FEDERAL COURT OF AUSTRALIA Marchesi, in the matter of Internet Finance Pty Limited [2005] FCA 676 CORPORATIONS – administrator – partner of liquidator – leave required – winding up – termination of liquidation Corporations Act 2001 (Cth) s 448C Bartlett Researched Securities Pty Ltd (admin apptd), Re (1994) 12 ACSR 707 referred to Chilia Properties Pty Ltd, Re (Administrators Appointed) (1997) 23 ACSR 548; 73 FCR 171 applied Cussen v Signature Resorts Pty Ltd (2000) 18 ACLC 341 not followed in part Dean-Willcocks v Yeshiva Properties No 1 Pty Ltd (prov liq apptd) (2003) 48 ACSR 525 followed Marine Investment Company, In re. Ex parte Poole's Executors (1873) LR 8 Ch App 702 applied Patent Automatic Knitting Machine Company, In re [1882] WN 97 applied South Barrule Slate Quarry Company, In re (1869) LR 8 Eq 688 applied Wright v Mansell (2001) 39 ACSR 580; 116 FCR 46 applied IN THE MATTER OF INTERNET FINANCE PTY LIMITED (ABN 95 087 364 805) (IN LIQUIDATION) (ADMINISTRATORS APPOINTED) BRENDAN JOHN MARCHESI v INTERNET FINANCE PTY LIMITED (ABN 95 087 364 805) (IN LIQUIDATION) (ADMINISTRATORS APPOINTED) VID 322 of 2005 FINKELSTEIN J 31 MAY 2005 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 322 of 2005 In the matter of Internet Finance Pty Limited (ABN 95 087 364 805) (In Liquidation) (Administrators Appointed) BETWEEN: BRENDAN JOHN MARCHESI Plaintiff AND: INTERNET FINANCE PTY LIMITED (ABN 95 087 364 805) (IN LIQUIDATION) (ADMINISTRATORS APPOINTED) Defendant JUDGE: FINKELSTEIN J DATE OF ORDER: 12 MAY 2005 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The winding up of Internet Finance Pty Ltd (ABN 95 087 364 805) (in liquidation) (administrators appointed) be terminated as at 12 May 2005. 2. The director of the company before the winding up resumes the management and control of the company. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 322 of 2005 In the matter of Internet Finance Pty Limited (ABN 95 087 364 805) (In Liquidation) (Administrators Appointed) BETWEEN: BRENDAN JOHN MARCHESI Plaintiff AND: INTERNET FINANCE PTY LIMITED (ABN 95 087 364 805) (IN LIQUIDATION) (ADMINISTRATORS APPOINTED) Defendant JUDGE: FINKELSTEIN J DATE: 31 MAY 2005 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Internet Finance Pty Limited (in liq) (admins apptd) was incorporated in 1999 in hopes of cashing in on the dotcom boom. It issued 27,038,800 shares to raise capital of $2,021,891.00 (in part by an exchange of shares) but, in the end, lost that and more, finishing up with no assets and debts totalling $197,507.57. On 24 March 2004 the company was wound up on the petition of the Deputy Commissioner of Taxation, who was owed $88,677.00 in unpaid taxes. The plaintiff, Mr Marchesi, was appointed the company's liquidator for the purposes of the winding up. 2 Following his appointment, the liquidator carried out an investigation into the company's affairs. He is satisfied that there are no recoverable assets. He now seeks an order that the winding up be terminated instead of completed by the dissolution of the company. This is the reason. The liquidator received a proposal from the company's principal shareholder, Epsom Software Development Pty Ltd, and its sole director, Mr Cooney, that the company be placed into administration so that its creditors could consider whether it should execute a deed of company arrangement under which Epsom Software (a company controlled by Mr Cooney) would provide $25,000 to be applied in discharge by composition of the claims of arms length creditors. The company would then be returned to the control of Mr Cooney. Presumably to keep costs down, Epson Software suggested that the liquidator appoint two of his partners, Messrs Sutherland and MacKinnon, to be the company's joint administrators. 3 The liquidator thought that the proposal had merit. To put the wheels in motion he appointed his partners as the joint administrators of the company pursuant to s 436B of the Corporations Act 2001 (Cth). The appointment was irregular. Section 448C(1)(g) provides that a person who is a partner of an officer (in s 9 an officer is defined to include a liquidator) must not, except with the leave of the court, act as an administrator of a company or of a deed of company arrangement. In Cussen v Signature Resorts Pty Ltd (2000) 18 ACLC 341, 342 Young J said that the only sensible way of reading s 448C(1)(g) "is that the disqualified person must be a partner of someone who himself or herself is disqualified. In other words, one must read before the word 'officer' the words 'who is disqualified', or, some such words." This construction was rejected by Barrett J in Dean-Willcocks v Yeshiva Properties No 1 Pty Ltd (prov liq apptd) (2003) 48 ACSR 525, 528. The judge favoured an approach which gave the words of s 448C their ordinary meaning. I agree with Barrett J. There are several reasons why a partner of an officer (whether disqualified or not) should not without scrutiny be permitted to take charge of a company in administration. One reason is that if, as is commonly the case, the administrator is required to investigate the company's affairs it will be very difficult for him to do so objectively and independently (as to which see Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707, 711) if those affairs were conducted by his partner. Nevertheless, although Messrs Sutherland and MacKinnon were disqualified from appointment without leave, their appointment is not a nullity: Re Chilia Properties Pty Ltd (Administrators Appointed) (1997) 23 ACSR 548, 550-551; 73 FCR 171, 175; Cussen v Signature Resorts Pty Ltd (2000) 18 ACLC 341, 342; Wright v Mansell (2001) 39 ACSR 580, 589-590; 116 FCR 46, 55-56. Hence the breach of s 448C is of no present consequence. 4 In due course the creditors of the company approved the proposed deed. Messrs Sutherland and MacKinnon were appointed the deed's administrators. This appointment was also without leave, but nothing turns on that. The deed requires Epsom Software and Mr Cooney to provide the deed administrators with sufficient funds to cover the liquidator's, administrators' and deed administrators' fees and disbursements, the petitioning creditors' taxed costs, any priority creditor's claim and finally a dividend of $5,000.00 to "Participating Creditors." By the operation of several definitions, a Participating Creditor is one who has not written "a letter confirming [that the creditor] will not lodge any Claim and agreeing that their debts will be released and forever discharged under the terms of the Deed." It was anticipated that every creditor other than the Deputy Commissioner of Taxation would write such a letter. There is also a term that the deed will only come into effect if an order is made terminating the winding up of the company. 5 The originating process seeking the termination order was served upon the company itself (which of course has no intention of opposing the application) and upon Australian Securities and Investments Commission. In correspondence with the liquidator, ASIC raised three matters which were of concern to it. First, it pointed out that Messrs Sutherland and MacKinnon required, but had not obtained, leave of the court to act as the company's administrators. Second, it noted that on one view of the deed, debts due to non-participating creditors would not be extinguished with the consequence that the company would still be insolvent on the termination of its liquidation. Finally, ASIC queried whether there might be unpaid share capital which should be called and distributed between the company's creditors. 6 ASIC's first point has been dealt with. While leave to be appointed should have been obtained, the appointment of the administrators is not invalid. In this regard I note that the administrators sought the necessary leave nunc pro tunc. I declined to make the order in the absence of proper supporting material and ASIC being put on notice. 7 The second point raises a serious issue. It is not, however, the precise problem which was identified by ASIC. The deed requires each non-participating creditor to write a letter "confirming [that the] creditor will not lodge any Claim and agreeing that their debts will be released and forever discharged". It is doubtful whether the letter would have that effect, there being no consideration for the release and the deed itself not providing for the release in clear terms. For this reason I required each non-participating creditor to execute under seal a release of his or its claim so as to eliminate any doubt that the company would in due course be freed from all debts. A short adjournment enabled the deeds of release to be signed. 8 In relation to ASIC's third point, the liquidator tendered evidence which established to my satisfaction that there is no uncalled share capital. 9 Once these matters had been resolved, there remained no impediment to the termination of the winding up. Such orders are commonly made when proceedings are taken for the re-organisation of a company (as in In re Marine Investment Company. Ex parte Poole's Executors (1873) LR 8 Ch App 702, 707 and In re South Barrule Slate Quarry Company (1869) LR 8 Eq 688, 691) or after an arrangement has been adopted (In re Patent Automatic Knitting Machine Company [1882] WN 97, 97). In this case the liquidator supports the termination. He has completed his investigations and there are no assets which can be recovered and no proceedings which can be brought against any of the officers. The creditors (including the Deputy Commissioner of Taxation) also support the termination. It was appropriate therefore to make the orders sought by the liquidator. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 31 May 2005 Counsel for the Plaintiff: Mr P Fary Solicitor for the Plaintiff: Deacons Date of Hearing: 3 & 12 May 2005 Date of Judgment: 31 May 2005