Supreme Court New South Wales Medium Neutral Citation: In the matter of Crow Inn Pty Limited [2020] NSWSC 601 Hearing dates: 15 May 2020 Date of orders: 15 May 2020 Decision date: 15 May 2020 Jurisdiction: Equity - Corporations List Before: Rees J Decision: Appointment of receiver to Crow Inn Pty Ltd; refuse application to appoint provisional liquidator to Puddy Pty Ltd and a receiver to The Puddy Trust. Catchwords: CORPORATIONS – appointment of provisional liquidators – appointment of receivers – principles at [44]-[53] – differences between receiver and provisional manager at [49]-[50], [62] CORPORATIONS – solvent – intractable dispute between directors / members of family companies – alleged conflict of interest – deadlock – director / general manager resigns as manager of hotel but continues to operate as defacto manager and objects to other director being involved in management – director / general manager and wife make $1.65M claim for backpay – directors unable to agree on interim regime – one company landholding only – parties able to attend to simple affairs of landholding company – important to avoid event of default on landholding company's loan – operational company needs independent official to maintain status quo until hearing – undertakings offered by director / general manager unlikely to work for any length of time –receiver appointed Legislation Cited: Corporations Act 2001 (Cth), s 233, 472 Cases Cited: Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 66 ACSR 325; [2008] VSCA 86 Australian Securities and Investments Commission (ASIC) v ActiveSuper Pty Limited (No 2) (2013) 93 ACSR 189; [2013] FCA 234 Australian Securities Commission v Solomon (1996) 19 ACSR 73 Boyd v Feeney [2017] NSWSC 1595 Constantinidis v JGL Trading Pty Limited (1995) 17 ACSR 625 Grace v Grace (2007) 25 ACLC 141; [2007] NSWSC 6 In the matter of Allco Securities Pty Limited [2011] NSWSC 1113 In the matter of Amazon Pest Control Pty Limited [2012] NSWSC 1568 In the matter of Catombal Investments Pty Ltd [2012] NSWSC 775 In the matter of Therma Truck Pty Limited [2016] NSWSC 266 Labraga v Pomfret [2005] NSWSC 490 Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 Nikolaidis v Camden Retail Pty Ltd [2010] NSWSC 977 Re Brylyn No 2 Pty Ltd (1987) 12 ACLR 697 Re Club Mediterranean Pty Ltd (1975) 11 SASR 481 Re McLennan Holdings Pty Limited (1983) 7 ACLR 732 Re New Cap Reinsurance Corporation Holdings Limited (1999) 32 ACSR 234; [1999] NSWSC 536 Re United Medical Protection Ltd [2002] NSWSC 413; (2002) 41 ACSR 623 Zempilas v J N Taylor Holdings Ltd (No 2) (1990) 55 SASR 103; 3 ACSR 518 Category: Principal judgment Parties: Netjay Pty Limited (First Plaintiff) Basil Berrigan (Second Plaintiff) Crow Inn Pty Limited (First Defendant) Phatso Investments Pty Limited (Second Defendant) Joel Berrigan (Third Defendant) Puddy Pty Limited (Fourth Defendant) Representation: Counsel: Mr L Livingston (Plaintiffs) Mr J Hogan-Doran (Second and Third Defendants) Solicitors: HWL Ebsworth Lawyers (Plaintiffs) Madison Marcus Law Firm (Second and Third Defendants) File Number(s): 2020/141395 ex tempore Judgment 1. HER HONOUR: This is an application by the first plaintiff, Netjay Pty Ltd, that, on giving the usual undertaking as to damages, a provisional liquidator be appointed to the first defendant, Crow Inn Pty Ltd, pursuant to section 472(2) of the Corporations Act 2001 (Cth). The second plaintiff, Basil Berrigan, also seeks that, on giving the usual undertaking as to damages, a provisional liquidator to be appointed to the fourth defendant, Puddy Pty Ltd, and a receiver and manager be appointed to the assets, property and undertaking of The Puddy Trust. Netjay is Basil Berrigan's investment company, which he owns together with his wife. 2. These orders are opposed by the third defendant, Joel Berrigan, and the second defendant, Phatso Investments Pty Ltd. Phatso Investments is Joel Berrigan's investment company, which he owns together with his wife. Joel Berrigan is the nephew of Basil Berrigan. 3. The application is not based upon the insolvency of Crow Inn or Puddy. Nor is there any suggestion of financial impropriety on the part of Joel Berrigan, who has managed the business operated by Crow Inn – the International Hotel Wagga Wagga (the Hotel) – for several years. Rather, the application is based on an intractable dispute between Basil Berrigan and Joel Berrigan combined with Joel Berrigan's recent resignation as General Manager of the Hotel, a claim by Joel Berrigan and his wife for unpaid wages totalling some $1.625 million, and the inability to agree upon a regime to manage the Hotel until these proceedings can be determined. Facts 1. In 2010, Puddy was incorporated for the purposes of owning property on which the Hotel was then built. Puddy is the trustee of The Puddy Trust. Initially, Puddy was owned by Basil Berrigan and his parents, Thomas and Helen Berrigan. After the land was purchased, Thomas Berrigan told his grandson, Joel Berrigan, that if he helped the family with the construction and running of the Hotel, he would receive 40% of the shareholdings in the land and business. In about 2011, Thomas and Helen Berrigan transferred some of their shares to Joel Berrigan so that he held 40% of the shares of Puddy. Today, Basil Berrigan holds 60% of the shares in Puddy whilst Phatso Investments holds the remaining 40%. Basil Berrigan and Joel Berrigan are directors of Puddy. 2. In December 2013, Crow Inn was incorporated as the operating company for the Hotel. Puddy leased the land and Hotel to Crow Inn under a long term lease. Basil Berrigan and Joel Berrigan are directors of Crow Inn. Initially, Netjay owned 70% of the shares of Crow Inn whilst Phatso Investments owned the remaining 30% of shares. 3. Joel Berrigan began working in the Hotel when it opened on 16 September 2013. Basil Berrigan says that he introduced Joel Berrigan to the hotel business and taught Joel Berrigan everything that he knows, whilst Joel Berrigan says he learnt everything from his grandparents. The Hotel compromises 80 rooms with en suites, a bar for which Joel Berrigan holds the liquor licence, a restaurant, conference rooms and car parking. Ordinarily it has 35 staff but, due to the COVID-19 pandemic, presently has only eight staff. Basil Berrigan lives in Sydney but visits the Hotel at least once a month, according to figures provided by Joel Berrigan. 4. The constitutions of Puddy and Crow Inn both provide that the quorum for a directors' meeting is two directors. A meeting that does not have a quorum must be adjourned. If there is no quorum present at the resumed meeting, the meeting is dissolved. The same applies for meetings of members. Basil Berrigan apprehends that, given the falling out between himself and his nephew, he expects that if he calls a meeting of directors or members of Puddy or Crow Inn, Joel Berrigan will not attend and thus no resolutions can be passed. Joel Berrigan does not suggest otherwise. Shareholders Agreement 1. In 2015, Basil Berrigan and Joel Berrigan entered into a Shareholders Agreement under which Basil Berrigan agreed to: 1. transfer 10% of his shares in Crow Inn to Joel Berrigan; and 2. pay $1 million from his loan account with The Puddy Trust to Joel Berrigan's loan account in The Puddy Trust. In return, Joel Berrigan agreed to remain as General Manager of the Hotel for a minimum period of 5 years. 1. The Shareholders Agreement also provided that, if the parties were unable to co-operate in operating the business together, then Basil Berrigan was entitled to elect to sell either the land and/or the business, or purchase Joel Berrigan's shares in Puddy or Crow Inn. If Basil Berrigan so elected, then he was obliged to obtain three valuations for the land and/or business and to take the median valuation to arrive at a purchase price. Similarly, if Joel Berrigan elected to sell his interest in the land or business, he was obliged to first offer to sell his interest to Basil Berrigan at a price determined by the same mechanism. Joel Berrigan develops another hotel 1. In November 2017, Joel Berrigan incorporated HTZ Investments Pty Ltd. Joel Berrigan is the sole director of this company and Phatso Investments is the sole shareholder. On 22 November 2017, HTZ Investments agreed to buy a commercial property in Forsyth Street, Wagga Wagga, which is 1.8 km from the Hotel. On 21 March 2018, the purchase was completed and HTZ Investments became the registered proprietor of the land. 2. On 23 March 2018, Basil Berrigan had coffee with Joel Berrigan in Sydney. Joel Berrigan told that Basil Berrigan that he had made an offer to purchase the property in Forsyth Street but was waiting for the three partners who owned the land to agree. Joel Berrigan said he intended to build a hotel there. Basil Berrigan objected as he thought the hotel would be in direct competition with the International Hotel Wagga Wagga. Basil Berrigan said that this would create a conflict of interest and Joel Berrigan should withdraw the offer. 3. On 27 March 2018, after doing an internet search, Basil Berrigan found that the Forsyth Street property had already been purchased and sent a text to his nephew asking whether Joel Berrigan had made an offer on the property or had already bought it. Joel Berrigan replied that they had accepted his offer but wanted a delayed settlement, "God knows what could happen". Further searches by Basil Berrigan revealed that the property had already been transferred to HTZ Investments before he had coffee with his nephew in Sydney. Basil Berrigan was not pleased. Buy out efforts 1. On 16 April 2018, Basil Berrigan issued a notice under the Shareholders Agreement electing to purchase Joel Berrigan's interest in Puddy and Crow Inn, and on 20 April 2018, Basil Berrigan exercised this election and provided three valuations for the land and business. On 29 May 2018, Basil Berrigan's solicitor wrote to Joel Berrigan advising that, based on Joel Berrigan's 40% shareholding in Puddy and Crow Inn, Basil Berrigan would pay him $4.16 million for his shares in both companies. 2. On 12 June 2018, Joel Berrigan lodged a development application for a 42 bed hotel at the Forsyth Street property. On 18 June 2018, Joel Berrigan's solicitor wrote to Basil Berrigan's solicitor disputing the validity of the Shareholders Agreement and rescinding it. In particular, it was said that, contrary to Basil Berrigan's representations which led Joel Berrigan to enter into the Shareholders Agreement, the $1 million and 10% of shares in Crow Inn were pre-existing gifts by Thomas Berrigan to his grandson. In these proceedings, Joel Berrigan said that in 2018 his grandfather told him that his grandparents had agreed to transfer money to Puddy on the basis that a $1 million loan was recorded in Joel Berrigan's loan account in Puddy. Further, his grandfather told him that Joel Berrigan's shareholding in Crow Inn should always have been 40%, not 30% with Basil Berrigan only transferring a further 10% to Joel Berrigan if he worked at the hotel for five years. Whether Thomas Berrigan did tell Joel Berrigan this and, if so, whether what Thomas Berrigan told his grandson was historically accurate or an expression of his affection for his grandson will be the subject of the substantive proceedings. 3. On 15 August 2018, Basil Berrigan's solicitor advised that he wished to resolve the matters in dispute amicably and without incurring unnecessary legal costs or the costs and delay of obtaining further valuations. Whilst the legal and factual allegations made in the letter from Joel Berrigan's solicitor were denied, Basil Berrigan accepted Joel Berrigan's rescission of the Shareholders Agreement and proposed that the Hotel be sold on the open market with vacant possession or alternatively that the parties attend a mediation. 4. Four months of correspondence ensued between the legal representatives for Basil Berrigan and Joel Berrigan as to if and how the Hotel should be sold. Finally, on 6 December 2018, meetings of the directors of Crow Inn and Puddy were held and Basil Berrigan and Joel Berrigan resolved to sell the land and business. Thereafter, further months of correspondence ensued between the solicitors for Basil Berrigan and Joel Berrigan seeking to advance the sale process with, it would appear, little result. On 17 June 2019, Joel Berrigan finally returned an executed agency agreement in respect of the Hotel for Basil Berrigan to sign, but received no response. 5. Further aggravation was caused by three matters. First, Basil Berrigan contended that, as Joel Berrigan had not served as the General Manager of the Hotel for the five years prescribed in the Shareholders Agreement, he was not entitled to retain Crow Inn shares transferred to him under the agreement and the share register should be rectified accordingly. Second, the CCTV cable at the Hotel was cut. The contractor who attended at the hotel at Basil Berrigan's request to fix the CCTV was told by Joel Berrigan not to fix it. This had the result that Basil Berrigan could not view events at the Hotel remotely from Sydney, where he ordinarily resided. 6. Third, Joel Berrigan was pursuing his development application for a hotel on the Forsyth Street property. Basil Berrigan considered that Joel Berrigan was making use of his position as the General Manager for the International Hotel Wagga Wagga to advance the development proposal, including by corresponding using the letterhead of the Hotel. Basil Berrigan complained that a consultant assisting Joel Berrigan to obtain development approval stayed at the Hotel without charge. Joel Berrigan tendered a receipt showing that HTZ Investments paid for the consultant's accommodation, albeit for a different stay than the one about which Basil Berrigan complained. On 29 April 2019, Joel Berrigan's development application was approved. Basil Berrigan considered that, in pursuing a competing hotel, Joel Berrigan was in breach of his director's duties to Puddy and Crow Inn. 7. In August 2019, Basil Berrigan says he was told of a possible breach of Responsible Service of Alcohol requirements and spoke to an employee at the Hotel about it. Joel Berrigan, who holds the liquor licence, was unhappy with Basil Berrigan seeking to involve himself in this aspect of operations and sent his uncle an email to that effect. Basil Berrigan then met with the licensing sergeant at Wagga Wagga Police Station and was told that there had been three breaches of the licensing provisions, which the police were continuing to investigate. According to Basil Berrigan, Joel Berrigan thereafter excluded him from management. Joel Berrigan substantially denies these events. 8. In November 2019, Thomas Berrigan passed away. Joel Berrigan was appointed as the executor of Thomas Berrigan's estate. On 2 January 2020, Basil Berrigan drove to the Hotel to look at the room where his father had been living for some years. He received a telephone call from Joel Berrigan, who said the police had been called. Joel Berrigan says that he saw Basil Berrigan removing items from his grandfather's room and asked him to leave, which he did. 9. On 6 January 2020, Basil Berrigan wrote to Joel Berrigan and the companies' accountant, Andy Teece, following a meeting in December 2019. Basil Berrigan said he was agreeable to Samantha Way – who had been trained as the relief general manager – immediately assuming the role as Relief Manager of the Hotel while the General Manager's position was advertised "with Joel relinquishing management control". Ms Way could apply for the role of General Manager on a permanent basis but, in the interests of fairness and transparency, Basil Berrigan said that the role should be advertised on the open market. Joel Berrigan replied that it would take six to eight weeks to complete Ms Way's training and "it was never discussed that the role would be advertised to the market or when it would be expected that Joel and [his wife] step aside from their position as managers of the hotel". 10. On 3 February 2020, Joel Berrigan did place an advertisement for the role of General Manager, although Basil Berrigan was not aware of it at the time. Although he received 42 applications, Joel Berrigan did not interview any candidates because he was then in settlement discussions with Basil Berrigan. These discussions appear to have gone nowhere, consistent with their efforts generally to resolve their disputes. On 13 March 2020, Joel Berrigan finally received the executed agency agreement from Basil Berrigan. Resignations 1. On 9 April 2020, Joel Berrigan sent a letter of resignation as General Manager of the Hotel. Joel Berrigan gave four weeks' notice, with his last day to be 7 May 2020. According to Basil Berrigan, Joel Berrigan did not speak to him about this beforehand. Joel Berrigan's wife, Rebecca Hachem-Berrigan, also gave a letter of resignation on the same day, although Basil Berrigan says that Ms Hachem-Berrigan was not an employee of the Hotel. Ms Hachem-Berrigan claimed that Crow Inn's ongoing breaches of her contract of employment amounted to a constructive dismissal and further that, in breach of Australian employment law, she had never been paid for the work that she had done at the Hotel since 22 August 2012, that is, for some eight years, during which time she had worked, on average, 60 hours a week. Ms Hachem-Berrigan claimed unpaid salary of $695,269.23. Ms Hachem-Berrigan provided four weeks' notice with her last day to be 7 May 2020. 2. On 10 April 2020, Basil Berrigan attended at the Hotel to clean out his father's room, which he described as "filthy". Joel Berrigan called the police, who threatened to fine Basil Berrigan $5,000 for breach of COVID-19 restrictions if he did not leave the premises immediately. As Basil Berrigan left the hotel, he attempted to speak to Joel Berrigan, who turned his back and walked away. Joel Berrigan said that he called the police on the advice of solicitors, as executor of the late Thomas Berrigan, and reluctantly. Whilst Joel Berrigan said he did not have any problem with Basil Berrigan visiting the Hotel, he should not enter his father's room. Relations between these gentlemen appear to be in a poor state. 3. On 27 April 2020, Joel Berrigan's solicitors submitted a claim for back-pay of $930,326.92. Joel Berrigan proposed that the directors of Crow Inn resolve that the company pay the wages claim on or before 29 May 2020. Failure to respond favourably by 30 April 2020 was said to leave Joel Berrigan with no alternative but to commence proceedings in the Federal Circuit Court of Australia without further notice. Basil Berrigan does not accept these claims for unpaid wages, but says that Joel Berrigan received substantial dividends from the companies instead. Basil Berrigan expressed concern that, if the claims of Joel Berrigan and his wife for back-pay are met, then the cash at bank of Crow Inn will be expended. 4. As of 7 May 2020, there has been no General Manager at the Hotel. Ms Way has worked as acting General Manager and Joel Berrigan and his wife have attended the Hotel from time to time to keep an eye on operations and give directions to staff as necessary. These proceedings and an interim regime 1. On 12 May 2020, these proceedings were commenced ex parte and orders were made for short service. Since then, the legal representatives for the parties have sought to agree upon a regime to manage the Hotel between now and final hearing. Although a significant amount of correspondence has ensued between the legal representatives, and they have been assisted by competent counsel on both sides, no agreement has been reached. From Basil Berrigan's perspective, he wishes to be involved in the management of the Hotel and, from Joel Berrigan's perspective, that is not an option. 2. Joel Berrigan deposed that, since the commencement of the COVID-19 crisis, occupancy at the hotel has fallen to 35% of previous levels. One of the floors of the hotel has been closed off whilst remaining rooms are occupied by staff from the local hospital as well as builders from a nearby construction site. The number of staff has also fallen. The business continues to break even. Presently, and until COVID-19 restrictions are lifted, he considers that the staff at the Hotel are sufficient to run the business with limited supervision or assistance. Only short attendances from him are needed on a weekly or monthly basis and there is no requirement for any more supervision or management. 3. According to Joel Berrigan, Basil Berrigan has had little or no involvement in the day to day management of the hotel, nor has he sought to be involved since Joel Berrigan has been General Manager. Since December 2019, Joel Berrigan said that he had been keen to step back from his role as General Manager to avoid any conflict of interest and, to that end, has trained Ms Way to undertake management duties. Joel Berrigan is confident that Ms Way is able to fulfil that role. Since his resignation, Joel Berrigan says that he has continued to train staff so that they are able to manage the Hotel without him; Basil Berrigan has not sought to participate in that training nor to advertise the role of General Manager, nor transfer the liquor licence from Joel Berrigan nor take any active steps in the management of the Hotel. If it becomes apparent that the staff are unable to manage the Hotel without some assistance, Joel Berrigan offered, together with his wife, to continue to assist the staff without pay. 4. Joel Berrigan says that he has no confidence in Basil Berrigan becoming the General Manager and remains willing to buy Basil's share in Crow Inn for 60% of its value "once the issues in dispute between us have been resolved". This appears to assume that Basil Berrigan's contention – that by reason of Joel Berrigan's resignation before the five year term prescribed in the Shareholders Agreement, Basil Berrigan is entitled to 70% of the shares in Crow Inn – is to be disregarded. Further, there seems no real prospect of the issues in dispute between them – which I assume includes the substantial claim for wages – being resolved any time soon. 5. Joel Berrigan has offered undertakings to allow Basil Berrigan unrestricted access to the public and staff areas of the Hotel; to take steps to ensure compliance with the liquor licence; to arrange for Ms Way to undertake training; to advertise the position of General Manager again; to respond to any reasonable request for advice or directions or assistance from staff; to provide Basil Berrigan with weekly management reports; and, to maintain remote access to the CCTV system. Financial position 1. Puddy has significant cash at bank of some $2.4 million. Puddy has a loan from the Commonwealth Bank of Australia which has a balance of some $3 million. There appears to be significant equity in the property, which appears to be worth some $9 million. 2. As best can be told from the Commonwealth Bank of Australia's standard commercial loan documents, a company will be in default if any action is taken to start a winding up of the company. It was submitted by the plaintiffs' counsel that appointing a receiver and manager to Puddy would not amount to an event of default. However, the Court does not have the actual loan agreements in place between the bank and Puddy, and so this is an educated guess. One would obviously be concerned to prevent an event of default which might cause the bank to take any action to recover monies advanced to Puddy. 3. Crow Inn has some $700,000 cash at bank, and according to Joel Berrigan, is presently breaking even. Joel Berrigan expressed a concern that appointing a provisional liquidator in the current pandemic environment would be tremendously damaging to the Hotel. He considered that putting a hospitality business in the hands of a liquidator for whatever reason would be seen by trade creditors, patrons, lenders and staff to be a consequence of the COVID-19 pandemic. Submissions 1. The plaintiffs submitted that, given the deadlock between Berrigan Basil and Joel Berrigan, it was appropriate to appoint a provisional liquidator. Basil Berrigan has lost trust and confidence in Joel Berrigan. The extent of the deterioration in their relationship is illustrated by the protracted solicitors' correspondence spanning some two years since Basil Berrigan gave notice under the Shareholders Agreement that he and Joel were unable to continue operating the Hotel together. The two directors can no longer conduct a cordial conversation. 2. By reason of the deadlock between the directors regarding the appointment of a new General Manager, the Hotel presently has no General Manager. As a consequence, there is no one qualified to set the roster or the hotel rates, to control the inventory, or to manage staff and house-keepers who is neutral to the deadlock situation. The hotel business is substantial. The financial viability of the Hotel is already at risk by reason of the COVID-19 pandemic and the substantial unjustified claims for unpaid wages recently made by Joel Berrigan and his wife. The revenue of the Hotel in April 2020 was less than 30% of the revenue in the corresponding month last year. Revenue in the first 10 days of May 2020 was less than 22% of the revenue in the same 10-day period in 2019. Based on the sudden unexpected decline in revenue, it is likely that Crow Inn will be unable to meet its future liabilities from cash resources if it were required to pay the wages claims made by Joel Berrigan and his wife. 3. The plaintiffs submitted that there is an urgent need for an experienced and independent decision-maker to determine whether Crow Inn can continue to trade whilst subject to the COVID-19 provisions restricting the use of the bar and the restaurant; and to determine how best to protect the interests of employees and creditors. Having regard to the extremely challenging trading conditions, it was said that the Court would have grave concerns about preserving the remaining value of the business unless its stewardship is placed in independent hands. There was an imminent danger that, without swiftly appointed and effective independent management and oversight, the remaining value of the business would be lost. 4. The plaintiffs submitted that the creditors, members and employees of Crow Inn and Puddy would be disadvantaged if the Court permitted the present impasse between the directors to continue. The circumstances of urgency, lack of control, deadlock, the public interest and "the need for stable governance until the final hearing" combined to provide the requisite "some good reason" for the appointment of provisional liquidators: Nikolaidis v Camden Retail Pty Ltd [2010] NSWSC 977 at [32] (Barrett J). As to the potential destruction of the companies' goodwill if a provisional liquidator was appointed, the plaintiffs submitted that a liquidator would be well‑placed to manage the risks of market perception which might attend any sale of the business or the sale of the land on which the business is conducted. Those considerations were said to be outweighed by the detriment to the plaintiffs, to creditors and to employees, and to the public interest, if the orders were refused. 5. The plaintiffs offered the usual undertaking as to damages. It was submitted that Joel Berrigan and Phatso Investments had not proffered an undertaking which would introduce the necessary stability, adequately protect the interests of the plaintiffs and preserve the status quo. An undertaking requested by the plaintiffs was rejected by Joel Berrigan on 13 May 2020. A further proposed interim arrangement, suggested by the plaintiffs on 14 May 2020 was rejected by Joel Berrigan on the same day. Nor did the undertaking proffered by Joel Berrigan present a realistic alternative as it provided for Basil Berrigan to be informed of various matters but did not provide a mechanism to resolve any disagreement between them. It was submitted that it enabled Joel Berrigan to continue to perform the function of a de facto General Manager with Ms Way as acting General Manager, being someone who has worked for Joel Berrigan for some seven years and thus is likely to be loyal to him. The undertakings offered by Joel Berrigan effectively excluded Basil Berrigan from any management role in Crow Inn. 6. The defendants submitted that Joel Berrigan's resignation was something Basil Berrigan asked for and was said to have made no difference to the operation of the business. Basil Berrigan had agreed that Ms Way would act as General Manager. In the month since Joel Berrigan resigned as General Manager, his uncle has made no enquiries and taken no action in respect of any changes to the running of the business. All such arrangements were left to Joel Berrigan. It was said that Basil Berrigan had so much confidence in Joel Berrigan that, despite their differences, when Basil Berrigan received the letter of resignation he took no steps to aid in the transition of the business or to take on any new role or responsibility. He did not even attend the Hotel on the termination date with any expectation of taking over. 7. It was submitted that the disputes between Basil Berrigan and Joel Berrigan are in respect of their respective entitlements to interests in the land and business rather than the operation of the Hotel. The business had generated large profits and dividends "for the absentee Basil and the ever-present Joel". Because Joel Berrigan has so successfully transitioned the business to enable him to step back, save as licencee, the business was now able to run with minimal interference. Joel Berrigan continued to act responsibly to ensure the smooth operations of the business, even in troubled times. Joel Berrigan was said to have done admirable work, and was prepared to give extensive and reasonable undertakings to preserve the business. In no way could it be said that "the assets of the company are in jeopardy", nor was there any justification for the "extraordinary" and "drastic intrusion" that appointment of a provisional liquidator entails, even in ordinary times, which these are not. 8. It was said to be a 'false claim' that Basil Berrigan had been excluded from the Hotel, apart from his late father's room. Basil Berrigan's complaints were largely dismissed on the basis that Basil lived in Sydney whilst Joel was "on the ground at Wagga". Acceptance of this submission depended on accepting Joel Berrigan's evidence to the extent that it conflicted with that of Basil Berrigan. On an interlocutory application, in the absence of any objection to the affidavit evidence of either witness or cross-examination, it is not possible to reach a conclusion beyond noting that each witness' description of events is markedly different to the other. 9. The defendants submitted that it was not apparent that there was any deadlock or disagreement in relation to the ongoing management or transition of the business. The defendants did not accept that it was likely that a winding up order would be made. The stepping back of Joel Berrigan from management may well resolve all matters or lead to an orderly sale of the Hotel in due course. It was most unlikely that the Court would favour the sale of the business by an external controller, or at all, in the current pandemic crisis. The situation was said to be so fluid that the need or propriety of such a step could only be guessed at. Appointment of a provisional liquidator could cause irreparable harm to the business. It may well cause a default of banking covenants. Joel Berrigan was willing to purchase Basil Berrigan's interests in the business. The regime proposed by Joel Berrigan was more than adequate. Basil Berrigan had had no interest in running the companies for years. The application presently before the Court came "out of the blue" and was inexplicable. Appointment of provisional liquidators 1. The principles are not in dispute. The appointment of a provisional liquidator is an extraordinary step. In Constantinidis v JGL Trading Pty Limited (1995) 17 ACSR 625, Kirby P observed at 635: In Zempilas v J N Taylor Holdings Ltd (No 2) (1990) 55 SASR 103; 3 ACSR 518 (SC(SA)), King CJ (with the agreement of Cox and Olsson JJ) stressed that: The appointment of a provisional liquidator pending adjudication upon the petition for winding up, is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo. 1. In Constantinidis, the Court also followed the principles stated by Master Lee in Re McLennan Holdings Pty Limited (1983) 7 ACLR 732 at 737-8, including that the power to appoint a provisional liquidator is by no means limited, the grounds on which a provisional liquidator may be appointed are infinite, and all that really has to be shown is that there is a bona fide application constituting sufficient ground for the making of the order: at 626. See also Re New Cap Reinsurance Corporation Holdings Limited (1999) 32 ACSR 234; [1999] NSWSC 536 at [23]; Australian Securities and Investments Commission (ASIC) v ActiveSuper Pty Limited (No 2) (2013) 93 ACSR 189; [2013] FCA 234 at [12]. The primary duty of the provisional liquidator is to preserve the status quo to ensure the least possible harm to all concerned and to enable the Court to decide, after a further examination, whether the companies should be wound up: Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80 (Tamberlin J) followed in ASIC v ActiveSuper at [16] (Gordon J). 2. As to how the Court should approach the task of deciding whether to appoint a provisional liquidator, Brereton J observed in Grace v Grace (2007) 25 ACLC 141; [2007] NSWSC 6, that, while the court has a 'wide discretion', the appointment involves 'the taking of a serious step and requires the exercise of very great care': at [26]. Further, as [29]: …[T]he decision … is usually approached — in a manner broadly analogous to that applicable to other forms of interim preservation, such as an application for the appointment of an interim receiver or an interlocutory injunction — by reference to two main questions: first, whether there are good prospects of the plaintiff obtaining a winding up order; and, secondly, whether, having regard to the whole of the circumstances and in particular the measures already in place, the assets of the company are in jeopardy such that they need to be put under the protection of a provisional liquidator pending trial. 1. More recently, in Nikolaidis v Camden Retail, Barrett J explained the position at [32]: More recently, I think, the question has become a more general one concerning the need for stable governance until the final hearing. There must be, in general terms, "some good reason" for the appointment of a provisional liquidator, for example "urgency, or unusual circumstances such as danger to assets, lack of control, deadlock, or some public interest element for his appointment": Re Brylyn No 2 Pty Ltd (1987) 12 ACLR 697 at 707. 1. As Barrett J also explained in Labraga v Pomfret [2005] NSWSC 490, the Court will generally decline to appoint a provisional liquidator where some suitably stabilising interim regime is in place: at [33]. His Honour appointed a provisional liquidator in that case as he was satisfied that there was a strong and arguable case for the making of a winding up order and "the impasse in the management and stewardship of the company means that there is a need for the installation of an external official to take matters in hand and to introduce some stability": at [39]. 2. The potentially adverse effect of the appointment of a provisional liquidator on the company was recognised by Austin J in Roumanus v Orchard Holdings [2007] NSWSC 1480 at [9]: … the order unavoidably disturbs the status quo to a degree, if at the time of the application the company is carrying on business in a commercial environment. The very appointment of a provisional liquidator can have a drastic effect on the company's business, perhaps even leading to its commercial death. 1. In In the matter of Therma Truck Pty Limited [2016] NSWSC 266, Black J said this passage reflected 'commercial good sense' and that a court will generally not require substantial evidence to establish that a trading company is likely to be adversely affected by the appointment of a provisional liquidator: at [55]. Further, his Honour observed at [56]: … the Court should recognise that the business community does not necessarily have a comprehensive understanding of the fact that a provisional liquidator can be appointed in circumstances that do not involve a company's insolvency, and that there is a substantial risk that persons who might otherwise trade with the Company would be concerned that the appointment of a provisional liquidator was indicative of its insolvency, and would either cease to trade with the Company or insist on more onerous trading terms if such an appointment took place. Having regard to Roumanus and Therma Truck, I enquired of the parties whether it may be better to appoint a receiver and manager to the assets of Crow Inn rather than a provisional liquidator. The plaintiffs embraced that suggestion whilst the defendants did not. 1. A provisional liquidator may be appointed where, on the material before the Court, there is a reasonable prospect that a winding up order will be made: Therma Truck at [19] (Black J); Australian Securities Commission v Solomon at 80 (Tamberlin J). Further, as Tamberlin J observed in Solomon at 80: The court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience: Re Club Mediterranean Pty Ltd (1975) 11 SASR 481 at 484 per Bright J. The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and various and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact. Amongst the considerations which led his Honour to conclude that a provisional liquidator should be appointed in that case were: it was apparent that there was a real prospect that winding up orders would be made at the hearing of the winding up application in the absence of any substantial evidence to the contrary; Mr Solomon was the controlling mind and will of the companies and faced a conflict of interest; and, it was essential in the circumstances that an independent person be appointed to deal with the company's assets and liabilities free from any personal or pecuniary interest in the outcome: at 81-82. 1. Where the application is to wind up the companies on just and equitable grounds or oppression, Brereton J considered in Grace v Grace that it is sufficient that there is a reasonable prospect that some form of relief under section 233 of the Corporations Act will ultimately be granted, even if that relief is not a winding up order, as long as the assets are in some degree of jeopardy: at [31]. For example, the affairs of the company are being conducted for the benefit of one of the directors and not for the benefit of the company as a whole, or it is not possible for the directors to meet civilly and discuss and manage the affairs of the company, or there is a conflict of interest between the directors and the proper interests of the company: at [31] citing Zempilas v J N Taylor. See also Austin J in Roumanus v Orchard Holdings at [11]. 2. As to whether there is a reasonable prospect that a winding up order will be made in this case, a deadlock or disagreement in the management of the company's affairs is a common case for a winding up under section 461(1)(k) of the Corporations Act where the Court is of the opinion that it is just and equitable to do so, including where a company was formed on the basis of a personal relationship involving mutual confidence, and that confidence has broken down so that continuation of the association would be futile: In the matter of Catombal Investments Pty Ltd [2012] NSWSC 775 at [19]-[20] (Brereton J); Boyd v Feeney [2017] NSWSC 1595 at [50] (Black J); Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 66 ACSR 325, [2008] VSCA 86 at [119] (Dodds-Streeton JA, with whom Ashley JA and Forrest AJA agreed); Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342 at [90], [96] and [117] (Barrett J); In the matter of Amazon Pest Control Pty Limited [2012] NSWSC 1568 at [17] (Black J). Such an order may more readily be made where a company is in the nature of a "quasi partnership", or "a majority controlled business requiring mutual co-operation and a level of trust", and there has been a loss of trust and confidence, or the loss of confidence frustrates the commercially sensible operations of the company in accordance with the incorporator's expectations and such loss of confidence is justified: Nassar at [77]-[79]; Amazon Pest Control at [18]-[19]; Tomanovic v Argyle HQ Pty Ltd [2010] NSWSC 152 at [49]-[51] (Austin J). 3. On the evidence before me on this interlocutory application, it appears that the deadlock between the directors is real and sustained. Although Basil Berrigan is the majority shareholder of both companies, he is unable to take the usual step of calling a meeting and removing Joel Berrigan as a director because the constitutions of the companies require two members to attend any meeting and, since Basil Berrigan and Joel Berrigan are effectively the only members, he expects that Joel Berrigan will not attend a meeting if called. That seems to be a reasonable prediction on Basil Berrigan's part. There is a sustained history of antipathy. Having regard to the authorities at [52] to [53], it seems to me that there is a reasonable prospect that a winding up order will be made in this case on just and equitable grounds. 4. Turning to the balance of convenience, several factors are relevant. First, the Hotel is a substantial enterprise with 80 rooms, a bar with a liquor licence, a restaurant and conference rooms. Whilst both sides called in aid the COVID-19 pandemic in support of why a provisional liquidator should, or should not, be appointed, it seems to me that the Hotel is operating in trying and changeable times. The business needs decision makers who can communicate, co-operate and make decisions as events unfold and the operations of the Hotel change accordingly. I do not think it is realistic to expect that, whatever arrangements Joel Berrigan has put in place, the staff at the Hotel will not need regular direction. I think it is more likely that decisions of a substantial nature will need to be made frequently. Under the regime proposed by Joel Berrigan, that direction will be given by him alone. In circumstances where Joel Berrigan does not enjoy the trust and confidence of his fellow director, and there is no mechanism by which any inevitable disagreement between them may be resolved, the regime proffered by Joel Berrigan seems unlikely to work for any length of time. 5. Second, the evidence points to a lack of progress between Basil Berrigan and Joel Berrigan over a sustained period. They appear unable to co-operate. The fact that they have been unable to agree on an interim regime confirms this. This seems unlikely to change in the near future. That is, the need for an effective decision maker is likely to remain until their dispute can be determined by the Court at a final hearing. I do not consider that the undertakings proffered by Joel Berrigan will provide a stable basis to run the Hotel for this length of time. 6. Third, the wages claim made by Joel Berrigan and his wife is in hot dispute and, if paid, will absorb the cash at bank at a time when the Hotel is 'breaking even' such that the solvency of Crow Inn may be called into question. Fourth, given that the business of Crow Inn is 'break even', any other financial shock may have a similar consequence. The present financial climate may produce further shocks for the Hotel. 7. Fifth, to suggest that Joel Berrigan's resignation is what Basil Berrigan asked for is an over simplification of events. Likewise, to suggest that Basil Berrigan's failure to attend the Hotel on 7 May 2020 and take over the business was an endorsement of Joel Berrigan's management is also an over-simplification. Rather, the history of the dispute indicates that a series of ultimatums have been made to endeavour to place the parties in the most favourable position: to either buy out the interests of the other at the best price or, in Basil Berrigan's case, to also sell the Hotel on the open market. None of this bodes well for the good management of the Hotel. 8. The minority shareholder has effectively resigned as General Manager but seeks to continue to run the Hotel through his visits to the Hotel to give guidance or make decisions in respect of its operations through an acting General Manager who he trained. The minority shareholder seeks to do this without the interference of the majority shareholder. Joel Berrigan seems to be trying to "have it both ways" in resigning but, for practical purposes, continuing to manage the Hotel. 9. So far as Puddy is concerned, it seems to me that there is a possibility that the appointment of a receiver and manager to that company may amount to an event of default under loan arrangements with the Commonwealth Bank of Australia. One cannot be certain as we do not have the loan documents. It would be advisable, if at all possible, to avoid that occurring. In circumstances where Puddy is a land holding company, does not operate a business, and where there is no evidence that the day to day expenses of Puddy cannot be paid, I am not minded to appoint a provisional liquidator to Puddy or a receiver and manager to The Puddy Trust. The day to day operations of Puddy are simple compared with the complexities of an event of default with its lender. 10. Turning to Crow Inn, I am of the view that the deadlock between the directors evidenced over a substantial period of time, combined with the loss of a General Manager, a proposed arrangement going forward which effectively excludes the majority shareholder, and substantial demands being made for payment of back-pay during a pandemic, amount to special circumstances. I consider it is in the interests of both directors that an independent and qualified receiver and manager or liquidator take over responsibility for Crow Inn. To adopt Barrett J's turn of phrase in Labraga v Pomfret, "the impasse in the management and stewardship of the company means that there is a need for the installation of an external official to take matters in hand and to introduce some stability": at [39] 11. I do not consider that there is any practical difference between appointing a receiver and manager or a provisional liquidator in this case. As Brereton J noted in Grace v Grace, the questions to be answered when appointing a receiver are largely the same as for the appointment of a provisional liquidator. In In the matter of Allco Securities Pty Limited [2011] NSWSC 1113, Barrett J noted that the distinction between a provisional liquidator and a receiver is, in a functional sense, not great: at [17], citing Re United Medical Protection Ltd [2002] NSWSC 413; (2002) 41 ACSR 623. In Re United Medical Protection, Austin J noted that the occasions for comparing provisional liquidation with receivership have not often arisen in the decided cases, but observed that a receivership is a very flexible equitable remedy although "it is nowadays more common than it once was for the appointment of a provisional liquidator to be made where it is not intended that the company's business be immediately shut down": at [5]. 12. However, I think that appointing a provisional liquidator may cause unnecessary damage to the goodwill of Crow Inn in circumstances where, particularly in the financially uncertain times surrounding the COVID-19 pandemic, the difference between a provisional liquidator appointed by reason of a deadlock between the directors, and a liquidator appointed due to solvency issues may be poorly understood by creditors. Thus, I think a better course is to appoint a receiver and manager. 13. For these reasons, I make the following orders: 1. Dismiss prayers 2 to 6 of Interlocutory Process filed on 12 May 2020. 2. Upon the second plaintiff, by his counsel, giving the usual undertaking as to damages, order that Alan John Hayes (Receiver) be appointed receiver and manager, without security, of the assets, property and undertaking of the first defendant (Assets). 3. Order that, as receiver and manager of the Assets, the Receiver have, with respect to the Assets, the powers conferred by section 420 of the Corporations Act 2001 (Cth) (other than subsections 420(2)(s), (t), (u) and (w)) as if the references in that section to "property of the corporation" were references to the Assets, including, without limitation, the power to do all things necessary or convenient: 3.1. to carry on the business of the first defendant; 3.2. to demand the books and records of the first defendant from any person; 3.3. to investigate transactions made using funds derived from the Assets; 3.4. to determine and make payment of any claims against the Assets; 3.5. to sell and convert into cash any of the Assets; in the ordinary course of business of the first defendant and not for the purposes of disposing of that business. 1. Order that the Receiver take into his custody all of the Assets. 2. Order that the costs, expenses and remuneration incurred by the Receiver in acting as receiver and manager of the Assets be paid from the Assets of the first defendant. 3. Reserve all question of costs. 4. Liberty to the parties to apply on 24 hours' notice. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 May 2020