Donglyn trading P/L & Ors v Mannerling Ltd [2009] QSC 52

SUPREME COURT OF QUEENSLAND CITATION: Donglyn trading P/L & Ors v Mannerling Ltd [2009] QSC 52 PARTIES: DONGLYN TRADING PTY LTD ACN 088 615 178 (applicant) CORNELIS MAARTEN VAN DE MEEBERG AND DIANA ELIZABETH LYNNE VAN DE MEEBERG (second applicant) JRG PROPERTY DEVELOPMENTS PTY LTD ACN 096 689 477 AS TRUSTEE FOR THE FIRST PROPERTY TRUST (third applicant) MANNERLING LTD ACN 098 981 205 (ADMINISTRATOR APPOINTED) (respondent) FILE NO/S: 1680 of 2009 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 13 March 2009 DELIVERED AT: Brisbane HEARING DATE: 27 February 2009 JUDGE: Douglas J ORDER: Application dismissed. CATCHWORDS: BANKRUPTCY AND INSOLVENCY — COMPANIES — EXTERNAL ADMINISTRATION — ADMINISTRATOR — REMOVAL — Conduct of administrator — Use of proxies at creditors’ meeting – Alleged delay in pursuing administration – Alleged failure to investigate actions of former directors and dealings in associated company - Administrator purporting to preside over creditors’ meeting by telephone — Alleged failure to carry out investigation of company’s affairs — Corporations Act 2001 (Cth) Pt 5.3A, s 439B(2), s 447A Corporations Regulations, 5.6.28, 5.6.29, 5.6.30 Re Paradise Constructors Pty Ltd (2004) 8 VR 171, referred Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd (2008) 66 ACSR 199, referred -- 1 of 8 -- 2 COUNSEL: D R Cooper SC for the applicants G D Beacham for the respondent SOLICITORS: MacGillivrays Solicitors for the applicants DLA Phillips Fox for the respondent [1] The applicants wish to terminate the administration of Mannerling Ltd and, instead, seek the appointment of a liquidator to wind up the company. Mr Aggs was appointed as the administrator on 9 January 2009 pursuant to a resolution of the company’s directors. He had no relevant previous involvement with the company or its directors and was appointed by them because they had formed the opinion that the company was insolvent. Background [2] The company was an investment vehicle which borrowed funds from investors to lend on to another company called New Capital Finance Pty Ltd as trustee for the NCF Unit Trust. In turn, NCF pooled those funds and lent them to other parties on short-term, high interest bearing loans. The directors of NCF were members of or associated with a family whose surname was Pyke-Knott. NCF ceased trading on 18 January 2008 and it appears that the business of pooling and on-lending the money sourced through Mannerling was then carried on by another company called NCF No 1 Pty Ltd (“NCF1”). [3] The shares in NCF1 were held as to 80 per cent by NCF but it has transferred them to Carol Pyke-Knott. The capacity in which she holds those shares is in dispute. Mr Aggs’ view of the evidence, supported by the documents he exhibits,1 is that NCF held those shares originally as trustee for the Pyke-Knott Family Discretionary Trust, that it has been removed as trustee and Carol Pyke-Knott has been appointed as trustee in its stead. The applicants say that the evidence supports the view that the shares were previously held for the NCF Unit Trust and contend that the 1,000,000 shares issued in NCF1 are now held by the wives of the new directors of that company and that NCF no longer has a financial interest in it since the transfer to Carol Pyke-Knott. There seems to be some confusion in their understanding on this issue. They rely on cl. 9.3(b) in a deed between Mannerling and its original subscribers that provides that any moneys lent by Mannerling to NCF will be secured over NCF’s assets and undertaking and in its capacity as trustee for the NCF unit trust.2 That says nothing as to the identity of the shareholders in NCF, the company. [4] The applicants also believe that the directors of Mannerling and NCF have misled them or concealed information about Mannerling’s operations and the solvency of NCF while continuing to solicit money from them, especially during 2008. They have not, however, commenced proceedings against those directors at this stage. [5] Speaking generally, the applicants take the view that it is necessary now to appoint a liquidator not only so that the company may be wound up, but also to permit an examination of the directors and officers of the company as to the conduct of its 1 Exhibits PKA16 and PKA17 to his affidavit filed by leave on 27 February 2009. 2 Exhibit DCM5 to the affidavit of Mr McBride filed 18 February 2009. -- 2 of 8 -- 3 affairs and to inquire into what has happened to the money advanced to it and lent on to NCF. They also submit that similar inquiries can be made by a liquidator in respect of NCF’s affairs. [6] They also make a number of specific complaints about Mr Aggs’ conduct of the administration so far. They include assertions that he has moved too slowly in his investigations, that he improperly counted two proxies at a creditors’ meeting and has failed to take steps to deal with the share transfer in NCF1, having misapprehended its significance. They also argue that NCF1’s business may be held on a constructive trust for NCF, something that should be investigated by Mr Aggs or a liquidator in his stead. Steps taken by the administrator [7] Before I examine those complaints it will be useful to set out the steps that have been taken so far. The respondent summarised them usefully in its outline of argument. [8] The first meeting of creditors of the company was held on 16 January 2009. At the meeting, the creditors resolved to appoint a committee of creditors and confirmed the appointment of Mr Aggs as administrator. Following his appointment, Mr Aggs determined that the only real asset of Mannerling was its secured loan to NCF. However, in order for that asset to be worth anything, it was necessary that NCF be in a position to repay the loan (or a substantial part of it). The most efficient way to cause NCF to repay the loan was to appoint a receiver and manager to NCF (or to enter into possession of the assets, as mortgagee) and cause NCF to realise its assets and pay over the net proceeds to Mannerling. However, the appointment of a receiver and manager involved further expense which would be borne by Mannerling and, for this reason, Mr Aggs decided to investigate whether NCF had any realisable assets before taking such a step. In the interim, Mr Aggs procured from the directors of NCF an agreement that had the effect of maintaining the status quo, so that the net asset position of NCF would not be prejudiced whilst he undertook his investigation. [9] Eventually, Mr Aggs’ investigations demonstrated that there was some commercial worth in the appointment of a receiver and manager. Therefore, on 11 February 2009, Mr Aggs caused Mannerling to appoint him as receiver and manager of NCF. The two primary assets of NCF are: (a) loans made by NCF (with the funds lent to it by the company). Those loans are categorised by NCF as delinquent and are at various stages of recovery; (b) an action by NCF against its former solicitors for negligence in relation to the making of certain loans. That action is on foot. [10] Since his appointment as receiver and manager of NCF, Mr Aggs has continued his investigations. This includes undertaking an independent assessment of NCF’s negligence claim. The second creditors’ meeting [11] On 5 February 2009 the second meeting of creditors was held. The applicants criticised Mr Aggs’ behaviour at the meeting in not accepting a motion to wind up -- 3 of 8 -- 4 the company although he agreed to let it remain “on the table”. They also asserted that Mr Aggs was unable to answer questions put to him by creditors because he said he needed more time to understand the company’s affairs better. They were not satisfied with attempts made by Mr Aggs’ partner, Mr Robson, to answer some specific questions put by creditors. Nor were they happy that Mr Aggs was unable to express an opinion about the likely prospects of success or the cost of the litigation on foot against the former solicitors of NCF. [12] The day before that meeting a proposal had been made by the directors of Mannerling to fund that litigation. The proposal includes an offer of: “3. our indemnity upwards to $100,000 to fund legal costs of the legal action of New Capital Finance Pty Ltd on a $1 for $2 spend, (ie 50% of costs to a maximum of $100000), such amount to be refunded as a priority creditor if the challenge is successful.” [13] The applicants contend that that proposal is not worthy of consideration and ambiguous as to whether it is an offer of $50,000 or $100,000. They do not, however, provide any evidence of funding that might otherwise be available if a liquidator were to be appointed. It should also be possible for Mr Aggs to seek clarification of the amount of the indemnity sought in any proposed deed of company arrangement. [14] The applicants also complained that Mr Aggs was unable to give any advice about his investigations of the affairs of the company, the possible exposure of the directors to insolvent trading claims or the prospect of recovering any of the loans which were in default. [15] Mr Aggs recommended that the meeting be adjourned for 60 days. That proposal was criticised as exemplifying ignorance by him of the fact that the legislation had been changed to permit a maximum adjournment of 45 days. When one examines the legislation, however, the maximum adjournment now allowed is 45 business days which translates into approximately 63 days so that the proposed adjournment of 60 days was consistent with the legislation.3 Nonetheless Mr Aggs agreed to a variation of the motion to a period of 45 days. [16] He was also criticised for not being able to provide a reason why a deed of company arrangement should be preferred to a liquidation although he did so in the report of 29 January 2009, saying that because of the existence of priority classes of creditors he did not believe there would be sufficient assets to satisfy the unsecured creditors’ claims.4 [17] Finally, at the meeting, his decision to vote a proxy against a motion to wind up the company was attacked, where the proxy was directed particularly to the adjournment of the meeting but said nothing one way or the other about the motion to wind up. The motion to wind up was defeated by 11 votes to 10 and a similar majority was in favour of adjourning the meeting to allow further investigations to take place and a proposed deed of company arrangement to be considered. I shall discuss the position in relation to the use of the proxies in more detail later. 3 See Corporations Act 2001 (Cth) s 439B(2). 4 See Ex PKAN9 to the affidavit of Mr Aggs filed by leave on 27 February 2009 at para 10 on p 46 of the exhibits to the affidavit. -- 4 of 8 -- 5 [18] Although the majority in number of the creditors was in favour of the adjournment and against the winding up, the majority in value of the creditors was in favour of the winding up and against the adjournment. The legislation, in these circumstances, places power in the hands of the majority in number of the creditors. [19] Although the criticism was made that many of the people voting against the resolution to wind up the company were aligned with the directors, there was no reliable evidence to suggest any connivance between them and the directors. [20] At the meeting Mr Aggs expressed the view that if the numbers were deadlocked he would have used his casting vote to defeat the winding up motion. That was said after his decision to allow the proxy to be voted against the winding up motion was challenged. When it was challenged he said “Well you can trot off to court then can’t you?” That attitude by him was also criticised as was his absence from the first creditors’ meeting which he attended only by telephone. In that context his conduct of the administration is also criticised because he appears to have delegated some of the work to his partner, Mr Robson. Assessment of the criticism of the administrator [21] In my view the complaints of the applicants about the conduct of Mr Aggs do not suggest that he has been either biased in favour of the directors of the company or dilatory in his conduct of the administration. Much of the focus of the criticism related to the conduct of the second meeting of creditors some of which I have already discussed. [22] Apart from the issues to which I have referred there was also criticism of the report to creditors prepared on 29 January 2009 that it did not express an opinion on the part of the administrator with respect to the matters required by s 439A(4) of the Corporations Act 2001, namely, whether it would be in the creditors’ interests for the company to execute a deed of company arrangement; whether it would be in the creditors’ interests for the administration to end and whether it would be in the creditors’ interests for the company to be wound up. The report deals with two of the issues, but not with whether it would be in the creditors’ interests for the company to execute a deed of company arrangement. That was because, at that stage, there was no deed proposal in existence.5 That complaint, therefore, does not seem to me to be one that holds water. [23] Nor does it seem to me that there is sufficient evidence for me to conclude that Mr Aggs has delayed unreasonably in the administration. It is clear that there are communication problems between the creditors and him but the administration has not been in existence for terribly long and steps have been taken to pursue the primary assets available to the company, namely delinquent loans and the negligence action against its former solicitors. Any delay in taking control of NCF was explained by the need to ensure that there was some commercial benefit in taking that course before those costs were incurred and the delays in assessing the worth of that action are not ones which seem to me to be unreasonable having regard to the likely complexity of an action alleging professional negligence of the type described. 5 See Ex PKAN9 to the affidavit of Mr Aggs filed by leave on 27 February 2009 at para 10 on pp 45- 46 of the exhibits to the affidavit. -- 5 of 8 -- 6 [24] Perhaps the most telling point in this context is that the administration is presently lacking in funds and it is appropriate for Mr Aggs to conserve funds and to focus on recovery proceedings that are likely to produce a return for creditors. It is also notable that there is no offer of funding from any creditors at this stage either for the administration or for any proposed liquidation. [25] The criticism in respect of the use by Mr Aggs of proxy forms at the meeting on 5 February 2009 seems to me to be misconceived. The complaint about one form, given by Mr and Mrs Debattista, was that theirs was a special proxy form to vote only against the winding up motion and nothing else. On my perusal of that form it appears to be one for the adjournment of the meeting and against the winding up resolution and otherwise directs the proxy to vote in a particular way on each motion.6 Another form given by Mr Lottering gave a direction to the proxy to vote for the adjournment of the meeting but gave no other specific directions apart from nominating the holder as his “special proxy” to vote at the meeting. [26] The Corporations Regulations relevantly provide: “5.6.28 Appointment of proxies (1) A person entitled to attend and vote at a meeting may appoint a natural person over the age of 18 years as his or her proxy to attend and vote at the meeting. (2) Subject to subregulation (3) and to regulation 5.6.30, a proxy appointed under this regulation has the same right to speak and vote at the meeting as the person who appointed the proxy. ... 5.6.29 Form of proxies (1) The appointment of a person as a proxy must be by: (a) an instrument in accordance with From 532 … … 5.6.30 Instruments of proxy An instrument appointing a proxy may specify the manner in which the proxy is to vote on a particular resolution, and the proxy is not entitled to vote on the resolution except as specified in the instrument.” (emphasis added). [27] It seems to me that a form which indicates a preference about one resolution only has the result that the proxy is required to vote in that way for that resolution but otherwise has the same right to vote as the person appointing him or her, as was submitted by Mr Beacham for the respondent. Mr Lottering’s proxy was for the adjournment of the meeting and was also used by Mr Aggs to vote against the winding up resolution. That does not seem to me to be improper and is also consistent with his wish to vote for the adjournment of the meeting. [28] Accordingly, the use of the proxies by Mr Aggs does not provide any reason for questioning his administration of the company. It was also pointed out by Mr Beacham that he permitted two creditors to vote separately when there was evidence suggesting that only one of them was then entitled to vote. Mr Aggs overruled that objection because it had not been raised at the commencement of the meeting. Those creditors exercised two votes for the winding up and against the adjournment 6 See Ex GME5 to the affidavit of Mr Edgecombe filed 18 February 2009. -- 6 of 8 -- 7 when, it was submitted, they were only entitled to one vote. This argument was used as a basis for reinforcing the result that was arrived at at the meeting but also to reinforce the submission that Mr Aggs was not partial in his conduct of the affairs of the company and the meeting and not blinkered in pursuing the possibility of a deed of company arrangement as compared to other possible solutions, including the immediate winding up of the company. That seems to me to be a valid submission. [29] Although Mr Aggs’ attendance at the first meeting of creditors by telephone was also criticised in reliance on a passage from the decision in Re Paradise Constructors Pty Ltd7 as not prudent or appropriate, it does not seem to me that that is a reason, in this context, to remove him as an administrator. Nor does his delegation of tasks to his partner provide such a reason, at least in these circumstances where he has retained overall control of the administration and has acted in it. It is not unreasonable to expect an administrator to delegate some of his functions and that is what the evidence appears to suggest has occurred here. [30] Another reason for refusing to enter into the affairs of this company at this stage by terminating the administration is, of course, that the creditors have voted to enable the administration to continue with a view to investigating the possibility of entering into a deed of company arrangement. Where no other source of funds is available or offered to a potential liquidator it seems to me that the creditors’ majority wishes should prevail at this stage. If the administration were terminated now and a liquidator appointed there would be further delays while that liquidator became familiar with the company’s affairs. Nor is there any material from which one could conclude that a liquidation would result in a swifter recovery of the delinquent loans or a swifter prosecution of the negligence action. [31] The applicants’ wish to investigate possible insolvent trading actions against the directors and other conduct of the directors to which I have referred previously is not persuasive as a reason to terminate the administration where no offer of funding to pursue such steps is made. It is also possible to complain about such conduct to the regulatory authorities. Conclusion [32] It is my view, therefore, that the application should be dismissed. [33] For this reason it is unnecessary for me to determine another issue argued before me, namely whether the court may order the winding up of a company pursuant to s 447A of the Act, which gives a general power to make orders under Part 5.3A of the Act dealing with the administration of a company’s affairs with a view to executing a deed of company arrangement. There is a conflict on the authorities as to whether that section permits a winding up order to be made under s 447A independently of any other empowering provision in the Corporations Act. [34] Mandie J in Re Paradise Constructors Pty Ltd8 took the view that such an order could be made under s 447A, which allows the court to make such order as it thinks appropriate about how that part is to operate in relation to a particular company. Austin J in Chief Commissioner of State Revenue v Rafferty’s Resort Management 7 (2004) 8 VR 171, 188-189 at [68]. 8 (2004) 8 VR 171, 187 at [63]-[64]. -- 7 of 8 -- 8 Pty Ltd,9 without reference to the earlier decision in Re Paradise Constructors Pty Ltd, expressed the view that a winding up order would need to be made on a ground stated in Part 5.4 or Part 5.4A rather than being based on s 447A . That debate can wait for another day. Order [35] The application is dismissed. I shall hear the parties as to costs. 9 (2008) 66 ACSR 199, 201-202 at [8]-[10]. -- 8 of 8 --