FEDERAL COURT OF AUSTRALIA

Huxtable, in the matter of P Hindle & Co (WA) Pty Ltd (in liq) [2013] FCA 1105

IN THE MATTER OF P HINDLE & CO (WA) PTY LTD (IN LIQUIDATION) ACN 092 932 520

THE COURT ORDERS THAT:

1.    Pursuant to s 447A of the Corporations Act 2001 (Cth) (Act), compliance with s 449E(7)(a)(iii) of the Act be dispensed with in respect of the remuneration reports sent by the plaintiff to creditors of P Hindle & Co (WA) Pty Ltd (in liquidation) (ACN 092 932 520) (Company) during the periods of time in which the Company was under voluntary administration and a deed of company arrangement was in place.

2.    Pursuant to s 447A of the Act, compliance with s 499(7)(a)(iii) be dispensed with in respect of the remuneration reports sent to creditors of the Company during the liquidation of the Company.

3.    Pursuant to s 511 of the Act, the Court declares that the resolutions passed by the creditors of the Company during the administration and liquidation of the Company were validly passed as required by the Act.

4.    Pursuant to s 511 of the Act, the Court declares that the plaintiff’s use of his casting vote, as liquidator of the company, in favour of his remuneration at the meeting of creditors held on 14 December 2010 was not appropriate in the circumstances.

5.    Pursuant to s 449E and s 504 of the Act, the plaintiff be entitled to a further payment of fees in the sum of $2,000 being the total amount held by the plaintiff in the winding up of the company.

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

IN THE MATTER OF P HINDLE & CO (WA) PTY LTD (IN LIQUIDATION) aCn 092 932 520

REASONS FOR JUDGMENT

overview

1    By originating process, Carl Alan Louis Huxtable (plaintiff) applies under s 447A, s 449E , s 467(3), s 504 and s 511 of the Corporations Act 2001 (Cth) (Act) for the following relief:

(1)    Pursuant to s 447A of the Act, compliance with s 449E(7)(a)(iii) of the Act be dispensed with in respect of the remuneration reports sent by Huxtable to creditors of P Hindle & Co (WA) Pty Ltd (in liquidation) (ACN 092 932 520) (Company) during the periods of time in which the Company was under voluntary administration and a deed of company arrangement was in place;

(2)    Pursuant to s 447A, or alternatively s 467(3), of the Act, compliance with s 499(7)(a)(iii) be dispensed with in respect of the remuneration reports sent to creditors of the Company during the liquidation of the Company;

(3)    Pursuant to s 511 of the Act, this Honourable Court declare that the resolutions passed by the creditors of the Company during the administration and liquidation of the Company were validly passed as required by the Act;

(4)    Pursuant to s 511 of the Act, this Honourable Court declare that Huxtable’s use of his casting vote, as liquidator of the company, in favour of his remuneration in the meeting of creditors held on 14 December 2010 was appropriate in the circumstances;

(5)    Alternatively, if this Honourable Court declines to make the above orders, this Honourable Court approve the remuneration of Huxtable as voluntary administrator, deed administrator and liquidator of the Company as it sees fit pursuant to s 449E and s 504 of the Act as applicable.

2    The Court finds that relief in terms of paras 1, 2 and 3 should be granted, but does not consider that relief in terms of para 4 is appropriate. However, the Court will hear from the plaintiff as to what order, if any, would appear to be appropriate in terms of the relief sought in para 5.

facts

3    The originating process is supported by the affidavits of the plaintiff sworn 18 June 2012 and 3 September 2012 and relates to the voluntary administration, deed of company arrangement and liquidation of P Hindle & Co (WA) Pty Ltd (company) over the period 28 March 2008 to 14 December 2010, at which times the plaintiff was administrator or liquidator.

4    The plaintiff’s affidavits depose to the factual circumstances attending the administration and liquidation and the reasons that caused him to act in material ways. The Australian Securities and Investments Commission (ASIC), upon reviewing files in relation to the company’s administration indicated to the plaintiff that, in its view:

(1)    Each of the resolutions in respect of the plaintiff’s remuneration as administrator and subsequently as liquidator at the following creditors’ meetings:

(a)    the reconvened second creditors’ meeting held 23 June 2008;

(b)    the creditors’ meeting held 30 June 2009;

(c)    the creditors’ meeting held 14 December 2010;

may not have been validly put, in that the associated reports may not have complied with the requirement to provide details as to the costs associated with each of the major tasks identified; and

(2)    The plaintiff’s use of the casting vote at the creditors’ meeting on 14 December 2010 to vote in favour of his remuneration may have been a conflict of interest.

5    As a result of ASIC’s advice, the plaintiff seeks the relief sought. ASIC has intervened in the hearing but only to be heard on the relief sought in para 4 of the originating process.

paragraph 1 of the relief sought

6    Section 449E of the Act provides for the remuneration of an administrator. The administrator of a company under administration is entitled to receive such remuneration as is determined by resolution of the company’s creditors (s 449E(1)(b)). Before that remuneration is determined the administrator must prepare a report (s 449E(7)(a)) setting out:

    such matters as will enable the company’s creditors to make an informed assessment as to whether the proposed remuneration is reasonable;

    a summary description of the major tasks performed, or likely to be performed, by the administrator; and

    the costs associated with each of those major tasks.

7    Sections 499(3)(b) and 499(7)(a) are relevant to the remuneration of a liquidator and mirror the relevant provisions of s 449E.

8    It is not in dispute that each of the remuneration reports associated with the creditors’ meetings identified by ASIC provided:

    a summary of matters to enable the company’s creditors to make an informed assessment as to whether the proposed remuneration is reasonable; and

    a summary description of the major tasks performed, or likely to be performed, by the plaintiff;

thus complying with the statutory requirements of s 449E(7)(a)(i) and (ii) and s 499(7)(a)(i) and (ii).

9    The issue raised with the plaintiff by ASIC in relation to each of the remuneration reports was the plaintiff’s failure to comply with s 449E(7)(a)(iii) and s 499(7)(a)(iii) by not identifying the specific costs associated with each of the major tasks to which he referred.

10    The administrator’s remuneration report associated with the reconvened second creditors’ meeting identified actual costs in the sum of $62,450 and estimated costs in the sum of $6,990. The report itemised each of the actual major tasks undertaken and the costs associated with each. The report itemised each of the anticipated major tasks to be undertaken, but did not provide a further breakdown of the overall costs estimated in respect of each task. The estimated costs identified in the report comprised approximately 10% of the remuneration sought by the administrator at the reconvened second creditors’ meeting.

11    The administrator’s remuneration report (the fifth report) associated with the creditors’ meeting held on 30 June 2009 identified actual costs in the sum of $68,947 and estimated costs in the sum of $9,800. The fifth report itemised each of the actual major tasks undertaken and the costs associated with each. It also itemised each of the anticipated major tasks to be undertaken, but did not provide a further breakdown of the overall costs estimated in respect of each task. The estimated costs identified in the fifth report comprised approximately 12.5% of the remuneration sought by the administrator at the creditors’ meeting held on 30 June 2009.

12    The liquidator’s remuneration report associated with creditors’ meeting of 14 December 2010 identified actual costs in the sums of $208,809 and estimated costs in the sum of $86,350. The report itemised each of the actual major tasks undertaken and the costs associated with each. The report itemised each of the anticipated major tasks to be undertaken but did not provide a further breakdown of the overall costs estimated in respect of each task. The estimated costs identified in the report comprised approximately 29% of the remuneration sought by the liquidator at the creditors’ meeting of 14 December 2010.

13    In each of the reports referred to, the anticipated major tasks were of a similar character to those tasks already performed and itemised as actual major tasks. The anticipated major tasks did not comprise more than 30% of the remuneration sought in any one instance and the total costs associated with the anticipated major tasks was provided to creditors.

14    At no time did the plaintiff receive from a creditor any complaint, query or other enquiry regarding his remuneration. In addition, no creditor of the company or ASIC has sought a review of his remuneration.

15    On behalf of the plaintiff, it is submitted that the creditors were provided with sufficient information to make a decision in respect of the remuneration requests despite the absence of specific compliance with s 449E(7)(a)(iii) and s 499(7)(a)(iii).

16    In these circumstances, the plaintiff requests the Court take into consideration that he provided the creditors with a summary of the anticipated tasks and the total costs of those tasks. The creditors, he submits, would have been under no illusions as to the amount of remuneration sought by him.

17    On behalf of the plaintiff, it is noted that s 447A(1) of the Act enables the Court to “make such order as it thinks appropriate about how this Part is to operate in relation to a particular company”. The plaintiff submits that s 447A enables the making of orders which alter the way in which Pt 5.3A of the Act is to operate in relation to a particular company, noting that in Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 at [18], the Court stated:

[I]n 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 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 … 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.

(Emphasis in original.)

18    Based on that understanding, the plaintiff seeks orders which alter how s 449E is to apply to the remuneration reports of the administrator, having the effect of exonerating him from the requirement to set out the costs associated with each of the anticipated major tasks.

19    I accept the submissions of the plaintiff concerning the Court’s power to make an order in the terms sought in para 1.

20    In the circumstances described above and for the reasons advanced by the plaintiff, and in the absence of any formal intervention by ASIC to the contrary, I consider it is appropriate to grant the relief sought in para 1 of the originating process.

PARAGRAPH 2 OF THE RELIEF SOUGHT

21     Relevantly, reg 5.3A07(1)(b) of the Corporations Regulations 2001 (Cth) (Regulations) provides that for subs 446B(1) of the Act, a company that has executed a deed of company arrangement is taken to have passed a special resolution under s 491, that the company be wound up voluntarily, if the deed of company arrangement specifies circumstances in which the deed is to terminate and the company is to be wound up, and if those circumstances exist at a particular time.

22    In this case the deed of company arrangement (DoCA) entered into by the company provided by cl 16.1 the specific circumstances in which the deed was to terminate and by cl 16.3 that the company was to be wound up.

23    The plaintiff issued the notice of DoCA default to the company on 10 November 2009 identifying specific breaches of the DoCA’s terms.

24    Following advice from the Australian Taxation Office (ATO) received 10 February 2010 that a statutory demand had issued against the company in respect of outstanding taxation liabilities, the plaintiff, as administrator, sent a notice of termination which was based on grounds that the company was non-compliant with the DoCA, that it was no longer practicable to continue to implement the DoCA and/or the occurrence of an event which had a material adverse effect on the ability of the company to pay its debts as and when they fell due and/or comply with the DoCA.

25    The notice of termination confirmed that the company was taken to have passed a special resolution under s 491 of the Act that the company be wound up voluntarily and that the administrator should become the company’s liquidator.

26    Section 446B(3) of the Act provides that in circumstances such as these, the Regulations may provide for matters of a kind provided for by any of subs 446A(2) to (7) inclusive. The passing of the resolution is one matter which falls within the contemplation of s 446B.

27    On behalf of the plaintiff, it is submitted that the scope of s 447A is such that it may be used to modify consequences or requirements flowing from the operation of a section within Pt 5.3A, even where those consequences or requirements, strictly speaking, form part of a statutory regime outside of Pt 5.3A. In this regard, the plaintiff draws attention to Gibbons v LibertyOne Pty Ltd (In Liq) [2002] NSWSC 274; (2002) 167 FLR 310, where Austin J used s 447A to modify the consequences or requirements flowing from the operation of s 446A in such a way as to dispense with the requirement under s 508(1)(b) (which forms part of the voluntary winding up regime under Pt 5.5) for the administrator/liquidator to hold an annual meeting of creditors. His Honour, at [50], stated:

Given that the winding up emerging from the application of s 446A is made to fit into the creditors’ voluntary winding up regime only by the operation of deeming provisions, and that those provisions qualify the way in which Pt 5.5 applies, there is no great leap involved in using s 447A to modify s 446A in another respect, so as to suit the circumstances of the case. To do so is not to give s 447A an operation beyond Pt 5.3A. It is to make an adjustment to the deeming provisions which ‘borrow’ Pt 5.5 and adapt it to circumstances arising out of a voluntary administration.

28    Following that approach it is submitted on behalf of the plaintiff that the requirement of the liquidator to comply with s 499(7)(a)(iii) is a requirement flowing from the operation of a section within Pt 5.3A, and that the Court has the power to make an order under s 447A to alter how s 499 is to apply to the remuneration report of the liquidator, having the effect of exonerating him from the requirement of s 449E(7)(a)(iii) to set out the costs associated with each of the anticipated major tasks.

29    I accept the submissions of the plaintiff concerning the Court’s power to make an order in the terms sought in para 2.

30    In the circumstances described above and for the reasons advanced by the plaintiff, and in the absence of any formal intervention by ASIC to the contrary, I consider it is appropriate to grant the relief sought in para 2 of the originating process.

PARAGRAPH 3 OF THE RELIEF SOUGHT

31    The plaintiff seeks a further, or alternative order, pursuant to s 447D and s 511 respectively, that the resolutions, passed in the course of the administration and the liquidation in respect of his remuneration as administrator and liquidator, were validly passed as required by the Act, notwithstanding that he may not have complied completely with the requirements of s 449E(7)(a)(iii) and s 499(7)(a)(iii).

32    In the circumstances, while it may not be strictly necessary in light of the orders made in respect of paras 1 and 2 of the relief sought, I am also prepared to grant relief in terms of para 3 of the originating process.

PARAGRAPH 4 OF THE RELIEF SOUGHT

33    By para 4 the plaintiff seeks a declaration or direction confirming “the appropriateness” of his exercise of a casting vote that had the effect of approving his remuneration as an insolvency practitioner at material times. In the event the Court is not minded to grant the relief sought in para 4 of the originating process, by the relief sought in para 5 the plaintiff asks the Court to fix his remuneration. It is in respect of the relief sought in para 4 that ASIC intervenes in the proceeding.

34    Dealing first with the para 4 relief and the question of the exercise of the casting vote, the material facts are that the plaintiff as liquidator of the company provided a report to creditors dated 29 November 2010, updating them on the progress of the winding up.

35    The notice to creditors enclosing the report to creditors advised that a meeting of creditors would be held at the offices of summerscorporate on 14 December 2010 at 10am. The notice also advised that “all relevant information” in relation to the meeting was provided by the report and its attachments.

36    The relevant report to creditors was said to be the ninth such report. By the executive summary, creditors were reminded that the plaintiff had terminated the DoCA on 10 February 2010 and commenced winding up of the company on that date. The plaintiff in brief advised that his activity to date had included:

    negotiation with regards to the continued operation of the business;

    negotiations with regard to the potential sale of the business;

    negotiation and settlement of the matter with Tarwarri Holdings Pty Ltd (Tarwarri) in respect of its assertion of a valid charge over the assets of the company;

    winding down the business;

    collection of debts, including analysis of various disputes and the commencement of court action for the recovery of unpaid debts;

    investigation and realisation of other assets (including the settlement with Tarwarri);

    investigation into the company’s affairs and lodgement of a preliminary report with ASIC; and

    liaising with employees and the Department of Education, Employment and Workplace Relations in respect of employee claims.

37    Creditors were also advised that current outstanding matters included:

    preparation and lodgement of a supplementary report with ASIC; and

    finalisation of asset recoveries.

38    Finally, in the executive summary of the report the plaintiff advised creditors that:

In the absence of creditor funding for further investigation and potential recovery action, I do not anticipate a return to ordinary unsecured creditors. Any return to employees will be contingent on the finalisation of recoveries and the costs incurred.

39    The report to creditors then dealt with a range of matters under the headings of history, continued trading, “the charge issue” (concerning Tarwarri), investigations, directors’ report as to affairs, assets, liabilities, future activity, estimated return, receipts and payments, remuneration of liquidator and meeting of creditors.

40    In the section dealing with investigations, the topics of unfair preferences, uncommercial transactions, unfair loans, unreasonable director-related transactions, voidable charges and insolvent trading were specifically addressed.

41    In section 4.4 dealing with unreasonable director-related transactions, the plaintiff noted that if a director receives a payment which is to the detriment of the company and to the benefit of the director, it is an unreasonable director-related transaction. The plaintiff advised creditors that his investigations had identified that “a handful” of the company’s debtors were some five or so months prior to the termination of the DoCA directed to deposit payments into the account of a related entity. He noted a total of $45,378 was paid into that entity’s account immediately prior to and following the start of the winding up and had not been repaid to the liquidator.

42    The plaintiff further advised creditors that the working capital trust was committed to ongoing trade. After applying those funds to continued operations he estimated that approximately $24,500 may be repayable to the beneficiaries of the working capital trust and that amount would be set off against the $45,378 mentioned above.

43    Accordingly, the plaintiff advised approximately $20,000 “may be recoverable” but that “this is subject to further assessment”.

44    In section 4.6 dealing with insolvent trading, the plaintiff noted that directors may be personally liable for insolvent trading and that based upon initial investigations:

    The company did maintain reasonable books and records.

    Superannuation entitlement had not been paid for most if not all of the DoCA period.

    Only four payments were made to the ATO during the DoCA period.

    Third party contributions to trading activities may have ceased at the end of February 2009.

    The company’s available liquid assets ceased to exceed liabilities due, payable and outstanding around April 2009.

    The assertion by Tarwarri of an enforceable debt and charge had no bearing on the company’s operations up to 16 October 2009.

45    The plaintiff then noted that the information provided in the report was a summary and he had not considered if the directors may be able to successfully argue any of the defences that “are available to them” pursuant to the Act.

46    The plaintiff then concluded:

Accordingly, any pursuit for the recovery of amounts in relation to insolvent trading is subject to further investigation and consideration of a number of factors.

47    It might be said as an aside that the information provided to creditors about insolvent trading would not have provided them with any particular reason to think that there were any amounts recoverable. Indeed, in section 9 of the report to creditors, concerning estimated return, the plaintiff, after referring to his earlier circular to creditors dated 1 April 2010, noted:

All currently available funds will be utilised in paying the costs of the winding up (including legal fees for asset recoveries, liquidator’s remuneration and costs of recovery). Creditors should note that a liquidator is not required to incur any expense unless there is sufficient available property (s545 of the Act). Accordingly, where there are insufficient funds to proceed with investigations or recovery processes (such as engaging lawyers) a liquidator is not bound to proceed with those tasks.

A distribution to employees will be reliant on finalising the investigations and subsequent recovery action.

It is my current view that all ordinary unsecured creditors should consider their debts as unrecoverable and I respectfully suggest they write those debts off.

48    In section 11 of the report to creditors, remuneration of liquidator was then dealt with. The plaintiff indicated that, at the reconvened second creditors’ meeting of 23 June 2008, creditors had approved the liquidator’s remuneration in the amount of $50,000 (including GST). That was based on anticipated work in the event the DoCA did not proceed at that time.

49    The plaintiff further advised that given the complexity of matters that had developed he had estimated in his earlier report that the liquidation may cost as much as $165,000 (including GST). He then advised that his actual remuneration had been higher than that as a result of:

    prolonged negotiations for the sale of the business;

    significant review of the file in regards to assertions by Tarwarri and negotiation of the settlement with Tarwarri;

    dealing with sale of assets in conjunction with Tarwarri; and

    additional assessment of debtors in light of significant complaints arising from a “peak period surcharge” invoiced some 12 months after the “surcharge” was purportedly incurred.

50    The report then indicated that a remuneration report was “enclosed for creditors’ information”.

51    The plaintiff advised creditors that he was convening a meeting seeking approval for payment of the balance of his remuneration. He further advised:

I may apply to the Court for approval of my remuneration however such an application will draw on any additional asset recoveries.

52    Section 12 of the report to creditors then provided the notice of meeting to creditors, the first agenda item being:

1.    To consider a resolution approving and fixing the liquidator’s further remuneration of $247,847.45 (plus GST) comprising:

a.    balance of remuneration to 24 November 2010 ($161,497.45);

b.    remuneration in respect of continued investigation and recovery ($64,000.00); and

c.    remuneration in respect of finalisation of the winding up ($22,350.00).

53    The attached “Remuneration Report” covered the period 10 February 2010 to 24 November 2010, and 24 November 2010 to finalisation. As to the liquidator’s remuneration, the report dealt with description of work completed by task classification and provided a more detailed summary. It also provided a summary of liquidator’s estimated future remuneration for the period 25 November 2010 to completion of the winding up. The plaintiff advised that as the actual activity was unknown he was unable to provide an actual figure. He added:

I have, however, estimated the overall costs based on prior liquidations and the outstanding work required. Remuneration is charged at the hourly rates as detailed in this Report.

54    The remuneration report then indicated that it was broken down into two parts, the first being representative of the prospective costs relating to continued investigation and subsequent action being commenced, the second being the basic costs to finalise the winding up. Future investigation and recovery costs were estimated at $64,000 and finalisation of the winding up costs were estimated at $22,350.

55    A summary of liquidator’s remuneration was also provided which showed a subtotal of $247,847.45 which, together with GST of $24,784.75, totalled $272,632.20.

56    It is, therefore, apparent that the subtotal of $247,847.45 shown in that summary is the same amount as that mentioned in agenda item 1 of the notice of meeting in section 12 of the report to creditors.

57    A meeting of creditors then occurred on 14 December 2010 at 10am, in accordance with the notice given.

58    The minutes of the meeting disclose the following course of events.

59    Present were the plaintiff, as liquidator, and a colleague of his acting as minutes secretary. Mr Sabatino Giacci and Mr Anthony Giacci, directors, each personally attended and were shown as being creditors in the sum of $35,644 each. Mr Tim Dawson, representing “Steven Winch/Transport Workers Union” also attended. A legal representative of the plaintiff also attended. By proxy, Ms Aranka Kis appointed the liquidator in respect of the amount of $7,105 and Mr Steven Winch appointed Mr Dawson (referred to above) in respect of a debt of $27,204.

60    The plaintiff acted as chairperson of the meeting, pursuant to reg 5.6.17(1) of the Regulations in the light of no objections to him doing so.

61    The plaintiff as chairperson tabled the notice of meeting and report to creditors. He noted there was a quorum of creditors, there being in attendance either in person, proxy or attorney two or more persons entitled to vote.

62    The minutes then record the following matters of substance. First, the liquidator’s report, including the outcome of negotiations with Tarwarri and the liquidator’s and directors’ view that the charge was unenforceable; but that, in the absence of funds, settlement of the matter was achieved in September 2010.

63    Further, that preliminary investigations indicated a total of $30,000 in unfair preference payments may be recoverable and $20,000 potentially recoverable in respect of director-related transactions, “both being subject to further funding and further investigations”.

64    The minutes show that questions from the creditors were received and there was some discussion. Questions were asked by Mr Dawson and Mr A Giacci. The latter asked questions concerning the recovery of amounts of funding provided by related entities under the DoCA, the decision to wind up the company, and a proposal from former director, Mr Buralli, to buy the business.

65    In relation to remuneration of liquidator, the minutes disclose that the plaintiff as chairperson advised creditors of the summerscorporate scale of rates and stated they were the basis upon which the liquidator would be seeking approval of further remuneration, referring to the report to creditors previously tabled. The following resolution is then recorded:

That the further remuneration of the liquidator be calculated according to the summerscorporate scale of rates and applied to the time occupied by the liquidator and persons in his employ or in the employ of summerscorporate up to a further fixed AMOUNT of $272,632.20 (Inc. GST) as detailed in the report to creditors dated 29 November 2010 beyond which further approval must be obtained from creditors.

66    The result of voting recorded is that:

    Ms Kis and Mr Winch voted in favour of the resolution, the two of them constituting creditors to a value of $34,309;

    the Giaccis each voted against the resolution, representing a value of $71,288.

67    The minutes further record that the plaintiff, as liquidator, noted that no result had been reached in accordance with reg 5.6.21(2) or (3) of the Regulations and so the chairman (the plaintiff) exercised his casting vote in favour of the resolution.

68    The minutes further record that the chairman (the plaintiff) exercised his casting vote on the basis that:

(a)    There was no legislative bar from exercising a casting vote in favour;

(b)    The objecting parties were potential defendants to actions that may be brought by the Liquidator;

(c)    Employee creditors represented at the meeting were in favour of the resolution; and

(d)    Additional costs would be incurred in applying to Court which would further reduce any ultimate return to creditors.

69    In his affidavit filed in this proceeding and sworn 3 September 2012 (the second affidavit), the plaintiff sought to provide further context and reasoning for the manner in which he exercised his casting vote, as follows:

    A total of 161 potential creditors were listed in his records at the time of sending the ninth report although eight of the notices had been returned to sender. Accordingly, he sent the report to the remaining 153 potential creditors.

    Only four creditors attended the 14 December 2010 meeting personally or by proxy, representing 2.48% of all creditors and 2.61% of creditors that were sent the ninth report.

    The records of the company show superannuation amounts payable in respect of the Giaccis. It was his view at the time and remains his view that they are unable to personally lodge claims in respect of superannuation amounts and were only entitled to a maximum potential priority claim of $1,500 each in respect of annual leave entitlements.

    On that view, the Giaccis were creditors in the sum of only $3,000.

    He had been a member of the Insolvency Practitioners Association of Australia (IPAA) since 2005 and, as at 14 December 2010, was aware that:

(a)    the Regulations prevent any person holding a general proxy from voting in favour of a resolution that puts that person in a position to receive remuneration out of the assets of the company except as a creditor;

(b)    there is a duty to act honestly and in the best interests of those who may be affected by the vote;

(c)    there was no “general rule” as to when a casting vote must not be used;

(d)    the IPAA had issued a Revised Draft Code of Professional Practice (draft code) which provided guidance as to the use of the casting vote; and

(e)    the use of the casting vote should be considered on the circumstances.

    His rationale for utilising the casting vote was summarised in the minutes of the meeting but the awareness he had as at 14 December 2010, just set out, “formed the construct upon which I based my decisions”.

    In particular, it was his professional opinion, having regard to the specific circumstances known to him at the time that:

(a)    given that 97% of creditors had not expressed any interest in the 14 December 2010 creditors’ meeting, notwithstanding the content of the ninth report, the quantum of the remuneration requested therein and that the resolution of the remuneration was the sole purpose of the meeting, it was:

(i)    not in the interests of creditors and the liquidation generally to spend further funds by adjourning the 14 December 2010 creditors’ meeting and subsequently reconvening that meeting;

(ii)    not in the interests of creditors and the liquidation generally to spend further funds by ending the meeting and calling another meeting of creditors for the same purpose;

(iii)    in the interests of creditors and the liquidation generally to utilise the casting vote.

(b)    the relevant legislation did not preclude him from exercising the casting vote in favour of the resolution “(as it would have had I been exercising the vote under a general proxy)”;

(c)    it was in the interests of creditors and the liquidation generally to cast that vote in favour of the resolution because:

(i)    it would avoid significant additional costs that would otherwise be incurred in applying to the Court for a review of the remuneration, which costs would, in all likelihood, have been payable out of the assets of the company, which would have reduced the total funds available for creditors;

(ii)    the non-director employee creditors represented at the meeting would be the primary recipients of future realisations, particularly as they were without the benefit of distributions and it was those who had voted in favour of the resolution;

(iii)    the motives of those voting against the resolution “appeared” to him to be questionable for the following reasons:

•    they were aggressive during the 14 December 2010 creditors’ meeting and continued to assert their entitlement to funds that had already been committed to the liquidation in the presence of both him and their lawyers;

•    they were aware of the risk that they were likely to be subject to a claim from him as liquidator arising in respect of incurring credit while the company was insolvent;

•    they were silent in respect of any query, question or contest as to the remuneration sought or justification for such justification; and

•    their decision to reject the resolution appeared to be uncommercial, given that if it was not resolved, additional funds would be required in having the Court determine the remuneration, which funds ought more properly be available to meet the claims of creditors of the company, including their own claims.

70    The draft code referred to and relied upon by the plaintiff at cl 24.7.4 dealt with the “Use of the casting vote”. In this section guidance was provided concerning the “legal principles” governing the exercise of the casting vote as explained in case law and texts. Having covered a number of competing factors, the section concluded as follows:

Except in very limited circumstances, a Practitioner should not use the casting vote in relation to any resolution determining or fixing the Practitioner’s remuneration [footnote referred to the two cases referred to below].

A Practitioner must declare the rationale for:

•    exercising his or her casting vote (whether for or against a particular resolution), or

•    choosing not to exercise, his or her casting vote.

The reasons must be minuted.

71    The footnote referred to the decisions of Krejci as liquidator of Eaton Electrical Services [2006] NSWSC 782; (2006) 58 ACSR 403 (Krejci) and Williams as liquidator of C and D Global Protection Pty Ltd (in liq) v CD Protective Services Pty Ltd (No 3) [2010] QSC 224 (Williams).

72    ASIC, as intervener, contends, however, that the Court should not hold that the plaintiff’s exercise of the casting vote to fix his own remuneration was appropriate in the circumstances and that the declaration sought should not be made.

73    ASIC draws attention to the “hung vote” on the resolution for approval of the liquidator’s remuneration, noting there were two votes in favour of the resolution – those two creditors representing a dollar value of $34,309 (or 32.5% of the votes cast) – and two votes against the resolution – those creditors representing a dollar value of $71,288 (or 67.5% of the votes cast). Nonetheless, the plaintiff then exercised a casting vote in favour of the resolution.

74    ASIC also notes the four reasons given by the plaintiff, in the minutes, for acting as he did.

75    ASIC draws further attention to a number of factors it submits are relevant to the Court’s consideration of the plaintiff’s application. It says no “scale of rates” accompanied the report to creditors dated 29 November 2010. There was the remuneration report but the rates mentioned there were “a range”, namely:

    Liquidator – $590 / $420.

    Manager – $300 / $130.

It contends it was also not obvious whether those rates were inclusive or exclusive of GST.

76    ASIC further says the remuneration resolution proposed in the notice of meeting accompanying the report to creditors was in different terms from that passed. The resolution in the notice was in the following terms:

To consider a resolution approving and fixing the liquidator’s further remuneration of $247,847.45 (plus GST) comprising:

a.    balance of remuneration to 24 November 2010 ($161,497.45);

b.    remuneration in respect of continued investigation and recovery ($64,000.00); and

c.    remuneration in respect of finalisation of the winding up ($22,350.00).

77    ASIC says that accordingly the remuneration sought was in part for work completed and in part for work to be performed in the future.

78    ASIC says the remuneration report gave details as to remuneration sought for work done and a summary as to the plaintiff’s estimated future remuneration. As to the estimated future remuneration it was said that the remuneration would be charged “at the hourly rates as detailed in this Report”.

79    ASIC notes that it is in these circumstances that the plaintiff seeks the order declaring (or directing) that his conduct in exercising the casting vote was “appropriate”, which necessarily raises a question whether the conduct was attended with propriety.

80    ASIC observes that a court will not give directions as to a business or commercial decision; but will deal with a legal issue of substance or procedure or an issue of power, propriety or reasonableness: Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [65]. ASIC accepts that here the plaintiff raises a matter of propriety, or perhaps reasonableness: Re Rewards Projects Ltd (in liq); Ex parte Rewards Projects Ltd (in liq) [2011] WASC 339 (Re Rewards Projects Ltd) at [22].

81    ASIC submits that a direction that an external administrator may “properly” carry out a proposed course of conduct is often used to signify that it is appropriate that he or she may do so: see Mentha v GE Capital Ltd (1997) 154 ALR 565 at 571-572; Re Ansett Australia Ltd [2001] FCA 1439; (2001) 39 ASCR 355 at [83]-[88]; Re Rewards Projects Ltd at [23].

82    ASIC says it is implicit in such an order that the Court is approving the proposed conduct. Accordingly, the direction now sought by the plaintiff is not merely as to whether the plaintiff’s conduct was lawful and the Court must consider the propriety of the conduct and give directions as to whether, in the circumstances, it is conduct that the Court approves of. Thus, ASIC submits, the question to be entertained is whether the Court endorses and approves of the plaintiff’s exercise of the casting vote in the circumstances.

83    In relation to the exercise of a casting vote, attention is also drawn to reg 5.6.21(4) of the Regulations which empower a person presiding at a meeting of creditors to exercise a casting vote where there is a hung vote. ASIC says this commonly happens because either there is a majority in number in favour, but a majority in value against; or because there is a majority in value in favour, but a majority in number against. In the present case, however, ASIC observes there was no majority in terms of the numbers as two creditors voted in favour and two voted against; however the majority in value voted against the remuneration resolution – $71,288 against $34,309.

84    ASIC says the person presiding at the meeting – in this case the plaintiff – must include in the minutes of meeting the reasons for exercising, or not exercising, a casting vote, as required by reg 5.6.21(4A). ASIC says the necessity for articulation of reasons facilitates the Court’s powers of review under s 600B and s 600C of the Act.

85    ASIC contends a casting vote is different to a deliberative vote. It is a device to resolve deadlock. For that reason there are no hard and fast rules as to how a casting vote should be exercised. At one time it was thought that because the chairperson has a duty to maintain impartiality, a casting vote should be used to preserve the status quo. But it is now clear there is no general rule to this effect: see Kirwan v Cresvale Far East Ltd (in liq) [2001] NSWCA 395; (2002) 44 ACSR 21 (Kirwan) at [361].

86    In Kirwan, the Court approved the view that a person who has a casting vote is under a duty to exercise it honestly and in accordance with what he or she believes to be the best interests of those who may be affected by the vote. Subject to that, the person presiding at a meeting is fully entitled to use his or her vote as he or she thinks fit. See also Re Free Wesleyan Church of Tonga in Australia Inc [2012] NSWSC 214; (2012) 260 FLR 348 at [40].

87    ASIC thus contends that there is a general duty when exercising a casting vote to act honestly and in accordance with what the liquidator believes to be the best interests of the creditors.

88    ASIC accepts that the Regulations do not “in terms” prevent a person presiding from casting a vote in favour of his or her remuneration, but observes that the question of when a casting vote should be exercised in this way has been the subject of judicial comment. In Krejci, eight creditors, representing approximately 58% in value of the creditors voting, were in favour of a remuneration resolution and 12 creditors, representing approximately 42% in value, were against it. The resolution passed on the external administrator’s casting vote. Barrett J said that “fundamental equitable principles” needed to be taken into account. His Honour referred, at [9]-[11], to the fiduciary nature of the position occupied by the voluntary administrator (which was the relevant form of external administration in that case) which gave rise to those principles. His Honour stated, at [12]-[14], as follows:

12.    It is an incident of a fiduciary’s duties that he or she must subordinate personal interests to those of the person or group whose interests are to be served. Any profit derived from the fiduciary office without the informed consent of the person or group concerned may not be retained. A related aspect of the expectations to which fiduciaries are subject requires that they not put themselves in a position where their duties conflict with their interests.

13.    In the present case, the availability of the casting vote to the plaintiff caused three courses to become open to him: he might exercise the vote in favour of the remuneration resolution; exercise the vote against the remunerative resolution; or not exercise the vote at all. Had he chosen the second or third course, the resolution would not have been passed. In that event, the fixing of the plaintiff’s remuneration as administrator would have become a matter for decision by the court upon application made by the plaintiff as administrator: s 449E(1)(b). Either such course would thus have enabled the plaintiff to observe and give effect to the fundamental requirement that he avoid a situation in which his duty to serve the interests he was bound to serve (that is, the interests of the company as an embodiment of the interests of its creditors) conflicted with his personal interest in having his remuneration fixed so that he might then receive and enjoy it.

14.    In the events that happened, the plaintiff chose the first of the three available courses and thereby failed to give effect to the fundamental requirement to which I have referred. His exercise of the casting vote was therefore a breach of the fiduciary duties he owed. As a result, equity will not allow him to regard the resolution as the source of a right to be remunerated and will not allow him to retain any remuneration received in reliance upon a purported right to be remunerated in accordance with the resolution.

89    ASIC submits that the proposition that a liquidator occupies a fiduciary position has been well-recognised and cites a number of authorities to this effect: Thomas Franklin and Sons Ltd v Cameron (1935) 36 SR (NSW) 286 at 296; Commissioner for Corporate Affairs v Harvey [1980] VR 669 at 695; Timbercorp Securities Ltd (in liq) v WA Chip & Pulp Co Pty Ltd [2009] FCA 901 at [8]; Re McGrath [2010] NSWSC 404; (2010) 266 ALR 642.

90    ASIC also draws attention, however, to the decision in Williams where the vote was two creditors for (representing 99.99% by value) and five creditors against (representing 0.01% by value). Thus, there was an overwhelming majority in value of the creditors in favour. Wilson J, in an ex tempore decision, referred to Krejci and stated at pp 8-9:

In my view, all the relevant circumstances of a case must be considered in determining whether a fiduciary has acted in the breach of his duty to those whose interest he is bound to serve.

If Barrett J meant there can never be circumstances in which a liquidator may exercise his casting vote in favour of his own remuneration, I respectfully disagree.

In this case, the liquidator was obliged to serve the interests of the company as an embodiment of the interests of its creditors, to use Barrett J’s description. Here, 99.9 per cent in value of the creditors voting were in favour of the resolution. An application to the Court would have involved expenditure of money which might otherwise be available to creditors. A schedule containing details of the remuneration had already been tabled at the meeting. These were all circumstances properly bearing upon the liquidator’s decision how to exercise the casting vote. I am not persuaded that she preferred her personal interests to those of the company.

91    On behalf of ASIC it is accepted, having regard to Williams, that it cannot be said that there can never be circumstances in which an insolvency practitioner may exercise the casting vote in favour of his or her remuneration. But ASIC do submit that there are obvious sensitivities when a liquidator exercises the casting vote in a manner that benefits himself or herself. One example would be where the casting vote is exercised to allow the insolvency practitioner to remain in office by preventing replacement as administrator or deed administrator. Another obvious example, ASIC submits, would reflect the facts of the present case – where the casting vote is exercised by a presiding person to approve his or her own remuneration.

92    ASIC submits that the Court should scrutinise the use of a casting vote where it is employed by an external administrator in his or her own aid. The use of the power to exercise the casting vote is then informed by the fiduciary position occupied by the person presiding at the meeting.

93    ASIC further contends that when one has regard to the four reasons expressed in the minutes for the exercise of the casting vote, it was not appropriate.

94    ASIC submits that there is some degree of reconstruction in the plaintiff’s second affidavit as to the amplification of the reasons that appear in the minutes.

95    ASIC contends that, in any event, the first reason advanced in the minutes, that there is no “legislative bar” against exercising the casting vote, does not justify the conduct.

96    As to the second and third reasons – that the objecting parties were potential defendants in prospective proceedings, and employee creditors were in favour – ASIC concedes those were potentially relevant. However, there was a failure to give any consideration to the fact that a substantial majority in value was against the remuneration resolution, making this a different case to that of Williams.

97    Also, so far as the plaintiff referred to the creditors opposing the remuneration as being “potential defendants”, there was no suggestion that the opposing creditors’ vote against the remuneration resolution was motivated by such extraneous considerations. To the contrary, the plaintiff’s first affidavit stated that neither of the opposing creditors commented as to their reasons for rejecting the remuneration resolution. Thus, ASIC submits, despite the reference to “potential defendants”, the plaintiff in his earlier report only identified a potential $20,000 unreasonable director-related transaction claim. The identified claim for $20,000 was unlikely to be pursued. Standing alone it is not a convincing reason to discount or give lesser weight to the views of the opposing creditors.

98    As to the fourth reason advanced – that additional cost would otherwise be incurred in applying to the Court for approval – ASIC accepts this is plausible on its face, as it was accepted in Williams. However, on its own it cannot be a sufficient reason, otherwise the exercise of the casting vote would be justified on every occasion.

99    Thus, ASIC submits, the circumstances identified here by the plaintiff are not like those in Williams where there was an overwhelming majority by value in favour of the resolution.

100    ASIC further submits that based on the plaintiff’s report to creditors and the prevailing financial position, the costs rationale, while plausible if taken at face value, on examination is illusory. The plaintiff’s report indicated that he did not anticipate a return to ordinary unsecured creditors. To the contrary, he stated that:

[a]ll currently available funds will be utilised in paying the costs of the winding up.

That proposition, ASIC submits, is borne out by the cash at bank in the liquidation. It appears that the cash available as at 14 December 2010 was in the order of $91,342.75. The plaintiff sought approval for remuneration of $247,847.45 plus GST – of which $161,497.45 had already been incurred. Accordingly, ASIC submits, an application to the Court would not have involved expenditure of money which might otherwise be available to creditors. It could only have impacted on the plaintiff personally. Viewed in context, therefore, the reason advanced was devoid of real substance.

101    ASIC further contends that the plaintiff did not have regard to all relevant matters, and the Court should have regard to the accepted range of relevant factors when assessing the propriety of the conduct of exercising the casting vote: see Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 289; (2007) 210 FLR 22 at [16]. In particular, ASIC submits that the plaintiff failed to consider the fiduciary nature of his role as liquidator and that the failure of the resolution would have no immediate impact on the creditors, but was only relevant to him personally. ASIC also contends that it was also material that:

(1)    In part the remuneration resolution concerned future work – this could have been the subject of a resolution at a future meeting when the work had been done and could be more readily assessed.

(2)    There was not, in fact, any scale of rates identified in the remuneration report.

(3)    The rates as disclosed in the remuneration report were a range and it varied considerably. For a manager the rate varied from $130 – $300 per hour, i.e. 131%. For a liquidator it was from $420 - $590 per hour, i.e. 40%.

(4)    The remuneration resolution proposed in the notice of meeting and the subject of the special proxy was not the same as that proposed by the plaintiff at the meeting.

102    In summary, ASIC contends that the Court should refuse the relief sought in para 4 because, first, there was no overwhelming majority in favour of the remuneration resolution, but there was a substantial majority against the remuneration resolution. Secondly, an application to determine the remuneration would not have involved spending money otherwise available to creditors. The reasons given by the plaintiff are insufficient to justify the exercise of the casting vote in the interests of the creditors as a whole and the plaintiff himself was the only person who would immediately benefit from his exercise of the casting vote. That course should not have been considered to him given the fiduciary position he occupied. He also voted against the wishes of the majority in value of the creditors and failed to have regard to a number of relevant considerations.

103    The plaintiff does not dispute the principles that guide the exercise of a casting vote, as developed in the submissions of ASIC.

104    On behalf of the plaintiff, reference is also made to Hawkwood Holdings Pty Ltd v Williamson the Liquidator of Merlino Constructions Services Pty Ltd (in liq) (Receivers and Managers Appointed) [2000] WASC 73 where the Supreme Court of Western Australia refused an application under s 600B to set aside a resolution, passed by virtue of a liquidator’s casting vote, to enter into a funding agreement to pursue an unfair preference claim of $620,688. The issue was not the proxy votes exercised but the casting vote. The creditors were not misled about the liquidator’s position. He informed creditors about the claim and the proposed funding offer and disclosed his costs position. Despite his personal financial interest in the outcome there was no need for him to decline to exercise a casting vote. The Court said, at [12]:

The liquidator is going to charge fees, and is entitled to charge fees, for every act he does in the course of the liquidation. So, if he is gathering assets, selling a property or pursuing an action, he is going to charge fees and is entitled to be paid with priority over other creditors. I consider that that fact should not preclude him from exercising his judgment in all kinds of matters, including the casting vote in issue here. In the absence of any authority at all, I am not willing to make new law and say that the liquidator, as in this case, who is owed fees for past work, and hoping to get paid for future work, is thereby debarred from making a casting vote on a matter which has divided the creditors ... I am willing to assume that he acted properly as an officer of the court in casting a vote for a resolution which offered reasonable prospects of recovering money for the benefit of all creditors, even though it incidentally offered the prospect of recovering money to pay his fees.

105    The plaintiff submits that in the case now before the Court, a mere 2.5% of all creditors showed an interest in the resolution, of which almost 92% of the value of priority creditors were in favour of the resolution to approve the liquidator’s remuneration. The remuneration report contained sufficient information on which a creditor could make an informed decision, and was not specifically queried by the creditors. Further, the plaintiff had concerns regarding the motives of the Giaccis for voting against the resolution, and took into consideration the fact that they could be the defendants in a claim by him for trading while insolvent. Such a claim was submitted to have a potential value of up to $500,000. In addition, an application to the Court would have involved expenditure of money which might otherwise be available to creditors.

106    On behalf of the plaintiff it is said that it is apparent from his affidavit evidence that he used the casting vote honestly and in accordance with what he believed to be in the best interests of the company and of those affected by the vote.

107    In the result, I am not satisfied that the Court should declare or direct that the plaintiff’s use of his casting vote, as liquidator of the company, in favour of his remuneration at the meeting of creditors on 14 December 2010 was appropriate in the circumstances.

108    What might be said is that it was convenient for the plaintiff to exercise his casting vote in the way that he did, because it obviated the need to seek the approval of the Court both for remuneration for work already done as well as for the work that might possibly be done in the future.

109    In broad terms, I accept the submissions made on behalf of ASIC. There appears to me to have been a lack of appreciation, as revealed by both the minutes recording the reasons for the exercise of the casting vote in favour the resolution as well in the elaborated account of why he acted as he did as set out in the second affidavit, that the plaintiff was in a fiduciary relationship which needed to be born steadily in mind when deciding whether or not to exercise the casting vote.

110    The authorities make it clear that while the fiduciary responsibilities of a person such as a liquidator raise well understood equitable principles, which at first blush bear against a fiduciary approving his or her own remuneration, nonetheless in appropriate circumstances a casting vote may be exercised that way. There is no blanket rule against the casting vote being used to approve an insolvency practitioner’s remuneration in appropriate circumstances.

111    But this case is not like that of Williams, where her Honour Wilson J had no hesitation in finding in the particular circumstances of that case that there was no relevant breach of a fiduciary obligation and indeed that it was appropriate for the insolvency practitioner to exercise the casting vote in approving her remuneration.

112    But, the situation here that makes me cautious about accepting the appropriateness of the exercise of the casting vote to support the resolution in favour of the remuneration is not just that there appears to have been no clear recognition by the plaintiff of the primary fiduciary relationship, but also the fact that the support of the resolution ensured the payment of work already done, in circumstances where, on the plaintiff’s relevant report to creditors, there was little likelihood of any other funds being obtained.

113    Thus, as ASIC reasonably submits, an application to the Court to approve remuneration would not have involved expenditure of money which might otherwise have been available to creditors. It could only have impacted on the plaintiff personally. Thus, viewed in context, the fourth reason advanced in the minutes in support of the exercise of the casting vote to approve the remuneration, the additional cost that would otherwise be incurred in applying to the Court for approval, is devoid of real substance. Rather, it highlights the nature of the practical conflict of the plaintiff in all the circumstances in exercising the casting vote in support of his own remuneration.

114    While it might generally be said, for a number of the reasons advanced by the plaintiff, that the exercise of the casting vote in favour of the resolution was convenient from his point of view – because in many respects it was a small liquidation with few active creditors and there were frosty relations involving the two directors/creditors who attended the meeting (the Giaccis), and there were not likely to be any funds to distribute to creditors – in my view those particular circumstances did not make it appropriate for the plaintiff to approve his own remuneration when the practical effect of doing so ensured only that expenses already incurred would be paid to the liquidator. The plaintiff, in my view, should appropriately have applied to the Court. Indeed, as noted above, in the report to creditors the plaintiff, in fact, advised creditors that he “may apply to the Court for approval of my remuneration”, although he did add that such an application might draw on any additional asset recoveries. That latter observation, as explained above, was really illusory in all of the circumstances. It did not convey the true position.

115    I am therefore not prepared in the circumstances of this case to declare or direct that it was appropriate for the plaintiff to exercise the casting vote in the manner he did and so I would not grant relief in terms of para 4 of the originating process.

Paragraph 5 of the relief sought

116    In these circumstances, the plaintiff seeks, as an alternative, an order in terms of para 5 that the Court approve his remuneration in his various capacities as it sees fit.

117    In the circumstances it would appear appropriate that the entitlement of the plaintiff to remuneration for the work that had already been done up to the point of the meeting of creditors at which the impugned resolution was made should now be assessed.

118    I note, however, that the plaintiff in his written outline of submissions, has drawn to the Court’s attention information the fact that he has, to date, received the sum of $297,230.25 (excluding GST) out of an approved amount of $368,847.45 (excluding GST). It is said the plaintiff’s actual costs associated with the company are $480,736.79 and that the balance of funds held by the company is approximately $2,000. Thus, the plaintiff will not receive any more than a further $2,000 for the work that he has completed.

119    In these circumstances, the Court will hear further from the plaintiff as to what order, if any, would appear to be appropriate in terms of the relief sought in para 5 of the originating process.

Associate:

Dated:    25 October 2013