Cadwallader v Bajco [1999] NSWSC 439

New South Wales Supreme Court CITATION : Cadwallader v Bajco [1999] NSWSC 439 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 1347/98 HEARING DATE(S) : 27 April 1999 JUDGMENT DATE : 27 April 1999

Alan Cadwallader (P) PARTIES : v Bajco Pty Ltd (In Liquidation) (D) JUDGMENT OF : Austin J

COUNSEL : J B Whittle (P) R Watson & D Hilliard (Ds) A R Connolly & Co (P) SOLICITORS : Tress Cocks & Maddox (D1,D2) Watson & Watson (D4,D5) CATCHWORDS : Corporations - companies - directors' duties - directors' appointment of voluntary administrator - duty to act for good faith and proper purposes - whether proper case for appointment of referee - whether proper case for determination as separate question ACTS CITED : Corporations Law, ss436A, 439A Supreme Court Rules, Parts 31 and 72 CASES CITED : Ampol Petroleum Limited v R W Miller (Holdings) Limited [1972] 2 NSWLR 850 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, 533 DECISION : Motion denied

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

TUESDAY 27 APRIL 1999

1347/98 - ALAN CADWALLADER -v- BAJCO PTY LTD (IN LIQUIDATION)

JUDGMENT (Ex tempore - revised 7 May 1999)

1 These reasons for judgment deal with an application by the first and second defendants in the proceedings by amended notice of motion filed on 27 April 1999. In that amended application the first and second defendants, as applicants, seek orders that under Part 72 of the Supreme Court Rules to the effect that a referee be appointed to consider and report on the following matter: "The following question arising in the proceedings, namely, whether the second defendants were validly appointed administrators of the first defendant on or about 28 November 1997 pursuant to section 436A of the Corporations Law". 2 The application is opposed by the plaintiff in the proceedings. The third defendant in the proceedings generally supports the application and draws attention to the fact that, if the application is successful and the matter is determined by the referee in a certain way, the third defendant will have no interest in participating in the proceedings thereafter. 3 While the application initially sought only a reference under Part 72, in its amended form the application seeks in the alternative an order pursuant to Part 31 rule 2 that the same question as set out above be determined separately and before the other questions in the proceedings. There is also an application for an order for discovery on that separate question. 4 The proceedings in which this motion has been brought are proceedings by statement of claim filed by the plaintiff on 20 April 1998. In the statement of claim the plaintiff alleges that a resolution by the directors of the first defendant for the appointment of an administrator under section 436A of the Corporations Law was, in the circumstances, invalid and that the deed of appointment was also invalid. So far as the execution of the deed of appointment is concerned, there is a specific contention as to the validity of that execution on behalf of the company, the first defendant. That is a matter within a confined and specific compass, the determination of which ought not to involve substantial exploration of facts. 5 The principal challenge to the directors' resolution for the appointment of an administrator is contained in paragraph 21 of the statement of claim. In that paragraph the plaintiff alleges that the passing of the resolution and also the execution of the deed of appointment was carried out by the third defendants as directors of the first defendant with the intention of stopping the third defendants from being replaced as directors of the first defendant at an extraordinary general meeting which had been convened for a date shortly after the resolution to appoint an administrator was adopted. 6 Particulars supporting the allegation in paragraph 21 are lengthy, but clearly they raise substantial and detailed issues of fact as to the good faith of the third defendants as directors of the first defendant at that time and as to the purposes for which the resolution to appoint an administrator was adopted. It is obvious that, if the allegations in paragraph 21 and the particulars to that paragraph are contested, the determination of matters of fact will be a substantial undertaking involving, one presumes, affidavit evidence, documents and substantial cross-examination. 7 The statement of claim contains several other factual allegations, some of which might arguably be regarded as separate and distinct from the allegations concerning the appointment of the administrator. One allegation is that a subsequent meeting of creditors of the first defendant was convened with inadequate notice. Another allegation is that the notice of the meeting of creditors failed to comply with the requirements of section 439A of the Corporations Law with respect to various matters. Another allegation is that the notice of meeting failed to express conclusions as to a number of matters, including the solvency of the company. The statement of claim contains prayers for relief which, in the circumstances, seek a variety of orders which are intended to invalidate the whole of the administration proceedings and to establish that the company ought to be dealt with on the basis that it is insolvent and that various orders should be made against the second and third defendants. 8 This very brief account of the plaintiff's claims is sufficient to show that there are allegations of a complex factual kind and an important issue for determination as to the good faith of the third defendants and their purposes in embarking upon the course of action which included, but was not confined to, the appointment of an administrator of the first defendant. 9 In these circumstances, the question is whether it is appropriate for the Court to make orders which have the effect of separating out the issues relating to the appointment of the administrator from other issues which the plaintiff's statement of claim purports to raise. 10 The applicant puts the matter first under Part 72 of the Supreme Court Rules. Part 72 was introduced in its present form in 1985 following the repeal of the Arbitration Act. It gives the Court a general discretion, except in matters to be tried by a jury, to appoint referees and refer to them either the whole of the proceedings or any question to which the proceedings give rise. The discretion is obviously a wide one. However, it is a discretion which must be exercised having regard to the nature of the matter sought to be referred and the appropriateness of a referee dealing with the matter rather than the matter being dealt with by the Court itself. 11 In my opinion, the question of appointment of the administrator in this case is quintessentially a matter which ought to be determined by this Court rather than to be sent out to a referee. Directors are fiduciaries. The Court has a responsibility in proceedings brought before it to ensure that those fiduciaries discharge the duty of good faith which the law imposes upon them. A fundamental part of the duty of good faith is the requirement that fiduciaries exercise their powers, including powers conferred upon them by statute, in good faith and for proper purposes. The Court must be jealous to ensure those requirements are adhered to in any case. 12 Given the nature of the allegations and also the factual issues to which those allegations give rise, in my opinion it would be inappropriate to exercise my discretion under Part 72 to appoint a referee and require a report on that matter. 13 As to the alternative claim under Part 31 rule 2, again, it seems to me that this is not an appropriate case for the identification and determination of a separate question. I accept the submission of counsel for the plaintiff as respondent that not much utility would be derived from determination of the separate question from the point of view of the time of hearing. The other issues in the case, while substantially separate in terms of their factual component, are unlikely to involve anywhere near as much time as the determination of the question of good faith and proper purposes with respect to the appointment. Counsel for the plaintiff has estimated that, from the point of view of time, the determination of the separate issue would take eighty or ninety per cent of the total hearing time and I have no reason to doubt that estimate. Overall, there is no compelling reason, from the point of view of practicability, for the Court to seek to have a separate question of this kind determined. 14 Additionally, counsel for the plaintiff has submitted that, in determining the issues of bona fides and proper purposes of the directors in their resolution to appoint an administrator, it is appropriate for the Court to have regard to facts which occurred prior to and subsequent to the adoption of the resolution in question. This factual investigation sheds light on the purposes which the directors may have had in mind at the time when they made their decision. Determination of a factual sequence of events which includes, but is not limited to, the events at the very time of the directors' decision has been thought to be appropriate in many cases in which the bona fides of directors' decisions have been challenged. I need only refer to the judgment at first instance by Street CJ in Ampol Petroleum Limited v R W Miller (Holdings) Limited [1972] 2 NSWLR 850; affd [1974] AC 821. Nothing said by the Privy Council in that case suggested that his Honour's approach to the determination of facts was in any way in error. 15 Counsel for the plaintiff therefore submits that to cut off a piece of the case and determine it as a separate question creates the risk that the Court may not have an adequate and complete picture of the facts and circumstances leading to and following from the directors' determination, which may cast light on their purposes. In those circumstances, says counsel, it would be risky and not merely impractical of the Court to order that a separate question be determined. I accept this submission. 16 I note that the Court must proceed cautiously if a party seeks orders under Part 31 for determination of complex questions of fact (see esp. Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, 533). I am not persuaded it would be a safe course of action in this case to use Part 31 in the manner advocated. I therefore propose to deny the application in the amended notice of motion. 17 I propose to order that the costs be costs of the proceedings. I think there was an arguable case for determination of a separate question, though I have reached the opposite conclusion. I think if the matter had fallen out differently, there might have been some way we could have progressed the case in an expeditious manner. 18 In the circumstances, therefore, my orders will be: 1. application in the amended notice of motion denied in whole. 2. costs of the amended notice of motion be costs of the proceedings. 19 I shall ask the parties to confer with respect to the further conduct of the proceedings, and if possible to bring in short minutes of orders to be made by consent. I shall stand the matter down in the list. 20 [Later in the same day] The parties have, by consent, handed up short minutes of order which I initial and date for the purposes of identification. I note that: (a) Orders 1 and 2 in that document confirm the orders which I made this morning on the second and third defendants' contested notice of motion and therefore confirm orders which this morning were not made by consent. (b) Orders 3-6 inclusive are proposed by the consent of all parties to the present proceedings. (c) As regards order 6, I have been informed by the solicitors for the third defendants that the only other non-corporate person in the proceedings referred to in paragraph 6, namely, Bruce Cadwallader, consents to an order in terms of paragraph 6. I make the orders in paragraphs 1, 2, 4, 5 and 6 and the directions in paragraph 3 of that document. * * * * * * * * * *