FEDERAL COURT OF AUSTRALIA

Sheahan in the matter of Gemhall Holdings Pty Ltd (in liquidation) v

Lo Pilato (liquidator) [2012] FCA 700

REASONS FOR JUDGMENT

INTRODUCTION

1    On 5 June 2012 I made declarations to the effect that:

(1)    the purported resolution of Gemhall Holdings Pty Limited (Gemhall) by a director Kamila Donovan made on 2 March 2012 to appoint the defendant Frank Lo Pilato as its administrator is invalid;

(2)    the resolution of the creditors of Gemhall made on 11 April 2012 that Gemhall be wound up is also invalid; and

(3)    the purported appointment of Mr Lo Pilato, a registered liquidator, as the administrator and then as the liquidator of Gemhall is void and of no effect.

2    I also made consequential orders.

3    Consequently, Gemhall has not been placed in administration and has not been placed in liquidation. The orders did not simply set aside the administration and the liquidation, or simply terminate the liquidation from the date of the declaratory orders. The orders were to negate the possible effect of the purported administration and the purported liquidation ab initio. It was, in my view, necessary to make the orders in those terms because Gemhall relevantly operated as trustee of a trust, and the effect of its administration and liquidation – even temporarily – could or would bring to an end its appointment as trustee. The setting aside of the liquidation would not re-instate Gemhall as trustee of the trust. The trust assets could then be dealt with by a new trustee. The Court had earlier made orders to restrain dealings in that trust assets, but its orders would not have extended to any new trustee of the trust.

4    These are the reasons for those orders.

5    I point out that Mr Lo Pilato did not act inappropriately on the material available to him in accepting appointment as the administrator, and then as the liquidator of Gemhall. On the hearing he provided the Court with such information as he had, and submitted to such orders as the Court considered appropriate.

BACKGROUND

6    This is an application by John Sheahan and Ian Lock (the plaintiffs) as the joint and several trustees of the bankrupt estate of Stephen Donovan (the bankrupt). The bankrupt is the sole shareholder of Gemhall and the plaintiffs are now vested with his shares in Gemhall pursuant to s 58 of the Bankruptcy Act 1996 (Cth).

7    The current application shares in large part a common background with another proceeding in this Court, regarding a failed business venture between Patrick Campbell Rafferty and the bankrupt. Between May 2007 and May 2008 Mr Rafferty and the bankrupt entered into a joint business venture, involving the sale of modular accommodation units. The business venture failed, and Mr Rafferty and two companies associated with him (Santora Holdings Pty Ltd and Karaville Holdings Pty Ltd) (the Rafferty interests) brought an action against the bankrupt and three companies associated with him (Time 2000 Systems (Australia) Pty Ltd, Time 2000 Operations (Australia) Pty Ltd and Embelton Ltd) (the Donovan interests) and against Time West Pty Ltd (a company formed by Mr Rafferty and the bankrupt for the purposes of the joint venture). The Rafferty interests complained that the Donovan interests had engaged in misleading and deceptive conduct in the negotiations prior to the parties entering into the joint venture contrary to the Trade Practices Act 1974 (Cth) (the TP Act), and that the Heads of Agreement, a Rights Agreement and a Joint Venture and Shareholders Agreement entered into were void or voidable under the Franchising Code of Conduct. They sought orders for the repayment of monies paid under the Heads of Agreement and other relief. They also brought an action against Madgwicks, a firm of solicitors, which acted for the Donovan interests, for being involved in the contraventions of the TP Act.

8    On 17 August 2010, Besanko J found in favour of the Rafferty interests: Rafferty v Time 2000 West Pty Ltd (No 4) [2010] FCA 725 (the primary reasons). On 19 August 2010 his Honour ordered Time 2000 West Pty Ltd, Time 2000 Systems (Australia) Pty Ltd, Embleton Ltd and the bankrupt to be jointly and severally liable to pay the Rafferty interests the sum of $1.7 million plus interest in the amount of $416,111.29 plus costs: Rafferty v Time 2000 West Pty Ltd (No 5) [2010] FCA 873 (the primary orders). There was no judgement adverse to Madgwicks. Mr Rafferty and Karaville Holdings Pty Ltd appealed against the trial judge’s failure to find that Madgwicks had been engaged in misleading or deceptive conduct or was involved in its contravention. The Donovan interests appealed against the findings that the Franchising Code of Conduct applied to the agreements between the parties, that the Donovan interests had engaged in misleading and deceptive conduct, and that s 87 of the Trade Practices Act supported an order for repayment of moneys, jointly and severally. The Donovan interests also appealed against the dismissal of their cross claim against Madgwicks and asserted that breach of retainer should have been made out against Madgwicks. Both appeals were dismissed by the Full Court on 20 March 2012: Rafferty v Madgwicks [2012] FCAFC 37.

9    On 2 April 2012, a sequestration order was made against the bankrupt. Karaville Holdings Pty Ltd was the petitioning creditor, based on its judgment debt of $1.5 million, being that part of the total judgment debt due to it. The plaintiffs were appointed as joint and several trustees of the estate.

10    The present application is part of the process of attempting to secure payment of that judgment debt. The Rafferty interests clearly suspect the bankrupt and those associated with him, including Ms Donovan, of endeavouring to avoid paying the judgment amount by the manipulation of assets of the bankrupt so as to put them beyond the reach of the Rafferty interests.

11    Gemhall was not a party to the Rafferty action but it is closely related to the financial affairs of the bankrupt. It has been subject to various orders incidental to the Rafferty action to hold the bankrupt’s financial position. They will be referred to below. Gemhall is the trustee of the Stephen Donovan Family Trust, a discretionary trust of which the bankrupt is one of the beneficiaries. The Rafferty interests and the plaintiffs believe Gemhall has (or had) control of significant assets, which should be available to the creditors of the bankrupt including the Rafferty interests.

THE ISSUE IN THE PROCEEDING

12    Mr Lo Pilato was appointed as administrator of Gemhall on 2 March 2012 by Ms Donovan. At the time said she was sole director of Gemhall. Mr Lo Pilato then undertook the usual steps in a corporate administration. On 11 April 2012 at a meeting of Gemhall’s creditors called by Mr Lo Pilato as administrator to consider adoption of a proposed scheme of arrangement, the creditors attending resolved to wind up Gemhall and Mr Lo Pilato was appointed liquidator of Gemhall, apparently pursuant to s 439A of the Corporations Act 2001 (Cth). That did not involve any order of the Court.

13    The plaintiffs successfully claimed that the appointment of Mr Lo Pilato as administrator and then liquidator is void, as the appointment as administrator was not made by a valid resolution of the directors, and that the winding up of Gemhall is also void.

14    The opposing position, put indirectly by Ms Donovan, is that she was appointed a director of Gemhall on 10 December 2008 and was its sole director from 10 June 2011. Prior to that date, the bankrupt was also a director from 15 June 1994 until 10 June 2011. Consequently her resolution appointing Mr Lo Pilato as administrator was valid, and the subsequent resolution of the creditors of Gemhall on 11 April 2012 to wind up Gemhall at a meeting convened by Mr Lo Pilato for the purposes of considering a proposed scheme of arrangement, was also valid. It was a critical step in her position that a quorum of directors of Gemhall at the relevant time, and from 11 June 2011, was one.

15    The word “indirectly” is used in the preceding paragraph because Ms Donovan was not represented at the hearing. She was served with the application and the supporting documents. On 2 May 2012, Ms Donovan by her solicitors filed an appearance. On 3 May 2012 I ordered that she file any application to intervene by 18 May 2012 with any supporting affidavits. She did not do so. Her solicitors informed the Court on 31 May 2012 that they no longer had instructions from Ms Donovan but they had not then filed a Notice of Ceasing to Act. They said that the time required for filing such a notice, after service of the proposed notice on Ms Donovan, had not yet expired.

16    Ms Donovan instructed solicitors (but did not apparently authorise them to apply for her to be joined as a party), and was aware of the hearing date. She failed to give her solicitors any instructions in relation to the matter. She is obviously not inexperienced in litigation. Inappropriately, by email to my Associate, received on the morning of the hearing on 5 June 2012, she sought an adjournment. She wrote that she was currently in France, that her husband had abducted her child, and that she was looking for both her husband and her child. This email was not sent to her solicitors, nor to the other parties. Ms Donovan did not support her claim to an adjournment by any evidence. She did not explain why she had not instructed her solicitors earlier. In the overall interests of justice, I decided that I should not grant the adjournment.

17    Ms Donovan was then represented by solicitors but they made no adjournment application on her behalf, obviously because she had chosen not to complete instructions to them. Ms Donovan had been served with the proceedings in a timely way. She engaged solicitors to act for her. They had appeared on her behalf up to that point, although she has not filed any application or other papers to intervene in these proceeding save for her appearance. I did not consider that Ms Donovan had identified her interests in a way which warranted the matter being adjourned. She had not produced any affidavit evidence which supported any adjournment of the proceedings. It is neither appropriate nor sufficient to put her position by that email, especially where she had solicitors acting for her. Nor had she filed any material relating to the facts raised by the papers served on her. She had not suggested she could not previously have given instructions to her solicitors. To the extent to which Ms Donovan had standing to seek an adjournment of the proceeding, notwithstanding a failure to file an application to intervene, I refused that application.

The previous injunctive orders

18    The current application is for the purported appointment of Mr Lo Pilato as administrator and then liquidator of Gemhall to be declared void ab initio. As will be seen, the plaintiffs’ application depends upon the exercise of the Court’s discretion, which in turn is reliant upon a proper appreciation of the circumstances of the appointments of Mr Lo Pilato. The context in which his ‘appointments’ occurred is not insignificant.

19    Gemhall has been subject to a number of freezing orders, and orders varying these freezing orders in the Rafferty action. The first freezing orders were made by Besanko J on 19 December 2008, dealing with both the assets of Gemhall, and also its management. The orders, in so far as they refer to Gemhall, are as follows:

(1)    Gemhall was directed to pay the proceeds of any sale or settlement of the property described in Victorian Certificate of Title Volume 10362 Folio 393, being the property situate at Level 1, 529 Chapel Street, South Yarra in the State of Victoria (the Chapel Street property), into an interest bearing account, net of the amount used to discharge or reduce the sum secured under any existing mortgage on that property or the property referred to in (3) below, and net of usual costs incurred in the course of sale, the details of which account are to be notified by an affidavit filed and served within seven days of settlement.

(2)    Gemhall by itself, its directors, officers, employees, agents or otherwise be restrained until further order from disposing of or otherwise dealing with $1.7 million of the monies in the accounts referred to in (1) and (3).

(3)    Time 2000 Pty Limited was directed to pay the net proceeds of any sale or settlement of the property described in Victorian Certificate of Title Volume 8193 Folio 672, being the property situate at 291 Beaconsfield Parade, Middle Park in the State of Victoria into an interest bearing account, net of the amount used to discharge or reduce the sum secured under any existing mortgage on that property or the property referred to in (1), and net of the usual costs incurred in the course of sale, the details of which account are to be notified by an affidavit filed and served within seven days of settlement.

…

(5)    Until further order, the bankrupt is to notify the solicitors for the Rafferty interests in writing of any proposed change in the shareholding or directorships of Gemhall or any proposed change to the appointors, trustees or beneficiaries of the Stephen Donovan Family Trust or the Diamanti Trust ten business days prior to the making of any such change.

…

(7)    Until further order, the bankrupt is to notify the solicitors for the Rafferty interests in writing of any proposed mortgage or encumbrance, or proposed variation of an existing mortgage or encumbrance, of the assets available to Gemhall or Time 2000 Pty Limited ten business days prior to the making of any such change.

…

(10)    The orders did not prohibit Gemhall and Time 2000 Pty Limited from:

(a)    paying their reasonable legal expenses;

(b)    dealing with or disposing of their assets in the ordinary course of their business, including paying business expenses bona fide and properly incurred up to $3,000 for any single expense;

(c)    in relation to matters not falling within (a) or (b), dealing with or disposing of any of the assets of Gemhall and Time 2000 Pty Limited in discharging obligations bona fide and properly incurred under a contract entered into before this order was made, provided that before doing so the Donovan interests give the Rafferty interests, if possible, at least two working days’ written notice of the particulars of the obligations, unless they arise from a contract with a related entity, in which case there be at least 14 days’ written notice of the particulars of the obligation.

(11)    The Donovan interests, Gemhall and Time 2000 Pty Limited and the Rafferty interests may agree in writing that orders 10 (a), (b) or (c) are to be varied. In that case the Donovan interests must as soon as practicable file with the Court and serve on the Rafferty interests a minute of a proposed consent order recording the variation signed by or on behalf of the Rafferty interests and the Donovan interests, Gemhall and Time 2000 Pty Ltd, and the Court may order the variation of the order accordingly.

20    In further reasons for the interlocutory judgment published on 17 December 2008 (Rafferty v Time 2000 West Pty Ltd (No 2) [2008] FCA 1931), Besanko J indicated that he was satisfied that there was a good and arguable case against the Donovan interests, and that there was a danger that the prospective judgment would remain unsatisfied if the orders were not made. In relation to the connection of Gemhall to the bankrupt, his Honour accepted that the bankrupt effectively controlled Gemhall, and he placed little weight on the appointment of Ms Runkowska (who subsequently took the name Donovan on her marriage to the bankrupt) as a co-director in 8 December 2008, saying at [24] that such changes ‘were carried out in the shadow of this application’.

21    Leave to appeal from this decision was refused on 4 March 2009: Time 2000 Systems (Australia) Pty Ltd v Rafferty [2009] FCA 216.

22    The Orders made on 19 December 2008 then remained in place until, and after, judgment was delivered in the Rafferty action.

23     As a result of the primary reasons and the primary orders in the Rafferty action, the bankrupt became jointly and severally liable to pay the Rafferty interests the sum of $1.7 million as well as interest and costs. On 31 August 2010 Besanko J made further orders restraining Gemhall from mortgaging, encumbering or varying any existing mortgage or encumbrance over the Chapel Street property.

24    On 15 November 2010 an application by Gemhall to vary the freezing orders of 19 December 2008 and 31 August 2010 was heard. Gemhall wished to negotiate the refinance of a mortgage facility on the Chapel Street property referred to in order (1) in [19] above. Lander J made orders on that day allowing Gemhall to apply to refinance the existing finance facility, and then on 22 November 2010 made further orders to enable the refinancing to occur and to establish an interest reserve for the payment of monthly interest payments.

25    A further application was made by Gemhall, to vary the orders so as to enable Gemhall to lease the Chapel Street property. The parties consented to orders in this respect, which were made on 23 February 2011 by Lander J. The potential lessee, however, subsequently withdrew its intention to lease the premises.

26    Gemhall then applied for the freezing orders made on 19 December 2008, as varied on 31 August 2010, 15 November 2010, 22 November 2010, 15 February 2011 and 23 February 2011 to be discharged. Lander J dismissed the application on 21 April 2011: Rafferty v Time 2000 West Pty Ltd (No 7) [2011] FCA 405. In considering the application of Order 25A r 5 of the Federal Court Rules (the applicability of the freezing injunction against Gemhall) Lander J held at [52]:

The position in that regard has not changed except that the Rafferty interests’ case has strengthened. There is now a judgment against the Donovan interests for a significant sum of money. The judgment remains unsatisfied. Mr Donovan has committed an act of bankruptcy and a petition has issued for an order for his bankruptcy. There is therefore a danger that the judgment will be wholly or partly unsatisfied.

27    His Honour reiterated that the bankrupt may become entitled to an interest in the Stephen Donovan Family Trust which would be recoverable by the bankrupt’s trustee in bankruptcy on behalf of his creditors, and that the bankrupt has an expectancy under the Stephen Donovan Family Trust (and implicitly, that the expectancy may be recovered by the bankrupt’s trustee in bankruptcy): at [54]. His Honour did not consider there to be any changes to this situation to warrant changes to the orders, holding at [58]:

If a trustee is appointed to Mr Donovan’s estate the shares in Gemhall being Mr Donovan’s property will vest in the trustee: s 58 of the Bankruptcy Act. The trustee will control Gemhall and have the right to appoint its directors. Gemhall is the trustee of a discretionary trust. In those circumstances, it continues to be the case that Gemhall may contribute toward satisfying the judgment.

28    Some six months later, on 28 October 2011 the Rafferty interests sought variations to the freezing orders to enable Gemhall to sell the Chapel Street property, on the condition that $1.7 million from the proceeds were to be paid into Court. On 3 November 2011, Lander J made orders (by consent) permitting the sale, on the condition that $1.7 million from the proceeds be retained in the bank account of Gemhall’s solicitors at the time, subject to an undertaking that the firm not disperse the monies.

29    Three weeks later, the Rafferty interests made a further application for orders restraining Ms Donovan from replacing Gemhall as trustee of the Stephen Donovan Family Trust. That was contested. By affidavit of 2 December 2011, Ms Donovan applied for orders permitting her to replace Gemhall as trustee, and for the release of the $1.7 million held by Gemhall’s former solicitors in trust, to enable Gemhall to purchase a separate property, referred to in the Rafferty action as the Wilson Street property. That property would be held by a fresh trustee of a separate trust called “the Donovan Trust”, which was created as a discretionary trust, with Ms Donovan as the appointor, and Time Apartments Pty Ltd as the trustee. The beneficiaries are identical with the beneficiaries of the Stephen Donovan Family Trust. Ms Donovan is the sole director of Time Apartments Pty Ltd and her infant son is the sole shareholder.

30    In cross examination, Ms Donovan indicated that the proposal was to change the trustee of the Stephen Donovan Family Trust and then to transfer the $1.7 million to the Donovan Trust for distribution, and that she was aware that if a new trustee was appointed over the Stephen Donovan Family Trust, the trustee in bankruptcy could not have access to the funds presently standing to the creditor of Gemhall.

31    Lander J delivered judgment on 21 December 2011: Rafferty v Time 2000 West Pty Ltd (No 9) [2011] FCA 1483. The orders included orders that the bankrupt and Ms Donovan be restrained from:

1.    causing or permitting, whether directly or indirectly, any dealing with the shares held by any person in Gemhall Holdings Pty Limited;

2.    causing or permitting, whether directly or indirectly, the appointment of any other person as a director of Gemhall Holdings Pty Limited;

3.    causing or permitting, whether directly or indirectly, any change to the trusts, powers, terms or conditions of the Stephen Donovan Family Trust, being the trust established by deed dated 6 April 1994 made between Bruce Heaney and Gemhall Holdings Pty Limited;

CONSIDERATION

32    It is the plaintiffs’ case that Ms Donovan has, by the appointment of Mr Lo Pilato as the administrator of Gemhall and then by the standard process, his appointment as liquidator of Gemhall, sought to achieve the outcome which she acknowledged in her evidence just referred to. That is, to have Gemhall removed as trustee of the Stephen Donovan Family Trust and so to remove the Stephen Donovan Family Trust assets from its reach. A new trustee would not be caught by the existing freezing orders. Moreover, a new trustee might (as she apparently contemplated) somehow remove the trust assets into a new trust, so further removing them from the reach of the bankrupt’s creditors.

33    The plaintiffs say that the appointment of Mr Lo Pilato as administrator of Gemhall is void ab initio, and consequently, the subsequent winding up of Gemhall is also void ab initio. They submit that the appointment is void because at the time Ms Donovan resolved to appoint Mr Lo Pilato as administrator of Gemhall she acted contrary to, and in breach of the Articles of Association of Gemhall as they require a quorum of two directors. They also submit that allowing the appointments and liquidation to stand would cause an injustice to the plaintiffs and the bankrupt’s creditors.

34    In the course of the oral submissions, it became clear that the plaintiffs’ primary position was not really to seek an order under s 482 of the Corporations Act 2001 (Cth) but that the Court should exercise its powers under ss 447A, 511 and/or 1322 of the Corporations Act, and also more generally s 21 of the Federal Court of Australia Act (Cth). The plaintiffs did not request orders for the termination of the appointments, but to have them declared void ab initio. An order under s 482 operates only prospectively, so Gemhall would be treated as having been in liquidation up until the date of the order for termination of its winding up purportedly commencing on 11 April 2012.

35    Clause 20 of the Trust Deed of the Stephen Donovan Family Trust states:

The office of a Trustee shall be ipso facto determined and vacated if such Trustee being an individual shall be found to be a lunatic or of unsound mind or if he shall become subject to any bankruptcy law or if such Trustee being a Company shall enter into liquidation whether compulsory or voluntary (not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction).

36    Consequently, if the liquidation of Gemhall occurred (even if later set aside) Gemhall would thereby cease as trustee of the Stephen Donovan Family Trust, so restricting any access that the bankrupt’s trustees might have as sole shareholder of Gemhall, in directing future distributions of the trust.

37    The plaintiffs relied in part on s 1322 of the Corporations Act 2001 (Cth) as the source of power for the orders they sought. Section 1322 deals with procedural irregularities. For present purposes, subs (1) and (2) are relevant. They are as follows:

1322    Irregularities

(1)    In this section, unless the contrary intention appears:

(a)    a reference to a proceeding under this Act is a reference to any proceeding whether a legal proceeding or not; and

(b)    a reference to a procedural irregularity includes a reference to:

(i)    the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation, at a joint meeting of creditors and members of a corporation or at a meeting of members of a registered scheme; and

(ii)    a defect, irregularity or deficiency of notice or time.

(2)    A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.

38    For an order under sub (2) the onus is on the plaintiff to overcome the default position, namely that an act is not invalidated because of any procedural irregularity: Re Caysand No 64 Pty Ltd (1993) 11 ACLC 1,198 per Thomas J at 1,201 - 1,202. The Court may make an order to declare a proceeding affected by a procedural irregularity invalid only where it is of the opinion that the irregularity has caused or may cause substantial injustice and that that injustice cannot be remedied by any order of the Court. The assessment of whether a remedial order under s 1322 would be unjust requires considering overall prejudice, taking into account all those who would have been affected by the dispensation order: NAB Ltd v Market Holdings Pty ltd (in liq) (2001) 19 ACLC 710 at [185] (Young J).

39    In this case, the procedural irregularity complained of is the lack of requisite quorum in the director’s meeting to appoint Mr Lo Pilato as administrator. Subsection 1322(1) provides that the absence of a quorum at a meeting of directors constitutes a procedural irregularity.

40    Gemhall’s Articles of Association provide at Article 84(b) and (c), that:

The number of the Directors shall not be less than two.

Gemhall may from time to time by resolution passed at a general meeting fix the number of Directors or increase or reduce the number of Directors (but so that the number shall not be less than two) and may also determine in what rotation (if any) the increased or reduced number is to go out of office.

Article 102(e) states:

A quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and unless so fixed shall be two.

Article 103 states:

The continuing Directors or Director may act notwithstanding any vacancy in their body but if and so long as their number is reduced below the number fixed by these Articles as the necessary quorum of Directors the continuing Director or Directors may act for the purpose of increasing the number of Directors to that number or of summoning a general meeting of Gemhall but for no other purpose.

41    In this case, Mr Lo Pilato’s purported appointment was made by Ms Donovan. The decision to appoint Mr Lo Pilato could not been without the requisite quorum of directors, namely two, unless Articles 84 and 102(e) had changed.

42    Mr Lo Pilato indicated that he was appointed based on a director’s resolution made by Ms Donovan alone. In his affidavit, he annexed a copy of a document entitled Minute of a Meeting of the Shareholder of Gemhall Holdings Pty Ltd ACN; 065 106 381, dated 8 June 2011. It states that the bankrupt as sole shareholder passes a special resolution to amend Gemhall’s Memorandum and Articles of Association ‘such that the number 1 is substituted whereever the number 2 appears in Article 84(e), 84(b) and 102(e).’ Mr Lo Pilato says he received this from Ms Donovan by email on 28 April 2012, only after Mr Lo Pilato raised concerns with Ms Donovan that the Articles required a quorum of two directors.

43    The document stands alone. It is not part of a minute book. Ms Donovan was required to deliver up to Mr Lo Pilato all the books and records of Gemhall to Mr Lo Pilato pursuant to s 438B of the Corporations Act 2001 (Cth). Mr Lo Pilato gave evidence that he had requested the minute book, that it had not been delivered, and that no reason has been provided as to why that is so. He has no other minutes of Gemhall.

44    I do not accept that document is an accurate record of the minutes of Gemhall. Nothing has been produced to support the authenticity of the purported minute. The timing is suspicious. The fact that it was not produced, except on request, is suspicious, particularly bearing in mind its date. It is too convenient, especially in the light of the earlier orders. I accept the plaintiffs’ contention that the minute was concocted in about April 2012 after Mr Rafferty’s solicitors had raised the issue of the validity of Ms Donovan’s appointment of Mr Lo Pilato. Other material tends to support those conclusions.

45    I have referred to the evidence of Ms Donovan given by affidavit of 2 December 2011 and in the course of her cross-examination on 7 December 2011. She was aware of the bankrupt’s bankruptcy and that the bankrupt’s trustee would be vested with the shares in Gemhall. Lander J rejected Ms Donovan’s application to change the trustee and instead made orders in favour of the Rafferty interests’ application for further restraint on Gemhall. In his reasons, Lander J describe the motivation behind the application by Ms Donovan at [50]-[53]:

Ms Donovan was cross-examined on her affidavit and, in particular, in relation to her reasons for seeking to appoint Time Apartments as the trustee of the Stephen Donovan Family Trust in lieu of Gemhall, and for establishing the Donovan Trust.

I think it fair to say that she gave two reasons for doing what she has done, and for why she wants to do what she seeks to do. First, Gemhall is infected commercially by the freezing orders, and whilst those orders exist parties will not deal with Gemhall because of the uncertainty of Gemhall’s position caused by the freezing orders. Secondly, she wants to protect the beneficiaries of the Stephen Donovan Family Trust and the Donovan Trust by freeing up the assets of the Stephen Donovan Family Trust so that a distribution might be made to Time Apartments as trustee of the Donovan Trust in order that Time Apartments can settle in relation to the Wilson Street property. If a distribution is made to Time Apartments as trustee of the Donovan Trust then that will avoid the freezing orders in relation to Gemhall.

I think that clearly Ms Donovan wants to avoid the effect of the freezing orders so that if Mr Donovan is adjudged bankrupt his trustee in bankruptcy could not assume the governance of Gemhall, and thereby direct a distribution solely to Mr Donovan, and therefore to his creditors.

I therefore find that the application by Ms Donovan to be allowed to appoint Time Apartments as trustee of the Steven Donovan Family Trust in lieu of Gemhall, and to allow for a distribution to Time Apartments as trustee for the Donovan Trust, has been made for the purpose of avoiding the consequences of the freezing orders.

46    Then later at [69]-[71], his Honour expands:

Time Apartments and Mrs Donovan entered into the contract with their eyes open and with full knowledge of those risks.

They also failed to advise the Court of the existence of the Wilson Street property at the time that the Court allowed Gemhall to settle on the sale of the Chapel Street property. That would have been a relevant fact for the Court to have known at the time that the Court made its order permitting Gemhall to settle on the Chapel Street property.

They also failed to advise the Court of the Wilson Street property contract at the time they offered undertakings through Frenkel Partners to the Court to hold $1.7 million in a secured account pending the disposal of the appeal by the Full Court. Again that would have been a relevant fact to have known at that time. Mrs Donovan and Gemhall have failed to advise the Court from time to time of facts relevant to the exercise of the Court’s power.

47    Accordingly the orders referred to above were made on 21 December 2011.

48    Furthermore, the appointment of Mr Lo Pilato as administrator was in clear breach of the Orders made on 21 December 2011. It shows a wilful disregard of the Orders of this Court and tends to confirm his Honour’s findings about Ms Donovan’s desire to avoid the effect of the freezing orders.

49    The absence of any apparent reason for the appointment of an administrator and liquidator is also significant. Gemhall is apparently solvent. Gemhall’s unsecured third party liabilities are $49,149.59, as recorded in the Report to Creditors of 28 March 2012 prepared by Mr Lo Pilato. These debts could easily have been paid with surplus funds available to Gemhall on the sale of the Chapel Street property. The Chapel Street property was sold on 9 November 2011, facilitated by the variations to the freezing orders made by Lander J on 3 November 2011 and 7 November 2011. It was sold for $3.4 million. Ms Donovan deposed that the proceeds of the sale were directed to discharge a mortgage to the Bank of Queensland, and $55,332.94 for expenses associated with the sale. A balance of $1.7 million was subsequently reinvested in the purchase of another property, referred to in the Rafferty proceedings as the Wilson Street property. Pursuant to the orders made by Lander J on 22 November 2010, Gemhall’s mortgage to the Bank of Queensland could not exceed $1,015,000. Using these figures, the balance of proceeds of sale is some $629,667.06; calculated as follows:

50    On the face of it, this surplus would be able to meet Gemhall’s liabilities as deposed, all of which were assumed prior to the sale of the Chapel Street property. In the absence of other liabilities (other than those to the Rafferty interests, assuming they have access to the net trust assets), Gemhall was clearly solvent. One may ask rhetorically: what in the circumstances would or could have justified the director or directors of Gemhall to put it into liquidation.

51    There is also a conflict in the affidavit evidence of Ms Donovan about what happened to the surplus. In Ms Donovan’s affidavit sworn on 29 November 2011 in support of the bankrupt resisting his bankruptcy proceedings, Ms Donovan deposed that the surplus was first transferred to Time Apartments Pty Ltd as trustee for the Donovan Trust. From this, Ms Donovan says that a number of payments were made, namely:

52    Three of the four creditors are also creditors who filed proof of debts, for debts accrued prior to the sale of the Chapel Street property. It is not clear why such debts were not paid at the same time Ms Donovan deposes the above debts were paid.

53    An additional factor is the flight of funds more generally from Gemhall. The sale of the Chapel Street property shows a surplus of approximately $580,000. This money has not been retained by Gemhall, but has been transferred first into Time Apartments Pty Ltd, and from there to Ms Donovan’s personal account, for ‘the purpose investment in [her] capacity as sole director of the trustee Company.’ In her affidavit of 1 May 2012 filed in the separate Rafferty proceedings (and referred to by leave on the application), Ms Donovan deposes that the proceeds were paid to the Stephen Donovan Family Trust and then distributed to the newly created ‘Donovan Trust.’ The Donovan Trust is not a beneficiary of the Stephen Donovan Family Trust. Any distribution or payment by Gemhall would be contrary to Court orders. It would not be a proper payment by Gemhall as trustee.

54    For those reasons, I consider the purported minute of 8 June 2011 is a sham. If it is, Ms Donovan’s purported appointment of Mr Lo Pilato as administrator was a procedural irregularity under s 1322. In the circumstances I consider that the irregularity has caused or may cause substantial injustice that cannot otherwise be remedied by any order of the Court, and so I made the declaratory orders referred to.

55    In any event, I am also satisfied that Ms Donovan’s appointment of Mr Lo Pilato as administrator was done for the purpose of attempting to avoid the freezing orders placed on Gemhall, and so on the Stephen Donovan Family Trust property. It caused or may cause substantive injustice to the plaintiffs and the bankrupt’s creditors. Mr Lo Pilato acknowledged that, if his appointment as administrator were invalid, his actions as administrator and his appointment as liquidator were also invalid. I accept that. The appointment precipitated a series of events, including the convening of the creditors meeting, and the investigation of the company’s affairs and the consideration of whether it would be in the creditor’s interests for the company to execute a deed of company arrangement or for the administration to end, or for the company to be wound up; that process does not require the involvement of the Court: Wood v Laser Holdings (1996) 19 ACSR 245 at 265-6 (Hansen J).

56    In addition to the provisions in s1322, the plaintiffs rely upon the Court’s general discretion under ss 447A and 511 of the Corporations Act 2001 (Cth) and s 21 of the Federal Court of Australia Act 1976 (Cth).

57    I do not consider that s 511 is of assistance. It relevantly provides:

(1)    The liquidator, or any contributory or creditor, may apply to the Court:

(a)    to determine any question arising in the winding up of a Company; or

(b)    to exercise all or any of the powers that the Court might exercise if the Company were being wound up by the Court.

…

(2)    The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

58    That section gives a wide discretion to the Court in cases where a company has been voluntarily wound up, and complements the provisions of s 479(3) in respect of Court-ordered winding up. It enables a contributory or creditor to seek guidance in the winding up. It presupposes and operates in the case of a valid winding up. It does not appear to be available when the application is to determine that there was no valid liquidation.

59    The like provision in s 479(3) is described as an administrative, non adversarial proceeding, which only applies in relation to future matters and does not allow the Court to make binding orders in the nature of a judgment: Re J W Murphy & P C Allen (1996) 19 ACSR 569, 570 (McLelland CJ). In Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 McLelland J (as he was then) sets out the legislative history of the provision and states at 679:

The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidators’ application for directions is the matter in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.

60    The orders sought and made are not of the character described. For that further reason, I do not consider s 511 is available to support the orders.

61    Section 447A is somewhat more widely expressed. It provides:

(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 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.

…

62    Section 447A has been interpreted widely to recognise the necessary supervisory role of the Court, as a means to ‘hold in check’ the immense power of the administrator: Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99, 101. This was discussed by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 at [17]-[18], where Gaudron, McHugh, Gummow and Hayne JJ held that:

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 some other provision 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 (1994) 181 CLR 404 at 421:

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.

…

[T]he orders contemplated in the examples go beyond a curial determination of what is the effect of the 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.

63    The fact that the administration has come to an end by the liquidation of the company does not mean in that case that the Court’s discretion in s 447A cannot be exercised: at [26].

64    Section 447A has been used to support orders ending the administration, where the power to appoint an administrator is exercised for an ulterior or extraneous purpose: Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99, 102 (Burchett J), Kazar v Duus (1998) 88 FCR 218, 233 (Merkel J) and Spacorp Australia v Fitzgerald (2001) 19 ACLC 979, 982 (Beach J); and Thomson v Randwick Corporation (1950) 81 CLR 87, 106 (Williams, Webb and Kitto JJ), Howard Smith v Ampol Petroleum Ltd [1974] AC 821, 837 (Full Court) and Ngurli Ltd v McCann (1953) 90 CLR 425, 438-40 ( Williams ACJ, Fullagar and Kitto JJ) in respect of exercises of power with an improper purpose more generally. It would also be an improper purpose to exercise the power conferred under Pt 5.3A to perpetuate control or positions of the directors or the governing committee: Kazar v Duus (1998) 88 FCR 218, 233 (Merkel J).

65    It is therefore possible that s 447A could be used to support the orders made. The possibility is left open by Merkel J’s decision in Kazar v Duus (1998) 88 FCR 218 in which his Honour declared the appointment of Kazar as administrator as invalid, void and of no effect, after finding that the appointment of the administrator was not made in furtherance of the object of Pt 5.3A, applying Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99.

66    In addition to the statutory provisions mentioned, the Court maintains a residual discretion to provide declaratory relief. The power to make declaratory relief is an inherent power of superior courts: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, 582 (Mason CJ, Dawson, Toohey and Gaudron JJ). Section 21 of the Federal Court of Australia Act 1976 (Cth) confirms the power of the Court “in civil proceedings in relation to a matter in which it has original jurisdiction, [to] make binding declarations of right, whether or not any consequential relief is or could be claimed.”

67    In Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421, Gibbs J (with whom Walsh J agreed) held that ‘[t]he jurisdiction to make a declaration is a very wide one’ and that ‘the right of a subject to apply to the court for a determination of his rights will not be held to be excluded except by clear words’: at 435-436. In that case Jododex made its application for declaratory relief at the same time proceedings were under way before the mining warden under the Mining Act 1906 (NSW). This did not have the effect of ousting the Court’s jurisdiction, and there was no provision in the Mining Act granting an exclusive right to the warden to decide the question and otherwise withdraw the determination of that question from the jurisdiction of the Supreme Court.

68    Viscount Radcliffe remarked in Ibeneweka v Egbuna [1964] 1 WLR 219 at 224-5, cited in Forster, that:

[I]t is doubtful if there is more of principle involved than the undoubted truth that the power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncements out not to be issued unless there are circumstances that call for their making. Beyond that there is no legal restriction on the award of a declaration.

69    In my view, the power to make the orders, provided a proper foundation for doing so and in all the circumstances it is appropriate to do so, can readily be found in the inherent jurisdiction of the Court once it is properly seized of a matter. In this case, there can be no real doubt about that. The court has jurisdiction to deal with applications under or relying on the Corporations Act 2001 (Cth) and the present application clearly enlivens that jurisdiction by reliance on the provisions referred to. In Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 the plurality at 581-2 described the power as follows:

It is a discretionary power which "[i]t is neither possible nor desirable to fetter ... by laying down rules as to the manner of its exercise." However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have "a real interest" and relief will not be granted if the question "is purely hypothetical", if relief is "claimed in relation to circumstances that [have] not occurred and might never happen" or if "the Court's declaration will produce no foreseeable consequences for the parties".

70    The Court has the power to set aside its own orders where they have been procured by fraud. As described by Lord Buckmaster, ‘[f]raud is an insidious disease, and if clearly proved to have been used so that it might deceive the Court, it spreads to and infects the whole body of the judgment’: Jonesco v Beard [1930] AC 298, 301-2. In this case the fraud alleged concerns not an order of the Court, but the appointment of an administrator, and then of a liquidator, for a purpose which is extraneous to the purposes of Gemhall. In such a case, ipso facto, the same power should exist. The processes of the Corporations Act 2001 (Cth) should not be available to enable the director or directors of a company to defeat its creditors or its potential creditors by manipulating its stakes.

71    It remains to explain why I consider fraudulent conduct on the part of Ms Donovan has been made out.

72    I have referred to the extensive background to this application. It includes the freezing orders relating to Gemhall and to Ms Donovan’s unsuccessful attempt to have Gemhall removed as trustee of the Stephen Donovan Family Trust, leading to the orders made on 21 December 2011. In the circumstances I conclude firstly that the appointment of Mr Lo Pilato as administrator was a ‘backdoor’ attempt to do what the orders of 21 December 2011 precluded, namely the appointment of a new trustee over the Stephen Donovan Family Trust. The current action comes on the back of a series of instances where Ms Donavan has not disclosed openly the circumstances of the company and its property dealings where it would have been prudent for her to do so, as discussed in Rafferty v Time 2000 West Pty Ltd (No 9) [2011] FCA 1483 at [68]-[71]. She is simply trying to avoid the consequences of the orders then made, and she is plainly doing so for the purpose of avoiding the consequences of those orders. That is what she foreshadowed by her evidence given at that time. This is effected also in my findings in [55] above.

73    Finally, I note that I have considered the interests of the creditors of Gemhall. To the extent these are secured creditors, then security exists. To the extent there are unsecured creditors, I do not think they are disadvantaged by the declaratory orders or other orders made. There are ample assets in the Stephen Donovan Family Trust to meet their claims. Moreover, they were (according to the material provided to them by Mr Lo Pilato) prepared to forego the opportunity of full repayment of their debts within a relatively short period of time under a proposed scheme of arrangement for the uncertainty of recovery through a liquidation which, equally with the Rafferty interests, would have removed from them such access to the assets of the Stephen Donovan Family Trust as they would otherwise have had.

74    There were no other discretionary matters brought to my attention which required consideration.

75    Accordingly I made the orders referred to above.

Associate:

Dated:    29 June 2012