CORPORATIONS LAW - winding up JUDGMENT Nov sume ty 1 CATCHWORDS appointment of liquidator - whether liquidator can be seen to be sufficiently independent - insufficient evidence to show lack of independence. Corporations Law s.472 Federal Court Rules Order 71, rule 37(7) Re Obie Pty Ltd (No.1) (1983) 8 ACLR 439 Re Dunquil Pty Ltd (1985) 3 ACLC 606 lectrica Attalox Pty Ltd [1984] 3 NSWLR 52. PE. ION No. NG 3532 of 1994 Sackville J. 16 November 1994 Sydney dustries LIM. RECEIVED 16 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY Ltd (i ov. ji v IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. NG 3532 of 1994 GENERAL DIVISION BETWEEN: PONGRASS GROUP OPERATIONS PTY LIMITED Applicant AND: LOWERPINEMS PTY LIMITED Respondent CORAM: SACKVILLE J. PLACE: SYDNEY DATE: 16 NOVEMBER 1994 MI E. F ORDER RT E Ts 1. The respondent be wound up by this Court under the provisions of the Corporations Law. 2. Mr Brian Raymond Silvia of Ferrier Hodgson, an official liquidator, be appointed liquidator of the company. 3. The applicant's costs be taxed and reimbursed in accordance with subsection 466(2) of the Corporations Law. TEs Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. NG 3532 of 1994 GENERAL DIVISION BETWEEN: PONGRASS GROUP OPERATIONS PTY LIMITED Applicant AND: LOWERPINEMS PTY LIMITED Respondent CORAM: SACKVILLE J. PLACE: SYDNEY DATE: 16 NOVEMBER 1994 REASONS FOR JUDGMENT This is an application that the respondent be wound up under s.459A of the Corporations Law. As events have developed, there is no dispute that a statutory demand for payment of a debt of $50,000 was made, but not complied with within the twenty one day period specified in the demand: s.459E, s.459F. The Court must therefore presume that the company is insolvent: s.459C(2)(a). There is also no dispute that the formal requirements for a winding-up order have been satisfied. The Legislation The only issue that has arisen is as to the identity of the liquidator who should be appointed by the Court. The Court's power arises under s.472(1) of the Corporations Law, which permits the Court on a winding-up order to appoint an official liquidator to be liquidator of the company. The applicant, pursuant to Order 71, rule 37(7) of the Federal Court Rules, nominated Mr Brian Raymond Silvia of the firm Ferrier Hodgson to act as the liquidator of the respondent. Order 71, r.37(7) provides as follows: "37(7) [Nomination of official liquidator] At the same time that the application and any affidavit in support is filed, the applicant may lodge a nomination in accordance with Form 88 of an official liquidator who, if an order for the winding up of the company is made, and unless the Court is satisfied that some other official liquidator should be appointed, will be appointed as liquidator." Section 532 of the Corporations Law deals with the circumstances in which a person is disqualified from being a liquidator. In general, a person cannot act as a liquidator unless he or she is a registered liquidator and has consented to act: $.532(1),(8),(9). Except with the leave of the Court and in certain other circumstances, a person is not to be appointed or to act as liquidator of a company, inter alia: (a) if the person is indebted to the company in an amount in excess of $5,000; (b) if the person, otherwise than in the capacity of a liquidator, is a creditor of the company in an amount in excess of $5,000; (c) if the person is an officer of the company, an auditor of the company or a partner or employee of an officer or auditor (s.532(2)). Thi inci As I understand the position, there is no dispute between the parties that Mr Silvia is an official liquidator and has consented to act as liquidator of the respondent. Nor is there any suggestion that Mr Silvia's reputation, integrity or skills are in doubt. However, the respondent has objected to the appointment of Mr Silvia as liquidator on the ground that he cannot be seen to be independent in his role as liquidator. The authorities recognise that a liquidator must act impartially and avoid placing himself or herself in a position where interest and duty conflict: Commonwealth of Australia v O'Reilly (1984) 52 ALR 631 at 644-5. The guiding principle is that the liquidator should be both independent and be seen to be independent: Re Stewden Nominees No.4 Pty Ltd (1975) 1 ACLR 185, at 187; Re Gibworth Pty Ltd (1985) 3 ACLC 653. In Re Qbie Pty Ltd (No.2) (1983) 8 ACLR 439, at 448-450, Master Lee QC (as he then was) reviewed the authorities. Master Lee summarised the position as follows (at 450): "It is therefore quite correct, as the solicitor for the creditor submits, that the court has a free and unfettered discretion as to who should be appointed liquidators of the company, but no principle appears to have been established which automatically requires that liquidators nominated by a creditor should take precedence over liquidators nominated by the company in a winding up based upon a company's petition. It is equally clear on the other hand that the court has the undoubted power to decline to appoint any nominated liquidators if their appointment conflicted or was likely to conflict with the best interests of the winding up as a whole including the best interests of all parties concerned in the winding up." These observations were approved by Olsson J. in Re Dunquil Pty Ltd (1985) 3 ACLC 606, at 610. His Honour in that case stressed that the views of the creditors of the company, although not binding on the Court, must be given due weight. Furthermore, at 611, his Honour indicated there is necessarily a public interest element in a winding up and that this "strongly reinforces the need to scrutinize with great care any proposal to appoint as official liquidator any person who has had a prior nexus with the relevant company and to give due recognition to the legitimate fears and perceptions of a substantial body of the creditors." See also Re National Safety Council of Australia (1989) 7 ACLC 602, at 606-607; Re Grant Resources Ltd [1991] 1 Qd R 107, at 115-117. vy Evidence The evidence bearing on the issue is sparse. Ms Tait, who appeared for the applicant, read an affidavit by Mr De Zylva, the group controller of the applicant. He deposed that in October 1993 Mr George Pongrass, the chairman of the Pongrass Group (of which the applicant was apparently a member) appointed Ferrier Hodgson to investigate the affairs of the Powerline group (of which the respondent is apparently a member). It is not clear whether Ferrier Hodgson specifically undertook any work in relation to the respondent. However, a letter dated 29 Octoh-~ 1993 was in evidence, signed by Mr George Pongrass, and addressed to the directors of the Powerline group of companies. The letter reads as follows: "As majority shareholder in your group of companies I advise that as of today I have appointed Ferrier Hodgson as Investing Accountants to review the group and management structure of the Powerline Group of Companies. As a result your ongoing roles in the management and affairs of the group is under review. I expect that Ferrier Hodgson will complete their assignment within two weeks. During this time I request that you provide them with your full co- operation and assistance and access to all company records. Over this period of time no executive decision (sic) are to be made within the Powerline group without reference to either myself or Ferrier Hodgson. The cheque signatories over all Powerline group companies will alter immediately and authority to issue purchase orders will likewise alter immediately. No stock or equipment is to leave the premises without my express authority. A meeting of the Board of Directors will be called at the earliest convenience with a view to the composition of the Boards being varied. Your assistance and co-operation in these matters would be greatly appreciated." Mr De Zylva's affidavit reveals that Power International Pty Ltd was wound up by order of this Court and Mr Silvia of Ferrier Hodgson was appointed liquidator. The affidavit does not specify the date of the winding up, although it appears to be some time in 1993. In about April 1993 Powerline Systems Pty Ltd was wound up and Mr Silvia appointed as liquidator. Except for the apvvointment of Ferrier Hodgson as inves*'gating accountants, the firm appears to have had no relationship with the Powerline group of companies. Mr Ridley, who appeared for the respondent, read an affidavit of Mr Shearer, a director of the respondent. Mr Shearer deposed to two conversations between himself and Mr Robert Pongrass. In one conversation, on about 29 October 1993, Mr Pongrass said "Max Donnelly, a senior partner in Ferrier Hodgson is a personal friend of the Pongrass family". In conversations on 2 September 1994 and 28 October 1994 Mr Pongrass said to Mr Shearer words to the following effect: "We will use Ferrier's to get as much money as possible back to Pongrass. We are not particularly concerned about other creditors." There is evidence that the respondent owed some $108,000 to Sensor Technologies Pty Ltd, a company of which Mr Shearer was a director. Mr Shearer also deposed that in his dealings with Ferrier Hodgson in relation to the liquidation of Powerline International Pty Ltd he had experienced "a significant degree of hostility from various representatives of Messrs Ferrier Hodgson". However, the affidavit does not explain the circumstances in which hostility was exhibited, how it was manifested and whether it was or was not justified. Is Mr Silvia Ineligible? It is clear from the authorities that a proposal to appoint as a liquidator a person who has had a prior nexus with the relevant company should receive close scrutiny. It is also clear that due recognition should be given to the legitimate fears and perceptions of a substantial body of creditors. In this case the wishes of Sensor Technologies Pty Ltd, as expressed by Mr Shearer (assuming he can speak on behalf of that company) should be taken into account. However, in my view, it is necessary to examine the evidence carefully and not to act on fears or suspicions that are not explained or justified by reference to underlying facts. Furthermore, it is relevant, although by no means decisive, to take account of the advantages of continuity of administration, if they apply in the circumstances of a particular case: Re Dunquil at 611, citing Bri assid lectrical Industries Pt Ltd (in prov.lig.) v Attalex Pty Ltd [1984] 3 NSWLR 52 at 68. I deal first with matters that I think have relatively little significance. The fact (if it be such), without more, that a senior partner of Ferrier Hodgson is a friend of the Pongrass family (who are or are associated with creditors of the company) does not seem to me to be sufficient to impair the capacity of another member of that firm to perform and be seen to perform his duties as liquidator. Those duties, it must be remembered, are owed by the liquidator himself or herself. The liquidator is an officer of the Court and under its control: Re Obie at 448, per Master Lee QC. Of course, there could be circumstances where the nature of the relationship between the friend of a creditor and the proposed liquidator might create doubts about the perceived capacity of the liquidator to perform his or her duties. The circumstances might also indicate a genuine risk of conflict of interest. But there is no evidence of the nature of the relationship here, much less that it might suggest an impairment of the capacity of Mr Silvia to perform, or be seen to perform, his functions independently. Similarly, I do not think that the comments of Mr Pongrass in conversation with Mr Shearer, impair the capacity of Mr Silvia to act and be seen to act independently. Mr Silvia was not a party to the conversation. There is no evidence to explain the context of Mr Pongrass' remarks. I would not read the words, without some background or context, as meaning that Mr Pongrass was implying that he would influence the liquidator to act ina Manner inconsistent with his (the liquidators) duties. Even if Mr Pongrass' comments could be read as implying more than I have suggested, there is nothing to indicate that they had any basis in fact or reflected any dealings between the Pongrass interests and Mr Silvia. For the reasons I have given, it is however necessary to take carefully into account the fact that Ferrier Hodgson undertook a review of the Powerline Group in about November 1993. But there is no evidence that Mr Silvia participated in that review. In particular, for all that appears in the evidence, he was not personally involved in the activities undertaken by the firm as "Investigating Accountants". In any event, participation in the review by Mr Silvia would not necessarily be a ground, of itself, for his disqualification as a liquidator, although of course it would be an important matter to consider. Much might depend upon the role played by Mr Silvia, the nature of the report prepared by him and the precise relationship between him and the Pongrass interests. There is no evidence of any of these matters before me, Other than the information contained in Mr Pongrass' letter, the terms of which are quoted earlier. That letter suggests that a review of the group and management structure occurred over a relatively short period, but not that anything was included in a report that provides grounds for questioning the competence or impartiality of any member of the firm Ferrier Hodgson. Nor is there anything in the evidence to suggest that the liquidator will be required to investigate the question of whether the firm of which Mr Silvia is a member had failed to act with due diligence or reasonable care in its investigation of the company. In Re National Safety Council of Australia, at 606-607, the Full Court of Victoria decided that a partner in a firm that had reported on the affairs of the National Safety Council of Australia should not be appointed a liquidator. The principal basis for this conclusion was that the evidence showed that the Council's indebtedness had increased by about $44 million during the course of the investigation. Thus there was sufficient evidence to indicate that the liquidator might have to investigate the potential liability of the firm of which the liquidator was a member. Nothing comparable appears in the evidence before me. In my view, it is appropriate, in considering whether Mr Silvia should be appointed, to have some regard both to the values of continuity and efficiency in liquidation and to Mr Silvia's role, in one case over a period of at least 20 months, as liquidator of other companies within the Powerline group. It is true that this is not a case where Mr Silvia can be shown to have had relevant experience, gained as provisional liquidator of the respondent (compare Brian Cassidy Electrical Industries Pty Ltd v Attalex Pty Ltd at 68). Nonetheless, I think I am entitled to infer that there is likely to be at least some advantages (as Mr De Zylva deposed) in Mr Silvia acting as liquidator of another company in the same group. Furthermore, there is nothing in the evidence to suggest that Mr Silvia has not faithfully and independently discharged his responsibilities as liquidator of the other companies in the Powerline group. Of course, the fact that nothing is said against the propriety or conduct of an official liquidator does not necessarily mean that that person is appropriate for appointment as a liquidator. The cases make it clear that it may be inappropriate to appoint a person of undoubted probity if the circumstances cast doubt on his or her capacity to act and be seen to act independently. However, Mr Silvia has acted in the liquidation of other companies in the very same group as the respondent. No suggestion has been made that the relationship between Ferrier Hodgson and the Pongrass interests has caused any difficulty in the discharge of Mr Silvia's duties as liquidator or in the way in which he has been perceived as carrying out his duties. At least some of the issues raised by the respondent would have been relevant to the appointment of Mr Silvia as liquidator of other companies in the Powerline group. Conclusion While due consideration must be paid to the prior nexus between Ferrier Hodgson and the respondent, I think that on balance it is not inappropriate that Mr Silvia be appointed liquidator of the respondent. Accordingly, I order that the respondent be wound up under the provisions of the Corporations Law and that Mr Silvia of Ferrier Hodgson, an official liquidator, be appointed the liquidator of the company. The application costs should be taxed and reimbursed in accordance with s.466(2) of the Corporations Law. I certify that this and the preceding 10 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. Associate: [- Je Pm of Dated: 16 November, 1994 Heard: 11 November, 1994 Places Sydney Decision: 16 November, 1994 Appearances: Ms Tait of Phillips Fox, Solicitors, appeared on behalf of the applicant. Mr Ridley of Somerville & Co, Solicitors, appeared on behalf of the respondent.