollar.
3.JV’s family trust Palm Hills to sell to FB the Bedroom Mazurka and Inside Home trade marks for a dollar.
4.JV to sell to FB his security over Newmore for a dollar.
5.JV to sell any loan monies he has in Bernsteen & Newmore for a dollar.
6.Diveni agrees to purchase from ARL its security over Bernsteen & Newmore for the consideration of $400,000 subject to the following:
à    An assignment of ARL’s entire debt and charge over Bernsteen & Newmore.
à    That the net stock (net stock meaning all stock free of any retention of title, distraint of rent or any other unspecified claims or encumbrances) being not less than $1,050,000. In the event that the next stock figure is less than $1,050,000 a pro rata consideration shall be paid, provided however that the net stock figure shall not fall below $850,000.00.
7.Employee liabilities for Bernsteen & Newmore shall not exceed:
à    For Bernsteen $227,000
à    For Newmore $112,000 which sum excludes entitle due to the director.
Signed …………….     Dated 27 Nov 2001 For Bernsteen & Newmore
Signed …………….     Dated 27 Nov 2001 For Diveni.
Mr Viscariello explained that the term concerning the minimum stock levels arose out of Mr Bart’s demand that the stores have enough stock to continue to trade successfully. Mr Viscariello also testified that Mr Bart wanted him to continue to manage the Companies under the proposed Bart DOCA. He explained that the purpose of the proposed Bart DOCA was to effect a quick sale of the business to Bart. I accept that that was his and Mr Bart’s joint intention.
A brief chronology of the salient events in the administration of the Companies and leading to their winding up is as follows:
·5/12/2001 – Mr Viscariello resolved as the sole director of Bernsteen and Newmore respectively that each of the Companies was insolvent or likely to become insolvent.
·5/12/2001 – Mr Viscariello appointed Mr Macks as administrator of both Companies.
·11/12/2001 – The first meeting of the creditors of each of the Companies.
·12/12/2001 – The first meeting of the Committee of Creditors for each Company.
·17/12/2001 – The second meeting of the Committees of Creditors of the Companies.
·19/12/2001 – Mr Macks reported to the creditors of Bernsteen and Newmore pursuant to s 439A of the Corporations Act. Mr Macks reported that Mr Viscariello had “very little defence” to an action for insolvent trading for the period from at least March 2001.
·21/12/2001 – At the second meeting of creditors, the creditors of Bernsteen and Newmore voted to wind the Companies up.
A summary of Mr Viscariello’s claims
Paragraphs [22], [23], [28], [29], [40] and [79] of the Statement of Claim allege that Mr Macks engaged in misleading or deceptive conduct in the course of trade or commerce in connection with his appointment as the administrator of the Companies contrary to what was then s 56 of the Fair Trading Act, or under the equivalent provisions of the Trade Practices Act.
Mr Viscariello alleges that at a meeting on 27 November 2001 Mr Macks told him and Mr Bart that if he were appointed as voluntary administrator of Bernsteen and Newmore he would recommend to the Companies’ creditors that they accept a deed of company arrangement incorporating the terms of heads of agreement reached between Mr Viscariello and Mr Bart and would take the necessary legal steps to effectuate the proposed Bart DOCA before Christmas. Mr Viscariello pleads that Mr Macks also agreed not to charge professional fees for work done prior to his formal appointment as voluntary administrator and that he would write off any outstanding debts owed by the Companies to him in relation to the earlier 1995 administrations. Mr Viscariello contends that those representations were false and, insofar as they related to future matters, that Mr Macks did not have reasonable grounds to make them.
Mr Viscariello also alleges that the following misleading and deceptive conduct of Mr Macks was causative of the Companies’ liquidation:
·The delivery of the proposed Bart DOCA to ARL on the pretence that all of its terms were proposed by Mr Bart.
·Misleading the Court, whether by instruction to his lawyers or through his lawyers as agent, to obtain a preponement of the second meeting of creditors without informing the Court of material changes to the circumstances deposed to in an affidavit filed in support of the application.
·Misleading the creditors of the Companies, in the course of the second meeting of creditors in which they resolved to wind the Companies up, by saying that Mr Bart had withdrawn his offer, or that there was no proposal to put to the meeting, when the truth was that ARL was denying support because the terms of the offer drafted by Mr Macks had the effect of denuding the Bart DOCA of any benefit to ARL in order to protect Mr Macks’ financial position.
·Misleading the second meeting of creditors by saying that there was no option but to put the Companies into liquidation when it would have been reasonable to adjourn the meeting.
·Misleading the second meeting of creditors by failing to inform the meeting of the reasons for ARL refusing to accept the offer.
Finally, Mr Viscariello alleges that Mr Macks’ negligent conduct of the administration led to the liquidation of the Companies. That conduct was:
·failing to properly negotiate the proposed Bart DOCA;
·failing to adequately advertise or otherwise procure other purchase of the business;
·failing to continue to trade after the rejection of the Bart DOCA.
Before turning to the evidence bearing on those claims, it is convenient to address the question of law whether an administrator acts in trade or commerce in discharging his or her duties. To that end it is first necessary to consider the statutory scheme for the voluntary administration of corporations.
Voluntary administration – the statutory scheme
I will refer to the provisions of the Corporations Act extant between 5 and 21 December 2001 (incorporating amendments up to Act No. 119 of 2001).
Part 5.3A of the Corporations Act establishes a regime for the voluntary administration of a corporation. Section 435A of the Corporations Act states that the object of Part 5.3A is to maximise the chances of the company, or its business, continuing in existence, and if that object is not possible to provide a better return to the company’s creditors and members than would result from an immediate winding up of the company.
Part 5.3A is calculated to provide an expeditious and inexpensive response to corporate insolvency. The office charged with responsibility to achieve those ends is that of a voluntary administrator. The independence, impartiality, skill and diligence of the voluntary administrator is the “very marrow” of Part 5.3A.[1] A company may appoint an administrator if its board resolves that in its opinion the company “is insolvent, or is likely to become insolvent at some future time” and that an administrator should be appointed.[2] A voluntary administrator must be a registered liquidator.[3] Section 1282 of the Corporations Act provides a regulatory regime for the registration of liquidators and in particular prescribes minimum tertiary qualifications, a level of experience and competence and that the person is “a fit and proper person to be registered as a liquidator”.
[1] Brovis v Lenleys Pty Ltd & Wily (2003) 45 ACSR 612 at [133].
[2] Section 436A Corporations Act.
[3] Section 448B Corporations Act.
It is an offence for a person to give or promise any valuable consideration to a member or creditor of a company in order to obtain an appointment as a voluntary administrator.[4] The voluntary administrator must prefer the interests of the creditors and members of the corporation over the interests of the appointor and must not give a contrary appearance.[5] A creditor of the company for an amount exceeding $5,000 commits an offence by taking an appointment as the voluntary administrator unless he or she first obtains the permission of the Court[6] but the appointment itself is not thereby invalidated.[7] Leave may be given nunc pro tunc.[8]
[4] Section 595(1)(b) and s 1311 and schedule 3 item 143 Corporations Act.
[5] Smarter Way (Aust) Pty Ltd v D’Aloia (2000) 35 ACSR 595 at 601.
[6] Section 448C, s 1311, schedule 3 item 126 Corporations Act.
[7] Cusson v Signature Resorts Pty Ltd (2000) 18 ACLC 341.
[8] Section 448C(1) Corporations Act.
The voluntary administrator must convene a first meeting of creditors within five days of his or her appointment.[9] The creditors may remove the voluntary administrator at the first meeting and appoint another but the power to do so does not subsist beyond that first meeting[10] unless with the approval of the court given pursuant to s 449B of the Corporations Act.
[9] Section 436E(1) and (2) Corporations Act.
[10] Section 436E Corporations Act.
At the first meeting of creditors the creditors must determine whether to appoint a committee and its members.[11] The function of the committee is to consult with the voluntary administrator about the course of the administration and to receive and consider his or her reports.[12] The committee does not have a power of direction.[13] The voluntary administrator must convene a second meeting of creditors within 28 days from the beginning of the day of the administration.[14] That period may be extended pursuant to s 439A(6) of the Corporations Act. The power to extend is exercisable only on an application made during the convening period.[15] The discretion to grant an extension of time in which to hold the second meeting of creditors is to be exercised in light of the objects of the Corporations Act.[16] The meeting convened in that period must be held within five business days after the end of the convening period.[17] In the case of Bernsteen and Newmore the period of voluntary administration commenced on 5 December 2001. Accordingly, the first meeting of creditors had to be held by 10 December 2001 and the second meeting of creditors had to be convened between 2 and 6 January 2002.[18]
[11] Section 436(1) Corporations Act.
[12] Section 436F Corporations Act.
[13] Re Eisa Ltd; Application of Love (2000) 34 ACSR 394.
[14] Section 439A(5)(a) Corporations Act.
[15] Section 439A(6) Corporations Act.
[16] Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1999) 30 ACSR 38.
[17] Section 439A(2) Corporations Act.
[18] Section 439A Corporations Act.

A voluntary administrator cannot hold the second meeting of creditors before the end of the convening period[19] unless the court makes an order for preponement of the meeting pursuant to s 447A of the Corporations Act.[20] Section 447A gives the court a general power to modify the application of part 5.3A in relation to a particular company:
[19] Supervac Australia Pty Ltd v Australasian Memory Pty Ltd (unreported) FCA 6 June 2007: Whitlam J.
[20] Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270.
General power to make orders
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2)For example, if the Court is satisfied that the administration of a company should end:
(a)     because the company is solvent; or
(b)     because provisions of this Part are being abused; or
(c)     for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3)     An order may be made subject to conditions.
(4)     An order may be made on the application of:
(a)     the company; or
(b)     a creditor of the company; or
(c)     in the case of a company under administration – the administrator of the company; or
(d)     in the case of a company that has executed a deed of company arrangement – the deed’s administrator; or
(e)     ASIC; or
(f)     any other interested person.
In Australian Memory Pty Ltd v Brien, the High Court explained:[21]
[21] Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 at [17]-[18], [24].
It is important to notice that the orders that may be made under s 447A(1) are described as orders about how Pt 5.3A is to operate "in relation to a particular company". The power is not cast in terms of a power to make orders to cure defects or to remedy the consequences of some departure from the scheme set out in the other provisions of Pt 5.3A. Its operation is not confined to such cases. Nor is there anything on the face of s 447A(1) that suggests that it should be read down. In particular, the words of the provision are wide enough to confer power to make orders which will have effect in the future but which are occasioned by something that has been done (or not done) under the other provisions of Pt 5.3A before application is made under s 447A(1). As was said in the judgment of the Court in Owners of "Shin Kobe Maru" v Empire Shipping Co Inc:
It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.
Cogent reasons must be advanced, then, if the power given by the general words of s 447A(1) is to be read down.
Section 447A(1) speaks of orders about how "this Part" is to operate. The reference to "this Part" cannot be read as referring only to the Part as a whole. That is, it cannot be read as referring, in some global way, to the total operation or effect of the Part. In its context, the reference to "this Part" is to be understood as a reference to each of the provisions in it, for it is the provisions of the Part which give it the operation which an order under s 447A(1) may affect. And although the examples given in s 447A(2) cannot be taken as exhaustive of the scope, or as controlling the meaning, of s 447A(1), it is clear from those examples that they assume that orders under s 447A(1) may alter the operation of other provisions of the Part. That is, the orders contemplated in the examples go beyond a curial determination of what is the effect of existing provisions of the Part on a particular company in the circumstances that may be established in a proceeding; the orders contemplated are orders that alter how the Part is to operate in relation to a particular company, not how the Part does operate in relation to that company.
…
Whatever may be said of the relationship between s 1322 and the provisions of Pt 5.3A generally, or of the relationship between s 1322 and s 447A in particular, s 447A is not properly described as a general power standing apart from the scheme found in Pt 5.3A. Section 447A is an integral part of the legislative scheme provided for by Pt 5.3A. In its terms, it enables the making of orders which alter the way in which "this Part is to operate in relation to a particular company". That is, it permits the making of orders which would alter how s 439A is to apply. It is not right to seek to characterise s 447A as some general source of power to which resort cannot be had because to do so would "circumvent" the statutory limitations upon the exercise of the power that is given by s 439A(6) to extend the convening period. So to characterise s 447A is to give to all of the other provisions of Pt 5.3A a fixed and unchanging operation in relation to all Companies. Yet the evident legislative intention of s 447A is to permit alterations to the way in which Pt 5.3A is to operate.
The second meeting of creditors is convened by written notice given to as many of the company’s creditors as is reasonably practicable[22] and causing a notice of the meeting to be published in a national newspaper or in a daily newspaper that circulates generally in each State or Territory in which the company operates at least five business days before the meeting.[23]
[22] Section 439A(3)(a) Corporations Act.
[23] Section 439A(3) Corporations Act.
The notice given to the creditors must be accompanied by a report prepared in accordance with s 439A (a “s 439A report”) which provides:
(4)The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:
(a)     a report by the administrator about the company's business, property, affairs and financial circumstances; and
(b)     a statement setting out the administrator's opinion about each of the following matters:
(i)whether it would be in the creditors' interests for the company to execute a deed of company arrangement;
(ii)whether it would be in the creditors' interests for the administration to end;
(iii)whether it would be in the creditors' interests for the company to be wound up;
and his or her reasons for those opinions; and
(c)     if a deed of company arrangement is proposed—a statement setting out details of the proposed deed.
A s 439A report can only be sent when the second meeting of creditors is convened.[24] Notice may be given by prepaid post or fax.[25] The notice is given when it is put in the post.[26] In the ordinary course a voluntary administration will result either in the execution of a DOCA or in a resolution by the creditors that the administration should end or, alternatively, that the company be wound up.[27]
[24] Re Vouras (2003) 47 ACSR 155 at 174, [104]; [2003] NSWSC 702.
[25] Regulation 5.6.12 (2)(b)(c) Corporations Regulations 2001.
[26] Re Vouras (2003) 47 ACSR 155 at [46].
[27] Section 435C Corporations Act.
The second meeting of creditors may be adjourned by the chairperson with the consent of the meeting and it must be adjourned if the meeting so directs.[28] A meeting must not be adjourned for more than 60 days. A voluntary administrator is an officer of the company[29] and as such owes the company statutory duties.[30] The voluntary administrator acts as the agent of the company.[31] The powers of the voluntary administrator are set out in s 437A of the Corporations Act which provides:
[28] Regulation 5.6.18(1)(a)(b) Corporations Regulations.
[29] Section 9 Corporations Act.
[30] Sections 180, 181, 182 and 184 Corporations Act.
[31] Section 437B Corporations Act.
Role of administrator
(1)     While a company is under administration, the administrator:
(a)     has control of the company's business, property and affairs; and
(b)     may carry on that business and manage that property and those affairs; and
(c)     may terminate or dispose of all or part of that business, and may dispose of any of that property; and
(d)     may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.
(2)     Nothing in subsection (1) limits the generality of anything else in it.
Section 438A of the Corporations Act obliges the administrator to investigate the company’s affairs and form an opinion about whether the interests of the company’s creditors are best served by executing a deed of company arrangement, ending the administration, or winding up the company. The voluntary administrator must form that opinion as soon as practicable after the administration of the company begins. To that end s 438B requires the directors to fully cooperate with the administrator in providing the company’s records.
It is the creditors of the company in the meeting which determine the ultimate outcome of a voluntary administration but it is the duty of the voluntary administrator to provide the information and recommendations upon which they can make an informed decision.[32]
[32] Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1999) 30 ACSR 38 at 44; McVeigh v Linen House Pty Ltd [2000] 1 VR 31 at 45-46.
The short time constraints imposed by the Corporations Act render the voluntary administrator’s task a delicate one.[33]
[33] Deputy Commission of Taxation v Portinex (2000) 156 FLR 453 at [126]-[128].
In the essay “Key Developments in Corporate Law and Trusts Law” published in honour of Professor Harold Ford[34] the policy balance is described as follows:
The courts have endeavoured to balance the legislative intention that the investigation is to be a swift and practical one[35] against the need for the administrator to present reliable information to creditors on the key issues.[36] The leading judgment is by Cohen J in Hagenvale Pty Ltd v Depela Pty Ltd. His Honour said:[37]
The intention was, as has been indicated in several cases, to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator’s actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Part 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly.
The balance between speed and accuracy is obviously a delicate one.[38] The administrator must not accept the company’s information uncritically without exercising judgment, and may be required to make further investigations where the available information is clearly inadequate on a critical issue, but frequently it is enough for the administrator simply to make a preliminary assessment and refer the matter to the creditors for a decision. Compare, for the application of these propositions, the facts and findings in the Portinex and Cresvale Far East cases which are cited in this chapter.
[34] Edited by Ian Ramsay.
[35] Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498 at 510.
[36] McVeigh v Linen House [2000] 1 VR 31; Deputy Commissioner of Taxation v Portinex (2000) 156 FLR 453 at 481; H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (looseleaf), para [26,190].
[37] (1995) 17 ACSR 139 at 145-6.
[38] Deputy Commissioner of Taxation v Portinex (2000) 156 FLR 453.
A voluntary administrator may be a fiduciary in his or her relationship to the company, its contributories and creditors.[39] Irrespective of the nature of the relationship under the general law the statutory duties must prevail. The relationship of a liquidator as an agent of the company puts him or her in a position of trust with respect to the property of the company but he or she is not a trustee stricto sensu.[40] The voluntary administrator is in a similar position.
[39] Hill v David Hill Electrical Discounts Pty Ltd (2001) 37 ACSR 617 at 621; Wood v Laser Holdings Ltd (1996) 19 ACSR 245 at 266.
[40] Commission for Corporate Affairs v Harvey [1980] VR 669 at 691.
However, as a general proposition, the administrator’s duty is owed to the company in administration. The duty may extend to the creditors generally because of the company’s insolvency but it is doubtful that the duty is owed to individual creditors.
A voluntary administrator who breaches his or her fiduciary or statutory duties can be removed pursuant to s 449B of the Corporations Act if it is in the interests of the creditors to do so. The voluntary administrator can be removed in circumstances in which there is a reasonable apprehension of a lack of independence.[41] The circumstance that the voluntary administrator has acted in a professional capacity for the company is not sufficient to create an actual bias or perception of bias.[42] Of course a conflict will arise if the voluntary administrator would in the ordinary course be required to consider, and if necessary, take some action with respect to work or advice that he or she has given to the company.[43]
[41] Central Springworks Australia Pty Ltd v McClellan (2000) 34 ACSR 169.
[42] Commonwealth v Irving (1996) 65 FCR 291 at 296.
[43] Citric Systems Inc v Telesystems Learning Pty Ltd(In Liq) (1998) 28 ACSR 529.
A voluntary administrator is liable for all debts incurred in the administration, including rent after the first seven days[44] but the voluntary administrator is entitled to an indemnity from the property of the company for debts incurred and for his or her remuneration.[45] The voluntary administrator’s indemnity takes priority over all the company’s unsecured debts and debts secured by a floating charge.[46]
[44] Section 443A Corporations Act.
[45] Section 443B Corporations Act.
[46] Section 443E(1) Corporations Act.
It is by reference to the above statutory context that the questions as to the nature of an administrator’s conduct and the duties he or she owes must be determined.
Does an administrator engage in trade or commerce?
I first deal with the question of whether, in discharging his or her statutory responsibilities pursuant to Part 5.3A, an administrator acts in trade or commerce for the purpose of s 56 of the Fair Trading Act 1987 (SA).
At the relevant time s 56(1) of the Fair Trading Act provided as follows:
56 Misleading or Deceptive Conduct
(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.
The term “trade or commerce” is not defined by the Act.
The authorities dealing with the conduct of directors provide some guidance on this question.
In a joint judgment in Concrete Constructions (NSW) Pty Ltd v Nelson,[47] Mason, Deane, Dawson and Gaudron JJ considered that, having regard to its location in Part V of the Trade Practices Act entitled “Consumer Protection”, it was “plain that s 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business”. Their Honours observed:[48]
Put differently, the section was not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities.
[47] (1990) 169 CLR 594.
[48] Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at [8].
Their Honours then said:[49]
What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. Such conduct includes, of course, promotional activities in relation to, or for the purposes of, the supply of goods or services to actual or potential consumers, be they identified persons or merely an unidentifiable section of the public. In some areas, the dividing line between what is and what is not conduct ‘in trade or commerce’ may be less clear and may require the identification of what imports a trading or commercial character to an activity which is not, without more, of that character.
[49] Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at [8].
In Yates v Whitlam[50] Windeyer J held that directors did not engage in trade or commerce by publishing advertisements seeking support for their re-election. On the other hand in NRMA Ltd v Yates[51] Santow J held that a director who published an advertisement complaining of “great waste and mismanagement” by the board of a company and promoting a campaign for the election of like-minded directors had engaged in trade or commerce. Santow J so found because the purpose of their conduct was to avoid further waste and mismanagement and thereby to influence the future trade or commerce of the company by changing its corporate governance.
[50] [1999] NSWSC 976.
[51] [1999] NSWSC 859.
In Cleary v Australian Cooperative Foods (No 2)[52] Austin J rationalised the decisions in Whitlam and NRMA Ltd by characterising the conduct in the former case as a bland advertisement for election without reference to the future commercial conduct of the board whilst the conduct in the latter case sought to influence the NRMA’s future commercial conduct. With respect, I find it difficult to see how conduct of the same legal, and business, kind, the election by shareholders of directors, can fall within or outside the scope of trade or commerce depending on the policy platform of the candidates. In Cleary Austin J held that a director’s conduct in distributing a proposal for a corporate merger which would lead to the listing of the corporation was conduct in trade or commerce.
[52] [1999] NSWC 991.
It seems to me that there is a distinction between conduct by which one person seeks to influence the commercial conduct of another and the commercial conduct itself. A person who by commentary, advice or criticism seeks to influence commercial conduct does not necessarily engage in the trade or commerce which is the object of the commentary. The election of directors is a matter of the internal governance of corporations. The election itself is not an aspect of, or even incidental to, trade or commerce in a market even though the election of one candidate over another is always likely to affect how the corporation itself engages in trade or commerce. On the other hand, steps taken to secure a corporate merger or the public listing of a company may well be conduct in trade or commerce in an equities market.
The distinction between commercial conduct and an act or series of acts antecedent to that conduct was highlighted in New Cap Reinsurance Corporation Ltd v Daya.[53] In that case, the plaintiffs, a company and its liquidator, sought leave to file a cross claim against the defendants, the former directors of the company, alleging amongst other things that one or more of the directors had made misleading and deceptive representations at a board meeting in contravention of the then s 52 of the Trade Practices Act. In holding that that part of the cross claim disclosed no viable cause of action on the ground that conduct complained of was not in trade or commerce, Barrett J observed:[54]
It must be inferred that what each of them said and did on that occasion was said and done by him as an officer of NCRA for the purpose of promoting discussion of, and facilitating a decision on, the proposal that NCRA commit itself to the US$30 million debt transaction. The discussion and decision were antecedent to NCRA’s actually entering into the relevant contract with the debt provider. The making of that contract would readily be characterised as an act in trade or commerce. It entailed dealings of a financial kind between NCRA and another corporation. The antecedent corporate decision of NCRA, however, stands in a different light, as do all the steps making up the process by which the matter progressed from idea to proposal to resolution within the board of directors of NCRA, including steps entailing expressions of opinion and the communication of advice or information or recommendations among members of NCRA’s board and NCRA’s assisting employees. The decision-making process and the steps within in it were internal to NCRA and did not themselves take place “in” trade or commerce. They were anterior to and preparatory for an act or series of acts “in” trade or commerce.
[53] [2008] NSWSC 64.
[54] Cap Reinsurance Corporation Ltd v Daya [2008] NSWSC 64 at [50]. See also Rozenblit v Vainer [2014] VCS 510 at [63].

The relationship between a voluntary administrator, the company, its contributories and creditors is purely a statutory construct. There is no room for commercial exchange and compromise on the part of a voluntary administrator who is bound by his or her statutory duties, and such further obligations as may be imposed by the general law.
I hold that a voluntary administrator does not engage in trade or commerce in discharging those statutory duties.[55] The relationship between the voluntary administrator after his or her appointment on the one hand, and the company, its contributories and creditors on the other, is not one in which there is any commercial exchange or trade. Of course the voluntary administrator may in the course of exercising his or her statutory duties dispose of the assets of the company in the course of trade or commerce. The prosecution, and compromise, of a chose in action of the company under administration may also involve conduct in trade or commerce. However, the conduct of an administrator in exercising his or her statutory functions, powers and duties relating to the creditors, contributories and directors of the company under Part 5.3A does not constitute conduct in trade or commerce.
[55] Cf: Baxter v Hamilton [2005] TASSC 64 at [64]-[67].
On the other hand, a registered liquidator who, by reason of that office, may be appointed as a voluntary administrator of a particular company, is in the business of providing services of the kind provided by liquidators and administrators to insolvent Companies. For that reason, insofar as a registered liquidator, who makes himself or herself available to act as voluntary administrator and or liquidator, competes for that work he or she engages in trade or commerce. If a registered liquidator were to make a false and misleading statement in the promotion of his or her services, or in the negotiation of the terms on which he or she will consent to be appointed, he or she would do so in trade or commerce.
The Administrator’s duties
I next deal with the question of the duties of the administrator to individual creditors or to the directors and shareholders of the company under his or her administration.
The role of an administrator is to execute the statutory scheme for the administration of corporations in accordance with part 5.3A of the Corporations Act . To that end, whilst the company is under administration the administrator has control of the company’s business, property and affairs. The administrator is entitled to the assistance of the directors of the company and to the company’s books.[56] The administrator is in turn under a statutory duty to provide reports and accounts with respect to his or her administration. Importantly, the administrator is charged with the responsibility of investigating the company’s business affairs and financial circumstances in order to decide whether the company should enter into a deed of company arrangement, the administration should be terminated or the company would up. The administrator is obliged to convene a meeting of creditors which may be adjourned from time to time and to report to that meeting on the opinion the administrator has formed.[57] It is then for the creditors of the company to ultimately decide the course to be taken.[58]
[56] Sections 438B and 438C Corporations Act.
[57] Section 439A Corporations Act.
[58] Section 439C Corporations Act.
The recommendation as to where the company’s interests best lie requires a sophisticated and complex business judgment to be made. The future of a financially distressed company depends on many varied contingencies. It is not susceptible to objective, and scientifically certain, analysis. The decisions are necessarily based to a material extent on an intuitive assessment which must be made quickly.
Moreover, different creditors may have different views about where their respective interests lie. There may be significant differences between the views of secured creditors and unsecured creditors. As between unsecured creditors the interests of a supplier of goods may differ from those of an employee. The statutory requirement that the voluntary administrator form a single view as to the best interests of the company necessarily requires that he or she weigh the competing interests and identify a course which optimises the overall outcome.
The voluntary administrator is subject to statutory duties to exercise care and diligence,[59] to act in good faith[60] and to not improperly use his or her position[61] in the course of his or her administration. A breach of those statutory provisions can result in a compensatory order in favour of the corporation but not individual creditors.[62]
[59] Section 180 Corporations Act.
[60] Section 181 Corporations Act.
[61] Section 182 Corporations Act.
[62] Section 1317H Corporations Act.
The Corporations Act provides a regime for the supervision of administrators. It provides statutory remedies for the failure of a voluntary administrator to perform his or her duties. The administrator is subject to the supervision of this Court[63] and in particular may be removed on the application of ASIC or a creditor.[64]
[63] Section 447E Corporations Act.
[64] Section 449B Corporations Act.
In Mills v Sheahan[65] the trial Judge held that a liquidator was not subject to a duty of care to third persons and dismissed a Statement of Claim which was premised on the existence of the duty. On appeal the majority, Sulan and Layton JJ set aside the Judge’s order on the basis that the existence of the duty was arguable. Their Honours left open the question of whether a liquidator owed a duty of care to a guarantor of a company debt to take reasonable steps to sell company assets at their proper value. Debelle J went further and held that the liquidator was, in law, under such a duty.
[65] (2007) 99 SASC 357: see also Perpetual Nominees Ltd v McGoldrick [2014] VSC 152.
Debelle J considered the principles relevant to the existence of the duty as follows:[66]
[66] Mills v Sheahan (2007) 99 SASR 357 at [23]-[32].
Vulnerability
The vulnerability of the plaintiff is an important requirement … The plaintiffs were not able to protect themselves from the economic consequences of the sale by Sheahan of those assets. Their liability to indemnify was entirely dependent upon what Sheahan obtained for those assets. They were vulnerable in the sense that they had no ability to ensure that Sheahan would take care to secure the best price reasonably obtainable in all the circumstances.
Proximity
The doctrine of proximity no longer governs the law of negligence in this country … Nevertheless, it is necessary to determine whether there is a sufficiently close relationship to give rise to a duty of care for breach of which a pure economic loss might be recovered …
Apart from the fact that Sheahan has, for the purposes of this application, admitted that the loss was reasonably foreseeable, there was a real proximity between Sheahan and the plaintiffs since Sheahan knew that the amount recovered from the sale of the assets would directly affect the amount payable by the plaintiffs. To the extent that proximity is relevant, there was a sufficient proximity or a sufficiently close relationship to entitle the plaintiffs to recover their reasonably foreseeable economic loss, that is to say, to establish a duty of care to ensure that the defendant did not cause economic loss to the plaintiff.
Indeterminacy of Liability
A factor which may militate against imposing a duty to take reasonable care to protect another from economic loss is that the law is concerned to avoid what Chief Judge Cardozo called the imposition of liability “in an indeterminate amount for an indeterminate time to an indeterminate class” …
It is not the size or number of claims that is decisive in determining whether potential liability is so indeterminate that no duty of care is owed. Liability is indeterminate only when it cannot be realistically calculated. If both the likely number of claims and the nature of them can be reasonably calculated, it cannot be said that imposing a duty on the defendant will render that person liable “in an indeterminate amount for an indeterminate time to an indeterminate class”.
In the present case there is no prospect of an indeterminate liability. The liability is confined to the plaintiffs as the persons liable to indemnify RFPL. It is to be contrasted with the wider liability which a liquidator has in any event to creditors and shareholders of a company, especially in the case of a large publicly listed corporation. The potential liability is limited to the amount of the shortfall to the three plaintiffs in circumstances where Sheahan was fully aware of their liability to indemnify.
Individual Autonomy
In a competitive world where one person’s economic gain is commonly another’s loss, a duty to take reasonable care to avoid causing mere economic loss to another, as distinct from physical injury to another’s personal property, may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage … McHugh J has described this as individual autonomy …
The question of individual autonomy is not relevant in this case because a liquidator or a trustee in bankruptcy, when exercising the power to realise assets, is subject in each case to a duty to creditors to exercise reasonable care and diligence. The liquidator or trustee in bankruptcy has clear obligations when realising assets and those obligations are not inconsistent with a duty to a person liable to indemnify. This is an instance where there is a coincidence of the interests of creditors and the interests of the person liable to indemnify: Hill v Van Erp at 167 per Brennan CJ and at 187 per Dawson J. Expressed another way, the duties are entirely compatible.
Inconsistent Duties
Another relevant factor is whether the imposition of a duty of care would be compatible with other duties which the defendant owed: Sullivan v Moody at [55]. As already noted, the duty to take care to secure a fair price is entirely consistent with the duties of a liquidator and of a trustee in bankruptcy when realising assets. The duties are entirely compatible. The duty which the plaintiffs seek to enforce is a duty to secure the best price reasonably obtainable in the circumstances for the assets which have been sold. If the liquidator or trustee in bankruptcy has discharged that duty, there is no impairment to the rights of creditors.
A related issue to the last is whether to impose the duty for which the plaintiffs contend would be inconsistent with existing principles of law or equity or with the scheme of the Corporations Act or Bankruptcy Act: Sullivan v Moody at [30]; Tame v New South Wales [2002] HCA 35; (2002) 211 CLR 317 at [28]; Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54; (2002) 211 CLR 540 at [78]. For the reasons just expressed, it is not inconsistent with the duties owed by a liquidator to creditors and shareholders or by a trustee in bankruptcy to creditors and the bankrupt. There is a coincidence of the interests of the creditors and of the interests of the person liable to indemnify: Hill v Van Erp (supra). It does not cut across any aspect of the scheme of either the Corporations Act or the Bankruptcy Act. Expressed another way, the duties are entirely compatible.
Sulan J, with whom Layton J agreed, expressed the following view regarding the conflict of duties:[67]
[67] Mills v Sheahan (2007) 99 SASR 357 at [112]-[127].
Conflict of duties
Central to the plaintiffs’ claim is an assertion that the defendant liquidator sold assets of RFPL at significantly less than their real value. It was submitted by the defendant before this Court that the imposition of a duty on a liquidator would be inconsistent with the other duties which a liquidator owes: principally, those to the company and to the creditors.
The plaintiffs in this case are not in the position of an ordinary creditor. Their financial liability has arisen from a Federal Court judgment, in which it was determined that the plaintiffs were required to indemnify the Companies as a consequence of the plaintiffs’ breach of fiduciary duty.
It has been suggested that a liquidator’s duty to creditors is a duty to the group, rather than to each creditor individually. Whether an individual in the position of the plaintiffs can recover is a novel question.
In my view, the fact that there are other parties to whom a liquidator owes a duty is not determinative of whether a duty exists towards the plaintiffs in the present case. As was stated in Sullivan:
circumstance that a defendant owes a duty of care to a third party, or is subject to statutory obligations which constrain the manner in which powers or discretions may be exercised, does not of itself rule out the possibility that a duty of care is owed to the plaintiff. People may be subject to a number of duties, at least provided they are not irreconcilable... But if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that the duty exists.
In the present case, the plaintiffs contended that there was no conflict between the duty that they claimed was owed to them by the liquidator, and the duties owed by the liquidator to the company and to the creditors. If it is found that the true value of the assets was less than the price at which the liquidator sold the assets, then it may well be that there is no conflict between the duties. However, that is a matter to be explored at trial.
Again, it should be observed that a conflict of duties may preclude the existence of a duty to a person in the position of the plaintiffs in the circumstances of a particular case. However, the existence of a conflict of duties, and the consequences of such a conflict, are matters to be explored at trial. The possibility of there being a conflict of duties should not, by itself, preclude the plaintiffs from bringing a claim.
There are numerous authorities that articulate the way in which a liquidator should reconcile conflicting duties. Further, the Corporations Act stipulates the order in which creditors can recover from the assets of a company, thus mitigating the possibility that a liquidator would be unable to reconcile duties. In my view, whether a duty can co-exist with the already onerous duties relating to creditors is a question which should arise following the determination of the facts at trial. It is not question to be dismissed on the pleadings.
I respectfully adopt the analysis of Debelle J on the question of the existence of a common law duty of care owed by the administrator to the company in administration and its creditors to manage its business affairs, including the sale of all or some of its assets, compromising claims for and against it, and the negotiation of a DOCA. The interests of the company, its creditors and shareholders, are at one in maximising the return to the company from its commercial dealings with unrelated parties. However, the imposition of a duty to individual creditors in making decisions as to the re-arrangement of the company’s finances, the proportionate payment of debt in accordance with a DOCA, or whether the company should go into liquidation, would compromise the statutory scheme to which I have referred. In my view, this factor alone decisively tells against the imposition of a duty to individual creditors with respect to that part of an administrator’s responsibilities.
It is manifestly inconsistent with the statutory regime of the Corporations Act regulating the duties of voluntary administrators to superimpose upon it a common law duty of care owed by the administrator to individual creditors, directors or shareholders to protect them from financial loss by the exercise of reasonable care in discharging his or her statutory powers affecting the form in which the company will continue to operate or, alternatively, whether it will be wound up. That inconsistency is at its greatest when an administrator must form an opinion and frame a recommendation to the creditors, about whether to trade on, enter into a deed of company arrangement, sell the business and/or wind up the company.
I would distinguish the exercise of those statutory powers from the business management of the company in administration. The administrator must exercise the skills and care of a competent business manager in negotiating commercial arrangements with third parties who may wish to purchase, in whole or in part, the business and stock of the company.
Similar skills must be exercised in negotiating a deed of company arrangement with the parties to such an agreement. Just as in the management of the business and its assets, the administrator is under a duty to properly safeguard the assets, so too with respect to a deed of company arrangement. There is no conflict of interest, nor any inconsistency with statutory duties and powers, in the imposition of an obligation to diligently seek expressions of interest from persons who may wish to either purchase the assets of the company or enter into a deed of company arrangement and to then manage negotiations with them. The offers so solicited will then be the subject of advice to, and final resolution by, the creditors. There is no duty of care owed in the formulation of that advice for the reasons I have already given. However, it is in the interests of all creditors that those matters are handled competently. Moreover, it is consistent with the administrator’s statutory duties to act diligently and reasonably in that respect.
In this case, for example, advice given by Mr Macks as to whether the company should enter into a deed of company arrangement, or continue to trade or be wound up, if there be no resolution to enter into a deed of company arrangement, is a statutory duty for which he, as the voluntary administrator, carried no common law duty of care. Indeed, a voluntary administrator is liable for the debts he or she incurs in the performance or exercise of his or her functions and powers as administrator for services rendered, goods bought, property hired and money borrowed.[68] The administrator is also liable in some circumstances with respect to, or under, pre-existing agreements for the use or occupation of property entered into by the company before the administration.[69] In some circumstances the administrator is liable for certain taxation liabilities.[70] The administrator is therefore in a position of conflict. The mechanism for the resolution of those conflicts is provided by the supervisory regime of the Corporations Act. It would be inconsistent with the Corporations Act and that scheme to impose a common law duty on the administrator to take reasonable care not to adversely affect what are the competing interests of shareholders and creditors which he or she must balance, one against the other.
[68] Section 443A Corporations Act.
[69] Section 443B Corporations Act.
[70] Section 443A Corporations Act.
In addition to his or her common law duties, the administrator owes a fiduciary duty to the company in the management of its property and business.[71] The administrator is also under a fiduciary duty to disclose all material information to the creditors.[72]
[71] Wood v Laser Holdings (1996) 19 ACSR 245 at 246; Hill v David Hill Electrical Discounts Pty Ltd 37 ACSR 617 at 621.
[72] Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1999) 30 ACSR 389 at 440.
No misrepresentations – no disqualifying conduct
According to Mr Viscariello, in mid 2001 Mr Bart asked Mr Viscariello to provide financial information to Mr Bart’s chief financial officer. Mr Viscariello provided the information requested. Mr Viscariello also had discussions with Mr Yeomans about ARL acquiring an interest in the Companies or their businesses.

Mr Viscariello and Bernsteen entered into a loan agreement on 1 November 1993. On the same day a similar agreement was reached between Viscariello and Newmore. The agreements govern such sums as the lender agrees to make available. Interest is set at a rate of 15 per cent per annum.
Mr Macks admits that Mr Viscariello made advances to Bernsteen in the sum of $270,000 and to Newmore in the sum of $60,000. Mr Macks also admits that Newmore entered into a deed of debenture in favour of Mr Viscariello on 1 November 1993 (the Newmore debenture). The Newmore debenture secured advances to Newmore and Bernsteen. Mr Macks admits that the Newmore debenture was registered. Mr Macks contends, however, that Mr Viscariello has failed to prove that the Companies were still indebted to him as at 5 December 2001. For that reason the historical records evidencing the loan must be examined.
The 1995 Bernsteen DOCA records an outstanding loan to Mr Viscariello in the sum of $180,000. I accept that Mr Viscariello never disputed that recital at the time of the 1995 Bernsteen DOCA was made. Mr Viscariello claims that the external financier referred to in the 1995 Bernsteen DOCA was the Commonwealth Bank of Australia (the CBA). The 1995 Newmore DOCA records a loan in the sum of $39,328 made by Mr Viscariello to Newmore and secured by a charge. I accept that Mr Viscariello never claimed at the time of the 1995 Newmore DOCA that that figure was incorrect.
However, Mr Viscariello testified that the total amount outstanding at the time of the 1995 Newmore and Bernsteen DOCAs was $330,000. Mr Viscariello relied on the 1993 financial statements prepared by the Newmore’s accountants which showed a loan of $329,000. I do not accord those financial statements much weight because Mr Viscariello was the principal of Newmore and had a personal interest in the accounting for the loan.
Mr Viscariello was a signatory to both the Newmore and Bernsteen 1995 DOCAs. When he gave his evidence, Mr Viscariello initially agreed that they recorded the debts owed to him by the Companies in 1995 even though he qualified his statement by saying that the information was provided by his accountants. He initially agreed that the Bernsteen loan stood at $180,000. However, when taken in the course of his evidence to the loan shown in the 1995 Newmore DOCA, he did not accept that it correctly recorded Newmore’s indebtedness. Mr Viscariello testified that his recollection was that a total of $330,000 was owed by the Companies at the time.
I find on the basis of the recitals in the 1995 DOCAs of the Companies that as of 31 October 1995 Bernsteen was indebted to Mr Viscariello in the sum of $180,000 and Newmore was indebted in the sum of $39,328.
Bernsteen’s balance sheet for the financial year ending 30 June 1996 shows an indebtedness to Mr Viscariello of $368,392.22. I place no reliance on that balance sheet because of the absence of any satisfactory explanation from Mr Viscariello as to why the loan might have so dramatically increased in that year. I have earlier recorded my finding that Mr Viscariello was not receiving the remuneration from the Companies which he claimed.
A financial report prepared by Mr Macks as administrator of the 1995 DOCA records that the level of indebtedness reduced under his administration from $180,000 to $153,000.18. However, financial statements prepared by Bernsteen’s accountants for the period 1 November 1995 to 31 October 1997 record a secured loan account in favour of Mr Viscariello in the sum of $427,319.96. Again, I reject that figure because of the absence of any explanation as to the increase in the loan over and above the 1995 Bernsteen DOCA figure, and the 1996 financial statement. The financial statement prepared for Bernsteen by its accountants for the financial year ending 2000 show the director’s loan outstanding at the end of the 1999 financial year in the sum of $200,000. Although the financial statement describes the loan as secured, Mr Viscariello did not hold any security over Bernsteen’s assets with respect to that loan. It was secured only by the registered Newmore debenture. Again, there is no explanation for the increase in the amount over and above $180,000. The financial statement prepared by the Company’s accountants for the year ending 30 June 2000 shows the director’s loans to be $150,000. I reject Mr Viscariello’s explanation that despite the financial statements recording Bernsteen’s indebtedness as $150,000, the loans to both Companies were still in the order of $330,000. In particular, I reject his contention that the inter-company loan between Bernsteen and Newmore includes, in part, an indebtedness to him.
The Bernsteen RATA did not show any debt owed to Mr Viscariello. However, on 21 January 2003 Mr Viscariello lodged a proof of debt through his solicitor in the sum of $300,000. He described the debt as “advances to co”. He made the following remark in support of the claim “details contained in co accounts and records.” Mr Macks, as chairman of the meeting of creditors on 21 January 2003, disputed the proof of debt but admitted Mr Viscariello as a creditor for voting purposes in an amount of $175,000. Mr Viscariello never appealed against that decision nor did he assert any security.
In a statutory declaration made by Mr Viscariello at the time that he entered into a Deed of Settlement with ARL over ARL’s claim against him for his guarantee of the credit ARL extended to Bernsteen, he declared that he was owed the sum of $142,773 by Bernsteen as at 30 June 2001.
Mr Viscariello did not call any of the Companies’ accountants. The reasons for, and the way in which any variation in the loan account was affected, was peculiarly within Mr Viscariello’s knowledge.
Financial statements prepared at the direction of Mr Macks during his administration of 1995 Newmore DOCA record the outstanding shareholder loan to Mr Viscariello in the sum of $39,328.
A balance sheet prepared by the Companies’ accountants as at 31 October 1997 show a secured shareholder loan in the sum of $64,797.38. Mr Viscariello did not give any evidence as to how or why the loan had increased. In audited financial statements prepared by Newmore by its accountants for the year ending 30 June 2000 there is also a column setting out the balance sheet for the financial year ending 1999. That column records the item “shareholder’s loan – J Viscariello” at $4,723. The 30 June 2000 report itself shows the shareholder loan at $7,818.62.
I reject Mr Viscariello’s evidence that in some way the inter-company loan from Bernsteen to Newmore represents an advance made by him either to Bernsteen or Newmore.
In the Newmore RATA Mr Viscariello claimed that he was owed $147,829 by Newmore. Mr Viscariello through his solicitor submitted a formal proof of debt for Newmore on 21 January 2003. I earlier referred to the second proof of debt filed in the Newmore liquidation claiming a total of $175,570.88 as “advances to Co”. That total comprised advances of $147,829, $21,630.18 and $6,111.70. The form elaborated on the debt stating “Details previously provided and are contained in the Co’s records and accounts”. The breakdown of the advances match claims made by Mr Viscariello in the Newmore RATA. The proof of debt claims:
Advances to Co
$ 147,829.00
$ 21,630.18
$ 6,111.70
$ 175,570.88
The first line matches the secured debt claimed in the Newmore RATA. The second line matches Mr Viscariello’s annual leave entitlement as claimed in the Newmore RATA. The third line appears to match Mr Viscariello’s long service leave claim in the Newmore RATA.
Nonetheless, Mr Viscariello has not given a satisfactory explanation for the increase in the amount outstanding after June 2001. I find that the indebtness of Newmore is no more than $7,818.62 which is the amount recorded in the financial statement for the year ending 30 June 2000.
The next issue is whether Mr Viscariello was a secured creditor. Mr Macks accepts that Mr Viscariello did have a floating charge over the assets of Newmore. He contends, however, that Mr Viscariello surrendered that charge by lodging proofs of debt as an unsecured creditor.
As a secured creditor, Mr Viscariello was entitled to:
·prove the whole amount of the secured debt and thereby surrender his security;
·estimate the value of the security and approve the balance; or
·to rely on the security only.
It is only if Mr Viscariello has unequivocally made an election in terms of the first alternative does he surrender his security.[146]
[146] Surfers Paradise Investments Pty Ltd (In Liq) v Davoren Nominees Pty Ltd [2003] QCA 458 at [5]-[7] per Williams JA, at [30]-[34] per Dutney J; Kelso v McCulloch 24 October 1994 NSWSC Young J; 17^th Canute Pty Ltd v Bradley Air Conditioning Pty Ltd (In Liq) [1987] 1 QdR 111.
Mr Viscariello did not expressly state that he was a secured creditor in his proof of debt and purported to prove for what he alleged to be the whole of his debt. In my view, the mere failure of Mr Viscariello to expressly assert his security and the mere lodgement of the proof of debt, in circumstances in which the administrator was aware of the existence of the security, did not result in the surrender of that security.
Even though Mr Viscariello voted in a show of hands at meetings of creditors, he never voted in a formal poll on the basis of his proof of debt. His participation in the meeting is, therefore, not inconsistent with the maintenance of his secured interest.
Mr Viscariello also claims to be a secured creditor by reason of rights of subrogation over a charge by the CBA over the assets of Newmore. In 2002 the CBA held a charge over the assets of Newmore (the CBA Newmore charge). It is accepted by Mr Macks that Mr Viscariello made a payment to the CBA discharging Newmore’s indebtedness and securing the release of the charge. The amount paid was $97,886.07. Mr Viscariello sought permission to amend his claim, close to the conclusion of the trial in February 2013, to plead that by that payment he was subrogated to the CBA security. Mr Viscariello pleads that he holds rights of subrogation through the CBA Newmore charge because he made that payment pursuant to a guarantee he had given to the CBA, or alternatively, pursuant to an all moneys mortgage he gave in favour of the Commonwealth Trading Bank of Australia.
The guarantee is not in evidence. It is, therefore, not possible to say whether or not the terms of the guarantee denied Mr Viscariello any rights of subrogation with respect to the security held by the CBA for the debts he had guaranteed.[147]
[147] Austin and Another v Royal and Another (1998) NSW Com R 655-683 – BC 980177.
The mortgage relied on by Mr Viscariello is in evidence but it is a mortgage to the Commonwealth Trading Bank. The evidence does not establish that the Commonwealth Trading Bank of Australia is the same entity as the Commonwealth Bank of Australia.
Internal bank correspondence of the CBA shows that on 4 December 2001 the Bank agreed to discharge Mr Viscariello’s guarantee and “the Bank’s equitable mortgage” on payment of the sum of $97,886.07. The equitable mortgage must mean the CBA Newmore charge. There is no reference to the payment being required under the mortgage to the Commonwealth Trading Bank. On 21 November 2002 the CBA advised Mr Viscariello that it had applied his payment to certain loan accounts. The letter does not refer to the payment being made pursuant to the Commonwealth Trading Bank mortgage.
The CBA Newmore charge was deregistered on 13 November 2002. On deregistration the Newmore charge ceased to have any priority over any other charge such as that of ARL[148] by reason of its earlier registration. However, the CBA Newmore charge predates the ARL charge and would enjoy priority for that reason.
[148] Sections 280 and 281 Corporations Act (incorporating amendments up to Act No 29 of 2002).
Mr Macks contends that if Mr Viscariello were subrogated to the CBA Newmore charge and, despite its deregistration in November 2002, it had statutory priority over ARL’s charge, an issue arises as to whether, by reason of the Deed of Priority entered into between ARL and Mr Viscariello in 2001, Mr Viscariello would be estopped from evading the effect of that Deed by subrogation to a prior security. Mr Macks contends that the resolution of such an issue would require interpretation of the Deed, consideration of extrinsic evidence and an analysis of the circumstances surrounding its execution. No such evidence has been led. I doubt the premise of Mr Macks’ contention in this respect. It is not obvious to me why the Deed of Priority should be thought to speak at all to rights held through another charge which enjoyed priority and has, in effect, been “purchased” by Mr Viscariello. That priority is, after all, limited by the amount paid to discharge the indebtedness to the CBA.
The very late notice of the proposed amendment left very little time to properly conduct investigations and examine records concerning the discharge of the CBA security and the basis on which it was paid. The guarantee has not been found. Mr Macks contends that Mr Viscariello should not be given leave to plead his subrogation to the CBA security because there is doubtful utility in giving leave to make the amendment. First, it remains unknown whether, and to what extent, there will be funds in the company on which the security can be enforced after proper allowance for the liquidator’s fees and costs. Moreover, ARL would have to be given an opportunity to be heard. However, the effect of refusing leave might be to allow Mr Viscariello to press his claim on another liquidator. I will reserve my decision on this issue further until the resolution of the question of the appointment of another liquidator. If another liquidator is appointed, this matter may then properly be investigated and the liquidator can consider and determine Mr Viscariello’s claims in this respect and, if necessary, any dispute over those claims can be brought before this Court.
Addendum – the production of privileged documents
It is apparent from the narrative given in my reasons, and in particular from the references to correspondence between Minter Ellison and Mr Macks and their discussions in meetings that communications which would otherwise attract legal professional privilege have been produced in the course of the trial. I made an order in the course of the trial that certain evidentiary material that would otherwise have been subject to legal professional privilege should be disclosed. Much of the material to which I have referred was provided to me for the purposes of deciding whether or not there were reasonable grounds to suspect that the communications evidenced by that material was made for a purpose which precluded Mr Macks and Ms George from claiming privilege over it. I was satisfied that there were reasonable grounds to conclude that certain communications disclosed in that material were made for the purpose of maintaining proceedings which were an abuse of process. I formed the view that there were reasonable grounds to suspect that Mr Macks was prosecuting Ms Hamilton-Smith for the purpose of facilitating his proposed insolvency action against Mr Viscariello or for other collateral purposes. I formed that view primarily on the basis of the massive disproportion between the costs of the litigation and the poor prospects of any recovery. After I had ordered the disclosure of some of the documents, Mr Macks decided to disclose additional material over which he had earlier claimed privilege.
I acknowledge that, at least until the matter was resolved, Mr Macks and Ms George intended to prosecute the matters to judgment if at all possible.[149] However, I was, and am, satisfied that that purpose had become insignificant to Mr Macks from mid 2005. There was by that time no prospect of any net return to the Companies after the payment of the legal costs of continuing the proceedings.
[149] Williams v Spautz (1992) 174 CLR 509.
It appeared to me then to be likely, and is now my view, that the continuation of the proceedings could only be explained by Mr Macks’ concern for his own personal financial and reputational interests. I have found in these reasons that was in fact the case.
From at least mid 2005 when Mr Macks gave instructions on the conduct of the proceedings he gave active consideration to the protection of his personal interests as he saw them. Notwithstanding Mr Macks’ general intention to prosecute the proceedings through to successful judgments in his favour if he could, the lack of any prospect of obtaining any reasonable return, coupled with the personal interests he sought to protect, constituted the proceedings an abuse of process.
I acknowledge that Mr Macks’ position as litigation funder did not in itself constitute the proceeding an abuse of process.[150] I also acknowledge that a funder can control litigation without it being an abuse.[151] Moreover, it is not an abuse to seek the bankruptcy of an opponent in litigation, especially when the opponent is insolvent and the defence unmeritorious. Finally, I acknowledge that a debt may be purchased in order to procure a sequestration order with a view to proving debts of the purchaser in the winding up or bankruptcy[152] unless the applicant seeks to extort more than is due.[153]
[150] Campbell Cash & Carry v Fostif Pty Ltd (2006) 229 CLR 386 at [84]-[89].
[151] Volpes v Permanent Custodian Pty Ltd [2005] NSWSC 827.
[152] McIntosh v Shashova (1931) 46 CLR 499 at 505.
[153] Rozenbes v Kronhill (1956) 95 CLR 407.
However in this case the proceedings were, to the knowledge of Mr Macks and his advisers, prosecuted when there was no prospect of a real recovery and for the purposes, at least in part, of protecting Mr Macks from litigation, threatened and then brought, by Mr Viscariello. The disconnection between the legitimate purpose of the litigation and Mr Macks’ personal purposes, and the way in which it was funded, were calculated to corrupt the proceedings.
In the peculiar circumstances of this case, the proceedings were an abuse of process.
I also record that after the close of submissions in this matter, the plaintiff filed two volumes of further submissions. The defendant then filed submissions in response contending that the plaintiff had gone beyond any permission given and taking issue with the submissions made. In particular, the defendant responded that the plaintiff was by and large putting a different case. The plaintiff responded to those submissions on 13 May 2013. The defendant made submissions in reply to the plaintiff’s submissions of 28 June 2013 in July 2013. I indicate that I have had regard to all the submissions provided to me.
Finally I indicate that I would give permission to the plaintiff to make the amendments in his proposed fourth amended Statement of Claim which relate to the findings I have made. I am satisfied that the issues relating to those findings were fully joined in the course of the hearing and that the defendant has not suffered any prejudice by the evolving nature of the plaintiff’s case.

In Cook v Pasminco Ltd (No 2) (2000) 107 FCR 44, Lindgren J at [47] noted:
A costs agreement is a bundle of mutual and reciprocal commitments between intending solicitor and client. It is entered into by parties whose interests are, at the time, generally opposed. Generally speaking, the solicitors are entitled to negotiate the terms of the agreement in their own interests. Once it is appreciated that a costs agreement is an agreement between persons who are about to enter into the relationship of solicitor and client, there is no obvious reason why such an agreement, as a class of document, should be the subject of legal professional privilege.

Of course legal professional privilege covers such information where it sets out the nature or narrative of the legal advice. See Carey v Korda & Winterbottom (No 2) [2011] WASC 220.