Club Superstores Australia Pty Ltd, Re [1993] QSC 174

,'.c "c,":~Ofc$~ ~:-:St~te Repolifin8-Bureau - c· C' .l.) TRANSCRIPT OF PROCEEDINGS ... (Copyright in this transcript is vested In the Crown. Copies ~hereof must not be made or sold . without the written authority of the Director, State Reporting Bureau.) -: · · -. -~- ' . ' SUPREME COURT. "OF QUEE;NSLAND CIVIL JURISDICTI9N THOMAS J ·. 'r . " I' App~ No 67 of 1993 _) • .' ";•".··. :r• ·. '. ._-; .· RE~ISED COPIES ISSUED .. Sratc Reporting Bureau . Date 3 · '.:·r.t •' --_ .. ~ -·~ . ' ' · · IN . THE MATTER of THE CORPORATIONS ·LAW ·.· .. and··· . I IN THE MATTER of· CLUB SUPERSTORES AUSTRALIA PTY. LTD. (IN LIQQIDATION) ,· _-., BRISBANE .. DATE 25/06/93 JUDGMENT 1 . ::,- -- 1 of 17 -- 250693, SC (Thomas J) ' :•'. HIS HONOUR: I have decided that the liquidator should be ' . removed and that Mr Geroff and Maloney should be appointed liquid~tors. I publish my reasons. I am prepared to hear submissions on further orders in relation to remuneration, costs and any 10 other matters that will enable the change to be effected. I further order'that the costs of each party be taxed and that those costs be costs in the winding up. 0 30 40 50 60 JUDGMENT 2 -- 2 of 17 -- : ~"\0 IN THE SUPREME COURT OF QUEENSLAND App. No. 67 of 1993 Brisbane Before Mr. Justice Thomas [Re: Club Superstores Pty. Ltd. (in liq.)] BETWEEN: IN THE MATTER of THE CORPORATIONS LAW - and - IN THE MATTER of AUSTRALIA PTY. LTD. A.C.N. 009 861 189 CLUB SUPERSTORES (IN LIQUIDATION) REASONS FOR JUDGMENT - THOMAS J. Judgment delivered the 25th day of June, 1993 CATCHWORDS : Companies - liquidators - dismissal of - conflict of duty to different parties - pre-liquidation conference - personal advice given to director - need for liquidators to be seen to be independent - observations on the practice of pre-liquidation conferences. Counsel: P. Dunning for applicant D. Jackson Q.C. & P. McQuade for respondent Solicitors: Tobin and Co for applicant James Conomos for respondent Hearing Date: 22nd June, 1993 (I -- 3 of 17 -- (\ \ ) IN THE SUPREME COURT OF QUEENSLAND BETWEEN: App. No. 67 of 1993 IN THE MATTER of THE CORPORATIONS LAW - and - IN THE MATTER of AUSTRALIA PTY. LTD. A.C.N. 009 861 189 CLUB SUPERSTORES (IN LIQUIDATION) REASONS FOR JUDGMENT - THOMAS J. Delivered the 25th day of June, 1993 This is an application to remove a liquidator. It is brought by Mr. Shannon, who was at material times, a director and the person in charge of the company. The liquidation is still in its early stages and the following is a broad preliminary picture of the position of the company. The total unsecured debts of the company are between (_) $5.3 million and $6 million of which $3.7 is owed to Mr and Mrs Shannon. The largest debtors of the company appear to be a unit trust and an associated company with which Mr. and Mrs. Shannon u are involved, namely Shannon Properties Unit Trust which is indebted to the company in the sum of about $8.4 million, and Shannon Holdings which is indebted in the sum of about $. 6 million. It does not seem that there is any reasonable possibility of these debts being collected. The unsecured creditors other than Mr. and Mrs. Shannon are probably of the order of about $1.8 million. The net realisation to date is little more than the priority debt of the Australian Taxation -- 4 of 17 -- .2 Office, and the prospect of a dividend to the unsecured creditors is presently unfavourable. Mr. Worrell was initially appointed as provisional liquidator on 3rd February, 1993 on the company's own application. He was a~pointed the official liquidator when the company was wound up on 4th March, 1993, again on the company's own application. The basis of the present application is that by reason of the relationship and dealing between Mr. Worrell and Mr. Shannon ~) and the company prior to h~s appointment, .he cannot be seen to be independent in his role. The present matter is a sensitive 0 one, involving as it does the practice of "pre-appointment conferences" by liquidators. There is some degree of inconsistency between the evidence of Mr. Shannon and of Mr. Worr~ll in relation to the nature of the·r~levant dealings, but the correspondence provides the best evidence. Mr. Shannon and Mr. Worrell have apparently placed 0 different interpretations upon Mr. Worrell' s function during their pre-liquidation consultations. There is however a deal of 0common ground and it will not be necessary to resolve the points upon whic~ the recollections of the deponents as to oral conversations differ. The company, which was at material times under the control of Mr. Shannon, traded in hardware and white goods. During 1992, with good cause, Mr. Shannon became concerned at the financial state,· of the company. }ie engaged a financial consultant, Mr-. · LeServe who in due course recommended that a meeting be arranged.with Mr. Worrell. -- 5 of 17 -- n 3 Mr. Shannon understood that a meeting would be arranged so that Mr. Worrell could give him advice with respect to his current position and my responsibilities as a company director. Mr. LeServe says that his initial advice to Mr. Shannon was that "winding-up of (the company) should be considered and that he should meet with Ivor Worrell to discuss this matter". Mr. Worrell says that Mr. LeServe informed him that the company was insolvent and had to be wound-up, and that "a meeting was arranged on the basis of my being appointed liquidator of Club". In the event a meeting took place in Mr. Worrell's office in August 1992. Financial information was collected and handed to Mr. Worrell. Mr. Shannon says that he tbld Mr. Worrell that he needed advice with respect to his position as a director and that Mr. Worrell told him that he would prepare ad~ice in due course. Quite clearly, considerable information was provided in relation to the dealings of Mr. and Mr~. Shann6n with t6e company including their financing of it, debts and obligations, and of the activities of their trust and other companies. Mr. Worrell says that he stressed to Mr. Shannon that he was not in a position to advise him personally and recommended that he should obtain independent advice concerning his own affairs. It is common ground however that Mr. Worrell undertook to prepare notes confirming what he told Mr. Shannon and Mr. LeServe. This was done in the form of a letter dated 19th August, 1992, addressed ·to Mr. Shannon, marked "Private and Confidential", and commencing "Dear Garry". It contained an·· analysis of the financial position of the company including the difficulty of realisation of the greater part of the intangible -- 6 of 17 -- 4 assets, observations on the working capital deficiency and concluding with the observation "it cannot be long before some kind of formal_arrangement is either adopted by the company or forced on the company unless funds are found promptly". The letter then proceeds to discuss matters concerning the personal position of Mr. and Mrs. Shannon, and does so under the heading "The position of other group companies_and G. & w. Shannon". It ' commences "I have not exhaustively examined the position of the other group companies or yourself and Wendy however the following Q notes may be useful for on-going discussion". The ensuing discussion quite plainly is directed to the position of 0Mr. Shannon's other companies and interest which might be affecteq or "exposed" by a winding-up of a company. These exposures included the Shannon Property Unit Trust Loan of $8.23 million, the personal guarantees of Mr. and Mrs. Shannon and advice concerning a particular company transaction. This latter point was expressed as follows: 0 "G. & W. Shannon (or other property hold~rs) would be exposed to the liquidator as a result of funds from the sale of Coolangatta being used to pay debts due by G. & W. Shannon. In fact this would not appear to be a problem as any amount claimed by the liquidator would be offset against the funds already advanced by G. & W. Shannon." The next heading in the letter is "The options available to you in regard to_ Club Superstores Australia Pty. Ltd.". The alternatives canvassed are continuing to operate as at present, liquidation, and provisional liquidation. It concludes "It must however be noted that the appointment of a provisional liquidator does take control of the company out of your hands and it is possible that the creditors would not agree to any proposed 0 -- 7 of 17 -- / ·. 5 scheme of arrangement although that would be appear to·· be unlikely if it could be shown to be for their benefit". In the summary and recommendations, the following is included:- "I will be very happy to discuss the matters with you further. Essentially I do not see how you can continue tooperate on the present basis for any length of time given the number and amount of unsecured creditors. I would recommend the appointment of a provisional liquidator so that a scheme of arrangement can be developed for consideration of creditors. I look forward to discussing these matters with you tomorrow '• '' The letter was obviously discussed when Mr. Worrell attended the company's store on the following day. During that meeting Mr. Shannon made it clear to Mr. Worrell that he was not at that stage intending to place the company in liquidation. Mr. Worrell left, and although he remained in contact with lJ Mr. LeServe on other matters, he had no relevant contact with Mr. Shannon until December. Shortly before 22nd December Mr. LeServe asked Mr. Worrell to arrange a meeting in Mr. Worrell's office to consider the winding-up of the company. A meeting then occurred between Mr. Shannon, Mr. LeServe, Mr. Worrell, a creditor of the company, and some others. Prior to the meeting, upon Mr. Shannon's request (relayed by Mr. LeServe), Mr. Worrell prepared a letter, which obviously was intended to confirm for Mr. Shannon's benefit the basis ·of the discussions. It is addressed to Mr. Shannon and contains the following:- -- 8 of 17 -- 6 nDear Mr Shannon I have been asked by Mr. John LeServe to indicate the basis on which our discussion this morning is to proceed. It is my understanding that you wish me to record the following. 1 . 2 . I am being consulted as an independent Insolvency Practitioner to advise the directors of Club Superstores Australia Pty Ltd on its current financial position. In the even~ that the directors of the company decide that the company should be .wound up I will consent to act as liquidator of the company. Any information regarding the confidential toavailable to any which is provided to me company will remain me and will not be made third party. 3. In the event that a creditor of the company makes an application for its winding up I will not consent to act as liquidator without first communicating with you." Mr. Worrell also, on Mr. LeServe's request, prepared an outline of the duties of a provisional liquidator as they might apply to this company. There is little doubt that the principal thrust of the discussion was a strong recommendation that the company be put into provisional liquidation. Mr. Worrell stressed that he should not feel obliged to appoint him (Mr. Worrell) as liquidator and that. he could seek to appoint another if he wished. Mr. Shannon advised that he was negotiating with other parties interested in purchasing the assets of the company at prices which would apparently overcome the financial problems of the company. Once again. no immediate action was taken to appoint a liquidator or provisional liquidator. However on 3rd February, CJ 0 0 0 -- 9 of 17 -- 7 1993, on the company's application, Mr. Worrell was appointed. Since the winding-up order of 4th March, 1993, Mr. Worrell has acted in the usual way in assembling information and has now reached the stage of presenting a report to creditors. A meeting of creditors has been convened for 6th July, 1993. The report to creditors includes the following:- "5.1 ... In this administration, in my view, in light of the substantial deficiency and the limited amount of assets available for realisation, a detailed investigation into the affairs of the company appears necessary." and "It appears that the company may have been insolvent and trading in that situation for some time and it is important that the time of the company's insolvency as far as possible be established." The report further states that the matters proposed for investigation included the question of preferential ~ayments or voidable transactions, to determine if any offences have been committed or breach of duty under the Corporations Law. The l) possibility of an examination of the directors under s.597 was mentioned. The question of appointment of a committee of inspection was placed on the agenda. u Mr. Shannon claims that the present application has been brought because his new· solicitors, upon perusing the correspondence set out above advised him that it was inappropriate that the present liquidator should continue in office because of the·need to be independent and to be seen to be independent. It is also possible that he feels let down by someone from whom he expected to receive favourable treatment, but it is idle to speculate upon motives. My task is to examine in an objective way whether -in these circumstances there· is a -- 10 of 17 -- 8 conflict between interest and duty or between duty and duty; or whether such a conflict might be perceived by others, not only by Mr. and Mrs. Shannon but by creditors, as casting doubt upon Mr. Worrell's independence. The principles are not in doubt. The following statements illustrate both the principle and the care with which courts act in order to ensure that its officers in company liquidation retain the confidence of those who may be affected by their actions. "The guidingprinciple in the appointment by the court of a liquidator is that he must be independent and must be seen to be independent." (Re National Safety Council of Australia (1990) V.R. 1 29, 34, citing with approval McPherson on Company Liquidations 3rd ed. p.209). "I should apply the same principles to an application to remove a liquidator as I would apply to an application to appoint a person to be a liquidator." (Shanks Byrne Industries Pty. Ltd. (1979) 2 N.S.W.L.R. 880, 883 per Needham J.) "It does seem to me that the liquidator is put into a position where he may have to review transactions inrespect to which his partner has given advice, and payments into and disbursements from a trust account of which his partner is an auditor. That places him, in my opinion, in a position where his independence might seem to be in question. There is no suggestion that the liquidator would not perform his duties withcomplete integrity and to the best of his ability. But a liquidator must be independent and must be seen to be independent." (Re Queensland Stations Pty. Ltd. (in lig) (1991) 9 A.C.L.C. 1341, 1344 per Ryan J.) "Notwithstanding the professional standing of theproposed liquidator, it is inappropriate that he as scheme manager of .the creditor should also be liquidator of the company which is indebted to the creditor." (Re Cabat Pty. Ltd. (1985) 3 A.C.L.C. 828,830 per Master Lee Q.C.) "It is of the greatest importance that there should be no possibility of criticism.attaching to one of the court's own officers on the ground of a conflict of interest. The ···liquidator needs to be seen to be independent in any matter which his duties as CJ 0 0 0 -- 11 of 17 -- () (\ \_ ) 9 liquidator may require him to investigate." (Re Giant Resources Ltd. [1991] 1 Qd.R. 107, 117 per Ryan J.) "There is .. evidence which does indicate some nexus between the provisional liquidators and members of their firm with companies which will require to be investigated if the liquidation is to be properly carried out. Having regard to this, and to the opposition to their appointment expressed by. a majority of unsecured creditors, I consider that I should make an order that they be removed and replaced by another provision liquidator. I consider that this should be done, notwithstanding the difficulties which the newly appointed liquidator will no doubt experience .. " ibid. p.117. The National Safety Council of Australia case above involved the possibility that some action might ultimately be taken against the firm of which the liquidator was a member. The court, in setting aside the appointment of the liquidator observed that it would be a substantial injustice to the creditors if the relationship between that firm and the company could not be fairly promptly and independently investigated-and be seen to be independently investigated (p.34 ibid). I accept ( ) the submission of Mr. Jackson Q.C. for the liquidator that some ,_/ realistic prospect of embarrassment or a serious possibility of () conflict in his continuing to act needs to be seen before a dismissal is required. But once a realistic possibility of conflict arises, it is not possible to wait and see. It is necessary in the interests of efficiency and of avoiding disquiet that an order be made. In the present matter although Mr. Worrell intended merely to provide the advice of the kind that may commonly be given at "pre-appointment conferences" events went well beyond preliminary advice to the company on the effects of liquidation. It is difficult, and often impossible to draw clear lines between -- 12 of 17 -- ~"------- 10 advice· given to as a director of a company and advice to that pe~son personally. Whatever limitations Mr. Worrell initially intended to place upon the advice, the personal affairs of Mr. and Mrs. Shannon and their unit trust and companies were plainly introduced, and became the subject of specific advice. It is true that no fee was charged either to the company or Mr. and Mrs. Shannon for. the services that were provided. On this basis it was submitted on behalf of the liquidator that C '.J there was no retainer, and no professional relationship between " Mr. Worrell and the Shannons. It seems to me that there probably was a species of retainer, in some.respects the converse of a solicitor's speculative retainer. In the solicitor's case he or she is paid if the client wins, and is unpaid if the client loses. In the accountant's case he or she is paid (i.e. the emoluments of the liquidator are obtained) if the client succumbs, but nothing is received if the client trades out of the difficulties. In the end it does not greatly matter whether this is characterised as a retainer or a contingent arrangement. The accountant accepts an obligation to give advice in circumstances that considerably increase his chances of being appointed liquidator of the company. The prospect that. no fees will be recovered for the advice is commercially acceptable when balanced against the strong probability of significant remuneration in the liquidation. Arrangements will vary from case to" case, but under the Queensland system in which a nomination of liquidator may be made by ~he applicant creditor or the applicant company (as the case may be) it seems plain that one of the purposes of a 0 0 0 -- 13 of 17 -- 0 11 "pre-appointment conference" is to engender the expectation or promise of a nomination in the event that the company goes into liquidation. I am advised that such conferences occur in more' than 90 per cent of liquidations. I have no desire unduly to restrict the ability of prospective liquidators to keep their place in what is undoubtedly a competitive and lucrative industryi However it seems to me that where there is a prospect that a liquidator may be required to investigate possible impropriety on the part of directors or pursue the directors for debt preference or br~ach of duty, or rule upon proo£s of debt submitted by directors, or otherwise take action potentially inimical to their interests, they must avoid giving the impression in pre-appointment conferences that they are giving personal advice to such persons. The correspondence in the present matter shows that the line was clearly crossed. The fact that no charge was made for the advice and that it was given with the best of motives is not really to the point. The main problems that may arise if Mr. Worrell continues with this particular liquidation are - (a) Substantial details and books were supplied to Mr.-Worrell by and on behalf of Mr. and Mrs. Shannon as well as on behalf of the company concerning trusts and affairs of those parties. It cannot be said that such information was or is immaterial or that Mr. and Mrs. Shannon might not be disadvantaged if it were recollected or used. (b) Despite the submission that the promise of confidentiality was intended to apply only until the time when a winding-up -- 14 of 17 -- 12 order was made, this was not told to Mr. Shannon, and the letter contains no such limitation. It is an unlimited promise of confidentiality with respect to any information given to him. Such a promise having been given, there is cause for concern on Mr. Shannon's part that it might be breached. Of equal concern is the fact that there is room - for concern on the. part of creditors that it might be honoured. (c) The letters are sufficient to· create an expectation on () Mr. Shannon's part of some professional protection from Mr. Worrell in relation to the information supplied and the advice given. Against that history a special bitterness is likely to be engendered on Mr. Shannon's part if Mr. Worrell now rigorously pursues remedies against him. (d) There is equally likely to be a concern, on the part of at least some creditors, that the liquidator, by reason of prior dealings with Mr. Shannon, is not pursuing them and their companies with the rigour that they would think appropriate. (e) Although I regard as unrealistic the submission on behalf of Mr. Shannon that in the event of applications for relief based'on insolvent trading under s.592 Mr. Worrell would be joined as a third party, it is by no means inconceivable that in .view of his association with Mr. Shannon at material times he might be a potential witness against Mr~ Shannon and might be in a position to give objective evidence of inability to pay debts .at material times if such evidence were needed~ An. allegation of trading with 0 0 0 -- 15 of 17 -- 13 knowledge of insolvency could well be relevant in some proceedings. (f) Sensitive decisions will have to be made by the liquidator including decisions on who should be publicly examined, how the creditors should be advised and what action if any should be taken against the directors. These factors lead. me to the view that whilst Mr. Worrell acted in good faith and whilst it is to be expected that he would / \ ) in fact conduct the liquidation with complete propriety, the perception by interested parties that he might not do so has to be recognised. It is undesirable that the present appointment should continue. Although considerable work has been done by Mr. Worrell, the liquidation is still in its early ~tages, and the inconvenience that results from a change of liquidators is not substantial. It is not in my view a weighty factor in the present matter. The application is supported by two creditors other than Mr. and Mrs. Shannon ( Fulmer and Williams) . In the circumstances of the present case I do not regard this additional circumstance as carrying much weight. I base my decision upon the potential perception of lack of independence, conflict between duty and interest and conflict between duty and duties owed to different parties. I should not leave this case without urging upon potential liquidators the need for special care in dealing with-companies and the officers of companies in pre-appointment conferences. Often it will be virtually impossible to avoid crossing the line and giving what will be perceived to be advice to the person who -- 16 of 17 -- 14 is running the company as to what it is best for him to do. It is obviously in the public interest that accountants give early advice to companies that are in financi~l trouble, and that the advice should cover corporate problems, and where necessary the wider individual problems that invariably associated with company dealings. If such advice leads to problems such as the present it may well be that practices will have to change, either by changing the present nomination system, or by recognition by liquidators that the pre-liquidation adviser does not become the c·) liquidator. If the practice of acquiring business through pre- appointment conferences is to continue, considerable care will need to be exercised to avoid raising any expectations on the part of directors or anyone else that they are getting the benefit of personal professional advice. A mere disclaimer will not suffice if the substance of the discussion is otherwise. It will be ordered that Mr. Worrell be removed as liquidator of Club Superstores Australia Pty. Ltd. (in liquidation) and that Peter Ivan Felix Geroff and Gregory Michael Maloney jointly and separately be appointed liquidators of the company. I shall hear submissions on further orders in relation to remuneration, costs and other matters. 0 0 0 -- 17 of 17 --