Cadwallader v Bajco (No.2) [2002] NSWSC 127

Reported Decision : 41 ACSR 58

New South Wales Supreme Court

CITATION : Cadwallader v Bajco (No.2) [2002] NSWSC 127 CURRENT JURISDICTION: 1347/98 FILE NUMBER(S) : SC Equity HEARING DATE(S) : 18 & 27 February 2002 JUDGMENT DATE : 5 March 2002

Alan Norman Cadwallader (P) PARTIES : Bajco Pty Ltd (D) Keith William Skinner and David John Frank Lombe (D2) David Ewart Cadwallader and Marilyn Alice Wintzloff (D3) JUDGMENT OF : Austin J

J B Whittle SC (P) COUNSEL : D J Hammerschlag SC (D1, D2) J W Stevenson (D3) A R Connolly & Co (P) SOLICITORS : Tress Cocks & Maddox (D1, D2) Watson & Watson (D3) CATCHWORDS : COSTS - directors resolved to appoint voluntary administrators in bad faith and for improper purposes - administrators were on notice of improper purpose but not bad faith - plaintiff succeeds in terminating deed of company arrangement - whether administrators and directors should be ordered to pay plaintiff's costs - whether administrators should be prevented from recouping costs from company LEGISLATION CITED : Corporations Act ss 445D, 445G, 447A City & Suburban Pty Ltd v Smith (unreported, Federal Court of Australia, Merkel J, 31 July 1998 CASES CITED : Cresvale Far East Limited (in liquidation) v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622 Gould v Vaggelas (1984) 157 CLR 215 DECISION : See under heading "Conclusions"

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

TUESDAY 5 MARCH 2002

1347/98 ALAN NORMAN CADWALLADER V BAJCO PTY LTD & ORS JUDGMENT 1 HIS HONOUR: On 24 December 2001 I handed down reasons for judgment in which I concluded that orders should be made terminating a deed of company arrangement entered into by the company on 12 January 1998. The effect of my decision was to cause the company to pass into liquidation. The second defendants, who were the administrators of the company, thereby became its liquidators. 2 I reached these conclusions on the grounds that · the third defendants as directors of the company resolved in favour of the appointment of the second defendants as voluntary administrators for the improper purpose of preserving themselves in office and preventing the discontinuance of litigation brought by the company against the plaintiff and others, and therefore their decision was voidable (paragraphs 225, 226); · the second defendants failed to comply with the requirement of s 439A (4) (c) of the Corporations Law, since their statement to creditors did not set out details of the proposed deed of company arrangement (paragraphs 257, 258); · the second defendants' report to creditors was false or misleading in a manner material to the creditors' decision, and there were omissions from the report of matters that were material to the creditors' decision (paragraph 263). 3 I decided that the appropriate course, using powers available to the Court under ss 445D, 445G and 447A, was to make an order treating the deed of company arrangement as having come to end at the time of the making of the order, rather than declaring that the deed of company arrangement or the voluntary administration preceding it was invalid ab initio (paragraphs 270-273). I noted that the second defendants would automatically become liquidators rather than administrators when I made my orders, and I declined to restrain them from taking steps to sell the company's property, if they thought it appropriate to do so in the administration of the affairs of the company in liquidation (paragraph 276). 4 I now must decide what orders to make with respect to costs. While the plaintiff seeks costs against all defendants, it is necessary to consider the positions of the first, second and third defendants separately, since the different considerations arise in each case. The first defendant 5 The first defendant, the company, filed a defence and was represented at the hearing by senior counsel, who also acted for the second defendants. However, it cannot be said that the first defendant was in any substantial way a protagonist at the hearing. According to my observation, the first defendant was represented, with an appropriate level of neutrality, solely to protect its position as a separate entity. The first defendant was essentially the subject of the dispute between the real protagonists. 6 Counsel for the plaintiff referred to my judgment in Cresvale Far East Limited (in liquidation) v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622, 625, to support his view that it was appropriate to order the company in liquidation to pay the plaintiff's costs. But in Cresvale (No 2) I was not invited to confine the costs order to the individual defendants. In the present case, however, a costs order against the company is opposed. It is therefore appropriate to give some consideration to the company's special position in the litigation. 7 In my opinion this is not an appropriate case for an order that the company pay the plaintiff's costs (though it is appropriate, as I shall note below, that the company pay the second defendants' costs of their amended cross-claim). The real dispute has been amongst the two directors with board control but a minority shareholding, the administrators who are alleged to have assisted those directors, and the largest shareholder who with his brother requisitioned the meeting to remove the directors. The burden of a costs order against the company would fall ultimately on the shareholders proportionately to their shareholdings (set out at paragraph 20 of the judgment), so that the heaviest burden would fall on the plaintiff because he is the largest shareholder, and a burden would also fall on two shareholders who are not parties to the proceeding. It is preferable, in my view, to endeavour to reflect my decision on the questions in dispute at the hearing by allocating costs amongst the plaintiff, the second defendants and the third defendants having regard to their success or failure on the matters in dispute at the hearing. The second defendants 8 While the proper contradictor in proceedings for termination of a deed of company arrangement is the company under administration, acting through the administrator, it is sometimes appropriate for the plaintiff to join the administrators personally as defendants: Cresvale (No 2), 637 (paragraph [77]). In the present case it was appropriate to join the second defendants as parties because the plaintiff sought to restrain them from acting as administrators of the first defendant and from proceeding with the sale of the company's property. 9 This is not the kind of simple case where it can be said that one party has substantially succeeded, and that costs should follow the event. As the second defendants point out, the affairs of the company remain under their control, in their new capacity as liquidators, and the company has not been returned to the directors as sought by the plaintiff. The plaintiff's claim for an accounting or equitable compensation has failed (judgment, paragraph 278). The plaintiff did not succeed on various technical issues, namely the validity of the deed of appointment of administrators, the failure to convene the meeting of creditors within the prescribed time, the failure to allow sufficient time between the date when the meeting was convened and the date when it was held, and the failure to comply with s 439A (4) (b) (see paragraphs 246 - 256). The injunction to restrain the second defendants from selling the property has been dissolved (paragraph 277). The company is in liquidation, which is precisely the outcome sought in the amended cross-claim. 10 Nevertheless, the second defendants have been substantially unsuccessful on some major areas of factual dispute. I note the following findings adverse to the second defendants' position: (i) Mr Cardwell was aware, or ought to have been aware, that the third defendants' dominant purpose in resolving in favour of voluntary administration was to stop the requisitioned meeting so that they could ensure the continuation of the company's 1997 proceeding, and therefore Mr Cardwell and the second defendants were on notice of the impropriety of the third defendants' purpose (paragraph 227); (ii) the second defendants failed to comply with s 439A (4) (c), an important provision under which they were required to supply creditors with a statement setting out details of the proposed deed of company arrangement, and their failure to do so was misleading (paragraphs 257-260); (iii) the second defendants' report to creditors was seriously and materially deficient with respect to the prospects of a substantial distribution to creditors, the use of substantial funds for the purposes of litigation, failure to indicate when the deed administration would be terminated, and failure adequately to consider the question of solvency (paragraphs 262-264). 11 Counsel for the second defendants seeks to minimise the significance of my findings in paragraphs (ii) and (iii) by submitting that there was a finding of bad faith on the part of the third defendants which pre-dated the report, and consequently the plaintiff's success on these two matters had no effect on the outcome of the case. In my opinion, however, my findings with respect to the inadequacies of the administrators' report were important components of the remedial conclusions to which I was led, and they are important factors in my consideration of the question of costs. 12 Counsel for the second defendants also emphasises that I made no finding of misconduct on the part of the second defendants, whom I have held to be appropriate to continue as liquidators of the company. It is true that there were no findings of misconduct by the second defendants, but there was a finding that they had notice of the third defendants' improper purpose at an early stage, prior to preparing and distributing their report, as well as findings about the inadequacy of their report and unfavourable findings about Mr Cardwell's evidence. 13 My findings with respect to Mr Cardwell are relevant to my conclusion as to costs. The day-to-day conduct of the administration of the company on behalf of the second defendants was undertaken by Mr Cardwell. I found that Mr Cardwell's evidence was unsatisfactory in various ways. Thus, I rejected the evidence of Mr Cardwell that Bruce Cadwallader had told him that he had changed his mind as to voting for the removal of the directors (paragraphs 204-205). I found, contrary to his evidence, that Mr Cardwell did not believe that Bruce Cadwallader would change his vote (paragraph 209). I found that, although Mr Cardwell was not implicated in the bad faith of the third defendants, who had adopted a resolution about the solvency of the company that they knew to be false (paragraph 189), his advice to them about the solvency of the company (paragraph 89) was wrong (paragraph 181). 14 His advice that the appointment of voluntary administrators would mean that the requisitioned meeting would not be held (paragraph 91) was also wrong (paragraph 107). Counsel for the second defendants submits that although the Court found that Mr Cardwell's advice on this point was wrong in principle, in fact the meeting was held but there was no quorum, and so the incorrect opinion ultimately had no effect. In my view the principal significance of Mr Cardwell's incorrect advice is that it provided part of the basis for the third defendants' decision, improperly motivated, to appoint voluntary administrators. I have found that Mr Cardwell knew, or ought to have known, of their improper purpose. 15 The plaintiff says that I should order the second defendants to pay his costs without limitation to the assets of the company. In Cresvale (No 2) (39 ACSR at 634, paragraph [64]) I expressed the opinion that the normal costs order against a deed administrator as unsuccessful defendant is an order that the administrator pay the successful party's costs, without limitation to the company's assets. I see no reason to depart from that normal order in this case. 16 In Cresvale (No 2) at paragraph [65] I indicated that it may be relevant, in the exercise of the Court's discretion with respect to costs orders, to consider whether the administrator would have a right of indemnity against the company with respect to costs of another party, ordered to be paid by the administrator. The second defendants submitted that the question was not properly before me. I agree that no occasion has arisen for me to make any orders directly recognising the existence of a right of indemnity on the part of the second defendants against the company or an equitable lien against its assets. However, it seems to me relevant to take the matter into account in deciding on an appropriate order for costs. All of the parties before me have had the opportunity to address the question, in light of my observations in the Cresvale (No 2) case. It is true that the interests of the first and second defendants were at odds on this question, although they were represented by the same counsel, but I am satisfied that the company's point of view has been adequately represented by the plaintiff. 17 I have held that the second defendants are entitled to be indemnified out of the company's property for their remuneration and expenses incurred as administrators up to the distribution of their report on 19 December 1997, but not thereafter (paragraph 278). As counsel for the second defendants points out, the question whether they are entitled to a lien or indemnity from the company for the costs of these proceedings is a different question from their entitlement to recover their remuneration and expenses out of the company's property. The question of indemnity with respect to costs raises the issue whether the second defendants behaved prudently and reasonably in defending the deed of company arrangement against challenge and in defending themselves against removal and other claims. 18 Counsel for the plaintiff submits that my finding, that the second defendants' were on notice of the third defendants' improper purpose, ought to have led to the second defendants immediately calling a halt to the administration. He contends that to continue with the administration when they were on notice of the improper purpose, and to deny the existence of the improper purpose and notice up to the conclusion of the hearing, amounted to impropriety on the part of the second defendants. He says that to put forward a report to creditors which was seriously deficient was to compound the unsatisfactory conduct. His contention is that the Court's refusal to grant an indemnity and lien to the second defendants for remuneration and expenses beyond 19 December 1997 should be coupled with refusal to recognise an equitable right to indemnity or an equitable lien over the company's assets for their own costs as well as the costs of any party whose costs they are ordered to pay. 19 I agree with the plaintiff that the second defendants ought not to have continued with the administration, and ought to have taken appropriate steps to cease to be voluntary administrators of the company, once they had notice of the third defendants' improper purpose. That point was reached, at the very latest, on 19 December 1997 when they distributed their defective report. The present proceeding did not begin until February 1998. To a significant degree, the commencement of this proceeding was a consequence of the conduct of the second defendants, who have endeavoured unsuccessfully to defend their earlier conduct as administrators on a factual basis that I have substantially rejected (compare City & Suburban Pty Ltd v Smith (unreported, Federal Court of Australia, Merkel J, 31 July 1998, considered in Cresvale (No 2) especially at paragraph [90]). In my opinion, the second defendants' conduct has excluded them from asserting any equitable right to an indemnity and lien against the first defendants with respect to any part of the plaintiff's costs payable by them pursuant to my orders, and with respect to their own costs and disbursements, except to the extent that any preparatory costs may have been incurred up to 19 December 1997 (provided that they are properly recoverable as costs of the present proceeding). 20 The second defendants had some limited success on their amended cross-claim, to the extent that they were able to invoke s 1322 to cure timing deficiencies in the convening of the meeting of creditors, and to the extent that they were held to be entitled to a lien and indemnity with respect to costs incurred up to 19 December 1997. On balance, it seems to me appropriate to order the first defendant to pay the costs of the cross-claim. 21 Counsel for the second defendants submits that there should be a special order in favour of his clients with respect to the reports of Mr Love, which were brought about by the attempted reliance by the plaintiff on the reports of Mr Watson, held by me to have been wholly inadmissible (paragraphs 153-159). I disagree. It was open to the second defendants to rely on the inadmissibility of Mr Watson's report and to choose not to respond to it. On the other hand, it seems to me correct that the plaintiff's recoverable costs should exclude costs relating to Mr Watson's evidence, and I shall so order. The third defendants 22 I have made findings against the third defendants that they acted in bad faith in adopting the resolutions for the appointment of voluntary administrators when they knew that the company was solvent (paragraph 188). I have found that they were motivated by a dominant purpose that was improper (paragraph 225). I have made unfavourable findings about the evidence of the third defendants (especially at paragraphs 170-171). The third defendants vigorously contested all substantive issues of fact and they were unsuccessful in these important respects. There is no good reason why costs should not follow the event. I shall therefore order the third defendants to pay the plaintiff's costs of the proceeding. 23 I shall also order the third defendants to pay the costs of the second defendants (cf Gould v Vaggelas (1984) 157 CLR 215, 229), and the costs of the partners of Deloittes with respect to the second cross-claim. I agree with counsel for the third defendants that the second defendants were not puppets of either the plaintiff or the third defendants and were required properly to undertake their duties as administrators. However, I have found that Mr Cardwell depended almost entirely on the third defendants for his information about the financial state of the company (paragraph 187), and he had no basis for treating the information he was given by them as untrue (paragraph 189). I therefore disagree with the submission by counsel for the third defendants that it was open to Mr Cardwell or his employers to have undertaken the analysis in relation to solvency that I undertook at paragraph 160ff of the judgment. 24 Importantly, I held that Mr Cardwell did not participate in or assist their decision to appoint voluntary administrators, to the extent that it was taken in bad faith (paragraphs 189 and 223). I found that although the partners of Deloittes were retained by the third defendants to provide advice as to the solvency of the company and as to whether they should appoint administrators, and they acted through Mr Cardwell, Mr Cardwell did not fail to discharge those duties in the advice he gave to the third defendants on 27 November 1997 (paragraph 283). 25 While I have made findings adverse to the second defendants, and Mr Cardwell, none of those findings serves to countermand or alleviate the findings I have made against the third defendants on the centrally contested factual issues. 26 Counsel for the third defendants submits that any order for his clients to pay the costs of the other parties should be limited to the issues concerning the calling of the meeting on 27 November 1997 (that is, the meeting for the appointment of voluntary administrators). Thereafter, according to this submission, the second defendants rather than the third defendants had the control of the company, and costs associated with their activities should not be sheeted home to the third defendants. I disagree with this submission. It appears to me that the central wrongdoing in this case was for the third defendants to resolve in favour of the appointment of voluntary administrators in bad faith, knowing that the company was solvent, and for an improper purpose. While I have found that the second defendants provided an unsatisfactory report to creditors, the defects in the report were, at least to a degree, the product of Mr Cardwell's reliance on information supplied to him by the third defendants. 27 Counsel for the third defendants also submits that any costs ordered to be paid by the third defendants should exclude costs relating to the evidence of the competing experts, Mr Watson and Mr Love, since their evidence was held to be inadmissible. I agree. The third defendants were not involved in the presentation of this evidence, and they should not be required to pay the costs of any other party relating to it. 28 The second defendants failed in their third cross-claim against the third defendants, because of my finding that Mr Cardwell was aware of the facts and circumstances constituting the third defendants' improper purpose. That being so, the second defendants should be ordered to pay the costs of the third defendants relating to the third cross-claim. Conclusions 29 I shall make orders to the following effect: (1) second and third defendants to pay the plaintiff's costs of the proceeding, except (in the case of the second defendants) costs relating to the evidence of Mr Watson, and (in the case of the third defendants) costs relating to the evidence of Mr Watson and Mr Love; (2) third defendants to pay the second defendants' costs of the proceeding (including costs of the plaintiff ordered to be paid by the second defendants, but excluding costs relating to the evidence of Mr Watson and Mr Love); (3) first defendant to pay costs of second defendants (cross-claimants) of the first cross-claim; (4) third defendants (cross-claimants on the second cross-claim) to pay the costs of the cross-defendants of the second cross-claim; (5) second defendants (cross-claimants on the third cross-claim) to pay the costs of the third defendants (cross-defendants) of the third cross-claim; (6) subject to order (3), and except for costs incurred up to 19 December 1997, costs payable by the second defendants in any capacity under these orders, and the costs incurred by the second defendants in this proceeding (including all cross-claims) are not recoverable from the assets or funds of the first defendant on any basis. **********