FEDERAL COURT OF AUSTRALIA

Mansfield, in the matter of Highrise Telecoms Pty Limited (Administrators Appointed) (No 2) [2018] FCA 2023

ORDERS

THE COURT DECLARES THAT:

1.    Pursuant to s 447C of the Corporations Act 2001 (Cth) (the Act), the plaintiffs were validly appointed as joint and several administrators of Highrise Telecoms Pty Limited (administrators appointed) on 5 October 2018 in accordance with s 436C of the Act.

THE COURT ORDERS THAT:

2.    The question of the costs of the second defendant’s challenge to the appointment of the plaintiffs be reserved.

3.    The plaintiffs file and serve an outline of their submissions on costs and any affidavit evidence on which they rely on the question of costs by 4.00 pm on 1 February 2019.

4.    The second defendant file and serve an outline of her submissions on costs and any affidavit evidence on which she relies on the question of costs by 4.00 pm on 15 February 2019.

5.    The proceeding be listed for further case management on 18 February 2019 at 9.30 am.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

YATES J:

Introduction

1    As I noted in reasons published on 29 October 2018 (Mansfield, in the matter of Highrise Telecoms Pty Limited (administrators appointed) [2018] FCA 1654), the plaintiffs’ appointment as joint and several administrators of Highrise Telecoms Pty Limited (administrators appointed) (the company) by Buroserv Australia Pty Ltd (Buroserv) pursuant to s 436C of the Corporations Act 2001 (Cth) (the Act) has been called into question by the second defendant, Leah Andreone, who is the sole director of the company.

2    Amongst other relief sought in this proceeding, the plaintiffs seek a declaration, pursuant to s 447C of the Act, that they were validly appointed as administrators of the company on 5 October 2018. On 2 November 2018, I made an order that this question be heard and determined separately from and prior to the remaining claims for relief in the Originating Process commencing this proceeding.

3    The sole issue that arises for present determination is whether the company is bound by a General Security Agreement (GSA) on which Buroserv relied in appointing the plaintiffs. The second defendant contends that the GSA was executed by the first defendant, Francesco Andreone, who is not a director or an agent of the company. Her case is that, as a consequence, the GSA is not binding on the company and that, accordingly, Buroserv was not a person who was entitled to enforce a security interest for the purposes of s 436C at the time the plaintiffs’ appointment was made.

Background Facts

4    The company is a telecommunications reseller that supplies telecommunications services to business and residential end users. Buroserv is a telecommunications wholesale aggregator that supplies telecommunications products and services using a combination of its own and other carrier network facilities.

5    On 14 November 2016, the first defendant, purportedly as a director of the company, executed a Master Supply Agreement (the MSA) on behalf of the company pursuant to which the company agreed to purchase certain telecommunication products and services from Buroserv. Clause 4 of the MSA recorded the company’s agreement to provide financial security to Buroserv as it (Buroserv) might require in relation to the trading arrangements. As the evidence shows, Buroserv became an integral, if not essential, part of the company’s business. It came to provide products and services for more than 75% of the company’s customers.

6    By 14 September 2017, the company was indebted to Buroserv in the sum of $119,236.25. The first defendant, purportedly as a director of the company, executed a Debt Repayment Agreement (DRA) on behalf of the company, which acknowledged this indebtedness and provided a repayment schedule under which the company agreed to pay Buroserv $25,236.25 by 31 October 2017; $35,000 by 30 November 2017; $25,000 by 31 December 2017; and $34,000 by 31 January 2018: see clause 2.1. Clause 3.1 of the DRA provided that, upon execution of the agreement and any required Security Agreement (as defined), Buroserv would immediately begin to provide provisioning and support services that had been withheld because of the company’s indebtedness. The evidence shows that the company paid Buroserv $25,263.25 on 6 November 2017. I infer that this payment was made pursuant to the repayment schedule in the DRA.

7    The date of execution is not recorded in the DRA, but other evidence satisfies me that it was executed at the same time as the first defendant also executed the GSA on behalf of the company, purportedly as a director. I am satisfied that this occurred on or about 17 October 2017. I am also satisfied that the GSA is the Security Agreement referred to in clause 3.1 of the DRA.

8    Clause 2.1 of the GSA provides as follows:

Granting of Charge

In consideration of the Secured Party:

(a)    making any advance or further advances to the Grantor; and

(b)    agreeing not to call in any monies already advanced to the Grantor,

the Grantor charges all the Charged Property to the Secured Party as security for the due and punctual payment to the Secured Party of the Secured Money.

9    The term Charged Property is defined broadly in Schedule 2 as follows:

Charged Property means all present, future and after acquired rights, property and undertaking of the Grantor including, without limitation:

 (a)    the Customer Base;

 (b)    Capital;

(c)    the benefit of all present, future and after acquired contracts entered into by the Grantor;

 (d)    any proceeds of Charged Property; and

(e)    any other personal property over which the Grantor has the power to grant a Security Interest pursuant to the PPSA.

10    Clause 3 of the GSA adds to the definition of the property encumbered by the company to the extent that any of the Charged Property is not personal property defined by the Personal Property Securities Act 2009 (Cth) (PPSA). Clause 4 of the GSA addresses the application of the PPSA.

11    The evidence shows that Buroserv continued to render invoices for the products and services it supplied. The company continued to make payments to Buroserv in respect of new invoices and in respect of its accrued indebtedness.

12    On 30 May 2018, the first defendant executed on behalf of the company a Deed of Forbearance (DOF). Once again, he did so purportedly as a director of the company. The DOF recites that, on 21 May 2018, Buroserv gave notice of its intention to suspend, again, the products and services it was providing to the company and to enforce the Securities which, as defined, included the GSA. Clause 2 of the DOF contains the following acknowledgement:

Highrise acknowledges, warrants and agrees that:

(a)    as at 31 May 2018, the Acknowledged Debt is outstanding and due and payable by Highrise to Buroserv;

(b)    in addition to the telecommunication services provided by Buroserv to Highrise, Buroserv provides access [to] its billing platform, which issues invoices to Highrise's customers and records payments received by Highrise's customers (the Billing Platform);

(c)    the Agreements and Security Agreement are legal, valid, binding and enforceable in accordance with their respective terms;

(d)    there is an event of default under the Security Agreement and Buroserv can exercise its rights;

(e)    this Deed does not in any way reduce or vitiate the liability of Highrise in respect of the Acknowledged Debt;

(f)    subject to the terms of this Deed, Buroserv is presently entitled to take whatever action it deems appropriate to enforce the Agreements and Security Agreement in accordance with their terms; and

(g)    subject to the terms of this Deed, interest continues to accrue on the Acknowledged Debt at the rate specified in the Agreements and the Security Agreement;

13    In this clause, the Agreements means the MSA and DRA. The Security Agreement means the GSA.

14    Clause 4 of the DOF required the company to pay $25,000 to Buroserv by 31 May 2018, with further monthly instalments of $25,000 thereafter. It was an Event of Default if the company breached a provision of the DOF, such as by failing to pay one of the monthly instalments: see cl 6(a).

15    The above events should be seen in the context of the following additional facts. At the commencement of their trading relationship, the company informed Buroserv that the first defendant was the company’s primary commercial contact. This was done by a document called the Burobill On Boarding Information (the BuroBill Information). There is no mention of the second defendant in the BuroBill Information, let alone mention that the second defendant was the company’s director or a contact of any sort so far as the company’s dealings with Buroserv were concerned. The company had four employees that were known to Buroserv: the first defendant, the second defendant, Mahnaz Zamani and Justine Judge. At the time that the company informed Buroserv that the first defendant was its primary commercial contact, it also informed Buroserv, by means of the BuroBill Information, that Ms Judge was its primary operational contact. However, Ms Judge resigned her employment with the company in September 2017, approximately one month before the DRA and GSA were executed.

16    The MSA was implemented, with Buroserv rendering invoices to the company and the company making payments to Buroserv on those invoices. This is borne out by a summary of financial records compiled by Buroserv. It is also borne out by the correspondence in evidence, which shows that the first defendant was acting on behalf of the company in its negotiations with Buroserv in relation to its financial arrangements, including its outstanding balance of account. The first defendant negotiated the lifting of a provisioning and support embargo that Buroserv had imposed on the company because of its accumulated debt under the MSA. The first defendant was also the person who, on behalf of the company, negotiated the terms of the DRA and GSA. The evidence also shows that the first defendant was the person who, on behalf of the company, reported all service incidents to Buroserv during the period from 18 October 2017 to 24 July 2018, the period immediately after the lifting of the initial provisioning and support embargo.

17    There is nothing in the evidence before me to suggest that the second defendant played any significant role in the conduct of the company’s business or affairs. This is supported by the second defendant’s response to an order I made on 2 November 2018 that, pursuant to s 438B of the Act, she deliver to the plaintiffs all books and records in her possession that relate to the company, other than books that the second defendant was entitled to retain as against the company and the plaintiffs. The second defendant’s response was to produce some minor correspondence and some miscellaneous documents, such as a licence agreement relating to two car parking spaces and the notification of an increase in the licence fee in respect thereof; a lease of real property; a solicitor’s fee note; some certificates of currency of insurance; and copies of various documents and affidavits filed in this proceeding. The production was accompanied by a letter dated 8 November 2018, which stated:

As ordered the company books and record that are in my possession are delivered in this package.

For any other company books and records you may want please contact Francesco Andreone.

18    On 7 September 2018, Buroserv issued a default notice to the company, in reliance on the DOF. The default notice claimed the sum of $155,514.95 as due and owing by the company as at 31 August 2018. By 2 October 2018, the company’s debt was $428,399.97.

19    On 5 October 2018, Buroserv appointed the plaintiffs as joint and several administrators in reliance on s 436C of the Act.

The Issues

20    The plaintiffs accept that the second defendant was the sole director of the company at all times relevant to the present question. They submit, however, that the first defendant had the implied actual authority of the company to enter into the MSA and the other contractual agreements to which I have referred (the GSA, the DRA and the DOF) irrespective of whether the first defendant was a director of the company. Alternatively, they say that the first defendant acted with the ostensible authority of the company when entering into those agreements on its behalf.

21    Although I made orders on 2 November 2018 providing for the first defendant and the second defendant to file and serve all affidavit evidence on which they, respectively, wished to rely on at the hearing of the separate question, no affidavit evidence was filed by them. The first defendant has not appeared at any stage of these proceedings, although he was present at the hearing of the separate question. He did not seek to participate in that hearing. The second defendant has appeared at case management hearings. She is the only person who has sought to actively agitate the validity of the plaintiffs’ appointment as joint and several administrators. She was represented by counsel at the hearing of the separate question although, despite an order I made on 3 December 2018, she did not file a written outline of the submissions she wished to make.

22    Thus, the only person actively disputing the validity of the plaintiffs’ appointment was before the Court. She did not dispute any of the facts I have summarised at [4] – [15] and [17] above. Her submissions on the substantive question presently before the Court were that the Court could not be satisfied on the evidence that the first defendant acted with the authority of the company when entering into the agreements. Relatedly, she submitted that the plaintiffs could not rely on the assumptions in s 129(3) of the Act. This was because neither of them was a person who had dealings with the company, within the meaning of s 128(1) of the Act, in relation to the relevant agreements, in particular the GSA. According to the second defendant, only Buroserv had those dealings, and it is not a party to the proceeding.

Is agency established?

23    In Bowstead and Reynolds on Agency (19th ed, 2010) at [1-001], agency is defined as follows:

Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation …

24    This definition was quoted with approval by the Full Court in Quikfund (Australia) Pty Ltd v Prosperity Group International Pty Ltd (in liq) [2013] FCAFC 5; 209 FCR 368 (Quikfund) at [66]. As I have noted, in the present case the plaintiffs rely on both the first defendant’s actual authority to act on behalf of the company when executing the relevant agreements, which they submit is to be implied from the circumstances of the case, and his ostensible authority to so act.

25    As the Full Court observed in Quikfund, with reference to Diplock LJ’s explanation of the two species of authority in Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (Freeman & Lockyer) at 502-503, a common feature of both species is conduct on the part of the alleged principal which, in all the circumstances, evidences the clothing of the alleged agent with the requisite authority to bind his or her principal: see at [71]. This conduct can include acquiescence on the part of the principal: CLC Corporation v Cambridge Gulf Holdings NL (1997) 25 ACSR 296 at 323; see also Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 361-362; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 134. But assertions made by the alleged agent (that he or she is acting for the alleged principal) can never, by themselves, prove the existence of the alleged agency. The Full Court in Quikfund observed (at 79]):

There must be some conduct on the part of the alleged principal from which the relationship of agency can be inferred and which breathes life into the assertions of the alleged agent.

26    The plaintiffs’ primary contention is that the first defendant had implied actual authority to bind the company to the DRA and GSA, which had been conferred since at least November 2016. This date is based on the fact that the first defendant executed the MSA on behalf of the company on 14 November 2016. The plaintiffs’ alternative contention on implied actual authority is that if, for some reason, the Court is not persuaded that this authority existed from November 2016, then it certainly existed by the time the first defendant executed the DRA and the GSA in October 2017. Amongst other things, the plaintiffs rely on what they submit is the acquiescence of the second defendant in the first defendant’s conduct in representing himself as a director and in executing the MSA, DRA and GSA. They also rely on the fact that neither the first defendant nor the second defendant called evidence to refute the existence of this authority, allowing the Court to draw the inference that there is no evidence which would have assisted them in this regard: Jones v Dunkel (1959) 101 CLR 298 at 320–321.

27    I am satisfied that the first defendant did have the actual authority to bind the company to the agreements which the first defendant executed on its behalf. I am satisfied that this authority arises as a matter of implication from all the circumstances of the case.

28    I commence with the fact that the company put forward the first defendant as the person who was to be the company’s primary commercial contact. This was done by means of the BuroBill Information, which was an apparently standard form document created by Buroserv but completed by the company. This document is not dated but its contents reveal information provided by the company that was obviously required by Buroserv so that it could provide its products and services to the company and carry out its dealings with the company and the company’s customers. It was, therefore, a document which must have been completed by the company and provided to Buroserv very early in the piece, most likely at or around the time that the MSA was executed.

29    There is also the fact that the MSA was executed by the first defendant in the stated capacity of director of the company. I bear in mind that an assertion by the first defendant that he was a director is not, by itself, enough to establish an agency relationship between himself and the company. Nevertheless, this fact is relevant to my consideration of this question and is to be taken with evidence of the company’s and the second defendant’s acquiescence in the first defendant’s conduct, a matter to which I will return. There is no doubt that the company then derived commercial advantage from the MSA and acted on the basis that it did have contractually binding force.

30    In this connection, the MSA contemplated the potential necessity for the company to provide financial security. As events transpired, Buroserv did require security to be given. This was done in conjunction with the DRA, which the first defendant negotiated on the company’s behalf and which was necessary to be entered into by the company to lift the initial embargo placed on it by Buroserv because of the company’s accrued indebtedness under the MSA. It would have been of little surprise to Buroserv that the first defendant executed the DRA and GSA on behalf of the company, given the first defendant’s involvement in managing the company’s commercial relationship with Buroserv, and the fact that he had also executed the MSA on the company’s behalf and had been put forward by the company as its primary commercial contact. Thereafter, the company acted in compliance with the DRA by making one of the payments according to the negotiated schedule, although it seems that the schedule might not have been adhered to in other respects.

31    There is a compelling inference available on the evidence adduced by the plaintiffs that the company authorised the first defendant to execute not only the MSA, but also the DRA and, importantly, the GSA. To the extent that it matters, there is also a compelling inference that the company authorised the first defendant to execute the DOF. This authorisation derives from the company’s and the second defendant’s apparent acquiescence in the first defendant’s dealings with Buroserv. I draw this conclusion more comfortably because of the absence of any evidence from the defendants and, in particular, the second defendant who is the only party who has actively disputed the plaintiffs’ appointment and who is the only nominated director of the company. The evidence shows that the company’s commercial relationship was managed by the first defendant and not by the second defendant, who appears to have had no significant involvement with Buroserv at all. If there is any reason why the plaintiffs’ evidence should not be accepted for what it plainly shows, this could easily have been addressed by the second defendant as the company’s only nominated director. She did not do so.

32    In light of this finding, it is not necessary for me to consider the further basis on which the plaintiffs support the validity of their appointment, which is that the first defendant was acting with the ostensible authority of the company when executing the MSA, DRA, GSA and DOF on its behalf. Nonetheless, for completeness, I should record that I am also satisfied that the first defendant was acting with the company’s ostensible authority.

33    In Freeman & Lockyer, Diplock LJ distinguished “ostensible” authority from “actual” authority, whilst noting that both concepts co-exist and can coincide even though their respective scopes may be different. His Lordship explained that “actual” authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties and to which the contractor is a stranger. The scope of the agency is ascertained by applying the ordinary principles of construction of contracts.

34    His Lordship explained the notion of “ostensible authority” at 503 as follows:

An “apparent” or “ostensible” authority, on the other hand, is a legal relationship between the principal and the contractor created by representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the “actual” authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent’s actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either upon the representation of the principal, that is, apparent authority, or upon the representation of the agent, that is, warranty of authority.

35    I do not suggest that, in the present case, Buroserv had actual knowledge of the company’s conferral on the first defendant of the authority to enter into contractual arrangements with Buroserv on its behalf. But of course, as Diplock LJ explained, such knowledge is not necessary in order to bind the company contractually to the MSA, DRA, GSA or DOF. Plainly, by permitting the first defendant’s conduct to which I have referred, and in taking the benefit of, and proceeding on the basis of, the arrangements into which Buroserv entered through the first defendant’s instrumentality, the company represented to Buroserv that the first defendant was acting with its authority. Just as the company would be estopped from denying the existence of that authority in proceedings brought by Buroserv directly against it to enforce its (Buroserv’s) contractual rights and entitlements, so too the company is estopped in the present proceeding from disputing the binding force and effect of the obligations it assumed under the MSA, DRA, GSA and DOF, and particularly the GSA pursuant to which Buroserv appointed the plaintiffs under s 436C of the Act, relying on the very same contractual rights and entitlements.

36    In light of these findings and conclusions, it is not necessary for me to make any determination on whether the plaintiffs can, additionally, rely on the assumption provided by s 129(3) of the Act.

37    Further, these findings and conclusions dispose of the only basis on which the second defendant has called into question the plaintiffs’ appointment as joint and several administrators under s 436C of the Act. Leaving to one side whether the company was bound by the GSA, the second defendant did not dispute that Buroserv was a person entitled to enforce a security interest in the whole, or substantially the whole, of the company’s property at the time of the plaintiffs’ appointment, or that Buroserv had perfected the security interest created by the GSA within the meaning of s 436C of the Act.

Conclusion and disposition

38    Given that the plaintiffs’ appointment as joint and several administrators has been called into question, and given my rejection of the only basis on which that challenge has been made, I am satisfied that it is appropriate that they be granted the declaratory relief they seek.

39    The plaintiffs have asked that I reserve the question of costs in light of certain matters they wish to draw to the Court’s attention. I will accede to that request and make orders to facilitate the determination of the question of costs.

Associate:

Dated:    17 December 2018