Reported Decision : (2003) 44 ACSR 21 (2003) 21 ACLC 371 New South Wales Court of Appeal CITATION : Kirwan v Cresvale Far East Ltd (In liq) [2002] NSWCA 395 FILE NUMBER(S) : CA 40188/01 HEARING DATE(S) : 19, 20 August 2002 JUDGMENT DATE : 10 December 2002 Nigel Peter Kirwan (Appellant/4th Cross Respondent) Cresvale Far East Limited (1st Respondent/1st Cross Respondent) PARTIES : Cresvale Securities Limited (2nd Respondent/2nd Cross Respondent) Vanda Russell Gould (3rd Respondent/Cross Appellant) Cresvale Capital Pty Limited (4th Respondent/3rd Cross Respondent) JUDGMENT OF : Meagher JA at 1; Giles JA at 4; Young CJ in Eq at 266 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT 3672/00 FILE NUMBER(S) : LOWER COURT Austin J JUDICIAL OFFICER : D J Higgs SC and R J H Darke (Appellant) COUNSEL : M Cashion SC (1st Respondent) P M Wood (2nd & 4th Respondents) S D Rares SC and P J Dowdy (3rd Respondent) John A Glynn & Associates (Appellant) SOLICITORS : Minter Ellison (1st Respondent) Blake Dawson Waldron (2nd & 4th Respondents) Henry Davis York (3rd Respondent) CATCHWORDS : CORPORATIONS- Administrator- Fiduciary duties- Duties re exercising casting votes- Standards of conduct for administrators- Liability of administrator to suffer order for costs. CORPORATIONS- Shares- Allotment- When power to allot exceeded. EQUITY- Equitable relief- Requirement to do equity. MEETINGS- Casting votes- Principles governing exercise. PROCEDURE- Costs- Administrator arguing both for the company and himself personally- How costs borne if unsuccessful. (D) Corporations Act 2001 (Comm) s 175, Pt 5.3A (particularly ss 439A(4)(c), 443C, 443D, 447E), ss 513C, 536, 600B LEGISLATION CITED : Corporations Regulations 5.6.21, 5.6.23, 5.6.26 Supreme Court Act 1970, s 76 Adsett v Berlouis (1992) 37 FCR 201 Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 Alati v Kruger (1955) 94 CLR 216 Breen v Williams (1996) 186 CLR 71 Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 Carr v Finance Corp of Australia Ltd (1981) 147 CLR 246 Chief Constable of North Wales Police v Evans [1982] 1 WLR 1155 City & Suburban Pty Ltd v Smith (No 2) (Merkel J, Federal Court of Australia, 31.7.1998) Commonwealth v McCormack (1984) 155 CLR 273 Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 Deputy Commissioner of Taxation v Comcorp Australia (1996) 21 ACSR 590 Equiticorp Finance Ltd (In liq) v Bank of New Zealand (1993) 32 NSWLR 50 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 Gambotto v WCP Ltd (1995) 182 CLR 432 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 Greir's case (1889) 45 Ch D 606 Harlowes Nominees Pty Ltd v Woodside (Lakes Entrance) Oil NL (1968) 121 CLR 483 Hindle v John Colton Ltd (1919) 56 ScLR 625 Hirsche v Sims [1894] AC 654 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Kinsela v Russel Kinsela Pty Ltd (In liq) (1986) 4 NSWLR 722 Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 Mills v Mills (1938) 60 CLR 150 National Australia Bank Ltd v Market Holdings Pty Ltd (2001) 161 FLR 1; 37 ACSR 629 National Trustees Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 Nell v Longbotham [1894] 1 QB 767 CASES CITED: Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 Ngurli Ltd v McCann (1953) 90 CLR 425 Oppenshaw v Whitehead (1854) 9 Ex 384; 156 ER 163 Pilmer v Duke Group Ltd (2001) 75 ALJR 1067 Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 R v Bradford Council; Ex parte Corris [1989] 3 All ER 156 Re Anderson Group [2002] NSWSC 764 Re Beddoe; Downes v Cottam [1893] 1 Ch 547 Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 Re Coalleen Pty Ltd [2000] 1 Qd R 245 Re Curry and Mooney Developments Ltd [1978] Qd R 277 Re GAE Pty Ltd [1962] VR 252 Re Martco Engineering Pty Ltd (1999) 32 ACSR 487 Re Network Welding Pty Ltd (No 2) [2001] NSWSC 809 Re Oriel Homes Pty Ltd (1997) 15 ACLC 564 Re Shanks Byrne Industries Pty Ltd [1979] 2 NSWLR 880 Re The London & Northern Bank Ltd (Cozens-Hardy J, 17.11.1899) Re William Hockley Ltd [1962] 1 WLR 555 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Re Zambena Pty Ltd (1995) 13 ACLC 1020 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 Vincent White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93 Wallington v Kokotovich Constructions Pty Ltd (1993) 11 ACSR 759 Wallsend Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 Walters v Woodbridge (1878) 7 Ch D 504 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 Wooster v Mullins 40 A 144 (1894) (Conn SC) Young v Sherman [2002] NSWCA 281 DECISION : See paras 449, 450 and 451 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40188/01 SC 3672/00 MEAGHER JA GILES JA YOUNG CJ in EQ Tuesday 10 December 2002 KIRWAN v CRESVALE FAR EAST LTD (IN LIQUIDATION) Judgment 1 MEAGHER JA: In this matter I have had the advantage of reading in draft the judgments of both Giles JA and Young CJ in Eq. I shall not recite once more the relevant facts, which are, perhaps more than adequately, set out in the judgments. 2 On the central question (which has now become obsolete) of whether the issue of shares should have been set aside on the grounds of improper purpose, I respectfully agree with Young CJ in Eq. Securities was carrying on business as a stockbroker; everyone agreed it should continue to do so; it was desperately short of capital, and was dancing on the brink of insolvency; it could not continue in business, unless there was some injection of capital; capital could have put it in liquidation, but did not do so; nobody was prepared to supply it with any capital, except Mr Kirwan; Mr Kirwan did so, in return for the issue of shares. In these circumstances, the correct principle is that set out by his Honour: "Likewise, if a company has need of capital and there is only one avenue of obtaining that capital, then even though the person who is subscribing the extra capital and has a dominant purpose in obtaining control and even though that person is a director of the company, there would be no improper purpose in making the allotment." Austin J should have applied that principle. 3 On the issue of Mr Gould's alleged impropriety, I entirely agree with Giles JA. 4 GILES JA: There was more than money at stake in these appeals. An unusually extended introduction is desirable. 5 Cresvale Securities Ltd ("Securities") carried on business as a stockbroker. It was a wholly owned subsidiary of Cresvale Capital Pty Ltd ("Capital"), itself a wholly owned subsidiary of Cresvale Far East Ltd ("Far East"). Mr Nigel Kirwan was one of its directors. 6 On 23 June 2000 Securities became subject to voluntary administration. Mr Vanda Gould was appointed administrator. At a creditors' meeting held on 21 July 2000 it was resolved, on the casting vote of Mr Gould, that a deed of company arrangement ("the DCA") be approved. The DCA was executed on 9 August 2000. Mr Gould was the deed administrator. 7 The DCA provided, amongst other things, for the allotment and issue by Securities to Mr Kirwan or his nominee of 20,000,000 shares for a subscription price of $100,000. The shares were issued and the money was paid. As a result, the shareholding of Capital was diluted to 5.33 per cent. 8 By an originating process filed on 22 August 2000 Far East claimed an order terminating the DCA and an order that, if the DCA was terminated, Mr Anthony McGrath or some other person be appointed as liquidator of Securities. It joined as defendants to the application, in numerical order, Securities, Mr Gould and Capital. Mr Kirwan was joined as fourth defendant at a later date. 9 Far East was directed to file a statement of claim, and did so on 20 September 2000. The relief claimed was more complete, and was relevantly - "51. A declaration that the deed is invalid and ineffective by reason that the Deed Resolution is not in accordance with Section 439C of the Corporations Law ; 52. In the alternative, an order terminating the Deed pursuant to section 445D of the Corporations Law ; 53. In the alternative, an order pursuant to section 600B(3) of the Corporations Law setting aside the Deed Resolution; 54. An order that Anthony Gregory McGrath or some other fit and proper person be appointed liquidator of the first defendant in the place of the second defendant; 55. A declaration that the share issue pursuant to the Deed is invalid and ineffective; 56. An order that the said share issue be set aside; 57. An order that the share register of the first defendant be rectified accordingly … " 10 By a cross-claim filed on 13 September 2000 Capital claimed relief encompassing but going beyond that claimed by Far East. It named as cross-defendants, in numerical order, Securities, Mr Gould and Mr Kirwan. In the body of the cross-claim it also named Far East, as third cross-defendant ahead of Mr Kirwan. The relief claimed was relevantly - "(a) Cresvale Securities be wound up and Anthony Gregory McGrath be appointed as liquidator; (b) the Deed of Company Arrangement executed on 9 August 2000 (the 'deed') be terminated pursuant to section 445D of the Corporations Law; (c) the deed be declared void pursuant to section 445G(2) of the Corporations Law; (d) the administrator be removed pursuant to section 447E(1) of the Corporations Law; (e) the administrator be removed pursuant to section 449B of the Corporations Law; (f) the Court set aside the deed pursuant to section 600B of the Corporations Law; (g) the administrator be removed pursuant to section 447E(1) and 449B of the Corporations Law; (h) the deed be set aside pursuant to section 600B of the Corporations Law; (i) the allotment of shares to the third cross-defendant be declared void and the share registry [sic] be rectified accordingly … " 11 Each of Far East and Capital pleaded extensively the grounds on which it claimed relief. The grounds included robust allegations against Mr Kirwan and Mr Gould. 12 Far East's grounds included allegations that the report to creditors provided by Mr Gould for the meeting of 21 July 2000 was false or misleading and materially incomplete; that DCA was for the improper purpose of diluting Capital's shareholding in Securities and giving control of Securities to Mr Kirwan and the other directors of Securities; and that the issue of shares under the DCA was for the improper purpose of benefiting the directors of Securities and "to wrest control of the first defendant from the third defendant to the fourth defendant. It was also alleged, without specific assertion of impropriety, that the effect of the DCA was to deny to creditors of Capital the opportunity to have Securities wound up and have voidable transactions investigated "particularly in circumstances where one of those transactions was between the first defendant and the fourth defendant (the Virotec Transaction)". 13 Capital's grounds included allegations that Mr Gould "wrongly and without reasonable cause" rejected Capital's proof of debt at the meeting of 21 July 2000; that Mr Gould's report to creditors was false and misleading and inadequately detailed the proposed DCA; and that the issue of the shares under the DCA was "for an improper purpose amounting to a fraud on the power, disclosing the unlawful purpose of the deed of arrangement" and was for the improper purpose of benefiting the directors of Securities and taking control of Securities from Capital. A section of Capital's grounds was devoted to the allegation that Mr Gould had failed properly to carry out his functions, by failing to investigate a "potential" claim against Mr Kirwan in relation to sale of shares in Virotec Pty Ltd ("Virotec") by Securities to Mr Kirwan; by failing to investigate an "apparent and likely claim" against Mr Kirwan and other directors of Securities for trading whilst insolvent; by failing to make inquiries relating to an underwriting agreement entered into by Mr Kirwan as to which Newland Resources Ltd ("Newland") was claiming against Securities; by admitting a claim by Mr Kirwan's service company Kamadhenu Management Pty Ltd ("Kamadhenu") for Mr Kirwan's "alleged" services to Securities; and by "improperly" exercising his casting votes at the meeting of 21 July 2000 and an earlier meeting of creditors of 30 June 2000. The section was summed up - "33. The administrator has failed to carry out his duties as administrator in an objective and impartial manner, and has allowed himself to become aligned with Kirwan's interests in the course of Kirwan promoting a scheme to acquire control of Cresvale Securities, and to avoid having his dealings with Cresvale Securities and his management of its affairs investigated and brought to account for the benefit of Cresvale Securities, its shareholders and creditors." 14 Neither pleading made specific mention of hostility by Mr Gould towards one of the liquidators of Capital, Mr Peter Hedge. That, however, became an issue in proceedings. 15 The proceedings were heard by Austin J on 13 and 14 February 2001. His Honour published reasons on 28 February 2001, the conclusion to which was - "236 Therefore, I believe (subject to any further submissions by the parties) that the principal orders I should make are an order removing and replacing Mr Gould under s 449B, an order terminating the DCA under s 445D, an order setting aside the allotment and issue of shares in Securities on 11 August 2000, an order under s 175 rectifying the register of members of Securities accordingly, and an order for costs. 237 I shall direct the plaintiff to bring in draft short minutes of orders, and stand a matter over to a time when submissions can be made with respect to the form of the orders, and with respect to costs." 16 It will be necessary to go to Austin J's reasons in some detail. For the present, the following will illustrate why there was more than money at stake in these appeals. 17 His Honour said that he agreed with the submission that views of Mr Gould found in his report to creditors, remarks he made at the meeting of 21 July 2000 and his evidence in the proceedings were "inadequately researched, biased in favour of Mr Kirwan and unfairly prejudiced against Mr Hedge". He also said that he accepted the submission that there were criticisms of Mr Gould's rejection of the proof of debt lodged by the liquidators of Capital, based on alleged unfair preferences, and that there were strong criticisms of Mr Gould's exercise of his casting votes at the two meetings of creditors. He said - "96. The cumulative effect of all these matters is to create an impression of strong bias in favour of Mr Kirwan and unfair prejudice against Hedge. That is a matter of significance for the exercise of my discretion to terminate the DCA." 18 In the course of detailed discussion of Mr Gould's exercise of his casting votes, his Honour held that there was "improper exercise" of casting votes to defeat a resolution at the meeting of 20 June 2000 that Mr Gould be replaced by Mr Greg Hall and Mr Hedge and another resolution at that meeting that Mr Gould be replaced by Mr McGrath, and that it was "improper" for Mr Gould to exercise his casting vote so as to cause the resolution for approval of the DCA to be passed unless there were very strong reasons for doing so and that the reasons advanced by Mr Gould were not strong enough "to justify his extraordinary action". His Honour said at one point, "I have held that it was improper for him to exercise his casting vote to have the proposed DCA approved, and it would be equally improper for him to exercise his casting vote to keep himself in office so that he could fully formulate and advocate the proposal". 19 His Honour described a passage in Mr Gould's report to creditors as "false or misleading", and said that there were other deficiencies in the report which he nonetheless did not think had any significance "other than as an indication of an unprofessional approach to the statutory requirements". 20 His Honour said that he regarded Mr Gould's failure to admit the proofs of claim of Capital and Newland for the purposes of voting at the meeting of 21 July 2000 "as improper conduct". 21 His Honour considered that the DCA was clearly disadvantageous to Far East, Capital and Newland, and in that regard said - "Capital was deprived of its control of Securities for no direct consideration, and in Mr Gould's view, it was not a creditor entitled to participate at all in distributions. Far East was disadvantaged indirectly by the unfavourable treatment of Capital, since it was the holding company of Capital and also a substantial creditor of Capital. Newland, if its claim succeeded, would be deferred to employees and trade creditors. Far East and Newland would receive only a proportion of their claims in distributions. The business would be launched again in the hands of the directors, free of their claims and with its assets intact." 22 His Honour held that the issue of the shares to Mr Kirwan was for an improper purpose, "to wrest control of Securities from Capital by using Pt 5.3A when negotiation failed". In that connection his Honour said that Mr Kirwan persuaded Mr Gould that Mr Hedge had treated him unjustly in various ways and that the proposed DCA would be fair notwithstanding its effect on the control of Securities, and that "Mr Gould was willing to be persuaded without making adequate investigations". 23 In considering whether it was appropriate to terminate the DCA his Honour said - "225 I have found that a passage in the Report by Mr Gould was false or misleading, and that there was a material omission from the Report with respect to the possibility of recovery [sic] Mr Kirwan's profit in the Virotec transaction. It is also appropriate for me to consider the general tone of the Report. It is evident from my summary of it that I regard the Report as a biased document, demonstrating an uncritical acceptance by Mr Gould of the information and opinions supplied to him by Mr Kirwan, and an unjustified hostility towards Mr Hedge. 226 I have also found that effect cannot be given to the deed without injustice, and that the deed is unfairly prejudicial to and unfairly discriminatory against Far East and Capital, in the specific ways set out above. And I have found that it was improper for Mr Gould to use his casting vote to defeat the First and Second Resolutions and to support the Third Resolution. 227 I have had to subdivide the facts, so that I can deal with the submissions of the parties. However, as Wordsworth said, 'we murder to dissect'. Here the whole is greater than the sum of the parts. By the mechanism of Part 5.3A and the DCA, control of a company has been wrested away against the wishes of its direct and indirect holding companies, whose shareholding interest has been reduced from 100% to 5.33%. Control has been delivered into the hands of a man who failed to achieve that outcome through negotiation. That man derived an enormous profit from dealing with the company while he was a director of it, and the adoption of the DCA effectively prevented further investigation of that transaction. He has produced just enough money to pay employees and trade creditors and thereby secure their support. The numerical majority of creditors who supported the DCA represented debts which were a small fraction of the debts of the creditors who opposed it. Two major claimants were not allowed to vote on the proposal. The chairman, who accepted uncritically the information supplied to him by the director and did not make adequate independent investigations, and consequently misled creditors, exercised his casting vote to ensure that the DCA was approved. The end result is so unfair that the Court cannot allow it to stand." 24 After considering reasons for not terminating the DCA and concluding that it was appropriate to terminate it, his Honour said - "231 In some cases justice may require the Court not only to terminate or set aside the deed for the future, but also to reverse the wrongful implementation of the deed in the past. This is such a case, since justice requires that the allotment and issue of shares pursuant to the DCA be set aside. If, in the circumstances of the case, the only source of judicial power is in Pt 5.3A, the Court will not be able to achieve its objective, because ss 445H and 451C have the effect that the Court's order terminating the deed does not affect things done under it. In the present case, however, I have found that the allotment and issue of shares by the directors of Securities pursuant to the DCA was for an improper purpose. I have equitable jurisdiction to set aside the allotment and issue, and statutory jurisdiction under s 175 to make an order correcting the register of members. I shall do so." 25 His Honour added - "I am inclined to make these orders conditional upon Securities repaying allotment money actually paid by Mr Kirwan to it, but I shall hear any submissions which the parties may wish to make on that point." 26 Following publication of the reasons of 28 February 2001, further submissions with respect to the form of the orders were made on 8 March 2001 and Austin J published reasons and made declarations and orders on that day. 27 The declarations and orders were - "The Court ORDERS that: 1. The second defendant be removed from office as the administrator of a deed of company arrangement executed by the first defendant on 9 August 2000 ('Deed'), pursuant to section 449B(a) of the Corporations Law ; 2. Peter James Hedge be appointed as the administrator of the Deed pursuant to section 449B(b) of the Corporations Law ; 3. The deed be terminated pursuant to section 445D of the Corporations Law. The Court DECLARES that: 4. The allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000 was: (a) for an improper purpose; and (b) invalid. 5. The allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000 be set aside. 6. The share register of the first defendant be rectified pursuant to section 175(2) of the Corporations Law to rectify the setting aside of the allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000. The Court further DECLARES that: 7. The fourth defendant as trustee for the GNPK family trust is an ordinary unsecured creditor of the first defendant for the $100,000 paid to the first defendant as consideration for the share issue which has been set aside." 28 The reasons dealt principally with the return of the $100,000. His Honour said that the inclination stated in his reasons of 28 February 2001 as to repayment of the $100,000 went only to whether Mr Kirwan should be entitled at all to repayment of that sum. He did not accept Mr Kirwan's submission that the allotment and issue of shares should not be set aside unless the $100,000 was repaid in full, and held that there should only be the entitlement to repayment of an ordinary unsecured creditor expressed in declaration 7. In doing so his Honour noted that "in cases of fraud something much less than complete restitution in integrum [sic] is appropriate" but that since Far East "does not now contend that I should treat the fourth defendant as guilty of fraud of that kind", in this case I do not propose to take [Mr Kirwan's] wrongdoing into account in exercising my discretion as to the form of relief". He later said, when identifying a factor in his exercise of discretion, that "without necessarily classifying the fourth defendant's conduct as fraudulent in a moral sense, I regard it as having led to the remedial outcome that the allotment and issue of shares must be set aside". 29 Further submissions with respect to costs were made on 10 April 2001. On 10 September 2001 Austin J published reasons and made the orders - "The Court ORDERS that: 1. The first, second and fourth defendants pay the plaintiff's and the third defendant's costs of and incidental to these proceedings. 2. With respect to Order 1, insofar as the first defendant is concerned, the plaintiff's and the third defendant's costs are to be costs in the liquidation of the first defendant. 3. With respect to Order 2, insofar as the second defendant is concerned, he is to pay the plaintiff's and the third defendant's costs of these proceedings personally. 4. The second defendant is to pay his and the first defendant's costs of and incidental to the proceedings, personally. Those costs of the first and second defendants are not payable from the assets or funds of the first defendant on any basis. 5. The application by Newland Resources Limited for an order for costs in its favour is denied." 30 Newland was represented on 10 April 2001, purportedly as supporting creditor. The principal issue was Far East's submission, supported by Capital and Newland, that orders should be made to ensure that to the extent that Mr Gould must pay Far East's and Capital's costs he must do so personally without any recourse to the assets of Securities, and that Mr Gould should pay the whole of his own costs and the whole of the costs of Securities personally without any recourse to the assets of Securities. As can be seen from the orders made, this submission was upheld. In the course of upholding it Austin J summarised his "findings against Mr Gould", at some length, and said that they amounted to "findings of impropriety, as well as negligence, throughout the course of the administration". 31 The allegations against Mr Kirwan and Mr Gould thus bore fruit, with copious findings adverse to both of them and to Mr Gould in particular and translation of the findings to loss of his shareholding and effective under-recovery of his $100,000, in the case of Mr Kirwan, and removal from office and a significant personal costs burden, in the case of Mr Gould. 32 Mr Kirwan appealed, in his amended notice of appeal stating that he appealed - " … from those parts of the decision of Austin J in which his Honour held - (a) that it was appropriate to make an order under s 445D of the Corporations Law terminating the Deed of Company Arrangement, thereby causing the Second Respondent to be taken to have passed a special resolution that it be wound up voluntarily; (b) that an allotment and issue of shares in the Second Respondent to the Appellant was for an improper purpose and invalid; and (c) that the allotment and issue of shares be set aside otherwise than on condition that the consideration paid by the Appellant for the shares be repaid to him." Mr Kirwan named as respondents, in numerical order, Far East, Securities, Mr Gould and Capital. 33 In the amended notice of appeal Mr Kirwan sought that the declarations and orders 3 to 7 inclusive made by Austin J on 8 March 2001 be set aside, or alternatively that declaration 7 then made be set aside and declarations 5 and 6 be expressed to be conditional upon the repayment of the $100,000 paid for the shares plus interest, with consequential orders that Far East and Capital pay his costs of the proceedings. 34 Mr Gould also appealed, in the form of a cross-appeal. The respondents to his appeal, in numerical order, were Far East Securities, Capital and Mr Kirwan. His appeal was expressed to be "from the whole of the decisions [sic] of Austin J", and the orders sought in the amended notice of cross-appeal were - "1. That the appeal be allowed and that without disturbing Orders 1-3 inclusive of 8 March 2001 it be: (a) Declared that in the events which have happened the DCA ought not to have been terminated by Austin J; (b) Declared that in the events which have happened Mr Gould ought not to have been removed as administrator or liquidator of Securities. 2. The orders of 10 September 2001 be set aside. 3. That the statement of claim and cross claim be dismissed. 4. That the appellant's costs before Austin J and in the Court of Appeal be payable by the first and third respondent to the appeal and/or out of the funds of the second respondent. 5. Declare that the appellant is entitled to be indemnified out of the assets of the second respondent in respect of his costs of and incidental to the proceedings before Austin J and in the Court of Appeal." 35 It will be seen that Mr Kirwan did not contest Mr Gould's removal as administrator, nor of course did he contest the costs orders made against Mr Gould. While Mr Kirwan contested the loss of his shareholding, he also sought to have full recovery of his $100,000. For his part Mr Gould expressly did not seek to be reinstated as administrator, but nonetheless contested the underlying holdings that the DCA should be terminated and that he should be removed as administrator; and his contest over the costs orders made against him was more than consequential, and involved the independent issue of his entitlement to indemnity from the assets of Securities. 36 In the appeals each of Mr Kirwan, Mr Gould and Securities was separately represented, and Far East and Capital were separately but jointly represented. 37 At the hearing of the appeals Mr Kirwan did not maintain his amended notice of appeal so far as he had sought that order 3, the termination of the DCA, be set aside. Further, he indicated that, Securities having gone into liquidation and the shares now being worthless, he was "not terribly fussed" about overturning the order that the allotment and issue of the 20,000,000 shares be set aside. He made it plain that his concern was to have overturned the declaration that the allotment and issue of those shares was for an improper purpose and invalid, while accepting that if that meant that there was no basis for the allotment and issue of the shares to be set aside then the order that it be set aside would have to be overturned. He said that even if the order setting aside the allotment and issue of the shares was not overturned, the declaration that he was an ordinary unsecured creditor of Securities for the $100,000 paid for the shares should be overturned. It was made sufficiently clear that Mr Kirwan's interest was first in having the finding of an improper purpose impugned, and secondly in getting back his $100,000. 38 As has been seen, Mr Gould did not ask that the orders terminating the DCA and removing him as administrator be set aside: instead, he asked for declarations that those orders "ought not" have been made. Perhaps excessively, and inconsistently, he asked that all the costs orders made on 20 September 2001 be set aside, not only those affecting himself, and asked globally that the statement of claim and cross-claim be dismissed. At the hearing of the appeals it was also made sufficiently clear that Mr Gould's interest was in his good name, by displacing the findings critical of his conduct, as well as in the personal costs burden imposed by the costs orders. History 39 Capital and Securities were incorporated in Australia. At all material times the directors of Securities were Mr Kirwan, Mr Neil Anderson and a third person. Austin J said that there was some uncertainty whether the third director was Mr Neill MacPherson or Mr Matthew Sonnemann, but that it was more likely than not that it was Mr MacPherson. Messrs Kirwan and MacPherson were also directors of Capital. The two companies engaged in inter-company lending and other financial transactions. 40 Kamadhenu lodged proofs of debt in the liquidation of Capital and the administration of Securities for provision of Mr Kirwan's services. The admission by Mr Gould of the proof of debt in the administration of Securities was one of the alleged failures properly to carry out his function. I will return to this in due course, but it is clear enough that there were arrangements whereby Mr Kirwan and Mr MacPherson were remunerated though their respective service companies. 41 Far East, the holding company of Capital and of Securities through Capital, was incorporated in Hong Kong, and was itself a wholly owned subsidiary of Princeton Economics International Inc (Princeton"), a company incorporated in the Turks and Caicos Islands. Princeton was one of a global group of related companies ("the Princeton group") carrying on business primarily in stockbroking and the mining industry. 42 On about 3 September 1999 the United States District Court, Southern District of New York appointed Mr Alan Cohen as temporary receiver to the Princeton group, purportedly down to and including Securities. At some time, possibly also in early September 1999, Princeton and Far East were placed into liquidation or provisional liquidation by orders in their respective jurisdictions of incorporation. I will refer generally to Mr Cohen and the foreign liquidators as the external administrators. 43 On 16 September 1999 Capital transferred all its listed investments and its furniture and fittings to Securities. The listed investments included 6,717,719 shares in Virotec (at the time called TIN Australia NL), which were transferred at their then market value of 3.8 cents per share, and 2,490,058 Virotec options, which were transferred at 1 cent each. The listed investments were transferred at a value of $415,534, of which $280,174 was attributable to the Virotec securities, and the furniture and fittings were transferred at a value of $174,610. 44 Although not specifically identified in the pleadings, as the case was conducted this was a voidable transaction investigation of which, within the allegations in Far East's grounds, was denied to creditors of Capital by the DCA. The allegations in Capital's grounds did not include that Mr Gould failed to investigate it. Whether the transaction might have been voidable gained some prominence in the proceedings. 45 On 30 September Mr Hall and Mr Hedge were appointed voluntary administrators of Capital. 46 By a letter to Securities dated 30 September 1999 the Australian Stock Exchange expressed its view that the listed investments recently acquired by Securities did not have a ready market for the purpose of calculating Securities' liquid capital position under the ASX Business Rules. It required that the listed investments be excluded from Securities' liquid capital calculations unless the holdings were liquidated or Securities could demonstrate that they were readily marketable. 47 Securities' response included selling the Virotec shares on the stock market on about 22 October 1999. Most of the shares were bought by Mr Kirwan as trustee for the GNPK Family Trust. Austin J said - "A graph of trading volumes shows very low turnover at that time, implying that the market in the shares of Virotec was relatively illiquid. The market price of Virotec shares rose from under 10 cents in February 2000 to peak at about $1.30 early in March 2000, on vastly increased turnover. The evidence does not disclose the precise number of shares acquired by Mr Kirwan, nor whether he disposed of any shares at the peak of the market. A written submission by counsel for Capital put the gain at $11.3 million, but evidence to that effect in an affidavit by Mr Hedge was rejected. However, it appears that his potential gain was in the order of several million dollars." 48 This transaction was the voidable transaction specifically identified in the allegations in the grounds as a transaction investigation of which was denied to creditors of Capital by the DCA (in the pleading of Far East) and a transaction which Mr Gould failed to investigate (in the pleading of Capital). 49 The sale of the listed investments did not satisfy the Australian Stock Exchange. It required that Securities have further liquid capital by 31 December 1999. 50 On 8 December 1999 Capital was placed in liquidation as a result of resolutions passed at a meeting of creditors on that date. Messrs Hall and Hedge were appointed liquidators. 51 Capital's shares in Securities were its most valuable asset. Messrs Hall and Hedge as administrators of Capital had attempted to sell the shares. They had advertised the shares in the Australian Financial Review on 13 October 1999 and had conducted what Austin J described as various discussions. 52 By a letter dated 10 December 1999 Mr Kirwan and Mr MacPherson offered to purchase the shares for $140,000. The offer included that claims against Capital by their respective service companies would be deferred until full payment of other creditors had been made. 53 No other offers had been or were received. Mr Hedge considered that, given the Australian Stock Exchange's liquidity requirement for Securities, acceptance of the offer was in the best interests of Capital. Securities was still trading, and Mr Hedge considered that it was solvent on a balance sheet basis. Austin J thought that implicit in Mr Hedge's view that the offer was in the best interests of Capital was that the liquidity requirement could not be met, that Securities would be prevented from trading, and that with the loss of its licence Capital's shares in Securities would effectively become worthless. 54 On 24 December 1999 there were executed a sale of shares deed and a deed of assignment. Both were expressed to be subject to conditions, including that by completion the liquidators of Capital were to be reasonably satisfied that no objection to the deeds had been made by the external administrators. Apparently this condition was stated because the liquidators of Capital had not had time to consult the external administrators. It could be waived by the liquidators. 55 The purchaser in the sale of shares deed was Mr Kirwan as trustee for the GNPK Family Trust or his nominee. What happened about Mr MacPherson's involvement was unclear. 56 Austin J summarised the sale of shares deed as follows: "24 The deed contained four principal operative parts: ? First, Capital (in liquidation) agreed to sell its shares in Securities to Mr Kirwan, in his capacity as trustee of the GNPK Family Trust. The purchase price was $140,000, and a deposit of $14,000 was payable upon execution of the deed. ? Secondly, Mr Kirwan (both in his capacity as trustee and personally) and Mr MacPherson undertook to contribute to Securities an amount not exceeding $350,000 on or before 31 December 1999, as required by the Australian Stock Exchange, to satisfy its capital adequacy requirements. The contribution was to be on the usual subordination terms required by the Exchange. There was provision for repayment of the deposit payable for purchase, if the deed was terminated, but no provision in the deed for return of the contribution to Securities' liquid capital in the event of termination. ? Thirdly, the deed dealt with claims for payment by the service companies of Mr Kirwan and Mr MacPherson (Kamadhenu Management Pty Ltd and Jackred Pty Ltd, respectively). Those companies had agreed with Capital to provide to it consultancy services by their nominated executives, Mr Kirwan and Mr MacPherson respectively. By the deed, Messrs Kirwan and MacPherson, and their respective service companies, agreed to subordinate their claims for payment to the claims of the unsubordinated creditors of Capital. ? Fourthly, Securities agreed to subordinate, to the claims of the unsubordinated creditors of Capital, its claim to repayment of the net loan said to have been made by it to Capital (which the deed quantified at $135,689)." 57 It may be added that fifthly, Capital and the liquidators agreed not to bring proceedings against Securities in relation to, amongst other things, "any claim against [Securities] which the liquidators may have against [Securities] for a voidable transaction within s 588FE of the Corporations Law". But in return claims by Securities were assigned to Capital. By the deed of assignment, which was interdependent with the sale of shares deed, Securities assigned to Capital for two years the benefit of any rights of action it may have against third parties for unlawful conduct in relation to the affairs of the Capital group. The unlawful conduct was defined widely, and would have included any right of action against Mr Kirwan in relation to the acquisition of the Virotec shares. 58 Under the sale of shares deed completion was to take place on 25 January 2000. The obligation to contribute in order to satisfy the Australian Stock Exchange's liquid capital requirements involved contribution prior to settlement, and contribution although the conditions had not been fulfilled. Subordinated loans sufficient to satisfy the liquid capital requirements were made to Securities by 31 December 1999. They included a loan of $160,000 by Mr Kirwan. 59 Mr Cohen objected to the two deeds and the transactions they embodied. The nature of the objection was not disclosed in the evidence. By a letter dated 21 January 2000 the liquidators' solicitor told Mr Kirwan's solicitor of the objection and that the liquidators were not prepared to waive the condition, and said that it was apparent that the deeds would "not be effective". In unexplained circumstances a different solicitor for Mr Kirwan wrote to Capital's solicitors on 24 January 2000, saying that Mr Kirwan had not heard that the liquidators were satisfied that no objection to the deed had been made, that he was ready, willing and able to complete the purchase, and that completion was demanded the next day. 60 The next day did not bring completion. Rather, on 25 January 2000 the liquidators of Capital convened a members' meeting of Securities, the sole member being Capital, for 28 January 2000, for the purpose of passing a special resolution that Securities be wound up. What lay behind this was not disclosed in the evidence. In circumstances also not disclosed, the meeting did not proceed. As Austin J said, the proposal for winding up demonstrated that "all relevant parties were aware as from January 2000 that a resolution to wind up Securities was an option for the liquidators of Capital, as long as Capital remained the sole shareholder of Securities … ". 61 Austin J recorded that by approximately the end of January 2000 completion of the sale of shares deed "had ceased to be a real practical prospect". The calling of the meeting, however, brought renewed intervention from the Australian Stock Exchange. It immediately told Securities that Securities should cease taking on new business, and again questioned Securities' liquidity position. The evidence did not go into detail on what then occurred, but Securities continued in business until the voluntary administration in June 2000. 62 One of the business transactions in this period was the Newland underwriting agreement. Securities co-underwrote a renounceable rights issue by Newland by an agreement dated 7 March 2000. Mr Kirwan as trustee of the GNPK Family Trust made a statutory declaration expressing a guarantee of Securities' performance of the underwriting agreement to a maximum amount of $1,754,676. Austin J said that it appeared "that the guarantee was for the benefit of Capital, given to procure Capital's assent to the transaction". That is a little odd. The statutory declaration recited that Mr Kirwan had entered into a contract to purchase the shares in Securities from Capital and that the contract "is conditional and settlement is yet to be effected", and also expressed an undertaking to Capital until settlement of the contract to guarantee Securities' performance of any underwriting agreement entered into by Securities. This was followed by the expression of the specific guarantee of the Newland underwriting agreement. As at March 2000 it is unlikely that the liquidators would have acknowledged the continuance of the contract for sale of shares. The occasion for the statutory declaration is rather speculative. 63 Following through the Newland transaction, the issue was under-subscribed and by a letter dated 23 May 2000 Newland called on Securities to take up rights at a cost of $1,576,277. Securities responded by a notice dated 8 June 2000 terminating the underwriting agreement under an entitlement to do so if representations made by Newland were incorrect in any material respect. There was correspondence over whether the representations on which Securities relied were made and whether they were made with Newland's authority. 64 By a letter to Mr Gould dated 11 July 2000 the solicitors for Newland provided him with relevant documentation and gave notice that it claimed to be a creditor of Securities for the $1,576,277. Mr Gould replied acknowledging the solicitors' letter and saying, "As you are aware, the directors dispute your claim to be a valid creditor of the Company". 65 In the report to creditors for the meeting of 21 July 2000 Mr Gould said, "I have received a letter of demand from solicitors acting for Newland Resources Limited requesting payment of $1,576,776.80. This sum relates to an alleged debt due to an underwriting commitment of Cresvale". He listed that amount as a contingent liability, and appended a note to the liability - "An amount of $1,576,276.80 may be payable to Newland Resources Limited in respect of an underwriting agreement entered into with Cresvale. Currently this amount is only a contingent liability. The directors are of the opinion that this amount will not be payable, but at best substantial legal costs may be payable in defending the action." 66 The solicitors for Newland wrote again to Mr Gould, before the report to creditors and notice of meeting had been received, in rather strident terms but making clear that Newland claimed at the least to be a contingent creditor with a right to lodge a proof of claim, to have a just estimate of the value of its claim made, and to be allowed to vote at a meeting of creditors subject to the vote being declared invalid if in due course the proof of debt was properly rejected. After receipt of the documents, on 20 July 2000 Newland lodged a proof of claim. 67 Although not directly part of the allegations in the pleadings, refusal to allow Newland's vote as a creditor at the meeting of 21 July 2000 came to be part of the proceedings; it was perhaps part of Capital's allegation that Mr Gould failed to make inquiries relating to an underwriting agreement as to which Newland was claiming against Securities. I will come to that in due course. 68 Returning to early 2000, Austin J said that Mr Kirwan continued to press Mr Hedge with his offer to buy the shares in Securities, and that Mr Hedge's attitude was unclear. 69 As to pressing Mr Hedge with the offer to buy the shares in Securities, the evidence was far from extensive. There was the letter of 24 January 2000 earlier mentioned. According to the minutes of the meeting of creditors of 30 June 2000, Messrs Kirwan and MacPherson were not happy about the liquidators' failure to proceed with the sale of the shares and they continued to offer to buy the shares, but there was no detail. At one point Austin J said that Mr Kirwan "threatened legal proceedings on the basis that Mr Hedge had not acted independently of the US receiver", the evidence of which is not clear; so far as I can see the only evidence was as to Mr Kirwan commencing proceedings to challenge the US receivers jurisdiction, which is a different thing. No doubt Mr Kirwan did press Mr Hedge. But I do not think that there was evidence that he went beyond what could be regarded as normal commercial negotiation. 70 As to Mr Hedge's attitude, Mr Hedge had initially considered that the sale was in the best interests of Capital. The evidence did not reveal whether or not he was influenced by the objection of the external administrator. Austin J said that Mr Hedge's attitude appeared to have been influenced by his developing assessment of the prospect of recovery of the Virotec shares sold by Securities to Mr Kirwan in October 1999, and that his attitude appeared to have changed in March 2000 when the market price for Virotec shares escalated dramatically. 71 The basis for what his Honour said seems to have been that in a report to the creditors of Capital dated 23 March 2000 Mr Hedge spoke of "developments in the liquidation" since December 1999, saying - " Sale of Shares in Cresvale Securities Limited ("CS") CS is a 100% subsidiary of CC and continues to trades [sic] as a stockbroking business licensed by the Australian Stock Exchange. Following various attempts to sell these shares a conditional agreement was entered into on 24 December 1999. The various conditions attached to this sale agreement have not been satisfied to date and I am now in the process of considering how best to move forward as liquidator with the sale of these shares. I will be in a position to discuss this matter in further detail at the forthcoming creditors meeting. Possible Preference Claim Investigations into the company's affairs have addressed a transaction involving the transfer of various assets prior to liquidation. On 16 September 1999 CC transferred all of its listed investments and furniture and fittings to CS to repay CC's intercompany loan liability to CS. Included in this transaction were 6,717,719 shares in TIN Australia NL ("TIN") transferred to CS at their then market value of $255,273 (3.8c/share). This transaction appears to constitute an unfair preference under Section 588FA of the Corporations Law which could be set aside by the Liquidators of CC. However, as CC owns 100% of the shares in CS, any benefit in setting this transaction aside would be offset by an equal decrease in the net worth of CS. Accordingly, there has previously been no financial benefit in endeavouring to set this transaction aside. A recent development with the TIN shares has lead to the matter being further investigated and will also be discussed in detail at the creditors meeting." 72 The report ended - " Conclusion The priorities in the liquidation are at present to: (i) finalise the realisation of CC's investment in CS. (ii) consider the possibility of any recoveries involving the TIN share transaction. (iii) finalise investigations into the company's affairs and report to ASIC in accordance with the Corporations Law. I will discuss these matters in more detail at the meeting of creditors." 73 From the report Austin J inferred that Mr Hedge reasoned that - " … to the extent that Securities had disposed of Virotec shares to Mr Kirwan in October 1999 there may have been some prospect of Securities recovering the shares or their value from him. Proceedings against Mr Kirwan could be taken, if Securities was first placed in voluntary liquidation. However, such proceedings became economically worthwhile only when the market value of Virotec jumped in March 2000." 74 The report does not obviously link the sale of the shares in Securities with any preference in the September 1999 transfer by Capital to Securities of the listed investments. In particular, it contemplates sale of the shares in Securities rather than their retention so that, through shareholder control, Securities could be put into liquidation and its liquidator could then recover the Virotec shares or their value from Mr Kirwan. There was no evidence of the discussion at the meeting of creditors. The more important issue is not so much why Mr Hedge was unwilling to proceed with sale of the shares, as whether Mr Gould was shown to have taken an unreasonable view of his unwillingness. It was certainly not clear why Mr Hedge was unwilling to proceed with sale of the shares, and speculation as to his reason or reasons is not a good basis for criticising Mr Gould. 75 The company secretary of Securities, Mr Richard Burnett, wrote to Mr Hedge by a letter dated 1 June 2000, in response to a letter from Mr Hedge dated 24 May 2000 which was not in evidence. Austin J summarised the letter of 1 June 2000 - "39 The letter of 1 June 2000 noted that in the three-month period ending 31 March 2000, which had covered the major part of the most active trading seen by the Australian Stock Exchange for several years, Securities had been reduced to only six active dealers and, allegedly as a result of this, the company recorded a loss. It said that the directors were conscious of the need to increase substantially the number of investment advisers, but no action could be taken until the future direction of the company had been put in place. The directors did not expect profitability to return until they were able to secure the services of at least 10 more advisers. After reviewing the value of the company's assets, the letter concluded that Securities had little or no value to outside parties, and conveyed the directors' unanimous view that any offer above the level of shareholders' funds should be seriously considered." It should be added that the letter included that projected shareholders' funds were minimal and that any delay would undoubtedly result in no distribution to shareholders in the event of liquidation. 76 Austin J said that "[i]t would not have been unreasonable for Mr Hedge to regard [the letter] as a self-serving plea on behalf of Mr Kirwan". The letter was responding to a letter from Mr Hedge, and the evidence gave no reason to treat it as other than an accurate account of the position of Securities. In short, when Mr Kirwan and Mr Gould said (as they did) that they considered that Mr Hedge's delay in deciding whether he would sell Capital's shares in Securities was detrimental to the interests of Securities, and to Capital as its sole shareholder, so far as the evidence went they were correct. It was submitted by counsel for Far East that Securities had declined in the period prior to 2000, that its unprofitability was endemic, and that the decline in 2000 could therefore not reasonably be laid at Mr Hedge's door. That misses the point being made in the letter, which was that the uncertainty prevented steps to turn the company's fortunes around. 77 In his report to the creditors of Capital dated 15 June 2000 Mr Hedge returned to the sale of Capital's shares in Securities and the possible preference claim. He said - " Possible Preference Recovery On 16 September 1999 CC transferred all of its listed investments and furniture and equipment to its subsidiary, Cresvale Securities Ltd ("CS") to repay the amount of approximately $480k due from CC to CS. This transaction is have [sic] prima facie a preference in favour of CS. There was initially no value to creditors of CC in pursuing the recovery of this transaction from its subsidiary while the value in the transaction was being realised in the sale of the CC shares in CS. However, certain of the shares transferred to CS included Virotec shares which increased in value to an extraordinary extent in March this year and the value of the preference is therefore being investigated in further detail and legal advice is being sought. This transaction is further complicated by the fact that the Virotec shares in question were transferred from CS to one of its directors, Nigel Kirwan, in October 1999. I will be consulting the creditors [sic] Committee of Inspection and reporting further to creditors on this matter. Investment in Cresvale Securities Limited ("CS") CS is a 100% subsidiary of CC and continues to trades [sic] as a stockbroking business licensed by the Australian Stock Exchange. Following various attempts to sell these shares a conditional agreement was entered into on 24 December 1999. The various conditions attached to this sale agreement were not satisfied and that contract lapsed. I am now in the process of considering how best to move forward with the realisation of this investment. The possible preference transaction reported above may be relevant to my strategy in this regard." 78 The Delphic concluding words were not otherwise explained. There was no evidence of Mr Hedge's investigation of the possible preference recovery, of any legal advice he sought or received, of consultation with the creditors' committee, or of further reporting to creditors. 79 Austin J said that estimated future legal fees of $100,000 in the financial figures in Mr Hedge's report could be fairly inferred as intended to cover "the cost of pursuing the preference claim against Securities and Mr Kirwan". The figure was not necessarily for the future, and any inference is rather speculative. I will return to this. 80 Austin J said - "43 The narrative history of events to this point shows that considerable tension, if not animosity, had developed between Mr Kirwan and Mr MacPherson, on the one hand, and Mr Hedge on the other. Mr Kirwan was at all times pushing vigorously to purchase the shares in Securities. Mr Hedge had at first taken the view that a sale of the shares in Securities would be in the best interests of the creditors of Capital, but when there was a dramatic escalation in the market price of Virotec shares in March 2000, it became appropriate for him to investigate the sale of Virotec shares to Mr Kirwan more closely. Mr Kirwan was highly critical of Mr Hedge's action, and threatened legal proceedings on the basis that Mr Hedge had not acted independently of the US receiver." 81 Mr Kirwan's criticism was of Mr Hedge's failure to proceed with sale of the shares. So far as the evidence showed, Mr Kirwan's criticism of Mr Hedge's action had been the letter of 27 January 2000 and the letter of 1 June 2000 from the company secretary of Securities. I have earlier commented on the reference to legal proceedings on the basis that Mr Hedge had not acted independently of Mr Cohen. The criticism was not Mr Kirwan alone and, whilst it could be described as critical of Mr Hedge's action, was confined in scope. The reference to considerable tension, if not animosity, is hardly justified. Undoubtedly Mr Kirwan wanted to purchase the shares in Securities. Mr Hedge's initial preparedness to sell the shares to him had been tempered, although Mr Hedge was still considering "how best to move forward with the realisation of this investment". It was far from explicit in Mr Hedge's reports that he was investigating the sale of the Virotec shares to Mr Kirwan "more closely", although in the report of 15 June 2000 it was referred to as a complication. 82 As I have said, on 23 June 2000 Securities became subject to voluntary administration. At a meeting on that day the directors resolved unanimously that in their opinion Securities was likely to become insolvent at some future time, that Mr Gould should be appointed voluntary administrator, and that the company seal be attached to the notice of appointment of Mr Gould as administrator. The resolution was signed by Messrs Kirwan, Sonnemann and Anderson as directors and Mr Burnett as company secretary. 83 Mr Gould met representatives of the Australian Stock Exchange. Either shortly before or just after his appointment as administrator the Australian Stock Exchange had suspended Securities from trading because it did not meet the necessary liquidity requirements. The representatives of the Exchange told Mr Gould that they saw no impediment to Securities resuming trading once the liquidity requirements were met. 84 Mr Gould then met the directors of Securities. Mr Kirwan told Mr Gould that he wanted to put capital into Securities, to allow it to resume trading and to continue to employ its current staff. The directors told Mr Gould that the staff wanted to continue to work for Securities. Austin J said - "Mr Gould said he formed the view that it was desirable to avoid liquidation in order to prevent one of the major assets of Securities, its securities dealers licence for which $250,000 had been paid, from becoming worthless. The directors made him aware of the attempted sale of the shares in Securities to Mr Kirwan in December 1999 and the attitude of the US receiver, and he reviewed the Virotec transaction. I infer that, after these investigations, he was favourably disposed to a proposal which would put the business in the hands of Mr Kirwan so that it could resume trading while retaining its present employees." 85 The first meeting of creditors was held on 30 June 2000. Those attending included Far East (by Mr Michael Hughes), Capital (by Mr Ray Mainsbridge) and Mr Kirwan. Mr Kirwan attended as creditor for $160,000, presumably the $160,000 subordinated loan pursuant to the deed of 24 December 1999, and also on behalf of Kamadhenu as creditor for $120,000. Far East attended as creditor for $828,675. Far East was by far the largest creditor. As will be seen, at this point Capital did not claim to be a creditor, although Mr Mainsbridge participated in the meeting to some extent. 86 Early in the meeting Far East moved that Mr Gould be removed as administrator of Securities and replaced by Messrs Hall and Hedge. According to the minutes of the meeting - "Robert Dubler then asked the Chairman if he had admitted in part or whole any debt from Cresvale Capital Pty Limited. The Chairman advised the meeting that Cresvale Capital Pty Limited did not appear to be a creditor of Cresvale Securities Limited. The Chairman further advised that Cresvale Capital Pty Limited was in fact a debtor of Cresvale Securities Limited for approximately $135,000. This was confirmed by Nigel Kirwan who then produced a letter dated 26 May 2000 from PriceWaterhouseCoopers, the Liquidator of Cresvale Capital Pty Limited. The letter confirmed that an amount of $135,689 was owed by Cresvale Capital Pty Limited to Cresvale Securities Limited. Robert Dubler then asked the Chairman if a formal proof of debt had been provided for Cresvale Capital Pty Limited. The Chairman advised that it had not. Accordingly Cresvale Capital Pty Limited did not have a right to vote at the creditors meeting." 87 The letter of 26 May 2000 was from the liquidators to Securities responding to an audit verification request, and stated that according to Capital's records it owed $135,689 to Securities as at 31 March 2000. A record of the meeting prepared by Mr Hughes included that Mr Mainsbridge said that Capital "would not be lodging a proof of debt at this time". 88 There was then debate on the motion. Austin J said that Mr Kirwan and Mr MacPherson spoke against the motion, and - "They criticised Mr Hedge, alleging that Mr Hedge's administration of Capital had caused substantial delays which had an adverse effect on business of Securities. Mr Kirwan alleged that Mr Hedge had interests other than the interests of creditors of Securities as his priority, namely interests of the US receiver and the Hong Kong liquidator. Both Mr Kirwan and Mr MacPherson criticised the costs of the administration of Capital." 89 According to the minutes of the meeting, the full debate on the motion was - "Nigel Kirwan then responded to the first resolution moved by Michael Hughes. Mr Kirwan said he had no confidence in the work that would be performed by PriceWaterhouseCoopers based on his experience with them in the liquidation of Cresvale Capital Pty Limited. Mr Kirwan also stated that he had encountered substantial dealys with all his dealings with PriceWaterhouseCoopers and these delays had had an adverse effect on the business, the employees and the creditors. He stated that he had spent at least six and a half months attempting to resolve the sale of the Cresvale Securities Limited business with Mr Hedge. He also stated that the issue of a preferential payment being raised may also create a conflict of interest with Mr Hedge being the Administrator of Cresvale Securities Limited. He further stated that he strongly believed Mr Hedge had interests other than the creditors of Cresvale Securities Limited as his priority, namely the US Receiver and the Hong Kong Receiver. In addition, he believed PriceWaterhouseCoopers' costs to conduct the administration would be too high. He believed the costs quoted by Mr Gould would be preferable for the company. Neill Macpherson also responded to this first resolution. As a creditor he said he had no confidence that Mr Hedge would undertake the administration and, if necessary, liquidation in an efficient or economical way. He also expressed concern regarding the estimate of Mr Hedge's fees. In particular he referred to the fees incurred in the liquidation for Cresvale Capital Pty Limited. Those fees were currently $98,000 with a further $200,000+ in future costs plus $100,000 in legal fees. Mr Macpherson stated that he could not understand how such costs could be warranted. Michael Hughes then responded to the claims of Neill Macpherson and Nigel Kirwan. He stated that Peter Hedge was the logical choice with his familiarity of the Cresvale corporate structure. Also Peter Hedge was familiar with the US matters which he stated were relevant to the current process. He further stated that liquidations are expensive and the quality of the outcome was more important than the dollar amount. Mr Hughes then produced a consent to act as Administrator of Cresvale Securities Limited signed by Anthony McGrath of KPMG in Sydney. Mr Hughes stated his client would be happy for Mr McGrath to act as Administrator if the meeting was not willing to accept Mr Hedge of PriceWaterhouseCoopers. Mr Macpherson enquired why Mr Gould should not continue as Administrator. Mr Hughes went on to say that Mr Gould did not have the international connections and expertise required to handle the administration of Cresvale Securities Limited. He stated that his client did not have confidence in Mr Gould and the quality of his work as he was only a small practitioner but did have confidence in PriceWaterhouseCoopers or KPMG to handle this matter. Mr Kirwan responded to this claim by Mr Hughes. Firstly, he said that the US matters were not relevant as no formal accusations had been raised in Australia from the United States. Secondly, Mr Hedge had made no attempt to investigate any of the allegations made by the US Receiver even with access to the company's documents. Mr Kirwan advised that PriceWaterhouseCoopers had had unfettered access to the documents of Cresvale Securities Limited for a period of three weeks. At the end of three weeks Mr Kirwan said he restricted access to these documents by PriceWaterhouseCoopers staff as he had become aware they were investigating records on behalf of O'Melveny & Myers, the US Receiver, which was improper because of client confidentiality. He stated that during this three week period no evidence was found to support any of the allegations. Mr Mainsbridge noted that he disputed Mr Kirwan's claims. James Beaton of Minter Ellison then asked the Chairman whether, to the best of his knowledge, all other creditors, would be paid except for Cresvale Far East Limited. The Chairman replied that if the matter was not conducted efficiently he doubted all other creditors could be paid in full." 90 Mr Hughes' record of the meeting included in this respect - "Nigel Kirwan spoke against the motion. He said that his experience with the administration and liquidation of Cresvale Capital meant that he had no confidence whatsoever in Peter Hedge or anyone associated with PriceWaterhouseCoopers conducting the administration in a proper manner. He said that the administration and subsequent liquidation of Cresvale Capital has involved substantial delays with an adverse impact on Cresvale Securities and its employees. He said the negotiations have been strung along for a purchase and there has been no substantial effort by Hedge in that regard. He said that he believes that Peter Hedge has a conflict of interest in that there is a 'potential claim' by Cresvale Capital against Cresvale Securities. He said that the administrator of Cresvale Securities should be independent from the liquidator of Cresvale Capital. He said that Hedge has been acting in the interests of the US receiver and the Hong Kong liquidators, rather than in the best interests of the creditors of the corporation. He said that the US receiver has no jurisdiction in Australia. He said the costs incurred in the Cresvale Capital liquidation have been exorbitantly high and he does not think that they have received value for money. He said that Vanda Gould has given a very competitive estimate of his fees, which is in the best interest of the creditors. Neil [sic] MacPherson also spoke against the motion. He said that the cost of the Cresvale Capital liquidation has been too high. He said that he has no confidence that Peter Hedge will do the job expeditiously for a competitive price. Michael Hughes said that the logic of appointing Peter Hedge and Greg Hall is their overwhelming knowledge of the issues in this case. He said that there is an international investigation on foot and that requires careful coordination and knowledge of what has to be done. He said the creditors should focus on quality of outcome rather than cost. Michael Hughes said that if the mood of the meeting is to oppose the nomination of Peter Hedge and Greg Hall then we are also instructed to put forward the nomination of Tony McGrath from KPMG as an alternative substitute administrator. Michael Hughes tabled a consent to act. Neil MacPherson asked Michael Hughes whether he was suggesting that Vanda Gould was not competent. Michael Hughes said, ' Not at all'. Michael Hughes said that our client just feels that Vanda Gould is not the man for the job and again raised concerns about the size and lack of international network of Vanda Gould's firm. Nigel Kirwan said that Cresvale Far East have not come to the party in negotiations. He said that there is no international investigation. He said that the US receiver has not sought to invoke his jurisdiction here. He said that he had commenced proceedings which were substantially withdrawn to challenge the US receiver's jurisdiction. He said that in those proceedings the receiver had a number of opportunities to invoke his jurisdiction but did not do so. He said that Peter Hedge has made no attempt to investigate the allegations which have been made by the US receiver. He said that he gave unfettered access to Peter Hedge to inspect all the records of the company in January on the condition that there was no copying. He said that three weeks were made available. At the end of those three weeks he discovered that the PriceWaterhouseCoopers people who were doing the investigation were actually working for the US receiver. He said that they came up with nothing. He said there has been no attempt to investigate anything ariseing from that inspection. Ray Mainsbridge said that he would dispute that the investigation was ' unfettered '." 91 The resolution was put to the vote by show of hands. Far East voted in favour, and there were 16 votes against. A poll was demanded. Because Far East was by far the largest creditor, the majority in value was in favour of the resolution but the majority in number were against it. Mr Gould exercised his casting vote and voted against the resolution. 92 Far East then moved that Mr Gould be removed as administrator of Securities and replaced by Mr McGrath. It put forward Mr McGrath as an independent insolvency practitioner not subject to the objections which had been raised against Messrs Hall and Hedge. Austin J said, "But Mr Gould argued against the proposal, saying that Far East had contributed to delays in the sale of business negotiations". 93 According to the minutes of the meeting, what was said was - "Michael Hughes stated for the record that the reasons raised earlier in respect of Mr Hedge did not apply to Mr McGrath of KPMG. The Chairman responded by saying that PriceWaterhouseCoopers alone was not the problem but also Cresvale Far East Limited which had contributed to Mr Kirwan's concerns due to their 'dilly-dallying' in the sale of business negotiations. Mr Beaton asked the Chairman what was meant by 'dilly-dallying'. Mr Nigel Kirwan expanded on this by stating that he had made numerous offers to buy Cresvale Capital Limited but had little response from PriceWaterhouseCoopers. He said that his offer would be the best outcome for the creditors of that company as Mr Hedge could not locate any other purchaser. Despite numerous promises being made no formal arrangement was undertaken. Robert Dubler then asked Mr Hughes if Mr Gould was removed as Administrator and another Administrator was appointed, would his client give an assurance that the other creditors of the company would be paid in full if higher administration costs were incurred. Michael Hughes' response to this was no." 94 Mr Hughes' record of the meeting included - "Michael Hughes said that the nomination of someone independent from KPMG removes any concerns the directors or creditors could have about a conflict of interest. Further, Cresvale Far East is the largest creditor in the administration by far. It is only appropriate that Cresvale Far East's nomination be accepted. Vanda Gould said that he rejected that. He said that Cresvale Far East do not have clean hands in this matter. He said that they have been 'dilly dallying' for seven months and have done nothing. He said that the actions of Cresvale Far East have contributed to the problems which Cresvale Securities has faced. Nigel Kirwan said that the liquidators of Cresvale Far East led him down the garden path. He said that about $25,000 was wasted. He said that Cresvale Far East then made a demand on Cresvale Securities which was improper. He said that he and Neill had attempted some time ago to reach a resolution with Cresvale Far East but all their attempts had been rejected. He said that they had made an offer that Cresvale Far East accept a lesser sum on 30 July 2000 but that had been rejected. He said that would have involved foregoing a substantial claim. Michael Hughes informed the meeting that Cresvale Capital does not have to sell its shares. That is a matter for it. Further, it is irrelevant that Cresvale Far East is negotiating with Kirwan and the other directors. That is a matter for it. Cresvale Far East is the largest creditor by far. Michael Hughes said that under IPAA Guidelines, Vanda Gould should exercise his discretion in favour of the creditor owed the largest amount in value. Michael Hughes said that the only reason given for why Vanda Gould did not vote in favour of the change on the last occasion was because he was concerned about independence. That issue has been removed. There was a comment from the floor to the effect that the major concern was in fact the cost structure of a major firm. The creditors want that cost structure to be avoided. Robert Dubler then asked whether if Cresvale Far East was contending it is the only creditor of any significance and all the other creditors will be paid out, would Cresvale Far East indemnify all the other unsecured creditors so that there was no risk to them? Michael Hughes said that he held no such instruction [sic] and that was an extraordinary suggestion." 95 The voting on this resolution was the same as on the previous resolution, and Mr Gould again exercised his casting vote and voted against the resolution. 96 It was then resolved that Mr Gould remain as voluntary administrator, the voting reflecting the same positions and Mr Gould exercised his casting vote in favour of the resolution. After other matters which it is not necessary to note, the meeting closed. 97 Mr Gould circulated his administrator's report to creditors under cover of a letter dated 14 July 2000. Austin J summarised and commented on the report as follows - "71 The Report began by giving a history of Securities and expressing Mr Gould's opinions of the reasons for the company's failure. It referred to Mr Hedge's claim that the transfers of assets from Capital to Securities on 16 September 1999 may have been voidable preference transactions. The Report said: 'Senior Counsel has advised that there is no voidable preference and I am also advised he conveyed this opinion directly to the Liquidator [Mr Hedge] and his legal advisers. I am also of the view that Senior Counsel is correct in his opinion based on my understanding of the transaction and note that to date the Liquidator has not formally pursued this matter.' 72 The Report expressed the view that a share sale would provide the best outcome for Capital's shareholders. It claimed that the directors of Securities became 'increasingly frustrated' with Mr Hedge when it appeared that the share sale would not take place, and as a result, the uncertainty surrounding the future of Securities increased, and this directly affected Securities' profitability. The Report gave an account of the decline of Securities' business in terms very similar to the company's letter of 1 June 2000, attributing business difficulties to the lack of certainty about the company's future. 73 The Report gave an explanation and justification of the decision by the directors to resolve to put Securities into voluntary administration, and to appoint Mr Gould as administrator. It said that after Mr Hedge decided not to enter into an agreement for the sale of the shares in Securities, the company was in a difficult position because it could not increase its income structure by employing further advisers due to its uncertain future. It said that the directors became aware that Securities would shortly be in breach of the liquidity requirements of the Stock Exchange regulations and would no longer be able to trade. 74 The Report set out summary balance sheets for Securities as at 26 June and 13 July 2000. The former was stated to be a summary of Mr Gould's understanding of Securities' financial position as at the date of his appointment as administrator, based on his preliminary investigations and the directors' disclosures. The latter was intended to be an estimate by Mr Gould of the financial position of Securities immediately prior to entry into the proposed DCA. It assumed, for example, that some of the receivables had been collected and some of the liabilities to employees and trade creditors had been discharged. 75 The two balance sheets are inconsistent in some ways: ? the first gives separate figures for cash on general account and on trust account, while the second gives a figure only for 'cash', which is more than the figure for cash on general account, but less than the sum of the figures for cash on general and trust accounts in the earlier balance sheet; ? the first balance sheet shows as an asset 'Cash-ASX Fidelity Account' but this item does not appear at all in the second balance sheet; ? the first balance sheet shows the loan to Capital (quantified at $135,689) as a receivable but that asset has a nil value in the second balance sheet. 76 In both balance sheets the claim by Kamadhenu Management for $120,000 for providing the services of Mr Kirwan is described as an account payable and is retained at its full amount, and the claim by Newland under the underwriting agreement for $1,576,277 is described as a 'contingent liability', but corresponding claims by Securities against sub-underwriters are not noted as assets in either balance sheet. 77 The balance sheet as at 26 June 2000 shows net liabilities based on valuation at $1,402,257, and shows net liabilities on the basis of estimated realisable values as $2,018,209. The balance sheet as at 13 July 2000 shows these two figures as having increased to $1,527,817 and $2,179,722 respectively. This enabled Mr Gould to conclude in the Report that Securities is 'clearly insolvent'. 78 The Report estimated and compared the returns to various classes of creditors under the proposed DCA and in a liquidation. Two sets of estimates were given, depending upon whether the 'contingent claim' by Newland was or was not included. If the Newland claim was excluded, all creditors other than subordinated creditors would receive 100 cents in the dollar under both the DCA and in a liquidation, while subordinated creditors (including Mr Kirwan and Far East as lender) would receive 22.2 cents in the dollar under the DCA and 8.6 cents in the dollar upon liquidation. If the Newland claim was included, employees would receive 100 cents in the dollar both under the DCA and upon liquidation, but trade creditors would receive only 27.5 cents in the dollar on liquidation while they would receive 100 cents in the dollar under the DCA. Kamadhenu Management would receive nothing under the DCA and 27.5 cents in the dollar upon liquidation. Far East as a lender would receive 33.8 cents in the dollar under the DCA and 27.5 cents in the dollar on liquidation. 79 These figures led Mr Gould to recommend in the Report that creditors should prefer the DCA, because the costs of liquidation and losses on actual realisations would reduce the dividend payable to all creditors except employees, and would permit previous employees to be reinstated to their former positions. The Report pointed out that in a liquidation the Newland claim might proceed to litigation, which may entail a delay of up to two years before a distribution could be made. Under the DCA Mr Kirwan would provide an indemnity to trade creditors with respect to the Newland claim, and would provide funds to meet the legal costs of defending the claim." 98 It should be said with respect to para 75 in this summary that the first balance sheet shows the loan to Capital as of nil realisable value in the same manner as the second balance sheet; and with respect to para 76 in the summary that (as earlier mentioned) the note to the contingent liability to Newland included, "The directors are of the opinion that this amount will not be payable, but at best substantial legal costs may be payable in defending the action". 99 It is appropriate to set out at this point the passage in the report found by Austin J to have been false or misleading. It was - "Creditors will appreciate that it is possible for a liquidator to bring actions against directors that would not be available if creditors approve a Deed of Company Arrangement. In accordance with my responsibilities I have attempted to make appropriate inquiries into the financial affairs of the Company. I have not completed a full investigation of the kind that would be performed should the company be placed into liquidation. Creditors will appreciate that only a liquidator has the power to pursue certain transactions which took place prior to the date of liquidation. Any recovery may provide a return to unsecured creditors. In the matter of Cresvale, because of the ASX supervision it is highly unlikely that such offences could be proved. An independent liquidation of Cresvale may also have better prospects of bringing an action against the Liquidators of Cresvale Capital and Cresvale Far East for the losses suffered by their actions." 100 The report concluded - "The information contained in this report is based on preliminary investigations into the affairs of the Company and advice from relevant parties. In these circumstances, creditors must appreciate the limitations on the information provided and the potential for inaccuracies. I trust the above report adequately discloses the information pertaining to the Company's position (subject to the limitations discussed above) and therefore allows creditors to make a more informed decision as to the Company's future. I welcome further advice or comments from creditors on the report and the affairs of the Company. Should you have any queries, or require any further information, please do not hesitate to contact me." 101 Austin J later summarised the DCA as follows - "97 The DCA was executed on 9 August 2000. It contained the following key points: · Securities was required to issue, and the administrator, the members of Securities and the directors were each required to cause Securities to issue, 20 million ordinary shares to Mr Kirwan or his nominee at one half a cent each, in return for a cash payment by Mr Kirwan of $100,000 (clause 5.1 - the share issue would dilute the shareholding interest of Capital in Securities from 100% to 5.33%); · Mr Kirwan and Kamadhenu Management each agreed to defer the amount of $120,000 behind other trade creditors, but in front of the 'subordinated debt' owing to Far East (clause 5.2.1); · Mr Kirwan agreed to indemnify all other trade creditors except Far East, including employees to the extent necessary, should the Newland claim be successful (clause 5.2.2 - evidently this was thought to be necessary in case payments to trade creditors under the DCA might be held to be unfair preferences); · Mr Kirwan agreed to provide funds to the administrator to meet the legal costs of defending the Newland claim, but those funds would be repayable to him in full in the event that the claim was successfully defended (clause 5.2.3 - it appears from discussion at the second creditors' meeting that this clause was not intended to cover costs found to be payable by Securities to Newland in the event that Newland was successful); · Mr Kirwan would take over all operational matters of the company including leases of machinery and would satisfy the requirements of the Stock Exchange (clause 5.2.4); · the administrator would call for proofs of debt from unsecured creditors and would open and maintain a bank account (clauses 9 and 10); · the administrator would pay unsecured creditors out of the fund in an order of priority which ranked the employees and trade creditors above Kamadhenu Management and Far East, placing Far East at the lowest priority on the ground that it had agreed to subordinate its debt to all other creditors; · there would be a first distribution out of the $100,000 subscribed by Mr Kirwan for shares and also from any money collected by pursuit of the company's collectable debts, and a final distribution at the conclusion of the Newland claim; · the DCA would come to an end 30 days after the final distribution, unless it was otherwise terminated; · distributions under the DCA would discharge the debts of all creditors as at 26 June 2000 (including Far East, Mr Kirwan and Kamadhenu Management); and · the DCA contained other relatively standard provisions for such a deed." 102 Because of Austin J's agreement with the submission that the views of Mr Gould in the report were biased in favour of Mr Kirwan and unfairly prejudicial against Mr Hedge, and his Honour's opinion that the report was a biased document demonstrating "an uncritical acceptance by Mr Gould of the information and opinions supplied to him by Mr Kirwan and an unjustified hostility towards Mr Hedge", it is appropriate to note in full that part of the report on which his Honour seems to have based paras 72 and 73 in his summary earlier set out and his views of its tenor. 103 After describing events up to the sale of shares deed of 24 December 1999, Mr Gould said - "Mr Kirwan advised that in the week prior to this conditional agreement being completed the Liquidator had advised Mr Macpherson that he had no problems with the sale proceeding and that he only inserted the conditional clause into the agreement as a formality to please Mr Cohen. Accordingly, Messrs Kirwan and Macpherson had no doubts that the sale would proceed as planned. The truth or otherwise of these matters is now irrelevant to the Company other than as background and the possibility that Messrs Kirwan and Macpherson, their service companies and the Company may have a cause of action against the Liquidator. As a consequence of the agreement of 24 December 1999 Mr Kirwan advanced $160,000 to the Company as a subordinated loan to meet the capital adequacy requirements of the ASX. Mr Kirwan may have a cause of action against the Company and the Liquidator as, strictly speaking, this sum is regarded as a type of trust receipt as the proposed contract did not proceed. During the period from January 2000 until the Company was formally placed in administration on 26 June 2000, negotiations continued between Mr Kirwan and the Liquidator as to the possibility of the sale of shares in Cresvale. It appears that the Liquidator did not complete the transaction because Mr Cohen opposed the sale. I understand Mr Cohen's concerns related to unspecified suspected 'improprieties' of Mr Kirwan. These concerns have never been documented. Directors advise that no evidence of any such transactions was ever identified to them even though directors allowed the liquidator three weeks' access to the Company's records. Directors claim the Liquidator advised that he could not establish any impropriety. The Liquidator has raised the issue of a possible preference payment recovery from Cresvale in respect of listed investments and equipment transferred from Cresvale Capital on 16 September 1999. Senior Counsel has advised there is no voidable preference and I am also advised he conveyed this opinion directly to the Liquidator and his legal advisers. I am also of the view that Senior Counsel is correct in his opinion based on my understanding of the transaction and note that to date the Liquidator has not formally pursued this matter. Nevertheless the commercial reasons the Liquidator still has for delaying the share sale transaction are unclear. It appears, however, that a share sale would provide the best outcome for Cresvale Capital's sharesholders. The existence of sale agreements supports this opinion, as well as substantial correspondence between Mr Kirwan and the Liquidator and Mr Kirwan's advance of personal funds and stock to the Liquidator to assist with the orderly winding-up of Cresvale Capital. The directors of Cresvale became increasingly frustrated with the Liquidator as it appeared that the share sale transaction would not take place and as a result of this, the uncertainty surrounding the future of the Company increased. This directly affected the Company's profitability. Directors have advised that the six month period to 21 March 2000 was a high volume trading period on the Australian stock market; however, as a result of the uncertainty regarding Cresvale's future, the Company was not able to take advantage of this. The Company was reduced to only six active dealers during this period and recorded a loss of $40,362. Directors have advised that they were conscious of the need to substantially increase the number of investment advisers; however, they could not take the required action as the future direction of the Company has not been resolved. Directors attribute these difficulties to the indecision concerning the sale of the Company's shares. During April 2000 Cresvale incurred a further loss of $64,077 and in May incurred a loss of approximately $90,000. The directors did not expect profitability to return to the Company until they were able to secure the services of at least a further 10 investment advisers. This required a stable company in which advisers could build a career and the provision of adequate financial facilities. During the six months to June 2000 the net asset value of Cresvale fell by $192,439 as a result of trading losses and continued to fall as the Company was unable to increase income or reduce its fixed and variable costs. Directors examined the cost structure and it seemed unlikely that any further cost savings could be achieved. In a desperate attempt to save the Company the directors relayed this information to the Liquidator on 1 June 2000, unanimously stating that any offer for the acquisition of the shares in Cresvale above the projected shareholders' funds should be seriously considered as any delay would result in further shareholder losses accruing in Cresvale, thereby minimising any possible dividend in the event of the liquidation of the Company. I have been unable to locate any response from the Liquidator. On 15 June 2000 the Liquidator issued his report to creditors of Cresvale Capital. In this report he stated that following various attempts to sell the shares in Cresvale, a conditional agreement was entered into on 24 December 1999. He then stated that the conditions attached to this sale agreement were not satisfied and the contract substantially lapsed. He further stated that he was now in the process of considering how to best move forward with the realisation of the investment. Following the Liquidator's decision not to enter into an agreement for the sale of shares in Cresvale and in light of the accruing losses in the Company, together with the inability of the Company to increase its income structure by employing further advisers due to the uncertain future of the Company, the Company was in a difficult position. The directors became aware that the Company would shortly breach its liquidity requirements under ASX regulations and would no longer be able to trade. On 23 June 2000 the directors resolved to put the Company into voluntary administration and appointed me as Administrator. I accepted this appointment on 26 June 2000. To date I have not been able to reach any understanding with the Liquidator concerning his overall position. My letter to him remains unanswered. His position may differ from what is outlined above and I have relied upon the correspondence file and the directors' representations in making this report which is subject to time constraints." 104 The second meeting of creditors was held on 21 July 2000. It will be recalled in relation to the possible preference transaction that at the meeting of 30 June 2000 Capital said that it "would not be lodging a proof of debt at this time". On the day before the meeting Capital lodged a proof of claim. It claimed $590,144, explained only as being in respect of the transfer of assets from Capital to Securities on 16 September 1999 but evidently asserting an entitlement to recover the value of the listed securities and the furniture and fittings on the ground that the transaction was voidable under s 588FF of the Corporations Law. 105 Those attending the meeting again included Far East (by Mr Hughes), Capital (by Mr Mainsbridge) and Mr Kirwan. Austin J summarised the meeting as follows - "82 When the meeting was declared open, there was debate about many aspects of the Report. For example: ? In response to a question about possible legal action against the liquidators of Capital, Mr Gould alleged that there had been seven months of inactivity regarding the sale of the shares in Securities, and that the liquidators of Capital were dominated by the US receiver's concerns, and were acting on his instructions. Mr Gould said this was not necessarily in the best interests of the creditors of Securities. ? As to the allegation in the Report that moneys contributed by Mr Kirwan to satisfy the Stock Exchange's liquid capital requirements were trust receipts, Mr Gould said he had not sought legal advice but that in his view, the issues were adequately canvassed in his Report. ? Mr Gould was pressed as to whether he had obtained any legal advice to support his view that the transaction of September 1999 between Capital and Securities did not generate a voidable preference. Mr Gould said he did not have any written advice. Mr Kirwan said that legal advice had been obtained from Mr Higgs of senior counsel, which had been given at a meeting at which the solicitor for the liquidator was present. The solicitor for the liquidator confirmed that he was present at the relevant meeting but said he did not recall any such advice and would have to consult his notes to confirm whether such advice was or was not given. 83 The solicitor for Capital asked Mr Gould if he had sought any legal advice in respect of the Virotec share transaction. Mr Gould said he had not had time to do so. He attacked Mr Hedge for not pursuing the matter for at least seven months. He claimed that the Virotec shares would still be held by Securities, if it had not been for the Stock Exchange's liquidity requirements and the Exchange's decision to exclude the Virotec shares for the purpose of calculating liquid capital. In Mr Gould's view it was clear that the Stock Exchange requirements had driven the sale, and the fact that Mr Kirwan had ultimately achieved a windfall when the share price later increased substantially was his good fortune. Mr Kirwan said that Mr Gould had been provided with all documents and legal advice surrounding the Virotec transaction, and that the shares had been transferred out of Securities by an on-market transaction at a value which was based on the fact that they were excluded assets for the purposes of calculating liquid capital. 84 After further discussion, Mr Gould put the motion that creditors approve the proposed deed of company arrangement ('the Third Resolution'). A poll was demanded. Mr Gould ruled under reg 5.6.3 [sic] that Newland was not entitled to vote at the meeting. Newland's solicitor objected, contending that Mr Gould should act under reg 5.6.26 by marking the proof as objected to and allowing the creditor to vote, subject to the vote being declared invalid if the objection was sustained. On legal advice, Mr Gould affirmed his view that Newland could not vote, on the ground that its claim was a contingent debt and a just estimate of its value had not been made. 85 Mr Gould also ruled that the preference claim by Capital did not entitle it to vote. Far East's solicitor disputed this interpretation on the ground that a proper investigation had not been undertaken and Mr Gould had merely relied on the directors' advice. Mr Gould asserted that he had undertaken his own investigation. 86 The motion was put to the meeting by a show of hands, and 15 creditors voted in favour of it personally or by proxy. Since Capital and Newland had not been permitted to vote, only Far East voted against the motion. Mr Gould then stated that creditors by number were in favour of the motion, but the creditor with the greater dollar value was against it. In this situation, he said, he had the power to cast a deciding vote. 87 Mr Gould asked the solicitor for Far East what his client's objectives were. The solicitor said that his client wanted the company liquidated. He expressed his client's concern that Mr Gould had relied on the advice of the directors and had not made independent inquiries or obtained independent advice on a number of specified matters. He criticised the terms of the proposed deed of company arrangement and said they were disadvantageous to Far East. Mr Gould responded that all of the Cresvale companies should be looked at as a group, and that in his opinion the group had other matters on its agenda which opposed the interests of the creditors of Securities. Mr Gould said that the casting vote allowed the administrator to protect trade creditors and employees from the decisions of majority creditors who wished to pursue non-commercial objectives that were not in the interests of the overwhelming majority of creditors. He therefore voted in favour of the deed, and declared the resolution carried." 106 I will come to matters relating to the voting in more detail later in these reasons. Again, because of Austin J's agreement with the submission that remarks Mr Gould made at the meeting of 21July 2000 were "unfairly prejudiced against Mr Hedge", it is appropriate to note in more detail what remarks were made. 107 According to the minutes of the meeting - "Mr Mainsbridge from Blake Dawson Waldron Solicitors said he had a question regarding the claims against Mr Peter Hedge of PriceWaterhouseCoopers (the Liquidator of Cresvale Capital) that were raised in the Report to the creditors. He said he had only received the Report yesterday and had not sufficient time to prepare a response. However, he advised that Mr Hedge will provide a written response to all the accusations made against him in the Report. Mr Mainsbridge also advised that Mr Hedge denied the claims raised in the Report. In particular, he advised that Mr Hedge denied even giving advice to Mr Macpherson that there would be no problem with the sale of the Cresvale business, as stated in paragraph 2 on page 3 of the Report. Mr Mainsbridge then asked what action the company may have against the Liquidator, as stated in paragraph 2 on page 2 of the Report, and if the Chairman had received any legal advice in regard to possible causes of action against the Liquidator. The Chairman advised that after seven months of inactivity in regard to the sale of shares in Cresvale, it appeared unlikely that Mr Hedge was going to take any action in regard to this matter. It also appeared that the Liquidator was tied up by the US Receiver's concerns which were not relevant to the Australian insolvency issues. The Liquidator appeared to be acting on instructions from the US Receiver which the Chairman believed were not necessarily in the best interests of the creditors of Cresvale. Mr Mainsbridge asked the Chairman to explain what he meant by 'trust receipts' in his Report. He further stated that he believed it was dangerous to assign this title to the receipts until he had reviewed all the correspondence which related to this particular matter. The Chairman replied that he had not sought legal advice in relation to this matter. He believed that the issues were adequately canvassed in his Report and that his description was satisfactory in the circumstances. Mr Mainsbridge denied that Mr Hedge had acted improperly and also denied that Mr Cohen (the US Receiver) had said anything to Mr Hedge regarding the sale. Further, he wanted to know what legal advice the Chairman had received, as noted in the Report, regarding the transaction between Cresvale and Cresvale Capital to believe that the transaction did not generate a voidable preference at law. He stated that as the Liquidator's legal adviser he was not aware of any such written advice. The Chairman said he did not have any written legal advice on this matter. Mr Kirwan stated that the legal advice from Senior Counsel, Mr Higgs, had been given at a meeting at which Mr Mainsbridge was present. Mr Macpherson asked Mr Mainsbridge if he was present at that meeting and Mr Mainsbridge confirmed that he was present. Mr Macpherson asked Mr Mainsbridge if he remembered the advice as given by Mr Higgs at that meeting. Mr Mainsbridge said he did not recall and would have to consult his notes to confirm either way. Mr Mainsbridge then referred to paragraph (a) on page 3 of the Report. He denied that Mr Hedge did not respond to the Chairman's letter of 3 July 2000. He stated that Mr Hedge replied on 5 July 2000 and the Chairman subsequently responded. The Chairman stated that Mr Hedge did not answer any of the questions in his letter regarding the sale of shares and the recovery of the $135,000; he only responded in regard to technical issues in connection with the Administrator's appointment and requested copies of the documents relating to this appointment." 108 The corresponding part of Mr Hughes' record of this meeting was - "Mr Mainsbridge then said that the report contained a number of allegations against the liquidator of Cresvale Capital (Peter Hedge), Mr Mainsbridge foreshadowed a detailed response to each of the points made in the report which he said would following writing [sic]. In that regard, however, he said that he was instructed to deny the allegations on page 2 of the report concerning steps taken to sell the shares of Cresvale Securities. He said that the picture painted by the report of the sale was misleading. Mr Mainsbridge referred to the comment in the report of Messrs Kirwan and MacPherson, their service companies and Cresvale Securities may have a cause of action against the liquidator of Cresvale Capital. Mr Mainsbridge asked whether Mr Gould had obtained any legal advice in relation to that claim. Mr Gould said that he did not, but he felt that the delay in approving the sale had been ' unreasonable '. He commented that the approach of the liquidator of Cresvale Capital appeared to have been driven by addressing the needs of the United States receiver, which he contended were not relevant to the Australian insolvency. Nothing has happened for seven months, and he said ' that speaks for itself '. Mr Gould mentioned that had written Mr Hedge seeking to find out his attitude towards the sale of the shares in Cresvale Securities and he had not received a reply. He said ' when you look at it, on the face of it, these are issues '. Mr Mainsbridge denied that the sale did not proceed because of any requirement imposed by Mr Cohen, the United States receiver. He said that there were serious issues which needed to be addressed, and referred to the pleadings and affidavits filed by Mr Cohen, and correspondence from Blake Dawson Waldron to Glynn & Associates particularly a letter dated 15 February 2000." 109 At a later point, more specifically in relation to the Virotec shares (see para 83 of Austin J's summary), the minutes of the meeting record - "Mr Mainsbridge asked the Chairman if he had sought any legal advice in respect of the Virotec share transaction. The Chairman responed by stating that in the short period of time of his administration it was not possible to obtain legal advice in regard to this matter. He went on to say that Mr Hedge had sat on this matter for a period of at least seven months and it was previously Mr Hedge's obligation to pursue the matter. The fact that Mr Hedge had not pursued the matter provided a very strong inference to him that there was no credibility in the claim. He further stated that the shares would probably still be in the company if it was not for ASX liquidity requirements and the ASX had stated that the Virotec shares were excluded assets for the purpose of the liquidity requirements. It was clear that the ASX requirements had driven the sale and the fact that Mr Kirwan had achieved a windfall when the share price substantially increased after he had purchased on-market was his good fortune. Mr Mainsbridge asked the Chairman what would happen if the company was to go into liquidation – would this transaction eventually be reversed and the company end up with additional money? The Chairman responded by saying that in principle liquidation had this advantage but he believed there was very little chance of that as Mr Hedge's lack of action in the past spoke volumes as to the prospects of Cresvale sustaining this claim. Mr Hughes asked the Chairman if he had had any legal advice in regard to the Virotec matter. The Chairman again said no. He noted, however, that if there was a reasonable prospect of litigation producing a recovery he would recommend that course. He also noted his own involvement in substantial litigation. The Chairman further stated that in his opinion the Virotec shares were not assets of Cresvale. At best, in liquidation, there may be a contingent asset to take into account in evaluating that option. Mr Kirwan noted that the Chairman had been provided with all the documents and legal advice surrounding this transaction and that Mr Hedge was aware of the ASX requirements at the time of the transaction. He was also aware that the shares had been transferred out of Cresvale as an on-market transaction at a value based on the fact that they were excluded assets for the liquidity requirements of the ASX. He further stated that even though Mr Hedge was aware of all the facts at the time of the transaction he had not raised this as an issue until June this year. Mr Kirwan noted that Messrs Hedge and Mainsbridge were offered access to the same documents in March and had not availed themselves of that offer. Furthermore, Mr Kirwan had offered to fund Senior Counsel of Mr Hedge's choice to review the transaction and obtain whatever affidavits were required. Mr Hedge had not availed himself of that offer." 110 The corresponding part of the Mr Hughes' record of the meeting was - "I then asked what investigations had been undertaken by Mr Gould about possible claims that might be available to a liquidator if Cresvale Securities was wound up. Mr Mainsbridge asked similar questions, particular [sic] focused on the setting aside of the so called Virotech [sic] transaction. Mr Gould's response was that it had not been possible for him to obtain independent legal advice about the claims in the time available. He said that he had read the correspondence in relation to the Virotech transaction and he felt that the directors' explanation was reasonable. He also felt that the seven months taken by Mr Hedge in ' dealing with this issue ', ' spoke for itself '. I pointed out that it was not an issue about whether Mr Hedge had pursued the claim properly or promptly, the issue was whether the claim was available to the liquidator of Cresvale Securities and if so what the value of that claim might be. Mr Gould answered simply that the claim was a ' contingent asset ' and that he did not feel that it would be beneficial to commence litigation in which regard he referred to the expense and costs which would be involved. I again asked him whether he had obtained independent advice about the matter. He said, ' I have formed my own view and it is not an asset of this company '. Mr Kirwan echoed these points saying that Mr Gould had taken the trouble to review the transaction and the relevant correspondence which had never been done by Mr Hedge." 111 Mr Mainsbridge also prepared, more in note form, a record of the meeting. I will refer to it in relation to refusal to allow Capital and Newland to vote. I do not think it adds to an understanding of what remarks Mr Gould made concerning Mr Hedge. 112 The DCA was approved. It was duly implemented. On 11 August 2000 the directors of Securities resolved that the 20,000,000 shares be allotted and issued to Mr Kirwan as trustee for the GNPK Family Trust. The minute of the resolution was signed by Mr Kirwan, Mr MacPherson and Mr Anderson as directors and by Mr Gould as administrator. Mr Kirwan paid the $100,000 to Securities on the same day. Mr Gould paid trade creditors, distributing a total of $116,428.68. When the proceedings were brought he was still to pay the administration creditors, Far East and the deferred creditors. He held a fund of $543,216. The hearing below 113 In the substantive hearing affidavits of Mr Hughes, Mr Mainsbridge, Mr Lindsay Colless, Mr Gould and Mr John Glynn were read. Documents in a bundle of documents were admitted. An affidavit of Mr Hedge was put forward, but he was not available for cross-examination and leave to read it was refused. 114 The evidence of Mr Colless and Mr Glynn need not be noted. Mr Gould was cross-examined at some length. The absence of evidence from Mr Hedge is, of course, material to the findings reasonably open to be made. So also, as will be seen, is the extent of cross-examination of Mr Gould. The findings of impropriety were serious findings in the context in which they were made. Before they were made, procedural fairness required that it be put to Mr Gould that, for reasons given, he had acted improperly, so that he could respond to the reasons and the characterisation sought to be put on his conduct. The allotment and issue of the shares 115 In his reasons Austin J said as to this - "218 Far East and Capital contend that the issue of shares to Mr Kirwan was made for an improper purpose, and is therefore invalid. Therefore, they say, the Court should rectify the share register of Securities. In developing their submission, they invoke the familiar principles governing the issue of shares by company directors for an improper purpose, such as the purpose of perpetuating their own control: Howard Smith Limited v Ampol Petroleum Ltd [1974] AC 821; Ngurli Ltd v McCann (1953) 90 CLR 425, at 439-440. They say that here the power to issue shares (if it existed) was used to wrest control of the company from Capital, and to make the proprietary right of Capital valueless without any demonstrable benefit to Securities: Kokotovich Pty Ltd v Wallington (1995) 17 ACSR 478. I agree with this submission. 219 A contrary argument is that in resolving to allot and issue the shares, the directors were merely discharging their duties having regard to the terms of clause 5.1 of the DCA and s 445G. I disagree. It is unnecessary to decide whether, by causing the company to execute the DCA, the directors placed an invalid fetter upon the future exercise of their discretion: see Ford's Principles of Corporations Law (looseleaf), para [8.300]. This is because the resolution to allot and issue the shares should not be assessed in isolation from the directors' activities leading up to that event. The evidence shows that Mr Kirwan and Mr MacPherson, two of the three directors, were engaged in a course of conduct directed towards acquiring a controlling shareholding in Securities for many months before the creditors approved the DCA. It would be misleading to focus on a single step in that course of conduct, namely the allotment and issue of the shares, and to investigate in isolation the directors' purpose in taking that single step. Regardless of whether they had placed themselves under an obligation to allot and issue the shares, the directors were motivated by their overall purpose in embarking on the course of conduct which led to the share issue. 220 When their attempts at a negotiated acquisition failed early in the year 2000, Mr Kirwan and Mr MacPherson developed the proposed DCA as an alternative strategy. Their purpose was to wrest control of Securities from Capital by using Part 5.3A when negotiation failed. That purpose, clearly an improper one, infected their operative decision to allot and issue the shares. Their purpose emerges from the chain of events that I have described. Mr Kirwan persuaded Mr Gould that Mr Hedge had treated him unjustly various ways, and that the proposed DCA would be fair notwithstanding its effect on the control of Securities. Mr Gould was willing to be persuaded without making adequate investigations. 221 Under the DCA fresh capital was subscribed for shares in a manner that would deliver a controlling interest to Mr Kirwan. There is no evidence to show that alternative forms of capital injection, which would not have diluted the control of the existing shareholder, were explored. The proposed DCA required Mr Kirwan to subscribe enough fresh capital to permit Mr Gould to pay employees and trade creditors. The support of those creditors for the proposed DCA was therefore assured. The obstacle posed by the inevitable opposition of Far East, a creditor for a much greater debt than all of the employees and trade creditors, was handled by Mr Gould exercising his casting vote in favour of the proposed DCA. The new shares were issued at half a cent each, with the same rights as the existing shares, ensuring that Capital's existing shareholding would be swamped. 222 I have reached my conclusion as to the directors' purpose by inference from the chain of events that I have described, and the terms of the DCA itself. Mr Kirwan did not give evidence to rebut the inference of improper purpose that arises from this chain of events. Nor did any other director. Although one must be careful to avoid indiscriminate application of the principle in Jones v Dunkel (1959) 101 CLR 298 (see Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389; White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169) in my view this is a proper case for inferring from the directors' lack of evidence that they had no evidence to give that would assist their position. 223 I reject the contention that the directors' purpose was to obtain the best deal for the creditors as a whole, including employees and trade creditors. That submission is untenable because the essential feature of the DCA was an allotment of shares that swamped the controlling shareholder's interest. An issue of shares was not a necessary ingredient of a scheme for the benefit of employees and trade creditors." 116 The first sentence in para 221 in this passage requires comment. Earlier in his reasons Austin J had accepted that "as a practical matter, the only real alternatives for the creditors at the second meeting were the proposed DCA or liquidation". His Honour had noted that Mr Hedge had attempted to sell the business of Securities to others and that the only offer he had received was Mr Kirwan's offer. He had said that this implied "that no-one other than Mr Kirwan was interested or prepared to inject sufficient capital into Securities to rescue it". It is not easy to reconcile with this undoubtedly correct assessment his Honour's apparent acceptance, in the first sentence in para 221, of the possibility of alternative forms of capital injection. 117 There can be no doubt that Mr Kirwan wanted to obtain shareholding control of Securities, and that the other directors shared his wish. Mr Kirwan and Mr MacPherson had offered to buy Capital's shares in Securities, and Mr Kirwan had entered into the sale of shares deed of 24 December 1999. Mr Kirwan's interest in acquiring shareholding control, with a view to continued trading by Securities, can only have been enhanced by his then lending $160,000 to Securities. He had sought to bring the liquidators of Capital to performance of the sale of shares deed notwithstanding Mr Cohen's objection and the liquidators' disinclination to waive the condition, and although the details are not known had sought otherwise to reach agreement with the liquidators on the sale of the shares. For whatever reason, this had come to nothing. There is no valid ground for concluding that Mr Kirwan's purpose was not the same when, as the moving party in the DCA, he supported it at the meeting of 21 July 2000. 118 As a negotiated sale of the shares in Securities, in December 1999 there was no question of wresting control of the company from Capital. By July 2000 the negotiated sale was well and truly in the past, and whether the issue and allotment of the shares was in the eyes of the law for an improper purpose must be judged in the circumstances at the time of the DCA. 119 Austin J saw the DCA as part of a substituted strategy to obtain shareholding control of Securities, with the directors exercising a relevantly unfettered power to issue shares rather than acting under the compulsion of the DCA. The exercise of the power to issue shares was thereby exposed to impropriety of Mr Kirwan's purpose, and was not protected by the preceding adoption of the DCA. In Mr Kirwan's appeal it was faintly suggested that the directors were doing no more than implement the DCA, but it is unrealistic to divorce the issue and allotment of the shares from the circumstances of approval of the DCA. I do not think that in the end Mr Kirwan submitted otherwise, and he focussed on the DCA being for the benefit of the company as a whole as the measure of the director's exercise of their power to issue shares. 120 Before going further, it is important to note what Austin J did not rely on for the improper purpose. Although he referred to persuasion of Mr Gould and to Mr Gould handling the opposition of Far East, there was no finding that Mr Kirwan acted in some manner wrongly in influencing Mr Gould. Nor was there a finding that Mr Kirwan's purpose in gaining control of Securities was, or was in part, to preclude investigation of his acquisition of the Virotec shares and action to recover any profit he had made following their acquisition. Although critical of Mr Gould for failing adequately to enquire into "the circumstances surrounding" Mr Kirwan's acquisition of the Virotec shares, his Honour said expressly that he did not "suggest that the known facts establish any breach of duty or statute [by Mr Kirwan], or even that they give rise to a prima facie case of breach". At times in his Honour's reasons there was what was described in the appeals as a flavour that Mr Kirwan wanted to gain control of Securities to preclude action against him in relation to his acquisition of the Virotec shares, but the absence of a finding that he was seeking to avoid enquiry into his acquisition of the Virotec shares is marked. On the evidence in the proceedings, such a serious finding could not be made. 121 In Ngurli Ltd v McCann (1953) 90 CLR 425 Williams ACJ and Fullagar and Kitto JJ said (at 438-9) - "Voting powers conferred on shareholders and powers conferred on directors by the articles of association of companies must be used bona fide for the benefit of the company as a whole. In Greenhalgh v. Arderne Cinemas Ltd , Evershed M.R., in a case relating to a special resolution altering the articles of association, said: 'In the first place, I think it is now plain that `bona fide for the benefit of the company as a whole' means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, `the company as a whole,' does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favour, for that person's benefit'." 122 Their Honours later said (at 439-40) that the power to issue new shares - " … must be used bona fide for the purpose for which it was conferred, that is to say, to raise sufficient capital for the benefit of the company as a whole. It must not be used under the cloak of such a purpose for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders. In the present case Horace Southcott was the donee of this fiduciary power. It was still a fiduciary power although he could issue the new shares to the trustee company, if it agreed to accept them on trust for himself to the exclusion of the McCanns. He could take advantage of the power to benefit himself if such a benefit was incidental to a bona fide exercise of the power but he could not use the power ostensibly to benefit the company but really to benefit himself at the expense of the McCanns." 123 But capital raising per se is not essential. In Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 the Privy Council said (at 835) that it is "too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company". In Harlowes Nominees Pty Ltd v Woodside (Lakes Entrance) Oil NL (1968) 121 CLR 483 the company had no immediate need for capital, but the issue of shares to cement a business partnership survived challenge. Barwick CJ and McTiernan and Kitto JJ said (at 493-4) - "The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company: Richard Brady Franks Ltd. v. Price; Mills v. Mills; Ngurli Ltd. v. McCann . Directors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. Thus in the present case it is not a matter for judicial concern, if it be the fact, that the allotment to Burmah would frustrate the ambitions of someone who was buying up shares as opportunity offered with a view to obtaining increased influence in the control of the company, or even that the directors realized that the allotment would have that result and found it agreeable to their personal wishes: Mills v. Mills . But if, in making the allotment, the directors had an actual purpose of thereby creating an advantage for themselves otherwise than as members of the general body of shareholders, as for instance by buttressing their directorships against an apprehended attack from such as Harlowe, the allotment would plainly be voidable as an abuse of the fiduciary power, unless Burmah had no notice of the facts." 124 The phrase "for the benefit of the company as a whole" has been widely used to express the criterion for valid exercise of directors' powers, see also Mills v Mills (1938) 60 CLR 150 at 187-8; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 299-300, and in this Court Kokotovich Pty Ltd v Wallington (1995) 17 ACSR 478 at 491. It is a difficult phrase. As was pointed out in Gambotto v WCP Ltd (1995) 182 CLR 432 at 443-4, 452, in connection with alteration of a company's articles, it is not a satisfactory criterion when there is a conflict of interests. Deciding what is for the benefit of the company as a whole may require selection between competing interests, and the phrase masks the problems of determining when an exercise of the power is vitiated. 125 In the context of shareholding control the limitations of the criterion have been recognized. In Whitehouse v Carlton Hotel Pty Ltd Mason, Deane and Dawson JJ said (at 289-90) - "As the Privy Council pointed out in Howard Smith Ltd v Ampol Petroleum Ltd , it is impossible to define in advance the exact limits beyond which the directors of a company must not ordinarily pass in exercising a fiduciary power to allot shares: '[It] clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase — such as `bona fide in the interest of the company as a whole,' or `for some corporate purpose'. Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: ie improperly favouring one section of the shareholders against another.' However, one thing does emerge clearly enough from their Lordships' judgment in that case and from the numerous cases in this and other courts dealing with the validity of an impugned allotment of shares. It is that the directors of a company cannot ordinarily exercise a fiduciary power to allot shares for the purpose of defeating the voting power of existing shareholders by creating a new majority: see, eg, Fraser v Whalley; Ngurli Ltd v McCann; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL; Ashburton Oil NL v Alpha Minerals NL; Howard Smith Ltd v Ampol Petroleum Ltd . The reason why, as a general rule, it is impermissible for the directors of a company to exercise a fiduciary power to allot shares for the purpose of destroying or creating a majority of voting power was identified by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd. It lies essentially in the distinction between the indirect proprietorship and ultimate control of the shareholders on the one hand and the powers of management entrusted to the directors on the other. It is simply no part of the function of the directors as such to favour one shareholder or group of shareholders by exercising a fiduciary power to allot shares for the purpose of diluting the voting power attaching to the issued shares held by some other shareholder or group of shareholders. As their Lordships said (29): 'The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office ( Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame) , so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers'." 126 In the present case, the articles of Securities provided that the directors could issue shares as they thought fit (art 3.1). That power was not one they could exercise in their own interests, although an otherwise valid exercise of the power could have the effect of benefiting them. 127 The description of the power as a fiduciary power is because it must be exercised in the interests of another or others. Who or what is or are the other or others? To refer to the company as a whole leaves much unanswered. In law the company has an existence separate from its shareholders. But, as the passage from Greenhalgh v Arderne Cinemas Ltd (1951) Ch 286 at 291 approved in Ngurli Ltd v McCann shows (para [118] above, the directors do not exercise their power according to the interests of the company as a separate commercial entity. To refer to the corporators as a general body, however, is obscure and incomplete guidance to the interests. 128 If the interests are those of the existing shareholders only, there is no doubt what Capital thought its interests were. This was not a case of conflict between existing shareholders. By July 2000 the negotiated sale was dead. As earlier noted, it was a case of the DCA or liquidation. Capital had not proposed injecting capital into Securities, and almost certainly could not do so, and at the meeting of 21 July 2000 the representative of Far East said in terms that Far East wanted Securities put into liquidation. It is all but irresistible that, although they had held back from it prior to Securities going into administration, Capital and its liquidators wanted to have Securities go into liquidation rather than have the DCA approved. Capital did not want dilution of its shareholding and continued existence of a company in which it held a small stake. Nor was it objectively for Capital's benefit that it be locked in as a small shareholder in Securities. 129 I do not see how, in the present case, it could be said that the directors' power was exercisable in the interests of future shareholders. The immediate future shareholder was Mr Kirwan. The power could not be exercised for the purpose of making him a shareholder. 130 Directors are obliged in some circumstances to exercise their powers in the interests of creditors. The creditors are not part of the company as a whole when the company is solvent (Kinsela v Russel Kinsela Pty Ltd (in liquidation) 1986 4 NSWLR 722 AT 730; Equiticorp Finance Ltd (in liquidation) v Bank of New Zealand (1993) 32 NSWLR 50 at 145-6). But the duty to creditors arising when the company is insolvent will make the interests of creditors then relevant in considering the exercise of a power for the benefit of the company as a whole. (For a discussion of when the duty arises see Keay, "The director's duty to take into account the interests of company creditors: when is it triggered?" (2001) 25MULR 315.) 131 It is not easy to support the issue and allotment of shares in the present case as the exercise of a power for the benefit of the company as a whole because of the interests of creditors. The creditors at the time of the meeting were already creditors, Securities was already in dire straits, and the directors were not taking a course which would jeopardise Securities' solvency. Future creditors were a non-issue, as liquidation was the alterative. The exercise of the power as an element in the DCA would bring payment to some of the creditors greater, depending on the Newland claim, than they would receive in a liquidation, but Far East as by far the largest creditor would gain no advantage. There was discrimination between creditors. Perhaps Far East as a parent company once removed could be regarded as in a different position from other creditors, perhaps because it chanced its economic arm in different circumstances from employees and trade creditors. But there was still discrimination, and I do not think regard to the interests of creditors permits the issue of shares to be seen as for the benefit of the company as a whole. 132 In Whitehouse v Carlton Hotel Pty Ltd the reason for impugning an allotment of shares was explained and, with reference to Howard Smith Ltd v Ampol Petroleum Ltd, the purpose of the exercise of the power was emphasised: see para [122] above. In Howard Smith Ltd v Ampol Petroleum Ltd at 835 Lord Wilberforce cited with approval the statement of principle, again emphasising purpose, from Hindle v John Colton Ltd (1919) 56 ScLR 625 at 630-31 - "Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason." 133 In my opinion, having regard to the interests which could be taken into account in considering the benefit of the company as a whole and the course of events leading to the DCA and the issue and allotment of shares, Austin J was correct in the result. In the circumstances the issue of shares may have been a necessary price for benefiting employees and trade creditors, and to that extent I may differ from his Honour. But neither in fact nor as the directors' purpose was the issue of shares for the benefit of the company as a whole. Judged according to the interests of shareholders and creditors (all creditors) it was not for their benefit, and the directors' purpose was not to advantage shareholders or creditors: it was to deliver control of Securities to Mr Kirwan. It was outside management of the company, and not a valid exercise of the power. 134 I should, however, add this. I have earlier referred (para [25] above) to his Honour's remarks about fraud and fraudulent conduct on the part of Mr Kirwan when considering repayment of the $100,000. The remarks could be misunderstood. 135 That a director is found to have exercised a power otherwise than for the benefit of the company as a whole does not necessarily connote fraud in the ordinary sue of that word, or in an equivalent legal use involving moral turpitude. In the appeals Far East made clear that it had never contended that Mr Kirwan should be treated as guilty of fraud in that sense. So far as in his remarks his Honour suggested that it did so, or that Mr Kirwan's conduct might be classified "as fraudulent in a moral sense", there was an unfortunate venture into an unnecessary area. It is appropriate, in my opinion, to state that although I have concluded that the issue and allotment of shares was not a valid exercise of the directors' power, I do not regard Mr Kirwan's conduct as fraudulent. Return of the $100,000 136 When terminating the DCA pursuant to s 445D of the Corporations Law Austin J noted that he could not reverse its wrongful implementation in the past. He therefore set aside the allotment and issue of the shares in the exercise of his equitable jurisdiction. In his reasons of 8 March 2001 he considered the return of the $100,000 as an aspect of the equitable jurisdiction. 137 His Honour accepted, citing Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 113, that the relevant principle was to do "what was practically just". He noted Mr Kirwan's submission that the correct way to do what was practically just, so as to restore the parties to their positions prior to the transactions, was to make the setting aside of the allotment and issue of shares conditional upon return of the $100,000. His reasoning then was in two stages. 138 First, his Honour considered that he should not "elevate [Mr Kirwan's] rights to a level of security beyond unsecured creditors". Answering the contention that anything less than full return of the $100,000 would be tantamount to punishing Mr Kirwan, his Honour said - "The correct analysis is that the money paid by the fourth defendant upon the allotment and issue of shares to him was paid to the first defendant, which at that stage was a company subject to a deed of company arrangement. Any entitlement of the fourth defendant to recover the money so paid was an entitlement against the first defendant. It was an entitlement to receive a sum of money. Analytically, it was no different from the entitlement of an unsecured creditor. It was an entitlement that did not give the fourth defendant any proprietary right by way of security or otherwise, in respect of any of the assets of the first defendant in administration. Therefore, to make an order of the kind contended for by the fourth defendant would be to elevate the fourth defendant's rights to a level of priority much higher than the proper analysis the transaction [sic] would warrant." 139 Secondly, his Honour said that there were some discretionary factors appropriate to be taken into account. They were that the $100,000 had been intended for payment of trade creditors, and had been used to pay them; that "without necessarily classifying [Mr Kirwan's] conduct as fraudulent in a moral sense" it had "led to the remedial outcome that the allotment and issue of shares must be set aside" because "[t]he plan which led to the impropriety of purpose of the share issue was Mr Kirwan's plan"; Mr Kirwan was aware of Securities' circumstances and should have suspected that an application to set aside the DCA and the share issue was likely; and the DCA might have made provision for the return of funds to Mr Kirwan if the allotment and issue of shares did not proceed, but it did not do so. His Honour said that these were factors "to be taken into account, not in any one case overwhelming, but supporting the view that I have taken". 140 Where equitable relief is granted by setting aside a transaction which has been wholly or partly performed, restitution is required. The transaction is set aside ab initio, and the parties are to be returned to their positions prior to the transaction. Equity allows greater flexibility than common law, and if complete restitution is not possible may use its powers so as to "do what is practically just between the parties, and by so doing restore them substantially to the status quo: Alati v Kruger (1955) 94 CLR 216 at 224. The notion of doing what is practically just is concerned with practicality. It does not deny that there must be restitution. 141 It seems to me that at the first stage of his reasoning Austin J erroneously regarded the notion of practical justice as permitting refusal of restitution although restitution was entirely practicable. It was not to the point that Mr Kirwan did not have a proprietary right in respect of any of the assets of Securities, and the "level of priority" of his rights flowed not from principles of company law but from the equitable requirement of restoration of the status quo. Accordingly, the equitable relief should have been granted on condition that the $100,000 be repaid. 142 I therefore respectfully differ from the view which his Honour thought was also supported by the discretionary factors, and I do not think that the discretionary factors themselves negate the application of the fundamental equitable principle. In particular, there is some ambivalence in his Honour's statement of the second factor. His Honour had said that he did not propose to take Mr Kirwan's "wrongdoing" into account (see para [25] above) but may have indirectly done so. If his Honour meant no more than that Mr Kirwan's conduct underlay the grant of equitable relief, as it did, the defendant's conduct underlies any successful claim to equitable relief and that factor cannot operate against restoration of the status quo. Removal of Mr Gould as administrator 143 Austin J addressed Mr Gould's conduct under four headings stating issues on which the parties had agreed. Slightly re-stated and combining two of them, the issues were - (a) whether Mr Gould should have exercised his casting vote as he did in relation to the two removal resolutions at the meeting of 30 June 2000 and the approval resolution at the meeting of 21 July 2000; (b) whether Mr Gould's report of 14 July 2000 contained false or misleading information or had material omissions; and (c) whether Mr Gould wrongly refused to allow Capital and Newland to vote at the meeting of 21 July 2000. 144 In the appeals counsel for Far East expressly did not enter upon "whether the trial judge was or was not overly or unduly critical of Mr Gould". Counsel for Capital sought to support, for the main part, the findings of impropriety. 145 Earlier in his reasons, but with anticipatory regard to some of these issues, his Honour had considered the matters leading him to his opinion concerning strong bias in favour of Mr Kirwan and unfair prejudice against Mr Hedge. It is convenient first to go to those matters. As will be seen, I consider that coming to such an adverse opinion was not warranted on the evidence, particularly in the light of the cross-examination of Mr Gould. 146 The opinion was stated (see para [14] above) as the cumulative effect of six matters. 147 The first matter was - "89 First, the Report claimed that Mr Hedge advised Mr MacPherson, in the week prior to making of the sale of shares deed, that he had no problems with the sale proceeding and that he only insisted on inserting a condition into the sale of shares deed 'as a formality to please [the US receiver]'. According to the Report, there was a possibility that in consequence, Messrs Kirwan and MacPherson, their service companies and Securities could have a cause of action against Mr Hedge. Although the Report speaks only of a 'possibility' of a cause of action, the impression given by the Report is that Mr Hedge behaved irresponsibly or misleadingly. Such statements should not be made in a report to creditors unless there is a clear basis for them. The evidence does not disclose any proper basis for any such view." 148 The relevant paragraph in the report of 14 July 2000, the first paragraph in the extract from the report at para [100] above, was explicit that the truth or otherwise of what Mr Kirwan and Mr MacPherson said had but passing relevance to the administration. There may or may not have been a basis for a cause of action against Mr Hedge. Mr Gould only mentioned the possibility, and had no occasion to report one way or the other whether there was a clear basis for a cause of action. Opinions could differ on whether it should have been mentioned at all, but the possibility of Securities having a cause of action against Mr Hedge, together with Messrs Kirwan and MacPherson and their companies, was arguably material to the creditors' consideration of whether or not to approve the DCA. In fact the paragraph in the report was addressed at the meeting of 21 July 2000, see the second and third paragraphs in the extract from the mintues of the meeting set out in para [104] above and the third paragraph in the extract from Mr Hughes' record of the meeting set out in para [105] above. 149 I do not read the paragraph in the report as gratuitously offensive to Mr Hedge. Nor was Mr Gould called on to show by evidence in the proceedings that there was a proper basis for a cause of action, and it should not be held against him that he did not do so. At no time during a lengthy cross-examination was it put to Mr Gould that the report in this respect was inappropriate, let alone indicative of bias in favour of Mr Kirwan and hostility to Mr Hedge. Before the paragraph was taken as indicative of bias and hostility, Mr Gould should have been given the opportunity to respond to that view of it. 150 The second matter was - "90 Secondly, the Report said that Mr Kirwan may have a cause of action against Securities and Mr Hedge arising out of his loan of $160,000 to Securities as a subordinated loan to meet the Stock Exchange's liquid capital requirements, 'as, strictly speaking, the sum is regarded as a type of trust receipt as the proposed contract did not proceed'. Once again, statements of this kind should not be made in a report to creditors unless there is a firm basis for them. Mr Gould's evidence was that the basis for his statement was to be found in the sale of shares deed itself, rather than any collateral representations. However, since the sale of shares deed did not require the return of Mr Kirwan's subordinated loan in the event that a condition was not met, it would be very difficult to argue that the loan moneys were held in trust. Mr Kirwan did not seek legal advice before making his statement, and there is no adequate basis for it." The reference to Mr Kirwan in the last sentence should no doubt be to Mr Gould. 151 The relevant paragraph in the report of 14 July 2000, the second paragraph in the extract from the report at para [100] above, was material to the administration insofar as $160,000 may not have been available to creditors. The report otherwise treated the $160,000 as a subordinated loan. In his cross-examination Mr Gould was not asked anything about the reference to a possible cause of action. He was asked about the subordinated loan, and expressed a view that $160,000 was a kind of trust receipt. Contrary to Austin J's statement of the second matter, Mr Gould did not base his view on the sale of shares deed, but rather on what he had been told of earlier discussions with Mr Hedge whereby the $160,000 was lent in expectation of completion of the sale of the shares. He said that his understanding came from Mr Kirwan "and his legal counsel". There it was left by the cross-examiner. 152 As the matter was left, it is not obvious that it would be difficult to argue that the $160,000 was held in trust. It depends on the earlier discussions. Mr Gould was not asked to detail what he was told of the discussions, and there was no evidence to controvert that what he was told (including, apparently, by a lawyer) gave a reasonable basis for his view that the $160,000 was regarded as a type of trust receipt. More to the point, it was not put to Mr Gould that there was an inadequate basis for what he said in the report or that his saying it was indicative of bias in favour of Mr Kirwan and hostility to Mr Hedge. 153 The third matter was - "91 Thirdly, Mr Gould conveyed some scepticism about Newland's claim, which he treated as a 'contingent' claim. He did not permit Newland to vote at the second meeting of creditors. Even in the face of a strong body of evidence supporting the claim, Mr Gould chose to accept Mr Kirwan's account of facts and legal outcomes for the purposes of the meeting, without taking his own advice." 154 I come to the refusal to allow Newland to vote later in these reasons. While the claim was strong if the underwriting agreement had not been validly terminated, Mr Gould had only assertion and counter-assertion as to the facts on which the termination was based. Mr Gould's evidence was that he regarded the Newland claim as "highly speculative and highly contingent". He said that he was told by Mr Kirwan and Mr MacPherson that Securities' solicitor, Mr Tolz, had advised "that he did not have any liability in relation to the Newland float as some of the conditions precedent that that liability arising had not materialised". He said that he satisfied himself that this was a reasonable stance. His evidence included, without detail, that he had spoken to the person who was said to have made the incorrect representations, and that there seemed to be "every prospect of substantial litigation". Taking his own advice, in the short time available, would probably not have provided an answer. It was not put to Mr Gould that he should have taken his own advice. Nor was it put to Mr Gould in any significant way that he acted inappropriately in regarding Newland's claim as he did. The closest the cross-examiner came, maybe with voting in mind, was "It did not occur to you perhaps it might be a claim to allow to the extent of an estimate as to what it might be worth?" He was asked whether it had occurred to him that he might have been being "used as an instrument to help Mr Kirwan avoid the financial consequences of his own guarantee [of the Newland underwriting]", and he said that he did take account of whether Mr Kirwan was going to gain a collateral benefit. There it was left. This was a marked holding back from putting bias or partiality. 155 I do not think that blind or unwarranted acceptance of Mr Kirwan's account was shown. On any view, Mr Gould was faced with a disputed claim. The word "contingent" was not appropriate, but it was clearly meant that the claim was disputed. In the report Mr Gould stated the fact, as advised to him, that the directors were of the opinion that the amount claimed would not be payable, but dealt with Securities' financial position on the alternative bases that it was or was not payable. There was nothing wrong in that. He emphasised at the conclusion of the report that it was based on preliminary investigations. Again, before Mr Gould's scepticism was taken as indicative of bias and hostility, he should have been given the opportunity to respond to that view of it. 156 The fourth matter was - "92 Fourthly, Mr Gould failed to scrutinise Kamadhenu Management's proof of debt for $120,000. His account of why he admitted the proof is unconvincing, especially given that the alleged debt did not appear in financial information provided to the Stock Exchange and in the company's financial statements. He says he was influenced by the fact that the claim would be deferred. It is hard to see how that consideration bears on decision to admit the claimant's proof." 157 In fact, no-one at the meeting of 21 July 2000 objected to Kamadhenu voting. Its proof of debt was questioned, but not to the point of objection to its admission. The relevant part of the minutes of the meeting is - "Mr Mainsbridge asked how the $120,000 owing to Kamadhenu Management Pty Limited had arisen in the Report when it was not previously reported in the management statements of the company. The Chairman asked Mr Nicholaeff to expand on this matter as he was the current auditor and responsible for preparation of the financial statements of Cresvale. Mr Nicholaeff responded by saying he could not comment on the matter as he had no information in front of him. The Chairman stated that the claim was included in the directors' statement to the Administrator. Mr Kirwan also responded to the question by stating that for an extended period of time Kamadhenu Management Pty Limited had not drawn any management fees from the company, but due to the change in the nature of Cresvale's business and the uncertain future of Cresvale, he had made the decision to lodge a claim for outstanding fees against Cresvale. Mr Woods asked if this amount was previously reflected in reports to the Australian Stock Exchange ("ASX"). Mr Kirwan said it was not but it would be reported in the June Quarterly Statement to the Australian Stock Exchange." 158 Mr Hughes' record of the meeting did not refer to questioning Kamadhenu's proof of debt. Mr Mainsbridge's record relevantly was - VG – Don't know. REM – Explain why Kamadhenu claim for $120k not in the previous accounts. Answer by auditor – Don't know. NK – Chose not to charge the company for my time for January to June. Because obvious the negotiations were in good faith I thought it was fair that I should charge. ASX – Was that put in the most recent returns to the ASX? NK – No. Most recent returns have not yet been lodged. 159 In his affidavit in the proceedings Mr Gould said - "34. The reason why I accepted the proof of debt of Kamadhenu was that I understood that Mr Kirwan would be deferring claiming the debt in any event and that he had been a director of Cresvale Securities and I believed was entitled to be remunerated for the work he had performed, even on a quantum meruit basis, as Cresvale Securities had continued to operate and I was satisfied that he had continued to manage the business and had continued to work and that the level of remuneration claimed was a reasonable market rate in the securities industry." He was not materially questioned about this in his oral evidence. 160 Scanty though the evidence is, there was a basis for the claim. Austin J found on no greater evidence that the service companies of Mr Kirwan and Mr Macpherson had agreed with Capital to provide their services to it. There is no doubt about an entitlement, the only doubt could have been as to amount, and Mr Gould's stated satisfaction as to the amount was not questioned in cross-examination. Mr Gould was not cross-examined to suggest that the recent emergence of the claim in Securities' financial information and financial statements should have caused him to scrutinise the claim more carefully, or that his scrutiny was otherwise inadequate. Nor was it put to him that the admission of the proof of debt in the circumstances was because of bias in favour of Mr Kirwan. It is true that the deferral of Kamadhenu's claim should not bear upon admitting it to proof. But that incorrect view was not put to Mr Gould as occasioned by bias, and was not a sufficient basis for finding bias. 161 The fifth matter was - 93 Fifthly, in various ways Mr Gould criticised Mr Hedge's administration of Capital. He was particularly critical of Mr Hedge's fees and delay. I shall return to this criticism, but I should say at once that in my view there is no substance to it." 162 Mr Gould was indeed critical of Mr Hedge's administration of Capital. The report of 14 July 2000 and the minutes of the meeting record his criticisms, and his evidence repeated them. 163 In his affidavit Mr Gould said - "22. After my investigations, I formed the view that Mr Hedge's decision not to complete the share sale agreement with Mr Kirwan and MacPherson and their private companies Kamadhenu Management and Jackred Pty Limited, and instead to continue to investigate the Virotec transaction (which I believed would only add to the cost of the liquidation of Cresvale Capital which was already approximately$400,000), at the same time as taking no steps in relation to Cresvale Securities allowing its value to deteriorate, was not in the best interests of either Cresvale Securities, Cresvale Capital, their creditors or employees. My view in this regard is set out in the report to creditors. I also formed the view that Mr Hedge's inaction was so great that potentially a case of negligent administration could have been made out. I telephoned Mr Hedge on 30 June 2000 and told this to him." 164 At a later point in his affidavit Mr Gould said, as item (g) in his reasons for exercising his casting vote in favour of the approval of the DCA - "(g) I do not believe that Mr Hedge had ' clean hands ' because I regarded him as having a conflict of interest. I regarded Mr Hedge's refusal to allow the conditional share sale agreement to Kirwan and others to be concluded as not being in the best interests of Cresvale Securities and its creditors and employees and that Mr Hedge's inaction, in having investigated Cresvale Capital's affairs for approximately 7 months and incurring costs of approximately AUD400,000 without improving the position of creditors, had allowed Cresvale Securities' position to deteriorate further;" In cross-examination Mr Gould was asked about his basis for referring to the incurring of costs of approximately $400,000, without it being suggested that he was in error: I refer to this a little later. It was put to him in effect that Mr Hedge was justified in first deferring investigation of a possible preference claim from the September 1999 transfer of assets, and then taking more interest in that claim when the Virotec shares increased in value, and he agreed that it could be a reasonable course, but he did not agree that he had been unfair to Mr Hedge in suggesting detrimental inaction. His response was that the question of a preference had been "on the table" since October 1999, that it was not a complicated matter, and that the postulated justification was never provided but Mr Hedge continued in negotiations for the sale of the shares after late January 2000 whereby there was extended uncertainty and "a perfectly viable business was being destroyed by inactivity". He was briefly asked about conflict of interest, and I refer to this also a little later. 165 When he returned to the criticism of Mr Hedge's fees and delay, in dealing with the exercises of the casting votes, Austin J said - "149 I reject Mr Gould's criticisms of Mr Hedge. I have set out the evidence concerning these criticisms at some length. It was appropriate for Mr Hedge to require that the sale of shares deed of December 1999 be made conditional on the US receiver not objecting to the transaction, because the Stock Exchange's liquid capital requirements had made it urgent to enter into the transaction before the US receiver's attitude was known. At that time, Mr Hedge evidently believed that the sale was in the best interests of all concerned, and no doubt would have been confident that the condition would be readily satisfied. He changed his attitude to the desirability of sale when the escalation in the market price of Virotec shares made it worthwhile to pursue further investigations. 150 It appears that nothing concrete has emerged from those investigations, but it is unfair to Mr Hedge for Mr Gould to accuse him of inaction for seven months. During part of the period from December 1999 to June 2000 Mr Hedge was pursuing the sale strategy in the belief that there was no point in further investigating the transfer of assets (including the Virotec shares) from Capital to Securities, and when the sale did not proceed he did make some investigations, which included review of Securities' records over a three-week period. 151 Mr Gould appears to have formed the view that costs of $400,000 had already been incurred by Mr Hedge in the administration of Capital, but the evidence before me indicates that the figures upon which Mr Gould relied for that conclusion include some projections for future costs. These projections encompass future proceedings to challenge the transactions of September 1999. 152 The fact that Mr Hedge was joint liquidator of Capital did not give him any 'conflict of interest' or a lack of 'clean hands' with respect to Securities. Given that Securities was a wholly-owned subsidiary of Capital and part of the Princeton group, it was rational for Far East to seek the appointment of a single Australian insolvency firm for the external administration of both companies. It is true that Securities had separate creditors, including the interests of Mr Kirwan, and no doubt the decisions of Mr Hedge (if he were appointed administrator of Securities) would have been influenced by other creditors of the group and the US receiver. But the law does not require the administrator of a wholly-owned subsidiary to disregard its position in the group and consider only the interests of its separate creditors. And there is nothing in the evidence to support the allegations that Mr Hedge acted or would act solely on the direction of the US receiver without any independent consideration of his responsibilities." 166 The principal factor was Mr Gould's criticism of delay on the part of Mr Hedge. The key to Austin J's view in this respect is that the change from willingness to sell the shares in Capital to reticence and deferral of action (I avoid the word delay) was explained by the increase in the market price of Virtoec shares and the consequential need for further investigation of the possible preference claim. 167 It is a strong finding that there is "no substance" in Mr Gould's criticism, as a ground for Mr Gould being unfairly prejudiced against Mr Hedge. Unfair prejudice may be expected to turn on whether Mr Gould's critical attitude was reasonably open to him, and to require satisfaction on the evidence that it was not. 168 With due respect to the different view taken by Austin J, I am not satisfied that Mr Gould's critical attitude was not reasonably open to him. The preference transaction itself, if there was one, does not appear to have required lengthy investigation. The September 1999 transfer of assets was known, the liquidators knew all there was to be known of Capital's financial position, and there were common directors. The liquidators could readily have determined whether there was a good case for a preference. If the investigation was really of Mr Kirwan's October 1999 acquisition of the Virotec shares, with a view to using Capital's shareholding in Securities to cause Securities to proceed against Mr Kirwan, that was left for inference rather than brought out directly. There was no evidence of Mr Hedge doing anything in that regard, there was slender evidence at best of what he wanted or intended to do, and the need for lengthy investigation was by no means self-evident. 169 Mr Gould thought that Mr Hedge's inaction had been to the point of negligent administration, and he did not mince words – he told Mr Hedge so. When there was such slender evidence supportive of Mr Hedge's course of action or inaction, why should a highly experienced opinion of Mr Gould be taken for nothing? And, although the proceedings were not the occasion for proof or disproof of either a preference claim or a breach of duty or statute by Mr Kirwan, it is of note that Austin J found that "nothing concrete has emerged from [the] investigations", whatever they might have been, and that the known facts did not even give rise to a prima facie case of breach of duty or statute. 170 The other factors were that Mr Gould's figure of $400,000 for costs in the administration of Capital included some projections for future costs, and that Mr Gould was incorrect in regarding Mr Hedge as having a conflict of interest. 171 As to the administration costs, Mr Gould referred to "incurring costs of approximately AUD400,000" in the seven month period. His basis was figures in the liquidators' report to creditors dated 15 June 2000. They relevantly showed payments to 15 June 2000 and "expected future movement". The payments to 15 June 2000 included $98,386 for dividend to administrator and $nil for liquidators' fees, legal fees and liquidators' disbursements. The expected future movement showed $nil for dividend to administrator and $200,000 for liquidators' fees, and $100,000 for legal fees and $10,000 for liquidators' disbursements. Mr Gould apparently regarded the items for expected future movement as incurred. To some extent they must have been, for example significant liquidators' fees; there was no exploration of what of the items had been incurred and what was for the future. Mr Gould was not asked anything about error in treating all the amounts as incurred. The matter was not taken further with Mr Gould. 172 Austin J's view as to administration costs seems to depend on his inference that $100,000 was for the costs of pursuing the preference claim against Securities and Mr Kirwan (see para [76] above). I have described the inference as rather speculative. This is too fragile a basis for inferring unfair prejudice against Mr Hedge, especially when he was not given the opportunity of responding to the suggested inference. 173 As to conflict of interest, in his oral evidence Mr Gould described the conflict as he understood it as "taking his instructions from the United States receiver and not having regard to the interests of the Australian creditors"; he also explained the conflict of interest to which he was referring in his affidavit as a conflict because of Mr Hedge's maladministration and excessive fees (in Mr Gould's view) in Capital's liquidation. In short, Mr Gould said that he did not think Mr Hedge was in a position fully to pursue the interests of creditors. It was not suggested to him that he was incorrect in his opinion of Mr Hedge's position of conflict, or unreasonable in holding it, let alone that he did not genuinely hold it even if mistakenly. (Indeed, although this was not raised it would have been impossible for Mr Hedge to have been administrator of Securities while as a liquidator of Capital pursuing a preference claim against Securities). Austin J appears to have based his view of Mr Gould being unfairly prejudiced against Mr Hedge in part on a critical attitude which Mr Gould did not have and in part on a critical attitude which was neither shown to have been unsound nor challenged in Mr Gould's evidence as indicative of unfair prejudice. 174 The sixth matter was - "94 Sixthly, the financial analysis presented in the Report is unsatisfactory in various ways. I have referred already to inconsistencies between the table as at 26 June 2000 and the table as at 13 July 2000, and some unsatisfactory features of the accounting treatment of claims by Newland and Kamadhenu Management. The figures seem to be directed to establishing the insolvency of Securities." 175 It appears that the "various ways" were the inconsistencies and unsatisfactory features then mentioned, plus the observation that the figures seem to be directed to establishing the insolvency of Securities. The previous reference to the inconsistencies and unsatisfactory features was in paragraphs 74 to 77 part of the passage from his Honour's judgment set out in para [94] above. For convenience, I repeat them - "74 The Report set out summary balance sheets for Securities as at 26 June and 13 July 2000. The former was stated to be a summary of Mr Gould's understanding of Securities' financial position as at the date of his appointment as administrator, based on his preliminary investigations and the directors' disclosures. The latter was intended to be an estimate by Mr Gould of the financial position of Securities immediately prior to entry into the proposed DCA. It assumed, for example, that some of the receivables had been collected and some of the liabilities to employees and trade creditors had been discharged. 75 The two balance sheets are inconsistent in some ways:· the first gives separate figures for cash on general account and on trust account, while the second gives a figure only for 'cash', which is more than the figure for cash on general account, but less than the sum of the figures for cash on general and trust accounts in the earlier balance sheet;· the first balance sheet shows as an asset 'Cash-ASX Fidelity Account' but this item does not appear at all in the second balance sheet;· the first balance sheet shows the loan to Capital (quantified at $135,689) as a receivable but that asset has a nil value in the second balance sheet. 76 In both balance sheets the claim by Kamadhenu Management for $120,000 for providing the services of Mr Kirwan is described as an account payable and is retained at its full amount, and the claim by Newland under the underwriting agreement for $1,576,277 is described as a 'contingent liability', but corresponding claims by Securities against sub-underwriters are not noted as assets in either balance sheet. 77 The balance sheet as at 26 June 2000 shows net liabilities based on valuation at $1,402,257, and shows net liabilities on the basis of estimated realisable values as $2,018,209. The balance sheet as at 13 July 2000 shows these two figures as having increased to $1,527,817 and $2,179,722 respectively. This enabled Mr Gould to conclude in the Report that Securities is 'clearly insolvent'." 176 The different figures for cash in the two balance sheets are correctly noted, as is the different item for the ASX Fidelity Account. Mr Gould was asked some questions about them, although with a degree of confusion in the questions as well as the answers. Investigation of the differences trailed off when Austin J asked whether it was necessary to pursue it. I have some difficulty in the differences being called inconsistencies, and regarded as unsatisfactory, when the cross-examination was abandoned before it had emerged from its own confusion. In any event, as unsatisfactory features I do not think they would point to bias in favour of Mr Kirwan or unfair prejudice towards Mr Hedge. 177 As I have earlier indicated (para [95] above), the loan to Capital was shown as of nil realisable value in both balance sheets. Mr Gould was asked why he gave it a nil value, and he said that Mr Hedge had not responded to his letters and that he thought it possible that Capital's assets would be exhausted by fees so there would be no recovery. It was pointed out to him that the liquidators' report of 15 June 2000 showed available assets of about $900,000 and creditors such that there would be a dividend of about 15 cents in the dollar. Mr Gould was pessimistic about further fees eroding the recovery, and said that he thought a nil value was a fair and reasonable assessment, although conservative, "because of the uncertainties". This cross-examination, rather than inconsistency between the balance sheets, could be thought to have suggested in Mr Gould an unfair attitude to Mr Hedge and a skewed approach to his own administration, although it was scarcely followed through in those respects. 178 I am not sure what Austin J meant by unsatisfactory features of the accounting treatment of claims by Newland and Kamadhenu. The reference must have been to his Honour's para 76. If Kamadhenu's proof of debt was correctly admitted, the accounting treatment was correct. What was meant by treating the Newland claim as a contingent liability was made sufficiently clear. Perhaps his Honour did not so much mean the accounting treatment as the assessment of the Kamadhenu and Newland claims. The assets did not include claims by Securities against sub-underwriters. In his oral evidence Mr Gould agreed that passing on Securities' liability to sub-underwriters was "quite possible", but in effect said that in the time available he could not go into recovery over against them. He was not asked anything about the accounting treatment of the possible asset. 179 On both sets of net assets and net liabilities figures Securities was insolvent on a balance sheet basis. On Austin J's findings, it was insolvent. I cannot see that the financial analysis in the report was unsatisfactory because demonstrating that fact, or that demonstrating the fact showed bias in favour of Mr Kirwan or unfair prejudice to Mr Hedge. 180 The final matter was - "95 Finally, there are criticisms of Mr Gould's rejection of the proof of debt lodged by the liquidators of Capital, which was based on the alleged unfair preferences in transactions on 16 September 1999, and also some strong criticisms of Mr Gould's exercise of his casting votes at the first and second meetings of creditors. These are substantial matters which will be explored later. I accept those criticisms, for reasons I shall give." 181 I will deal with the criticisms a little later in these reasons. As will appear, I do not share Austin J's acceptance of the criticisms. 182 It is, of course, necessary to take all these matters together. Even on a cumulative basis, I am unable to come to the same conclusion as Austin J, that they created an impression of strong bias in favour of Mr Kirwan and unfair prejudice against Mr Hedge, and particularly in the light of the cross-examination of Mr Gould I do not think that his Honour's adverse opinion was warranted. 183 I go then to the issues (a), (b) and (c) earlier identified. (a) Exercise of casting votes 184 Under regulation 5.6.21 of the Corporations Regulations a resolution is carried if a majority of creditors in number and value vote in favour of it and is not carried if a majority of creditors in number and value vote against it. In other circumstances, the person presiding at the meeting has a casting vote in favour of or against the resolution. Such a circumstance arose at the two meetings, with a majority of creditors in number voting one way and the majority creditor in value voting the other way. 185 Austin J's conclusions on the exercise of the casting vote at the meeting of 30 June 2000 began - "146 By exercising his casting vote against the First and Second Resolutions, Mr Gould kept himself in office as administrator notwithstanding that the largest creditor by far had twice attempted to remove him. It is not easy to think of circumstances in which it would ever be appropriate for an administrator to take such a step. In my view it was clearly inappropriate for Mr Gould to do so in this case." 186 More specific matters followed, to which I will go in turn. It should be said at the outset that in the appeal counsel for Far East did not seek to support his Honour's conclusion as to the exercise of the casting vote on the removal of Mr Gould and his replacement by Mr Hedge, saying that there was no reason to criticise Mr Gould's decision "and his reasoning process was one absolutely available to him". 187 His Honour said that if Mr Kirwan had formulated the proposed DCA at the time of the meeting and if Mr Gould "knew the plan", Mr Gould's knowledge of the proposed DCA would not be a justification for his voting to keep himself in office. But his Honour also said that he could not find either that Mr Kirwan had formulated the DCA at the time of the meeting or that Mr Gould had any knowledge of it. Nor had Mr Gould put forward any such justification for voting as he did. This was tilting at a non-existent windmill. It also makes difficult to understand his Honour's remark (see para [15] above) that it would have been improper for Mr Gould to exercise his casting vote "to keep himself in office so that he could fully formulate and advocate the proposal". There was no basis for finding, if his Honour was intending so to find, that Mr Gould exercised his casting votes for that purpose, and the remark was inappropriate. 188 His Honour then referred to what he regarded as the reasons given by Mr Gould for exercising his casting votes against the two resolutions. One was Mr Gould's opinion that Mr Hedge had a conflict of interest, for which his Honour noted part of the item (g) in his affidavit earlier mentioned. The others were the guidance Mr Gould thought he found in a text, Hanrahan, Ramsay and Stapledon, Commercial Applications of Company Law, and in part 5.3A of the Corporations Law, for which his Honour noted items (h) and (i) in the affidavit. 189 Mr Gould said in the affidavit that - "I exercised my casting vote in favour of the Deed Resolution (as that term is defined in the statement of claim), as I had in relation to the First Resolution and Second Resolution (as those terms are defined in the statement of claim), for the following reasons … ". He then listed items (a) to (i). Most of the reasons related to the benefits he saw in approval of the DCA. Item (g) has already been set out, and I set out items (h) and (i) below. 190 It must be remembered that in what he said in his affidavit Mr Gould was focussing on the vote in favour of approving the DCA. Where he said "as I had in relation to the First Resolution and Second Resolution", he can not have meant that all the reasons applied to the exercises of his casting votes at the meeting of 30 June 2000. Where he said "as I had in relation to the First Resolution and Second Resolution" he seems to have been noting the fact of his earlier casting votes, rather than giving the reasons for the exercise of the earlier casting votes. 191 That does not mean that the item (g), (h) and (i) reasons are not to be taken into account when addressing the exercise of the casting votes at the meeting of 30 June 2000. But the reasons are not automatically transposed to the two removal resolutions. 192 I have earlier considered what Austin J said about Mr Gould's item (g) reason. In my view, it has not been shown that it was not reasonably open to Mr Gould to hold the opinion that Mr Hedge had been unduly inactive to the detriment of Securities and was in a position of conflict. 193 In connection with the item (g) reason Austin J added that in his oral evidence Mr Gould had said that Mr Hedge and Mr McGrath referred work to one another, they being partners in large accounting firms. His Honour commented that "there is no basis for contending that any objection to Mr Hedge could be extended to Mr McGrath because of their relationship". Mr Gould did not say that it could, or that it had. Nothing of that kind appears in the records of the meeting. In his evidence in the proceedings Mr Gould said, after reference to Mr Hedge's conflict of interest, that the situation would clearly be different for "Mr McGrath's candidacy". He remarked that he did not know the relationship between Mr Hedge and Mr McGrath, "I guess they swapped jobs", and in response to a specific question that he believed that they often swapped jobs. He was asked "That was a factor in casting your vote on the second resolution?", and answered "No". 194 As the item (h) reason Mr Gould said - "(h) I had previously had cause to review page 440 from the text book Commercial Applications of Company Law by Hanrahan, Ramsay and Stapledon, which set out to me quite clearly what those learned commentators regarded as being an appropriate situation for an administrator to exercise his casting vote contrary to the express wishes of the majority creditor (in value). I regarded the situation facing me in relation to the Deed Resolution as being such a case and this assisted me in forming the view that I should exercise my casting vote in favour of the Deed Resolution." This was specifically referable to the vote in favour of approving the DCA. 195 The relevant passage in the text read - "The way creditors make their choice is by voting. In practice, voting is usually by poll. On a poll, the creditors' resolution is passed if a majority in number and value of those present and voting vote in favour of the resolution. Where a majority of creditors in number vote one way and a majority of the value of total creditors' claims votes the other way, the administrator has the casting (deciding) vote. An example of when this may occur is where: ? there are many unsecured creditors at the meeting (many of whom are employees), and they all vote in favour of a deed of company arrangement believing it will improve their chances of keeping their jobs; ? but the total value of their claims is less than the claim of a secured creditor (a bank), and the bank votes against the execution of a deed of company arrangement.'" 196 Austin J said that what Mr Gould said seemed to be based on a misreading of the text, since he treated the learned authors as saying that, in the circumstances to which they referred, trade creditors and employees should be preferred to the bank, whereas in fact the authors expressed no opinion. 197 Mr Gould agreed in cross-examination that the learned authors did not suggest which way the casting vote should be exercised. He nonetheless saw it as describing a situation where it might be legitimate for the administrator to vote in favour of the deed of company arrangement, and as an indication of the sort of extraordinary situation where it was appropriate to exercise his vote in the way he did. The cross-examiner did not pursue Mr Gould's thinking. 198 It should not be assumed that Mr Gould was irrational in finding guidance in the text. The most likely guidance he found was that the learned authors regarded a vote either way as open, and that the example indicated that a vote aligned with that of the major creditor was not inevitable. I do not think that Mr Gould meant that the text indicated to him in which way he should exercise his casting vote. He meant only that it indicated that he could properly exercise his casting vote against the wishes of the major creditor. This could be transposed to the vote against the two removal resolutions. 199 As the item (i) reason Mr Gould said - "(i) I consider that my action in exercising my casting vote in favour of the Deed Resolution was in accordance with the express intention of part 5.3A of the Corporations Law, as outlined in section 435A, as being to maximise the chances of Cresvale Securities continuing in existence and to ensure, so far as possible a better return for Cresvale Securities' creditors than would result from the winding up of Cresvale Securities." 200 This was specifically referable to the vote in favour of approving the DCA It is plain that Mr Gould did not mean that he was influenced in the exercises of his casting votes at the meeting of 30 June 2000 by what he found in 5.3A of the Corporations Law. 201 In my opinion, the grounds given by Austin J for his conclusion that it was clearly inappropriate for Mr Gould to have exercised his casting votes as he did at the meeting of 30 June 2000 did not warrant that conclusion. Beyond the matter of conflict of interest there was little exploration in the evidence of Mr Gould's exercise of his casting votes at the meeting of 30 June 2000, as distinct from his exercise of his casting vote at the meeting of 21 July 2000. Whether Mr Gould acted correctly may be debated. It may be unusual for an administrator to remain in office contrary to the wishes of the significantly major creditor. But it can be so (see Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544), and it must depend on the circumstances. The administrator has responsibilities to the minor creditors as well as to the major creditor, and would not act correctly in complying with the wishes of the major creditor simply because it was the major creditor. Whatever the answer in the debate, however, acting improperly is another matter. 202 The circumstances included Mr Gould's critical attitude towards Mr Hedge's conduct of the liquidation of Capital, and I do not think he acted improperly in exercising his casting vote so that the administration did not pass to Messrs Hall and Hedge. The stance of counsel for Far East in that respect has already been noted. Exercise of his casting vote so that the administration did not pass to Mr McGrath is more questionable, because Mr McGrath was not open to the same attitude. From the minutes of the meeting, it seems that Mr Gould was influenced by his view of Far East's clean hands. It is not easy to see that this was relevant, but it is also not easy to be sure of the relevance he saw in the absence of exploration in the evidence. Apart from that, however, the competence of Mr Gould was not questioned and the question was one of size of the administrator's establishment. The minority creditors wished to avoid the cost structure of a major firm. There was that positive reason for Mr Gould to remain as administrator, and I do not think that it was shown that as an exercise by Mr Gould of his voting entitlement it was improper in a pejorative sense. 203 Austin J's consideration of the exercise of the casting vote at the meeting of 21 July 2000 was more extensive. It went in three steps. First, his Honour identified "considerations which should have caused Mr Gould to vote the other way at the second meeting", and said that in view of the matters identified it was improper for Mr Gould to exercise his casting vote in favour of the DCA "unless there were very strong reasons for doing so" and that he did not regard the reasons advanced by Mr Gould as "strong enough to justify his extraordinary action". Secondly, his Honour considered, as what he described as "a crucially important aspect of the matter", Mr Gould's view of the Virotec transaction, concluding that without further inquiry into that transaction Mr Gould was not in a position to prefer the DCA to liquidation and was therefore not in a position to exercise his casting vote in favour of the DCA. Thirdly, his Honour considered the reasons given by Mr Gould for exercising his casting vote, and found them wanting. As I understand his Honour's reasons, his Honour regarded the Virotec matter as of itself sufficient for the conclusion that Mr Gould acted improperly in exercising his casting vote as he did. 204 Austin J began the first step by accepting that the only real alternatives for the creditors at the meeting of 21 July 2000 were the proposed DCA or liquidation (see para 112 above). He said that Mr Gould's task was to weigh up the relative advantages and disadvantages of those two alternatives. His Honour then said - "121 The proposal before the second meeting favoured the interests of the employees and trade creditors and prejudiced the interests of Far East, Capital and Newland, in ways that I have explained. When Mr Gould had regard to the interests of the various groups of creditors (as he was required to do), his analysis should have directed him towards voting against the proposed DCA. 122 It was also relevant for him to consider how the interests of the directors would be affected by the exercise of the casting vote. Mr Kirwan had embarked upon a campaign to acquire a controlling interest in Securities, but had been thwarted by the objection of the US receiver and subsequent non-completion of the sale of shares deed. The effect of adoption and implementation of the proposed DCA would be to wrest control of Securities from Capital against the wishes of its liquidators, delivering to Mr Kirwan through Part 5.3A the outcome he could not achieve by negotiation. 123 Mr Gould was aware of all of these matters. In those circumstances it was improper, in my view, for him to exercise his casting vote so as to cause the Third Resolution to be passed, unless there were very strong reasons for doing so. I do not regard the reasons advanced by Mr Gould as strong enough to justify his extraordinary action." 205 The impropriety, in his Honour's view, lay in greater prejudice to Far East, Capital and Newland as creditors than to the employees and trade creditors, and in the wresting of control of Securities from Capital. 206 As to the balance between creditors, Mr Gould's view of the status of Capital and Newland was not as favourable as that taken by his Honour. Putting aside any question of issue of shares, the DCA would be better for creditors than liquidation, although (as I have indicated) in a discriminatory manner – better for some creditors. Still putting aside any question of issue of shares, it can readily enough be seen as not irrational, still less improper, that in weighing up the relative advantages and disadvantages Mr Gould took the view that he should exercise his casting vote in favour of the proposed DCA. The key, then, is the issue of shares. The DCA would give control of Securities to Mr Kirwan. 207 It was put to Mr Gould that parts of his report of 14 July 2000 were "an advocate of Mr Kirwan's position in his dispute with Mr Hedge", which he denied, and - "Q. And that you have allowed yourself to, in effect, become an advocate supporting his position and lending your authority to stringent criticism which Mr Kirwan was making because Mr Hedge was frustrating him in carrying out his business plan? A. No." 208 This was the furthest the cross-examination went towards complicity in wresting control of Securities from Capital. It may be sufficient to permit criticism of Mr Gould for failing to take into account, when considering the exercise of his casting vote, that implementation of the DCA would involve misuse of the directors' power to issue shares. The criticism must be tempered, however, by the availability of a contrary view eloquently demonstrated by the reasons of Young CJ in Eq in the present case, which I have had the advantage of reading in draft. Whether or not he acted incorrectly, on which minds can (and do) differ, it can not be said that Mr Gould acted improperly in voting as he did because control of Securities would be given to Mr Kirwan. 209 Going to Austin J's second step, his Honour's consideration of the Virotec transaction began with the following analysis. If the DCA were approved and implemented, it was very unlikely that Mr Kirwan's acquisition of the Virotec shares would be challenged. The Virotec transaction may have given Mr Kirwan a potential or actual profit of several million dollars. If a liquidator were appointed to Securities, and after investigation the liquidator successfully took proceedings against Mr Kirwan and recovered this profit, then Far East, Capital and Newland would be better off than under the DCA because recovery from Mr Kirwan would probably permit the liquidator to satisfy their claims in full. On the other hand, if the liquidator failed to recover from Mr Kirwan, then trade creditors, Far East, Capital and Newland would be worse off than under the DCA. 210 His Honour continued - "130 Mr Gould made an assessment that there was no realistic likelihood that an investigation would reveal any claims with good prospects of success. He therefore concluded, logically enough, that the DCA was a far better option than liquidation. He exercised his casting vote in accordance with his assessment. The critical question is whether his assessment was sound, and that in turn depends upon whether he had sufficient information. 131 It appears from his evidence that his mind was focused upon whether the transaction was voidable as an unfair preference under ss 588FA and 588FF. He says he concluded after investigation that the sale was likely to have been bona fide and for market value, although he did not obtain legal advice. He based this conclusion on the fact that Securities had a bona fide need to sell shares to satisfy the Exchange's liquid capital requirements, and that the shares were sold on the market, not all of them to Mr Kirwan. He also concluded that Securities was solvent at the time of the transaction, and was not rendered insolvent by it. 132 If the last proposition is correct, the transaction could not be an insolvent transaction (s 588FC) and therefore would not be voidable as an unfair preference under s 588FF. But Mr Gould's analysis seems to overlook the possibility that Mr Kirwan might be held accountable in other ways - for example, for breach of his fiduciary duty by wrongfully exploiting a corporate opportunity or preferring his self-interest to his duty to Securities, or for obtaining a financial benefit contrary to what is now Part 2E, or even for insider trading. The fact that the company had a need to dispose of its asset did not necessarily make it permissible for a director to acquire the asset, even for market value. The fact that the sale was for a large volume of Virotec shares in a relatively illiquid market should have raised doubt as to whether the company obtained full value in an arms' length, anonymous market, for the purposes of the general law of fiduciary duties and also the application of Part 2E or its predecessor." 211 After referring to some other matters, his Honour said - "136 In my opinion, the facts known to Mr Gould, as administrator, about the Virotec transaction put him on inquiry. He knew that Mr Kirwan was at all relevant times a director of Securities, well aware of the need for Securities to sell the Virotec shares, and of its decision to do so. He must have known that the market in Virotec shares in October 1999 was relatively illiquid, so that Mr Kirwan was in a good position to acquire a substantial quantity of shares without unduly raising the market price. He must also have known that the market price of Virotec shares escalated enormously some three months after Mr Kirwan's acquisition. He knew that Mr Kirwan became a director of Virotec and had previously been in contact with that company in his position as a director of a substantial shareholder (first Capital and then Securities). These facts would suggest to a reasonable person the real possibility, worthy of further inquiry, that Mr Kirwan may have breached his fiduciary duties or his statutory duties in respect of related party transactions and insider trading (cf Hamilton v National Australia Bank Ltd (1996) 19 ACSR 647). 137 Given the size of the transaction and therefore the potential recovery to Securities, Mr Gould should have made at least some further inquiries into the circumstances surrounding it. In particular, he should have inquired into the relationship of Mr Kirwan to Virotec at the time of the transaction and subsequently, and Mr Kirwan's state of knowledge about matters material to the price or value of shares in Virotec. In light of those further inquiries, he should have obtained his own legal advice as administrator. 138 In deciding whether an administrator's investigation is sufficient, the Court must take into account the circumstances in which such an investigation is to be undertaken. As Heerey J observed in Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498, 510, the investigation intended by Part 5.3A is to be a swift and practical one. For example, it is often not practicable for the administrator to use the powers of compulsory examination in the Corporations Law, given the limited time available for the administration. As I said in Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453, 481, the balance between speed and accuracy of investigation is a delicate one, and the distinction between an adequate preliminary investigation which concludes that there are grounds for suspecting wrongdoing but goes no further, and inadequate investigation which fails to assemble available information with respect to wrongdoing, is a matter of degree. In my opinion, by failing to make any significant inquiries or obtain his own legal advice on such a major issue as the Virotec transaction, Mr Gould fell far short of making an adequate preliminary investigation. 139 I do not suggest that the known facts establish any breach of duty or statute by Mr Kirwan, or even that they give rise to a prima facie case of breach. The submissions by the defendants, concentrating on the absence of evidence of wrongdoing, rather missed the point. The point is that a reasonable administrator in the shoes of Mr Gould would have been sufficiently suspicious, in view of the known circumstances, that he would have made further inquiries and obtained legal advice, notwithstanding the exigencies of the administration process. In the absence of these steps, and knowing the effect of the DCA on further investigation of the Virotec transaction, Mr Gould was not in a position to prefer the DCA to liquidation. He was therefore not in a position to exercise his casting vote in favour of the DCA." 212 There are, it seems to me, some difficulties in this reasoning. In essence, it is said that Mr Gould acted improperly in failing to make an adequate preliminary investigation into any breach of duty or statute by Mr Kirwan, even though the facts known at the time of the proceedings did not even give rise to a prima facie case of breach of duty or statute. Why, in those circumstances, is Mr Gould's view to be taken as the fortuitously correct outcome of an inadequate preliminary investigation, rather than a correct forecast from a sufficient preliminary investigation? As his Honour said, the balance is a delicate one, and adequacy of preliminary investigation is a matter of degree. In the result, Mr Gould got the balance and the degree right. 213 Importantly, at no time in his cross-examination was it put to Mr Gould that he should have done more by way of preliminary investigation, that he had failed to consider breach of fiduciary or statutory duties as distinct from preference or that his investigation was inadequate to permit him to vote in favour of the DCA. There was confusion in the cross-examination between the September 1999 transfer of assets and Mr Kirwan's October 1999 acquisition of the Virotec shares. The cross-examination as to the Virotec transaction first invited Mr Gould to affirm that he thought no wrongdoing had come to light and that further investigation was unlikely to lead anywhere, probably referring to Mr Kirwan's acquisition of the Virotec shares. He did so. It then diverged to the September 1999 transfer of assets. It then slipped back to Mr Kirwan's acquisition of the Virotec shares, and Mr Gould was asked to explain his enquiries into whether that gave rise to "a preference claim" and why he "dismissed the idea, at least discounted the idea that a preference claim may be available". He did so. Some events were suggested, and the culmination, if that is a correct word, was - "Q. Just given the timing of those events that I have just suggested to you, assuming that they are correct, don't you think it is reasonable for Mr Hedge to want to consider whether Mr Kirwan might have had some knowledge of Virotec business at the time he purchased the shares which ought to have been disclosed to Cresvale Securities? A. In principle, yes but Mr Hedge himself, as I understand, was intimately involved in the sale of these shares. He was fully aware of what was being done. Q. Is it not Mr Hedge's responsibility to investigate the prospectively of the investments or that is Mr Kirwan's job? A. No, the insolvency issue at large of the parent company, whatever that benefit he asserts might by to the company, would be a concern, a real matter of concern for him. Q. You did not take any advice on that aspect either, did you? A. On? Q. On the question of whether it was reasonable to further investigate the probability of a claim of breach of duty by Mr Kirwan in relation to the October 1999 transaction? A. That is true. I mean the issue would have, I would have been aware of the issue but the evidence is what I saw of the Stock Exchange, how the whole transaction came together I was satisfied at that time. The prospects to sustain such an action were slim." 214 It is harsh, in those circumstances, to find that Mr Gould acted improperly in exercising his casting vote in favour of the proposed DCA because he was not in a position to prefer the DCA to liquidation. I do not think the finding should have been made. 215 Going to the third step, Austin J paraphrased the reasons (a) to (i) given by Mr Gould for his voting on the resolutions. Apart from the references to the text and Pt 5.3A of the Corporations Law, items (h) and (i) earlier mentioned, those presently material were - "(a) he considered that the Third Resolution represented the most favourable result for Securities, its creditors, members and employees; (b) the Third Resolution prevented the dealers securities licence, worth approximately $250,000, becoming worthless in a liquidation scenario; (c) the business would ultimately be returned to solvency and be able to continue to trade; (d) the employees of Securities would maintain their employment; (e) the resolution had the support of all creditors, other than Far East (this proposition excludes Newland and Capital); (f) the US receiver along with the liquidators of Capital and the liquidators of Far East appeared to want to have a liquidator investigate the affairs of Securities, but in the view of Mr Gould there were no realistic prospects of such an investigation revealing any claims with good prospects of success and which would result in any recovery for the benefit of creditors;" 216 Items (a) to (e) did favour approval of the DCA. The contrary was supported by the view of the other creditors and would-be creditors, particularly the prospects of recovery from wrongdoing in the Virotec transaction. His Honour said that items (a) to (f) of Mr Gould's reasons "cannot be sustained unless he was right that there was no real prospect of recovery in respect of the Virotec transaction", meaning as I understand it unless he had made sufficient preliminary investigations to justify the view that there was no real prospect of recovery. What I have last said therefore applies. 217 Obviously opinions can differ upon whether Mr Gould was correct in exercising his casting vote in favour of the proposed DCA. In my opinion, however, it was not shown that, as an exercise by Mr Gould of his voting entitlement, it was improper in a pejorative sense. (b) The report of 14 July 2000 218 Austin J set out the passage earlier noted as the passage found to have been false or misleading. For convenience, it is repeated – "Creditors will appreciate that it is possible for a liquidator to bring actions against directors that would not be available if creditors approve a Deed of Company Arrangement. In accordance with my responsibilities I have attempted to make appropriate inquiries into the financial affairs of the Company. I have not completed a full investigation of the kind that would be performed should the company be placed into liquidation. Creditors will appreciate that only a liquidator has the power to pursue certain transactions which took place prior to the date of liquidation. Any recovery may provide a return to unsecured creditors. In the matter of Cresvale, because of the ASX supervision it is highly unlikely that such offences could be proved. An independent liquidation of Cresvale may also have better prospects of bringing an action against the Liquidators of Cresvale Capital and Cresvale Far East for the losses suffered by their actions." 219 His Honour posed the question, "Whether this is a case of negligent or inadequate investigation; that is, whether the Report fails to meet a standard achievable within the limited time made available to an administrator". 220 His Honour answered the question - "165 I have held that the facts known to Mr Gould put him on inquiry as to whether there were grounds for taking proceedings against Mr Kirwan for breach of his fiduciary duties as a director of Securities, receiving a financial benefit from a related party transaction, and insider trading. I have found that this was an important matter to investigate, even allowing for the limited time and resources made available to an administrator. Mr Gould did not make an adequate investigation of these matters, or take proper legal advice. Indeed, it is doubtful that he even considered the possibility of proceedings on these grounds. 166 Supervision by the Stock Exchange has some relevance to the recovery of unfair preferences, because relief under s 588FF depends upon showing not only that there was an unfair preference under s 588FA, but also that the transaction was an insolvent transaction under s 588FC. Although the question of insolvency for the purposes of s 588FC is not identical with the Stock Exchange's concerns about capital adequacy and adequate liquid capital for stockbrokers, it is not unreasonable to assert (as the Report implies) that if the Exchange did its job properly, Securities was probably solvent while the Exchange permitted it to trade. But solvency is not a defence to an action against Mr Kirwan for breach of equitable or statutory duties. 167 The extracted passage conveys the ideas that: ? it is highly unlikely that a liquidator would be able to prove the ingredients of contraventions which could lead to recovery for the benefit of unsecured creditors; ? this is because the Stock Exchange supervised Securities; and ? these conclusions are supported by 'appropriate inquiries' made by Mr Gould. 168 The third proposition is untrue. Because of his lack of inquiries, Mr Gould did not have an adequate basis for expressing the first proposition. The second proposition is untrue except (arguably) if the claim relates to an unfair preference. That being so, there was no adequate basis for the first proposition. Consequently the extracted passage was, to this extent, false or misleading." 221 Paragraph 165 in this extract took up paras 136-139 in the judgment, in which I have set out in para [208] above. I have earlier noted, in a slightly different connection, some difficulties in the reasoning (para [209] above). There is some tension within the paragraphs. In para 136 it is effectively said that the (known) facts would suggest to a reasonable person the real possibility that Mr Kirwan may have breached his fiduciary or statutory duties. In para 139 it is effectively said that the known facts do not give rise to a prima facie case of breach by Mr Kirwan of his fiduciary or statutory duties. The distinction is a fine one. 222 However, in considering whether Mr Gould had made appropriate enquiries it is necessary to go in a little more detail into what Mr Gould did or did not do about the possibility of breach and why he did or did not do it. 223 In his affidavit Mr Gould said - "15. In the course of these investigations I reviewed the correspondence between the ASX and Cresvale Securities. Exhibited to me and marked "VRG 7" is a copy bundle of relevant documents in my possession relating to the sale by Cresvale Securities of its shares in Virotec International Ltd (CAN 004 801 398) (formerly Tin Australia N.L.) ("Virotec"). I reviewed and investigated this correspondence prior to compiling the report to creditors. I discussed the transaction with the directors, Messrs Neill Macpherson and Kirwan. The main background to this transaction which I set out below is not referred to by Mr Hedge in his affidavit sworn 11 September 2000. 16. By letter dated 30 September 1999 the ASX advised Cresvale Securities and [sic] the shares it owned in Virotec did not constitute a current asset for ASX's liquidity requirements due to the fact that in the ASX's opinion, it would be difficult to dispose of such a large parcel of shares at any one time on the market. 17. I formed the view that if Cresvale Securities had not converted its shares in Virotec into cash by sale on the market, Cresvale Securities would have breached the liquidity requirements of the ASX initially on 21 December 1999. 18. The effect of Cresvale Securites breaching its liquidity requirements would have been that it was suspended from trading by the ASX prior to the end of December 1999. 19. As a result of the ASX letter referred to in paragraph 16 above, Cresvale Securities sold the shares on the market on 22 October 1999, the majority of which were acquired by Kirwan as trustee for the GNPJK Family Trust. The ASX was aware of the transaction and did not raise an objection, provided the shares were sold through the market. 20. From my investigation into the circumstances surrounding this transaction I formed the view that the sale of the shares in Virotec to Kirwan as trustee for the GNPK Family Trust was likely bona fide and for market value. Factors supporting that view were as follows: (a) Cresvale Securities had a bona fide need to convert the shares into cash at that time; (b) the shares were sold on the market at the time and not all the shares were bought by Kirwan; (c) the liquidators of Cresvale Capital (then in administration) were informed of the transaction beforehand but took no action as sole shareholder to prevent the sale of the shares to Kirwan as trustee for the GNPK Family Trust and subsequently they did not seek to reverse the transaction but rather had conditionally agreed to sell Cresvale Capital's shares in Cresvale Securities to Kirwan and Macpherson; (d) I was told by Mr Kirwan that he had advice from Mr Higgs SC that the Virotec transaction was not a voidable transaction under division 2 part 5.7B of the Corporations Law as it did not involve any unfair dealing or voidable preference and that Mr Higgs SC had told this to the solicitor for the liquidators of Cresvale Capital, Mr Mainsbridge; (e) Kirwan had offered to Mr Hedge that he would obtain independent advice from a Senior Counsel concerning the transactions relating to the sale of the shares in Virotec but Mr Hedge had declined that proposal; (f) Cresvale Securities was solvent at the time, and not rendered insolvent by the transaction, and hence avoidance of the transaction as a voidable transaction under division 2 part 5.7B of the Corporations Law would have been difficult to make out." 224 As to this aspect of the report to creditors of 14 July 2000, Mr Gould said in the affidavit - "28. I considered that supervision of Cresvale Securities' affairs by the ASX was relevant to considering when it was likely that Cresvale Securities was first insolvent, if at all, prior to my appointment as the administrator of Cresvale Securities. This was because I was aware that the ASX required Cresvale Securities to provide daily liquidity updates, monthly management accounts (to be prepared and submitted by its auditors) and audited accounts on a quarterly basis. Accordingly, it was unlikely, in my view, that Cresvale Securities was insolvent, pursuant to the Corporations Law definition, prior to its securities dealers licence being suspended. This, in turn, impacted upon my view as to whether any action was available to any liquidator of Cresvale Securities in relation to recovering any voidable transactions under division 2 of part 5.7B of the Corporations Law and influenced my decision to recommend that the creditors vote in favour of the Deed Resolution (as that term is defined in the statement of claim) in lieu of liquidation. Further, I consider that the close supervision by the ASX would also have made it difficult for a director to engage in insolvent trading or any other inappropriate activities in relation to Cresvale Securities' funds." 225 I have earlier set out those parts of the minutes of the meeting of 21 July 2000 and Mr Hughes' record of the meeting dealing with the Virotec transaction (paras [106] and [107] above). The same views of Mr Gould are evident. I have also earlier identified the cross-examination of Mr Gould as to the Virotec transaction, and said that it did not take up with him that he should have done more to investigate the transaction (para 210) above). It only brought repetition of some of the reasons why Mr Gould concluded that Securities had no claim against Mr Kirwan, and the high point in the culmination of the cross-examination in this respect was - "Q. You did not take any advice on that aspect either, did you? A. On? Q. On the question of whether it was reasonable to further investigate the probability of a claim of breach of duty by Mr Kirwan in relation to the October 1999 transaction? A. That is true. I mean the issue would have, I would have been aware of the issue but the evidence is what I saw of the Stock Exchange, how the whole transaction came together I was satisfied at that time. The prospects to sustain such an action were slim." 226 The cross-examination or Mr Gould did not suggest in the slightest that the report was false or misleading in the manner found by Austin J. The allegations in the pleadings were particularised. The particulars were not that the passage in the report conveyed the three propositions and the propositions were untrue or without adequate basis. They may have sufficiently covered that by alleging, amongst other things, that the report wrongly represented that Mr Gould had reasonable grounds for expressing the opinions that recovery was highly unlikely and that due to ASX supervision it was highly unlikely that offences could be proved. But essential to his Honour's conclusion was that Mr Gould had not made appropriate enquiries, what were appropriate enquiries being judged in the circumstances of a swift and practical investigation and the express reference to incomplete investigations. 227 No doubt Mr Gould could have done more, although even in the proceedings a prima facie case of breach by Mr Kirwan of his fiduciary or statutory duties was not found. But I do not think that it was shown that the report to creditors was false or misleading in the manner found by Austin J. (c) The refusal to allow Capital and Newland to vote 228 Regulation 5.6.23(2) of the Corporations Regulations provides that a creditor must not vote in respect of an unliquidated debt or a contingent debt, an unliquidated claim or a contingent claim, or a debt the value of which is not established, unless "a just estimate of its value has been made". Regulation 5.6.26 of the Corporations Regulations gives the chairperson of a meeting of creditors the power to admit or reject a proof of debt for the purposes of voting. By regulation 5.6.26(2) - "If the Chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained." 229 In Vincent White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93 Hodgson CJ in Eq noted the difference between not voting because a just estimate of the value of an unquantified debt or claim has not been made, on the one hand, and not voting because of doubt whether a proof of debt or claim should be admitted or rejected, on the other hand. The two regulations address different matters, and admission or rejection of a proof of debt or claim comes before any question of making a just estimate of the value of an unquantified debt or claim once the proof of debt or claim has been admitted. 230 Why did Mr Gould refuse to allow Capital and Newland to vote? Three records of the meeting of 21 July 2000 were in evidence. 231 According to the minutes of the meeting - "Mr O'Farrell then asked the Chairman about the admissibility of the Newland debt. The Chairman said that Regulation 5.6.23 of the Corporations Law meant that Newland was not entitled to vote at this meeting. Mr O'Farrell stated that Regulation 5.6.26 stated if there was any doubt the debt should be admitted and the amount be noted as an objection. However, in this case he said the amount of the debt was clear and there was no objection to that. Mr Dubler stated with reference to Regulation 5.6.23 that the debt was clearly a contingent debt and it would not be appropriate to admit an unliquidated amount. The Chairman also ruled that the preference claim was not eligible to vote. Mr Hughes disputed this interpretation as a proper investigation had not been undertaken as the Chairman had relied on directors' advice and that the Chairman must undertake his own independent investigation and obtain his own independent legal advice to form the opinion he expressed. The Chairman disputed Mr Hughes' claims and stated that he had undertaken his own investigation and his investigation had satisfied him that his determination was in accordance with the law. Mr Hughes disputed this and stated that he believed the debt should be admitted and supported his claim by making reference to various cases and also Regulations 5.6.23 and 5.6.26. The Chairman reiterated his point by stating that an extended period of time had passed with no action being taken by the Liquidator in regard to this matter and to him this spoke volumes as to the validity of the claim." 232 According to Mr Hughes' record of the meeting - "Before the vote on the proposed deed of company arrangement was taken, Mr Gould made rulings on the claims to vote by the liquidator of Cresvale Capital in respect of the preference claim, and in relation to Newland Resources Ltd. In relation to both he held that Cresvale Capital and Newland Resources were not entitled to vote at the creditors' meeting. He said that it was impossible to make clear the value of the Newland Resource's claim. This was disputed by Mr O'Farrell who pointed out that the amount of the claim by Newland Resources was in fact set out in the report at 1.576,276.80. Mr Gould made the same ruling in relation to the preference claim of Cresvale Capital. He said that it was impossible to determine the value of the claim. Again he said the fact that it had been received at the last minute provided him with some reason or at least support that his decision not to admit it to proof." 233 According to Mr Mainsbridge's record of the meeting – " Question/Comment Answer/Discussion RB – Can you estimate the likely time of payment to employees by a liquidator? VG – Hard to say. Hope to say liquidator would pay promptly but would be a further delay. DOF – Is the Newlands' proof admitted and, if so, for how much? VG – Can't vote because a contingent debt. REM – Also seek ruling on CC claim. Discussion to the effect that rejection on the same basis. MH – Dispute both rulings because not undertaken proper investigation. Relied on directors' views and not made any attempts to make a just estimate. VG – Disagree. Have reviewed. VG – Is it ingenious [sic] that a claim has been lodged the day before and therefore do not admit to vote. REM – Don't accept that preference claim not admissible. Refer Dodlot. Discussion that preference claim has been on the table for several months as indicated by the directors. " 234 The three records indicate that - (i) Mr Gould refused to allow Capital to vote because he did not admit its proof of claim and in any event he considered that a just estimate of its claim could not be made; and (ii) Mr Gould refused to allow Newland to vote because he considered that a just estimate of its claim could not be made. 235 In his affidavit Mr Gould did not further explain the refusal to allow Newland to vote, but as to Capital said - "The reason why the proof of debt of Cresvale Capital was rejected by me was because I initially had not understood the basis of the claim. I had been originally informed by the proxy for Cresvale Capital, Mr Ray Mainsbridge, who attended the meeting that it had related to an unfair preference and when this was challenged, I was subsequently informed that it related to the transfer of certain furniture and shares. However, the consideration for that transfer had been paid by an appropriate reduction in Cresvale Capital's loan account and I did not believe that there was any amount owing at that time to Cresvale Capital. It has been acknowledged by the liquidators of Cresvale Capital that, in fact, Cresvale Capital is indebted to Cresvale Securities in the sum of $130,000 how [sic]." In the last sentence of this Mr Gould was referring to the letter from the liquidators to Securities dated 26 May 2000 earlier mentioned, responding to an audit verification request and stating that according to Capital's records it owed $135,689 to Securities as at 31 March 2000. 236 Mr Gould was not directly cross-examined as to his refusal to allow Capital and Newland to vote. He was cross-examined in relation to Capital having a preference claim against Securities, with the cross-examination rather confusingly involving a possible preference claim (using those or similar words) by Securities against Mr Kirwan. In summary, because the cross-examination was convoluted, while he accepted that in principle one could see the possibility of a preference claim, he said that he enquired into the September 1999 transaction and was satisfied that the prospect of a successful preference claim was "very slim", and referred apparently as supporting that view to what he described as Mr Hedge's "extraordinary inaction". There was put to him as to Newland the question maybe with voting in mind earlier noted (para [151] above), which was not taken further. 237 Austin J did not make express findings as to the reasons given at the meeting for the refusal to allow Capital and Newland to vote. His Honour proceeded on the basis that Mr Gould rejected the two proofs of claim. On that basis, the question was whether Mr Gould should have been in doubt whether the proofs of claim should have been admitted or rejected and should have allowed Capital and Newland to vote subject to the votes being declared invalid, see reg 5.6.26(2). 238 Austin J said as to that - "183 Mr Gould was presented with a proof of debt by Capital shortly before the day of the second meeting of creditors. In my view, there was room for doubt as to whether Capital's proof should have been rejected, because there was a measure of uncertainty as to whether Securities was solvent in September 1999. Mr Gould was entitled to take the view that Securities was probably solvent at that time, but he was not entitled on the evidence to rule out the possibility of insolvency. There should have been doubt in his mind on that subject. If the only evidence before Mr Gould was the evidence presented to me, there must also have been some doubt as to whether Securities was a creditor of Capital on 16 September 1999. 184 I have explained my view that Mr Gould acted in a way that was biased towards Mr Kirwan and against Mr Hedge. If his rejection of Capital's proof of debt was considered in isolation, it might be plausible to contend in his favour that there was insufficient real doubt about Capital's counterclaim to require him to proceed under reg 5.6.26 (2). But when his rejection of Capital's proof is considered in context, the conclusion which emerges is that his rejection of the proof was part of his biased conduct, rather than a genuine determination that there was no doubt that the claim should be rejected. He should have admitted Capital's proof under reg 5.6.26 (2), marking it as objected to and allowing Capital to vote. But his doing so would not have made any difference to the outcome, which was determined by the exercise of his own casting vote. 185 I reach the same conclusion with respect to Newland's proof of debt. However, it would be harder for Mr Gould to maintain the position that at the second creditors' meeting he was in no doubt that Newland's proof should be rejected. He treated Newland as having a contingent debt in his Report. He was well aware of the correspondence about Newland's claim, from which it emerged that Newland was entitled to recover the amount claimed unless Securities could show that there had been misrepresentations falling within the underwriting agreement and entitling it to terminate the agreement. While Newland's entitlement was not beyond doubt, the correspondence showed that Newland had a reasonably strong case. 186 I regard Mr Gould's failure to admit the proofs of Capital and Newland for the purposes of voting at the second creditors' meeting as improper conduct, to be taken into account in the exercise of my discretion to terminate the DCA under s 445D." 239 It may be that his Honour meant to refer to Capital's solvency in para 183. We were taken in the appeals to financial statements which it was said indicated that Capital was insolvent. Mr Gould was not taken to them, and he may or may not have had them at the time; other than general assertions of a September 1999 preference transaction, there was not put to him materials which it was said should have caused him to regard the possibility of a successful preference claim as more than very slim. If it was plausible to contend that there was insufficient real doubt about Capital's claim to require Mr Gould to proceed under regulation 5.6.26(2), and nothing more appeared, Mr Gould's rejection of Capital's proof of debt would at most be an error of judgment: it could not be categorised as improper conduct. 240 More did appear, supportive of Mr Gould's view. He referred to the advice of Mr Higgs SC, given in the presence of Mr Mainsbridge, Capital's solicitor. Mr Gould knew of the advice only from Mr Kirwan. But it was specifically referred to at the meeting of 21 July 2000. Mr Mainsbridge had no recollection. Mr Mainsbridge gave evidence. He said nothing about the advice from Mr Higgs. I do not see why Mr Gould could not pay regard to what Mr Kirwan told him of the advice, together with other matters, including that only on 20 July 2000 did Capital assert a preference transaction. 241 His Honour took the view that, when considered in context, it should be given the latter characterisation because "part of [Mr Gould's] biased conduct" and not a genuine determination that there was no doubt that the claim should be rejected. The conclusion of improper conduct therefore depended upon satisfaction that Mr Gould otherwise engaged in biased conduct, it seems meaning bias in favour of Mr Kirwan (or possibly bias against Mr Hedge as the personification of Capital). For the reasons I have given, his Honour's conclusion of strong bias in favour of Mr Kirwan and unfair prejudice towards Mr Hedge was not well founded. In my opinion, characterising Mr Gould's refusal to admit Capital's proof of claim as improper was not justified. 242 Mr Gould's alternative basis that a just estimate of Capital's claim could not be made is another matter. I will return to it. 243 Going to the Newland proof of claim, on none of the records of the meeting did Mr Gould reject it. The distinction between admission or rejection of a proof of debt or claim and the making of a just estimate of the value of an unquantified debt or claim does not emerge clearly from the records, and may not have been fully kept in mind by those at the meeting. But it is plain enough that Mr Gould ruled that Newland could not vote because a just estimate of the value of its claim could not be made. He did not so rule because he rejected the proof of claim. 244 Did Mr Gould act improperly in ruling that a just estimate of the value of Newland's claim could not be made? On the information he had, it was an all or nothing claim. If representations justifying termination of the underwriting agreement had been made, there was no liability. If the underwriting agreement remained, there was a liability of $1,576,277. On one view, it was not a question of valuing the claim at all, because it was not a true contingent debt or claim or one the value of which (if there was a debt or claim at all) was not established: Mr Gould's doubtful use of "contingent" in the report to creditors has earlier been noted. (According to the minutes of the meeting, however, Mr Dubler shared this use of the word.) On another view, it would have been appropriate to give the claim a justly estimated nominal value, see re Zambena Pty Ltd (1995) 13 ACLC 1020 and National Australian Bank Ltd v Market Holdings Pty Ltd (2001) 161 FLR 1. On another view, a just estimate of the value could not be made because it was all or nothing and there was no realistic in-between figure. The inter-action between regulation 5.6.23 and 5.6.26(2) is not clear, and has exercised judicial minds. 245 A curiosity is that the minutes of the meeting recorded that Mr Gould affirmed his ruling "on legal advice" (para [102] above). He was not asked about this. The legal advice may have been the advice as to the prospects of Newland's claim. It could have been as to the operation and application of the regulations, specifically with respect to voting. It is unfortunate that this was not made clear. 246 Mr Gould may well have been incorrect in his view of the operation and application of the regulation, but when his evidence did not explain his reasoning in relation to the Newland proof of claim and he was not asked about it in cross-examination, it is again harsh to find that he acted improperly. 247 To return to Securities' proof of claim, much the same may be said of the alternative basis that a just estimate could not be made. 248 A finding that Mr Gould acted improperly, meaning as part of a course of biased conduct, is difficult when no such thing was put to Mr Gould in cross-examination. Mr Gould was asked questions which brought explanation of why he considered that Capital's proof of claim should be rejected, but it was not put to him that his reasons were false or were the product of bias. He was not asked about making a just estimate of Newland's proof of claim, and it was not put to him that his (unexplored) reasons for his ruling were false or were the product of bias. Undoubtedly lack of objectivity and partiality were in issue in the proceedings, as the robust allegations earlier mentioned made plain, although improper refusing to allow Newland to vote was not specifically alleged. Unduly precious insistence on particular cross-examination would be erroneous. But the difference between genuine but mistaken rulings and rulings as part of a course of biased conduct is important, and Mr Gould was entitled to have bias in making the rulings squarely put to him. 249 In my opinion, the serious finding of improper conduct "in failing to admit the proofs of Capital and Newland for the purposes of voting at the second creditors' meeting" was not warranted. 250 It is, of course, necessary to consider together the issues of exercising the casting votes, the report being false or misleading, and refusal to allow Capital and Newland to vote, plus the matters seen as showing bias in favour of Mr Kirwan and hostility to Mr Hedge. The cumulative effect of individual instances of conduct each capable of benevolent regard could be telling towards impropriety. I am not satisfied that in the present case it is. There are a number of areas where Mr Gould's discharge of his function can be questioned. But I do not think the impropriety found against Mr Gould should stand. 251 As earlier noted, Mr Gould did not seek to have the DCA restored or to be reinstated as administrator. He asked for declarations that the relevant orders "ought not" have been made, his interest lying in displacing the findings critical of his conduct. In appropriate cases a declaration of such a kind can be made, see Ainsworth v Criminal Justice Commission (1992) 175 CLR 564. 252 The orders terminating the DCA and removing Mr Gould as administrator are to stand. Mr Gould's interest is not so much in whether the orders should have been made as in whether the findings of impropriety should have been made. Given my view of the issue and allotment of shares, the order terminating the DCA probably should stand. Given the areas where Mr Gould's discharge of his function can be questioned, although short of impropriety, it may be that the order removing him as administrator can be supported. It can be seen from the minutes of the meeting that he took a strong position on matters such as Mr Hedge's conduct and Far East's position, and may have been incorrect in some of the things he did. But in the appeals the issues were not termination of the DCA or whether Mr Gould's discharge of his function, short of impropriety, warranted his removal as administrator. 253 Accordingly, I do not think the declarations should be made. It is sufficient that by these reasons I respectfully differ from the findings of impropriety made by Austin J. The costs orders 254 Austin J's reasons of 10 September 2001 were extremely thorough, and included a full discussion of principles relevant to an administrator's liability to pay costs to other parties to litigation and entitlement to indemnity from the company's assets. His Honour held, in short, that Mr Gould was properly joined in the proceedings, that he was liable for the costs payable to Far East and Capital, and that he was not entitled to indemnity from the assets of Securities for those costs or for his own and Securities' costs. 255 There remaining sufficient assets, it is sufficient in my view to focus on Mr Gould's entitlement to indemnity. The relevant orders are orders 3 and 4 made on 10 September 2001. 256 Austin J considered that he had power under s 447E(1) of the Corporations Act to order that Mr Gould pay Far East's and Capital's costs, and that he should so order because - "I am satisfied that Mr Gould, as the administrator of Securities under administration, has managed the company's affairs in a way that was prejudicial to the interests of some or all of the company's creditors and members, by virtue of the improper conduct in which he engaged as administrator. I am also satisfied that Mr Gould, as administrator of Securities under a deed of company arrangement, has done an act prejudicial to such interests, by virtue of defending proceedings for his removal and termination of the deed on the ground of his improper conduct." 257 As to indemnity for his own and Securities' costs, his Honour thought the answer "fairly obvious" because of his "findings of impropriety against Mr Gould". His Honour said - "88 Mr Gould acted improperly in the ways described in my earlier judgment. Although he may have believed that he was acting properly, my view is that no reasonable person in his shoes, knowing what he knew, could have held that belief. It was therefore unreasonable for him to conduct an active defence to proceedings to terminate the deed and remove him from office. His duty to defend the deed was, in effect, superseded by the circumstances of his own wrongdoing. 89 There are cases, of which Re Biposo is an example, where an administrator may have acted wrongly but is entitled to defend himself and to defend the deed under which he was appointed. But the difference between the facts of cases of that kind, and the facts of the present case, is in my opinion quite stark. In my view the circumstances of the present case are such as to deny Mr Gould access to the company's assets under the equitable right of indemnity and lien of a deed administrator." 258 His Honour again saw his power in s 447E of the Corporations Act, and said - "96 ... I have found that Mr Gould is not entitled to an indemnity against Securities in respect of the costs of the proceedings. It therefore follows that he cannot recoup the costs incurred by him as the second defendant and a cross-defendant in the proceedings, and if he has purported to pay any of those costs out of the assets of Securities, he must reimburse Securities for that expenditure. As to the costs incurred by Securities as the first defendant and a cross-defendant in the proceedings, I have found that Mr Gould's disentitlement to an indemnity extends to prevent him from recovering from Securities any of the costs incurred in defending the case, whether on his own behalf as second defendant or on behalf of Securities as first defendant. To the extent that Securities has already paid any of those costs, Mr Gould was not entitled to charge them to the company, and he must reimburse the company for that expenditure." 259 For the reasons I have given, I have come to a different view of the findings of impropriety essential to his Honour's making of orders 3 and 4. On the view I have come to, it was reasonable for Mr Gould actively to defend the proceedings brought against Securities and against himself as administrator. He was entitled to indemnity for costs reasonably and honestly incurred (re Beddoe; Downes v Cottam (1893) 1 Ch 547; National Trustees Executors and Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268; Adsett v Berlouis (1992) 37 FCR 201). It does not matter that at the same time Mr Gould was "defending his own character" (Walters v Woodbridge (1878) 7 Ch D 504). Whether particular costs were reasonably incurred may arise, but there was not impropriety in the administration amounting to misconduct whereby, because defending his own misconduct, Mr Gould did not incur the costs reasonably and honestly. 260 Reverting to Mr Gould's liability for the costs payable to Far East and Capital, I agree with Young CJ in Eq that his liability should not be limited to one set of costs; to the reasons his Honour gives may be added that the cases put forward by Far East and Capital were not identical. The result 261 It seems to me that the consequences are these. 262 Mr Kirwan should be repaid his $100,000 in full, and since the issue and allotment of shares was set aside ab initio at first sight should have interest on that sum from the date it was paid. The costs of the trial payable by Mr Kirwan should be ameliorated to exclude any costs referable to the issue of repayment of the $100,000, as to which Far East and Capital should pay Mr Kirwan's costs. In his appeal Mr Kirwan had only partial success. As against the real protagonists, Far East and Capital, he lost on the more significant issue of setting aside the issue and allotment and shares, and an appropriate order is that he pay two-thirds of Far East's and Capital's costs of the appeal and the costs of Securities and Mr Gould of the appeal. 263 Mr Gould has not obtained the declarations he sought, but has effectively succeeded in the cross-appeal. The orders having the effect that he bears the costs of the trial personally and without indemnity should be set aside. In the cross-appeal Capital took a back seat, but it did not concede Mr Gould's position and Far East and Capital should pay the costs of the other parties to the cross-appeal. 264 I propose the following orders. On the appeal - (1) Appeal allowed in part. (2) Set aside declaration 7 made on 8 March 2001. (3) Vary declarations 5 and 6 made on 8 March 2001 – (a) by adding at the commencement of declaration 5 "Upon condition that the first defendant repay to the fourth defendant the sum of $100,000 subscribed for the shares," and (b) by adding at the commencement of declaration 6 "Upon the same condition,". (4) Vary order 1 made on 10 September 2001 by adding at its conclusion, "save so far as the fourth defendant's costs relate to the issue of repayment to the fourth defendant of the sum of $100,000 which costs are to be paid by the plaintiff and the third defendant". (5) Appellant pay two-thirds of the costs of the first and fourth respondents and the costs of the second and third respondents of the appeal. On the cross-appeal - (1) Set aside orders 3 and 4 made on 10 September 2001. (2) First and third cross-respondent pay cross-appellant's costs of the cross-appeal. 265 The consequences, particularly as to costs, are a little complicated, and what I have said and proposed should be regarded as tentative. The parties should be directed to bring in agreed short minutes or, if they are unable to agree, competing short minutes and written submissions in support of the competing versions, before the end of term. In the absence of agreement, the orders to be made will be finally determined on the written submissions. 266 YOUNG CJ in EQ: This is an appeal by N P Kirwan from a decision of Austin J who terminated a deed of company arrangement entered into by the second respondent, Cresvale Securities Ltd, to which I will refer as "Securities". There is a cross appeal by the third respondent, Mr Gould, who was the administrator of Securities but, in reality, this cross appeal is a second appeal against the same decision as both the appeal and cross appeal seek to set aside the principal orders made by the learned Judge. 267 The appeal is resisted by the first respondent, Cresvale Far East Ltd ("Far East"), and the fourth respondent, Cresvale Capital Pty Ltd ("Capital"). 268 The Cresvale companies, in 1999, were all subsidiary members of the Princeton group of companies now under scrutiny by the Securities Exchange Commission of the United States of America which has appointed a receiver. Far East, which is incorporated in Hong Kong, is a wholly owned subsidiary of Princeton Economics International Inc incorporated in the Turks and Caicos Islands, now in provisional liquidation. Far East owns all the shares in Capital (which went into voluntary liquidation in December 1999). Capital is an Australian company which held all the shares in Securities. 269 On 23 June 2000, the directors of Securities (Messrs Kirwan and two others), resolved that as the company was likely to become insolvent at some future time it should go into administration and it appointed Mr Gould as administrator. 270 The first meeting of creditors was held on 30 June 2000. Seventeen creditors attended in person or by proxy and exercised voting rights. Sixteen of these voted in favour of administration and for Mr Gould to be the administrator. One creditor, Far East, which was admitted to vote for $828,675 voted the other way. This meant that the majority in number had voted one way and the majority in value of the creditors, voted the other way. 271 In circumstances such as these, one must look to the Corporations Act Regulations 2001 as to the rules for voting at creditors' meetings. 272 Regulation 5.6.21 provides that a resolution is carried if a majority in number and value of the creditors vote in favour of it. A resolution is not carried if a majority of creditors vote against the resolution as do the majority of creditors by value. Sub-regulation (4) then provides: "If no result is reached … then: (a) the person presiding at the meeting may exercise a casting vote in favour of the resolution, in which case the resolution is carried; or (b) the person presiding at the meeting may exercise a casting vote against the resolution, in which case the resolution is not carried." 273 At this first meeting of creditors, Mr Gould exercised his casting vote in favour of administration and himself. 274 The second creditors' meeting was held on 21 July 2000. Various versions of the minutes of that meeting are in evidence, but from all of them it appears that a claim by Newland Resources Ltd ("Newland") for $1,576,277 for compensation from Securities alleging reneging on an underwriting agreement, was not admitted so that Newland was held by Mr Gould, the chairman, not entitled to vote. 275 Capital also claimed to be a creditor in the sum of $590,144. Again, Mr Gould rejected this claim, though the reasons he did so are far from clear. I will return to these later in these reasons. 276 The provisions of the proposed deed of company arrangement ("DCA") were explained to the creditors' representatives present at the meeting. I will again flesh this matter out at a later point. 277 The motion that the DCA be approved was put to the vote. This was referred to below as "the Third Resolution". Fifteen creditors voted in favour. Far East, which had the majority in value, voted against. Again, this required a casting vote by Mr Gould, and he exercised his casting vote in favour of the resolution. 278 The deed was executed on 9 August 2000. Its provisions as noted by Austin J in para 97 of his judgment (which was accepted by all parties), could be summarised as follows: · "Securities was required to issue, and the administrator, the members of Securities and the directors were each required to cause Securities to issue, 20 million ordinary shares to Mr Kirwan or his nominee at one half a cent each, in return for a cash payment by Mr Kirwan of $100,000 (clause 5.1 – the share issue would dilute the shareholding interest of Capital in Securities from 100% to 5.33%); · Mr Kirwan and Kamadhenu Management each agreed to defer the amount of $120,000 behind other trade creditors, but in front of the 'subordinated debt' owing to Far East (clause 5.2.1); · Mr Kirwan agreed to indemnity all other trade creditors except Far East, including employees to the extent necessary, should the Newland claim be successful (clause 5.2.2 – evidently this was thought to be necessary in case payments to trade creditors under the DCA might be held to be unfair preferences); · Mr Kirwan agreed to provide funds to the administrator to meet the legal costs of defending the Newland claim, but those funds would be repayable to him in full in the event that the claim was successfully defended (clause 5.2.3 – it appears from discussion at the second creditors' meeting that this clause was not intended to cover costs found to be payable by Securities to Newland in the event that Newland was successful); · Mr Kirwan would take over all operational matters of the company including leases of machinery and would satisfy the requirements of the Stock Exchange (clause 5.2.4); · the administrator would call for proofs of debt from unsecured creditors and would open and maintain a bank account (clauses 9 and 10); · the administrator would pay unsecured creditors out of the fund in an order of priority which ranked the employees and trade creditors above Kamadhenu Management and Far East, placing Far East at the lowest priority on the ground that it had agreed to subordinate its debt to all other creditors; · there would be a first distribution out of the $100,000 subscribed by Mr Kirwan for shares and also from any money collected by pursuit of the company's collectable debts, and a final distribution at the conclusion of the Newland claim; · the DCA would come to an end 30 days after the final distribution, unless it was otherwise terminated; · distributions under the DCA would discharge the debts of all creditors as at 26 June 2000 (including Far East, Mr Kirwan and Kamadhenu Management); and · the DCA contained other relatively standard provisions for such a deed." 279 On 11 August 2000, the directors of Securities resolved pursuant to clause 5.1 of the DCA that 20 million ordinary shares be allotted to Mr Kirwan and Mr Kirwan paid $100,000 for those shares on the same day. 280 On 22 August 2000, Far East commenced the present proceedings to terminate the DCA. Before the proceedings had been commenced, the DCA had been acted on in other respects, for instance, Mr Gould made distributions of $116,428.68 to creditors pursuant to the terms of the DCA. However, at the date of commencement of the proceedings there were still $543,216 in Mr Gould's accounts. 281 The proceedings came on for hearing before Austin J on 13 February 2001. On 28 February 2001 his Honour gave reasons and subsequently made orders which essentially terminated the DCA, removed Mr Gould, ordered that Securities be wound up with another person as liquidator, and ordered Mr Gould to pay the costs personally. Although this is a fairly accurate summary, it is appropriate to set out in full the orders that were made. 282 Set A of the orders made on 8 March 2001 were as follows: "The Court ORDERS that: 1. The second defendant be removed from office as the administrator of a deed of company arrangement executed by the first defendant on 9 August 2000 ( 'Deed' ), pursuant to section 449B(a) of the Corporations Law ; 2. Peter James Hedge be appointed as the administrator of the Deed pursuant to section 449B(b) of the Corporations Law ; 3. The Deed be terminated pursuant to section 445D of the Corporations Law ; The Court DECLARES that: 4. The allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000 was: (a) for an improper purpose; and (b) invalid. The Court further ORDERS that: 5. The allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000 be set aside. 6. The share register of the first defendant be rectified pursuant to section 175(2) of the Corporations Law to reflect the setting aside of the allotment and issue of 20,000,000 shares in the first defendant on 11 August 2000. The Court further DECLARES that: 7. The fourth defendant as trustee for the GNPK family trust is an ordinary unsecured creditor of the first defendant for the $100,000 paid to the first defendant as consideration for the share issue which has been set aside." 283 After further reasons for judgment were delivered on 10 September 2001, his Honour made orders Set B as follows: "The Court ORDERS that: 1. The first, second and fourth defendants pay the plaintiff's and the third defendant's costs of and incidental to these proceedings. 2. With respect to Order 1, insofar as the first defendant is concerned, the plaintiff's and the third defendant's costs are to be costs in the liquidation of the first defendant. 3. With respect to Order 1, insofar as the second defendant is concerned, he is to pay the plaintiff's and the third defendant's costs of these proceedings personally. 4. The second defendant is to pay his and the first defendant's costs of and incidental to the proceedings, personally. Those costs of the first and second defendants are not payable from the assets or funds of the first defendant on any basis. 5. The application by Newland Resources Limited for an order for costs in its favour is denied. 6. Orders 3 and 4 are stayed for 28 days." 284 By the time the appeal came on for hearing, it was clear that there was no purpose in disturbing the actual orders that had been made by Austin J because any hope of saving Securities under administration or under the DCA had gone, Securities had been in liquidation for 18 months, and the shares for which Mr Kirwan paid $100,000 were valueless. Thus it is expedient to note the outcome which the appellant and cross-appellant seek to achieve in this appeal. 285 As I noted earlier, on the hearing of the appeal, the parties fell into two groups. The appellant Mr Kirwan for whom Mr D J Higgs SC and Mr R Darke appeared and the cross-appellant, Mr Gould for whom Mr S Rares SC and Mr P Dowdy appeared challenged parts of Austin J's decision. Far East for whom Mr M Cashion SC appeared and Capital for whom Mr P M Wood appeared submitted that the decision must stand. 286 The appellant seeks vacation of Austin J's orders Set A 4 to 7. He says there was no basis for any finding of improper purpose on his part and the allotment should not have been set aside. However, he really does not care too much as to whether the actual allotment stands or falls as the shares are now clearly worthless. We have approached the matter on the basis as to whether Austin J should have made an order that Mr Kirwan's $100,000 be refunded to him. In actual fact, his Honour declined to do this, so that the $100,000 would just rank as an unsecured claim in the liquidation. 287 The cross-appellant seeks declarations that he did not act improperly and also seeks to set aside the order for costs made against him. 288 The issues that arise on this appeal can be dealt with under the following heads. I will deal the relevant facts and findings of the trial judge under the appropriate head: 1. Was the allotment of shares in Securities improper? 2. What fiduciary duties were owed by Mr Kirwan? 3. Should the allotment be set aside? 4. Should the $100,000 paid for the shares be refunded in full? 5. Was Mr Gould guilty of improper conduct? 6. Should the declarations sought by Mr Gould be made? 7. Was the Judge in error in his order for costs against Mr Gould? 8. What is the result of the appeal and cross appeal? 289 1. A convenient starting point when analysing this sort of problem is Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. At 835 Lord Wilberforce, in giving the judgment of the Privy Council said that where there is a challenge to a director's power to issue shares, "It is then necessary for the court … to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management …". 290 At 834 the Privy Council had set out the arguments of the parties in that case at their extremes. Lord Wilberforce said: "The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: but once it is found that the directors were not motivated by self-interest … the matter is concluded in their favour and … the court will not enquire into the validity of their reasons for making the issue. … "On the other side the main argument is that the purpose for which the power is conferred is to enable capital to be raised for the company, and that once it is found that the issue was not made for that purpose, invalidity follows. … "In their Lordships' opinion neither of the extreme positions can be maintained. It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self-interests of the directors, or at least the purpose of the directors to preserve their own control of the management … . … "But it does not follow from this … that the absence of any element of self-interest is enough to make an issue valid." 291 In Ngurli v McCann (1953) 90 CLR 425, 439-440, three Justices of the High Court said of the power to issue shares by directors: "The power must be used bona fide for the purpose for which it was conferred, that is to say, to raise sufficient capital for the benefit of the company as a whole. It must not be used under the cloak of such a purpose for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders. … [the director] could take advantage of the power to benefit himself if such a benefit was incidental to a bona fide exercise of the power but he could not use the power ostensibly to benefit the company but really to benefit himself at the expense of the [other shareholders]." This latter statement was supported by the words of Lord Selborne in Hirsche v Sims [1894] AC 654, 660-1: "If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own." 292 It is of no real use to regurgitate the numerous utterances of past courts upon this topic. However, I will mention a few other authorities which provide guidance to the court in the instant case. 293 In Wallington v Kokotovich Constructions Pty Ltd (1993) 11 ACSR 759, I had to deal with a dispute within a company with two shareholders, one of whom held a governing director's share and the other was the discarded partner of both an emotional and business association. The governing director passed a resolution "That the company immediately raise as extra capital which is need for the purposes of the payment of liabilities …" and issued shares to himself so as to dilute the plaintiff's equity. I said at 768 that even though there was an expression in the resolution that the issue was made for the purpose of raising money, the substantial purpose was to make the plaintiff's holding virtually valueless and as this "was not for any demonstrable benefit to the company as a whole, the dominant purpose of the allotment was impermissible and the allotment would be set aside by the court". In the Court of Appeal, reported as Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478, the appeal was dismissed. Kirby ACJ who gave the leading judgment said at 491 that he agreed with the passage that I have just set out. 294 In Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, at 289-290, three Justices of the High Court said: "The directors of a company cannot ordinarily exercise a fiduciary power to allot shares for the purpose of defeating the voting power of existing shareholders by creating a new majority … . The reason why, as a general rule, it is impermissible for the directors of a company to exercise a fiduciary power to allot shares for the purpose of destroying or creating a majority … lies essentially in the distinction between the indirect proprietorship and the ultimate control of the shareholders on the one hand and the powers of management entrusted to the directors on the other. It is simply no part of the function of the directors as such to favour one shareholder or group of shareholders by exercising a fiduciary power to allot shares for the purpose of diluting the voting power attaching to the issued shares held by some other shareholder or group of shareholders." However, the learned Judges went on to say at 292: "It is arguable that special circumstances may arise in which the dilution of the voting power of an existing shareholder or group of shareholders or the creation of new voting power may constitute a legitimate purpose to be pursued by directors in the exercise of a fiduciary power to allot shares." 295 Farrar's Company Law, 4th ed (Butterworths, London, 1998) p 390 sums up the situation by saying: "A power to allot shares … is not restricted to cases where the company requires additional capital but can be used (unless the articles otherwise provide) to defeat a corporate looter, Teck Corporation Ltd v Millar (1972) 33 DLR (3d) 288 S Ct BC, to foster business connections, Harlowe's Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co (1968) 121 CLR 483, or indeed to ensure that the company has the requisite number of shareholders to exercise its statutory functions, see Punt v Symons & Co Ltd [1903] 2 Ch 506. On the other hand, it can never be used solely to destroy an existing majority or create a new one, Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, Piercy v S Mills & Co [1920] 1 Ch 77." 296 I now turn to the facts of the present case. Austin J noted the respondent's case at [218] as follows: "Far East and Capital contend that the issue of shares to Mr Kirwan was made for an improper purpose, and is therefore invalid … . In developing their submission, they invoked the familiar principles governing the issue of shares by company directors for an improper purpose, such as the purpose of perpetuating their own control: Howard Smith Ltd v Ampol Petroleum Ltd … Ngurli Ltd v McCann … . They say that here the power to issue shares (if it existed) was used to wrest control of the company from Capital and to make the proprietary right of Capital valueless without any demonstrable benefit to Securities … ." His Honour refers to Kokotovich in the Court of Appeal at page 491 and then says that he agreed with that submission. 297 The reference in [218] to "(if it existed)" was a reference to the argument that with a company under administration the directors had no power to issue shares. His Honour found against this submission and it was not pursued on appeal. His Honour rejected the submission that the directors were merely discharging their duties having regard to the terms of the DCA. His Honour said at 219-220, that the resolution to allot the shares should not be assessed in isolation from the directors' activities leading up to that event. He said: "The evidence shows that Mr Kirwan and Mr MacPherson, two of the three directors, were engaged in a course of conduct directed towards acquiring a controlling shareholding in Securities for many months before the creditors approved the DCA. It would be misleading to focus on a single step in that course of conduct, namely the allotment and issue of the shares, and to investigate in isolation the directors' purpose in taking that single step . Regardless of whether they had placed themselves under an obligation to allot and issue the shares, the directors were motivated by their overall purpose in embarking on the course of conduct which led to the share issue. "When their attempts at a negotiated acquisition failed early in the year 2000, Mr Kirwan and Mr MacPherson developed the proposed DCA as an alternative strategy. Their purpose was to wrest control of Securities from Capital by using Part 5.3A when negotiation failed. That purpose, clearly an improper one, infected their operative decision to allot and issue the shares. Their purpose emerges from the chain of events which I have described. Mr Kirwan persuaded Mr Gould that Mr Hedge had treated him unjustly in various ways, and that the proposed DCA would be fair notwithstanding its effect on the control of Securities. Mr Gould was willing to be persuaded without making adequate investigations." 298 The phrase "to wrest control" is a coloured phrase, but it derives from the passage from Ngurli Ltd v McCann picked up in Kokotovich at 491 which I have set out earlier. I think it is probably preferable just to use the neutral words "obtain control". 299 It is really unnecessary to examine whether Austin J's findings of fact had a basis in the evidence. This is because the real question is that assuming that the shares were issued for the purpose of obtaining control of Securities by Mr Kirwan at the expense of Capital, was that an improper purpose in the light of all the circumstances including Securities' needs for funds and the fact that no-one else was forthcoming with funds. 300 As has been suggested in the authorities, particularly in the Whitehouse case, although it is rare, there can be situations where obtaining control of a company at the expense of somebody else, even if it is one's substantial or dominant purpose is not an improper one. 301 One obvious example of this is where there is a two person company, the company is in need of funds, either to pay its creditors or for development which has been properly assented to by the appropriate organs of the company and a call for new capital is made on the two shareholders equally. Even if one of those shareholders knows that the other is in such an impecunious position that he or she cannot pay a call, so that the probabilities will be that that other person will obtain a majority holding, there is no improper purpose involved. 302 Likewise, if a company has need of capital and there is only one avenue of obtaining that capital, then even though the person who is subscribing the extra capital and has a dominant purpose in obtaining control and even though that person is a director of the company, there would be no improper purpose in making the allotment. The rules set out in the authorities and the textbooks are rules that apply in ordinary circumstances (if they ever exist) and are not to be applied unthinkingly to every situation. One must judge each case as to whether in all the circumstances of the case there was an equitable fraud in the exercise of the power to issue shares. 303 In the instant case, Austin J found as facts [139] and [120] as follows: "[139] I do not suggest that the known facts establish any breach of duty or statute by Mr Kirwan or even give rise to a prima facie case of breach." "[120] I accept that as a practical matter, the only real alternatives for the creditors at the second meeting were the proposed DCA or liquidation. Attempts had been made by Mr Hedge to sell the business of Securities to others, but the only offer he received was Mr Kirwan's offer. That implies that no-one other than Mr Kirwan was interested or prepared to inject sufficient capital into Securities to rescue it. Mr Kirwan had made it plain that his objective was to become the owner of Securities, and the proposed DCA stated, in effect, the terms upon which he was prepared to buy the company." 304 At [130] his Honour said: "Mr Gould made an assessment that there was no realistic likelihood that an investigation would reveal any claims with good prospects of success. He therefore concluded, logically enough, that the DCA was a far better option than liquidation." 305 There are, in the judgment, some statements which go the other way. For instance, at [221] his Honour said: "Under the DCA fresh capital was subscribed for shares in a manner that would deliver a controlling interest to Mr Kirwan. There is no evidence to show that alternative forms of capital injection, which would not have diluted the control of the existing shareholder, were explored." It is difficult, with respect to his Honour, to see how that statement is compatible with his finding at [120]. In any event, it was abundantly clear that Securities could not survive without an injection of funds. There was never any suggestion that anyone in the Princeton Group, including Far East and Capital was going to supply the money, and despite attempts by the liquidator of Capital (Mr Hedge) and Mr Gould, no other sources of funds other than Mr Kirwan, had appeared. 306 In this scenario, and particularly in the light of the fact that the creditors (other than Far East) after full discussion had accepted the DCA and knew that this would be a transfer of control to Mr Kirwan, the allotment of shares to him was not for an improper purpose. 307 On this analysis, the mere fact, if it be the fact, that the acquisition of shares was part of some devious or convoluted plan to gain control is irrelevant. 308 However, some reference to the basal facts is needed in order to see how the learned Judge came to the finding that he did. 309 On 10 December 1999, Messrs Kirwan and MacPherson forwarded a formal letter to Mr Hedge, the liquidator of Capital, making an offer for the acquisition of shares in Securities. This letter noted, as was the fact, that Mr Hedge had advertised for a purchaser for shares in Securities but had not attracted anybody. The formal offer was to acquire all the shares in Securities for $140,000. There were certain other "sweeteners" in the offer. 310 On 24 December 1999, a conditional deed intituled "Share Sale Deed" was entered into between Capital and its liquidators, Mr Kirwan, Mr MacPherson and others. The deed is set out in Blue Appeal Book Vol 1 at 168 and following. The deed recorded an obligation for Mr Kirwan and others to pay $140,000 and receive all the shares in Securities. However, the deed was conditional upon the liquidators of Capital being reasonably satisfied that no objection is made by the provisional liquidators of Princeton Economic International Ltd appointed by the Court in the Turks and Caicos Islands or by the receiver of the Princeton Group appointed by the US District Court. Alternatively, the liquidators of Capital could waive the condition by notice. 311 It would seem that as at December 1999, it was reasonably contemplated that the Princeton liquidators would have no objection to the sale. However, the probabilities are that another transaction between Capital, Securities and Mr Kirwan may have affected their attitude. In the long run, they did not drop their objections and the liquidators of Capital did not waive the condition so that the deed never became unconditional. Certainly, by June 2000 this situation appears to have been recognised by everybody. 312 The other transaction can be summarised thus. On 16 September 1999 the relevant parties entered into the following transactions. Capital transferred to Securities 6,717,719 shares and 2,490,058 options in a company then known as Tin Australia NL but later renamed Virotec International Ltd. The shares and options were transferred at 3.8 cents per share and 1 cent per option. There was also a transfer on the same day of furniture and fittings from Capital to Securities as a result of which all of Capital's hard assets were transferred to Securities and there was an obliteration of the intercompany debt owed by Capital to Securities. 313 Securities conducted a business of stock broking and allied activities and was subject to scrutiny by the Australian Stock Exchange as to its liquid capital position under the ASX Business Rules. Virtually, the ASX required Securities to dispose of the Virotec shares and options. The shares and options were sold on the Stock Market on 22 October 1999. Most of them were purchased by Mr Kirwan. The purchase price was relatively similar to what had been obtained by Capital on the sale to Securities. However, the market price of Virotec shares rose from 3 cents to under 10 cents in February 2000, to peak at about $1.40 in March 2000. Capital claimed that under this transaction Mr Kirwan gained about $11.3 million. The suspicion was certainly engendered that Mr Kirwan must have had some prior warning of this rise. Indeed, at some stage he had been a director of Virotec. Mr Kirwan denied this and pointed to the fact that by November 1999 it was public knowledge that Virotec had commissioned Southern Cross University to report into its assets. 314 As stated in para 139 of his Honour's judgment, no-one ever came to the view that Mr Kirwan was involved in insider trading or had otherwise taken advantage of his position to acquire a profit. 315 I have related the incident here because it may be the reason why the overseas liquidators and receivers did not give their assent to the purchase of the shares. Certainly one cannot say that these overseas liquidators and receivers ever vetoed a sale to Mr Kirwan as was suggested by some counsel on this appeal: they merely did not waive their objections. 316 The Virotec transaction comes into play in another part of the judgment of Austin J with which I will deal later. There, the allegation is not that Mr Kirwan was engaged in insider trading or making improper use of information, but that when an administrator was appointed, the background circumstances were so suspicious that any reasonable administrator would have made enquiries to see whether there was an actionable breach of fiduciary duties by Mr Kirwan rather than just saying that the transaction gave rise to no right of action by Securities. 317 These facts show that there is no doubt that Mr Kirwan was anxious to acquire the shares in Securities. However, one cannot say that the reason for this must have been, as his Honour suggests, to immunise himself from any action over the Virotec or other transactions. An equally available hypothesis is that Mr Kirwan, who was virtually the managing director of Securities, could see that it could be a profitable business, but if Securities went into liquidation, its prime asset – its dealer's licence – would become valueless, and thought that he and the other employees of the company could turn the company round into prosperity. 318 Even if one took the blackest view against Mr Kirwan (which, in my view would not be justified on the evidence, there was never anything more than suspicion), it would not seem to me that these circumstances would lead to a finding that the issue of the shares was improper. As I have said earlier, in all the circumstances if the company was to survive, it had to have an injection of capital, and the only way in which it could obtain capital was from Mr Kirwan. 319 In my view the finding of an improper allotment of shares ought not to have been made. 320 2. Although strictly speaking, this is tangential, it is useful to spend a little time exploring the notion that the evidence showed that Mr Kirwan breached some fiduciary duty to Securities. 321 The textbooks are full of wide statements that directors are fiduciary agents and thus owe fiduciary duties to the companies of which they are directors; see eg Gower, Principles of Modern Company Law 6th ed (Sweet and Maxwell, London, 1997) pp 598 et seq and Ford, Principles of Corporations Law 9th ed (Butterworths, Sydney, 1999) pp 280-1 [8.010]. 322 Behind this straightforward statement is the truth exposed by Shepherd in his Law of Fiduciaries (Carswell Co, Toronto, 1981) p 347 that: "Nowhere are fiduciary principles applied in a more complex or a difficult context than the modern corporation." 323 The textbooks say, eg, Ford, p 281, that directors owe positive duties of loyalty to a company to act honestly, to act in good faith for the benefit of the company as a whole, to give adequate consideration to matters for decision and to keep discretions unfettered and to exercise powers only for proper corporate purposes. They say that the directors' duties involve positive aspects such as I have just cited and negative aspects to avoid conflicts of interest as well as a duty of care. 324 I have mentioned this wide aspect of directors' fiduciary duties, because in the cross-appellant's supplementary written submissions, reliance was placed on what Gaudron and McHugh JJ said in Breen v Williams (1996) 186 CLR 71,113 that: "In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed." 325 Whilst the High Court applied these words in the case of directors' duties in Pilmer v Duke Group Ltd (2001) 75 ALJR 1067 at 1082-3, there are, indeed, some prescriptive duties on directors as Ford points out. 326 However, being a fiduciary does not completely remove one's capacity for acting in one's own interest. Usually, one can only act in one's own interest if, by appropriate means, there is full consent of the beneficiary to the transaction, or the terms of engagement of the fiduciary provide for the transaction; see eg Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at 693-695 per Spigelman CJ. 327 A third escape route is noted by Hutley JA in Wallsend Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815, 847, that: "A person subject to a fiduciary duty to provide information can escape liability by showing that the information which he failed to disclose could not have caused any change in the attitude of the principal." In my view, to a limited extent, this statement can be applied to other breaches of fiduciary duty. 328 In Queensland Mines Ltd v Hudson (1978) 52 ALJR 399, 403, a director was absolved from an apparent breach of fiduciary duty because "The board of Queensland Mines, fully informed as to all relevant facts, had reached a firm decision to renounce all interest in the exploitation of the licence and has assented to Mr Hudson taking over the venture for his own account." 329 In the instant case, there was nothing that Mr Kirwan did in and about the issue of the shares which breached any fiduciary duty. Indeed, the learned Judge so found at [139]. As to the Virotec transaction, no breach of fiduciary duty again was established against Mr Kirwan. The furthest the Judge was able to go was that the possibility of there being a breach should have been further explored by Mr Gould before agreeing with Mr Kirwan that the DCA should be put in place. 330 However, there is a flavour in the Judge's judgment that Mr Gould acted improperly because: "These facts would suggest to a reasonable person the real possibility, worthy of further inquiry, that Mr Kirwan may have breached his fiduciary duties or his statutory duties in respect of related party transactions and insider trading (cf Hamilton v National Australia Bank Ltd (1996) 19 ACSR 647)." [136] 331 At [165], his Honour repeats this concern: "… the facts known to Mr Gould put him on inquiry as to whether there were grounds for taking proceedings against Mr Kirwan for breach of his fiduciary duties as a director of Securities, receiving a financial benefit form a related party transaction, and insider trading." Later his Honour explains [174] et seq, that Mr Gould had not given the creditors a fair account as to the possibilities of recovery against Mr Kirwan in respect of his profit on the acquisition of the Virotec shares. 332 I will deal with these matters further when considering Mr Gould's duties. However, the fact remains that there is no reliable evidence upon which the Judge could have found any breach of fiduciary duty by Mr Kirwan, nor did he do so. 333 3. It follows that the order setting aside the allotment of shares was wrongly made. 334 However, the Court should not interfere with it in the light of subsequent circumstances for the reasons that I give under head 5. 335 4. An application to set aside an allotment of shares on the basis that the allotment was an improper exercise of the directors' duties, is a claim in equity. Even though s 175 of the Corporations Act gives statutory authority for the correction of the Register, the correction is ordered applying the principles of equity. 336 It is axiomatic that equity does not allow claims to be made unless the claimant offers to "do equity". Almost always where a person is seeking to upset a transaction, and that person has received money in consideration of parting with his property in the transaction, then there has to be an offer to return the money. Although in the more relaxed equity procedure of the 21st century courts do not always insist on the statement of claim containing an offer to do equity, the claimant must submit to such a condition in the order. In Palmer's Company Precedents 15th ed (Stevens, London, 1938) p 1211, there is a precedent for a form of order where there is an avoidance of an allotment and the register of members is rectified accordingly. Most subsequent editions of Palmer deal with the other situation where there is the wrongful removal of X as a shareholder and substitution of Y. The form, 718 on that page, which derives from the order made by Cozens-Hardy J on 17 November 1899 in Re The London & Northern Bank Ltd provides for rectification of the register and repayment by the company to the applicant of the amount paid by him in respect of the said shares with interest at 4%. This confirms the general view that the setting aside the allotment and the refund of the allotment monies are correlative rights. 337 Accordingly, the debate that took place before Austin J as to whether Mr Kirwan would obtain some advantage if he was given his money in full instead of being a creditor does not arise. In any event, it would need to be assessed in the light of the fact that the transaction under which the money was paid occurred after the commencement of the winding up, which by virtue of s 513C of the Corporations Act occurred on 23 June 2000 when the administrator was appointed. 338 It was submitted that there is no jurisdictional basis for the Court ordering the refund. It is put that the $100,000 was paid in connection with the whole scheme of acquisition, voluntarily, without any Court order. It was not a case where setting aside an order resulted in an order for restitution of moneys paid pursuant to the order; cf Commonwealth v McCormack (1984) 155 CLR 273, 276. 339 However on the view I have taken, the considerations noted in the previous paragraph do not arise. 340 I should note that on 12 September, after the first draft of these reasons had been prepared, I received a series of further submissions on this point. This was irregular as no leave had been given to make further submissions. In this Court the rule as to additional submissions laid down by the High Court in Carr v Finance Corp of Australia Ltd (1981) 147 CLR 246 applies (though perhaps not always strictly enforced in this Court) that no further submissions are received after the hearing except by leave. One very good reason for this rule is that often draft judgments are prepared which have to be restructured after late submissions with a waste of Court time. If further submissions are to be made, the presiding Judge should be notified of the intention to seek leave to make them at the earliest opportunity. 341 In the instant case, the further submissions do not in any event, affect the result. 342 Mr Higgs SC is to be commended for the clear manner in which he made his submissions. However, a thread ran through them that there was some doctrine of restitution through judicial error. Whilst there is certainly a principle that money paid under a judgment for damages that is upset on appeal will be ordered to be repaid; see eg Commonwealth v McCormack (1984) 155 CLR 273 and a declaration may be made to remove slurs that might otherwise attach; see eg Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, I am yet to be convinced that this restitutionary principle extends further. In view of my reasons under head 2, I do not need to consider this submission further in the instant appeal. 343 It thus follows that Mr Kirwan is entitled to a refund of his $100,000 plus the appropriate rate of interest. 344 As to interest, as the sum claimed is due as a condition of the relief sought, it is a post liquidation debt and carries interest from the date of filing the originating process, viz 22 August 2000. In the absence of argument to the contrary, I should think it would carry interest at Schedule J rates. 345 5. The question as to whether Mr Gould was guilty of improper conduct is a matter on which my mind has wavered during the argument. After taking into consideration everything that both Mr Rares SC for Mr Gould has said, and Mr Wood for Capital, it seems to me that the basal question is whether, as Mr Wood put it, "It's not a question of whether there is one mistake which can be explained, there is a question of whether there are so many that Austin J was justified in characterising them in the way of partiality." 346 It would seem from the judgment that seven matters were put forward as to why, viewed cumulatively, the Judge should draw this inference, viz: (1) Mr Gould failed to make proper inquiries about the Virotec transaction; (2) He made unreasonable criticisms of a fellow liquidator, Mr Hedge, without apparent reason; (3) He consistently exercised his casting vote in favour of Mr Kirwan and against Capital on significant resolutions; (4) He was very partial in the selection of material that he placed in the administrator 's report so as to give that a misleading impression; (5) He wrongfully excluded proofs of debt for Newland and Capital, yet allowed those in the Kirwan's interest in full without adequate reasons; (6) Which corresponds to (5), he excluded Newland and Capital from voting on vital resolutions; (7) He was a member of a sort of conspiracy directed to obtaining control of Securities by Mr Kirwan. 347 So far as (7) is concerned, although some veiled suggestion was made about this, it was never directly put to Mr Gould and it does not seem to me that the evidence is there to support it. Accordingly I will deal with the other six matters only. 348 (1) The Judge made it clear that he recognised that: "In deciding whether an administrator's investigation is sufficient, the Court must take into account the circumstances in which such an investigation is to be undertaken. … For example, it is often not practicable for the administrator to use the powers of compulsory examination in the Corporations Law, given the limited time available for administration." [138] 349 However, his Honour said that, even whilst recognising this factor, in the circumstances it was hard to countenance that a reasonable and experienced administrator would not, having had facts which should have put him on inquiry, obtain his own legal advice and make inquiries of his own about the Virotec transaction. Rather, Mr Gould merely relied on Mr Kirwan and legal advice he may have obtained. 350 Mr Wood says that the Virotec's transaction presented a situation where there was potentially an asset of Securities worth up to about $9 million. There is a flavour that there has been some insider trading or a related party transaction in respect of which there has not been full disclosure. Mr Kirwan was quite close to the Virotec company. The dramatic rise in price occurred a very short time after Mr Kirwan acquired the shares and became a director of the company. 351 In all these circumstances, would a reasonable administrator have merely taken the word of Mr Kirwan and accepted the legal advice that had been proffered to Mr Kirwan in circumstances where he must have known that it was to Mr Kirwan's interest to avoid any proper independent investigation into the transaction? Moreover, by acquiring control of Securities and by avoiding liquidation of Securities, Mr Kirwan would avoid any examination at all. 352 Austin J, as an experienced Judge in the corporations law area, was firmly of the view that this conduct was not what he would have expected from such an experienced administrator. I have avoided using the word "improper". 353 It seems to me that the factual material is there from which the Judge could have drawn that inference. However, as Mr Wood says, one mistake is not enough for the finding of improper conduct, but this matter is one which needs to be put into the mix. 354 I note another aspect of this matter, that is, that Mr Gould unduly relied on an assumption of solvency because of the connection between Securities and the Stock Exchange, again an indicator that he was guilty of not making sufficient inquiries. The Judge rightly rejected this proposition. 355 (2) This is a relatively minor matter, and I do not consider that even if it were established it would really affect the position one way or the other. However, it is unusual to see that an administrator employ such trenchant criticism of a fellow professional. 356 (3) I have already set out the provisions of the regulations under the Corporations Act as to exercising casting votes. 357 A casting vote as a device to resolve deadlock has been with us for a long time. 358 An example is Wooster v Mullins 40 A 144 (1894) (Conn SC). There, Baldwin J, giving the judgment of the majority, said: "A tie is that which is tied. It is a knot. And when provision is made, in regulating legislative procedure, for the casting vote by the presiding officer in case of a tie, the object is to allow him to untie this knot." 359 In Nell v Longbotham [1894] 1 QB 767, 771, Cave J noted that the institution of the casting vote was a creature of the statute law introduced by Sturges Bourne's Act many years ago to resolve deadlocks in elections to municipal corporations. It also seems to have existed in the English Houses of Parliament when the Speaker or presiding officer of a House had to resolve an equal vote. 360 The matter of casting votes was discussed in R v Bradford Council; Ex parte Corris [1989] 3 All ER 156, 160, where Neill LJ, in giving the judgment of himself, Nourse and May LJJ, said: "A person who has a second or casting vote is clearly under a duty to exercise it honestly and in accordance with what he believes to be the best interests of those who may be affected by the vote. Subject to this, however, it seems to me that the person presiding at a meeting was fully entitled to use his vote as he thinks fit." 361 It must be remembered that by the exercise of a casting vote in some circumstances one person or a group of persons will be elected to an office over another person or group of persons. It would be impossible, in that case, to say that there was some hard and fast rule as to how a casting vote should be exercised. Where a casting vote has to be exercised on a motion to pass a resolution, there is in some quarters some lore custom that ordinarily the casting vote should be against the resolution so as to preserve the status quo. This, however, depends on the custom and lore of the institution. It has never been seriously suggested that there is some general rule to this effect. 362 The proposition that was canvassed before us went a little further than this. It was put that generally it was preferable for a presiding officer to exercise the casting vote against the motion: Horsley's Meetings 4th ed by A D Lang (Butterworths, Sydney, 1998) p 175. Whilst that may be in appropriate circumstances a good guideline, it does not seem to me to go any further. 363 Although there is very little in the authorities on the point, it never seems to have been suggested that there is any fiduciary or other duty on the presiding officer to exercise a casting vote in any particular way other than a general duty to act honestly and in the best interests of the relevant community. 364 Regulation 5.6.21 itself makes it plain that the presiding officer may decide to vote either for or against the resolution. 365 His Honour referred to Hanrahan and others, Commercial Applications of Company Law (CCH, 2000), where examples are given as to situations where the administrator will be called upon to exercise his or her casting vote. One is where there are a large number of unsecured creditors, particularly a group of creditors such as employees who will all vote the one way for their own job's sake, and on the other hand, a large financial organisation such as a bank has a large amount of debt owing to it. Austin J pointed out that the insolvency practitioners' guideline would imply that in that example the bank should be preferred to the employees and trade creditors. His Honour rightly said that he did not consider that one could solve the question quite so easily and indicated that in his view the presiding officer needed to weigh up all relevant factors including matters such as whether any particular class of creditors would be unfairly prejudiced by the proposal, or that the meeting had been given all relevant information whether the directors stood to gain an unfair advantage. 366 Section 600B of the Corporations Act applies if a person presiding at a meeting exercises a casting vote in connection with a deed of company arrangement. The section enables a person to apply to the court to set aside or vary the resolution under certain circumstances and empowers the court to set aside or vary the resolution. 367 Austin J directed his mind to this section in [153] and following of his reasons. He considered that the Third Resolution should not stand and that it was improper for Mr Gould to exercise his casting vote to have the proposed DCA approved in the circumstances where he was acting against the wish of the major creditor in value and where there was a general plan for a minority interest to obtain control of the company. Indeed, Austin J went further and at [146] said of the First and Second Resolutions that it was not easy to think of circumstances in which it would ever be appropriate for an administrator to exercise a casting vote to keep himself in office notwithstanding that the largest creditor by far had twice attempted to remove him as was the case in the present company. 368 This court discussed s 600B and the casting vote in meetings held in connection with administration in Young v Sherman [2002] NSWCA 281, a decision handed down after the argument was completed in the present case. 369 In that case the court was comprised of Sheller and Hodgson JJA and Davies AJA. The lastmentioned made it clear that he did not have to deal with the current point. 370 Hodgson JA said at [78] that he had some questions as to the exact role of the court when reviewing the exercise of the casting vote pursuant to section 600B of the Corporations Act. He said: "However, whether the role extends to reconsideration of matters of commercial judgment, or is limited to intervention if some other serious error is detected, I am inclined to think that the court should have available to it all the material that was available to the administrator in deciding how to exercise the casting vote." 371 Sheller JA dealt with the matter more extensively in [48] and following. His Honour referred to, with apparent approval, the view taken by Austin J in this present case that there was no general rule that the administrator should exercise the casting vote to prefer the majority in value over the majority in number but that the correct approach was to weigh up all relevant factors (see [55]). His Honour cited the cases that I have recently mentioned and also Re Martco Engineering Pty Ltd (1999) 32 ACSR 487, 489 and Re Coalleen Pty Ltd [2000] 1 Qd R 245. His Honour seemed to approve the general proposition I have mentioned without taking the matter into any further detail. 372 Accordingly, the matter must be judged as to whether, to use Neill LJ's words, the presiding officer exercised his casting vote honestly and in accordance with what he believed to be in the best interests of those affected by the vote. 373 Austin J concluded at [123], that in all the circumstances, it was improper for Mr Gould to exercise his casting vote so as to cause the Third Resolution (that is the resolution to approve the DCA) to be passed, unless there were very strong reasons for doing so. His Honour did not regard the reasons advanced by Mr Gould as strong enough to justify what his Honour described as an "extraordinary action". 374 Mr Wood says that when one sees the background to the exercise of this casting vote one can see that Mr Gould did not exercise his casting vote for the benefit of the company and its stakeholders. 375 He says that when one sees that Mr Gould (1) was very discriminatory in respect to which creditors he would admit to vote; (2) carried out inadequate investigation of the Virotec transaction; (3) inadequately considered possible causes of action generally against Mr Kirwan; (4) preferred trade creditors; and (5) put the rights of Far East and Newland and Capital in so far as they get in at all, as the bottom priority; and then (6) voted for a deed of company arrangement that has had discriminatory effect, it is plain that he has not exercised his casting vote properly (see Transcript 120-121). 376 There is some weight in what Mr Wood is putting. Furthermore, Austin J came to the view that the exercise of the vote was improper, though not for precisely the reasons put by Mr Wood. The matter really needs to be left until examination of the whole six factors involved as Mr Wood's submission makes it clear that it is only if there were a series of unfair and discriminatory acts, that the whole of Mr Gould's conduct should be considered improper. 377 (4) Austin J deals with this issue at [171] to [178]. At [174] his Honour agreed with the submission that there was a misleading impression given because Mr Gould failed to indicate what the Judge called "the limited and inadequate extent of his investigation into the Virotec transaction". He said that if there was any real prospect of recovery justifying further examination in the Virotec transaction, then a step which would effectively prevent further investigation could not be justified. The report failed to explain that there may be a basis for recovery for breach of fiduciary and statutory duties and that this possibility had not been explored. The Judge also dealt with other allegations that there were material omissions, but considered that apart from these omissions being an indication of an unprofessional approach to a statutory requirement, there were no other vital omissions. 378 It does not seem to me that the criticism of Mr Gould by the Judge is made out. For the reasons which have already been canvassed, there was nothing more than suspicion about the Virotec transaction. There was very little time to investigate and the allegation about breach of fiduciary duty was all rather fuzzy. Certainly I do not think it is anywhere near as clear as it appeared to Austin J that there almost certainly was some breach of a fiduciary duty in the Virotec transaction. 379 True it is that there is the disturbing aspect that the administrator seems to have taken the view that just because Mr Kirwan's lawyer said there was nothing in the claim, that he should not investigate further, but it does not seem to me that this by itself is sufficient to say that there was a partial selection of material. 380 A connected matter is whether Mr Gould complied with s 439A(4)(c) of the Corporations Act. That paragraph requires that the creditors receive a statement setting out details of the proposed deed. 381 Austin J followed the decision of the Full Federal Court in Deputy Commissioner of Taxation v Comcorp Australia (1996) 21 ACSR 590, 624 that what the paragraph requires is those details which can reasonably be expected to have been material to creditors in deciding whether or not to vote in favour of the deed. 382 I agree that this is the appropriate test. I would add one rider. It is axiomatic that no actual deed is in existence at the date of the notice. However, there must in my view actually be in existence a draft deed which can be sighted by creditors of which details are given. I say this because, at first instance, I have seen situations where there is no document and the "details" given to creditors are details of a proposal in broad outline. This is insufficient. There must be what is discernable as a deed in existence before details of the proposed deed can be given: Re Curry and Mooney Developments Ltd [1978] Qd R 277, 278 and see Re GAE Pty Ltd [1962] VR 252. 383 Austin J concluded at [178] that there were indeed failures to comply properly with s 439A(4)(c). However, his Honour recorded that these were not a significant factor in his decision. This being so, it is of no value to explore these matters more deeply 384 Accordingly, I would not find this fourth head of improper conduct established. 385 (5) and (6) These matters are perhaps close to the heart of the attack on Mr Gould. Mr Wood submitted that Mr Gould made so many errors in and about the rejection of the Capital proof of debt and the Newland proof of debt, that the Judge could and should infer improper conduct. This would appear to be an a fortiori situation once one took into account the fact that Mr Gould admitted Mr Kirwan's company's proof of debt which may also have deficiencies without any comment. 386 Mr Wood also points out that Mr Gould shifted his ground as to his reasons for rejecting the Capital and Newland proof of debt. 387 In his affidavit, Mr Gould says (Blue Appeal Book, Vol 4 at 744): "The reason why the proof of debt of Cresvale Capital was rejected by me was because I initially had not understood the basis of the claim. I had been originally informed … that it had related to an unfair preference and when this was challenged, I was subsequently informed that it related to the transfer of certain furniture and shares. However, the consideration for that transfer had been paid by an appropriate reduction in Cresvale Capital's loan account and I did not believe that there was any amount owing at that time to Cresvale Capital. …". 388 Mr Wood submits that it is significant because Mr Rares SC, who appeared for Mr Gould, placed emphasis not on these matters, but rather on technicalities that Mr Gould rightly rejected the proof of debt because it was in the name of the company and not the liquidator and that a proper proof of debt had not been lodged. 389 There were three sets of minutes of the meeting kept by various people. At Blue Appeal Book, Vol 3 at 591, Michael Hughes of Minter Ellison for Far East wrote this in his version of the minutes: "Before the vote on the proposed deed of company arrangement was taken, Mr Gould made rulings on the claims to vote by the liquidator of Cresvale Capital in respect of the preference claim, and in relation to Newland Resources Ltd. In relation to both he held that Cresvale Capital and Newland Resources were not entitled to vote at the creditors' meeting. He said that it was impossible to make clear the value of the Newland Resources claim. This was disputed by Mr O'Farrell who pointed out that the amount of the claim by Newland Resources was in fact set out in the report as $1,576,276.80. "Mr Gould made the same ruling in relation to the preference claim of Cresvale Capital. He said that it was impossible to determine the value of the claim. Again he said the fact that it had been received at the last minute provided him with some reason or at least support for his decision not to admit it to proof." 390 Mr Wood points out that this is quite contrary to what Mr Gould says in his affidavit. 391 The solicitor for Capital made notes that appear in Blue Appeal Book, Vol 3 at 610 that the question of the Newland's proof came up and Mr Gould said, "Can't vote because a contingent debt". Mr Gould was asked on what regulation he relied and said "5.23(2)". On the Capital claim there was a discussion to the effect that it was rejected on the same basis. Furthermore Mr Gould said, "It is ingenious that a claim has been lodged the day before and therefore do not admit to vote." The solicitor recorded that there was then discussion that the preference claim had been on the table for several months as indicated by the directors. 392 As Mr Wood put at p 110 of the transcript: "What we have from these three sets of minutes are reasons varying from impossibility to determine the value to the proof being late, to the debt being contingent, to the fact that there's an extended period without it being pursued." Meagher JA then said: "And he didn't understand what the claim was" to which Mr Wood said, "Indeed. And what then complicates it even further is when Mr Gould was cross-examined on this topic … [there is] we submit … an admission by Mr Gould that there was something in this preference claim." 393 I should set out the provisions in the Regulations which Mr Gould purportedly applied. 5.6.23(2) provides: "A creditor must not vote in respect of: (a) an unliquidated debt; or (b) a contingent debt; or (c) an unliquidated or a contingent claim; or (d) a debt the value of which is not established; unless a just estimate of its value has been made." 394 5.6.26(2) says: "If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained." 395 There is some tension between the two regulations. However, even if the administrator was correct in applying in 5.6.23, it is not permissible to refuse to allow a creditor to vote at all by not making a just estimate of the value of the claim. If 5.6.23 is to be applied, then there is an obligation on the chairman to make "for the purpose of voting" a just estimate. If the chairman finds it almost impossible to ascribe a value to the claim, then it should be valued at a dollar which at least would allow the claimant to be recorded amongst the number of creditors voting on the resolution. 396 The matter has been considered in previous decisions of this Court. 397 Hodgson CJ in Eq as his Honour then was, examined the matter in Vincent, White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93. He held that the doubt referred to in Regulation 5.6.26 was not doubt as to the existence or amount of the debt, but doubt as to whether a proof of debt should be admitted or rejected. In cases where the value of the debt was not established, and a just estimate had been made, the doubt must be a doubt as to whether the creditor should be allowed to vote on the basis of the just estimate. If the chairman had such a doubt, then the creditor should be allowed to vote on the basis of the just estimate. If no just estimate of the debt could be made at all, then 5.6.23 required the creditor not be permitted to vote at all and 5.6.26 would have no application. I am summarising what his Honour said at p 101. 398 I considered the matter in National Australia Bank Ltd v Market Holdings Pty Ltd (2001) 161 FLR 1; 37 ACSR 629. The case was a different one to the Vouris case, because in the Vouris case the chairman had made an estimate of the value of the proof, whereas in the Market Holdings case no such value had been attempted. I distinguished the Vouris case at 170 (FLR 27; ACSR 656) for that very reason. 399 There should have been no difficulty in assessing either the Capital claim or the Newland claim. Particularly the latter claim could have been easily assessed and valued. The claim was a simple one: the company had allegedly reneged on an underwriting agreement and either the loss Newland made was payable by the company, or it was not. It was not enough for the administrator to say that he had legal advice that the claim would fail. He needed to assess, at least in approximate terms, the chances of success which could easily be worked out, at least so far as a range is concerned, from legal advice. It was not open to decline to assess a just value on the claim and to reject it altogether. 400 This conclusion is reinforced by what Thomas J said in Re Oriel Homes Pty Ltd (1997) 15 ACLC 564, 565, where his Honour said that the reference in Regulation 5.6.23 to the making of a just estimate suggests that the administrator has an ultimate responsibility to make a decision on the matter. His Honour then said of 5.6.23 and 5.6.26 that under the latter: "The power to admit includes the power to admit in part. If the position is clear, the chairperson should make a just estimate of the value of the debt. If, however, he or she is in genuine doubt, the claim must be allowed at the amount that the creditor has claimed and should thereupon be marked as 'objected to'. The creditor should then be allowed to vote at that value." 401 In the circumstances, his Honour considered that there was a contingent claim which should have been valued at one dollar. 402 There is then the consideration as to whether it was valid to class the Newland debt as a contingent debt in any event. The classic definition of a contingent debt is contained in Re William Hockley Ltd [1962] 1 WLR 555, 558, where Pennycuick J said: "The expression 'contingent creditor' … must, I think, denote a person towards whom under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date." That definition was adopted by the High Court in Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455, 459. Typically, there will be a contingent claim if it is necessary for the alleged creditor to establish that an event such as certification of his claim or the issuing of a statutory notice is necessary before it becomes a debt which can be the subject of action. A claim does not become a contingent claim merely because the company denies it. There was no event which had to occur before Newland could sue. The fact that it may have had to issue a statutory demand or sue in the District Court before being able to execute on the company's assets is neither here nor there. 403 Mr Wood's submission is valid that one must compare and contrast the difficulties that the administrator had in considering the claims of Newland and Capital on the one hand, with the ease in which he admitted the claim of Kirwan and his associated companies. There was very little material to back up these claims, yet no questions about them appeared to suggest themselves to the administrator. 404 When one considers the different reasons put forward at different times for rejection of the Capital and Newland's claims, the failure of an experienced company administrator to make a valuation of the claims, the rather strange approach generally to the claims, and compares this with the ease in which the Kirwan claim was admitted, it seems to me that one is justified in coming to the conclusion that the conduct of the administrator in and about this matter was very singular indeed. 405 It is a very serious matter to make a finding of improper conduct on the part of an administrator. One must apply the Briginshaw test. However, putting together all the matters that I have just discussed and adding in those discussed under head 3, it would seem to me that it was open to his Honour to come to the conclusion that this administrator had acted improperly. 406 6. Mr Rares SC acknowledges that for all practical purposes Mr Gould has now been removed as administrator and that so much has occurred since his removal that there is no utility in reversing the substantive order which Austin J made. However, he says that if, as a result of an erroneous judicial decision, a person has been prejudiced in a real way, even if the actual decision is not capable of reversal, that person should be entitled to a declaration that, for instance in this case, he has not been guilty of improper conduct. Mr Rares relies on what was said by the High Court in Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582 and 596-7, and see also Chief Constable of North Wales Police v Evans [1982] 1 WLR 1155, 1172. 407 Mr Wood submits that there is no utility in making such a declaration. He agrees that the court proceeds on the basis that reputation itself should be protected, but submits this does not mean that where a party such as Mr Gould has been afforded natural justice through his opportunity to be represented and give evidence in the proceedings he should be entitled to the benefit of a bare declaration where the practical status quo of what was ordered by Austin J will be maintained. He submits that the practical controversy between the parties concerns the termination of the DCA. The remedy which Mr Gould seeks is more to be used for the purposes of defending himself in any proceedings that might be brought against him to be deregistered as a liquidator and auditor. Mr Wood submits that allowing the appeal or making a declaration ultimately for this ulterior purpose would be unwarranted. 408 It seems to me that the general approach of Mr Rares is correct and that this Court might make a declaration if it came to the view that Mr Gould's conduct was not improper. However, I would have to put on that statement the rider that the onus would be on Mr Gould to establish affirmatively that he was entitled to such a declaration and it would be insufficient merely for him to say that on the Briginshaw standard the trial judge should not have come to the conclusion he did. 409 For the reasons I have already given, no such declaration should be made in the present case in any event because the basis for making the declaration has not been established on the facts. 410 7. This matter concerns the appropriate order for costs that should have been made at first instance. The essential question before us is whether Austin J properly exercised his discretion as to costs. 411 In an additional judgment delivered on 10 September 2001, Austin J concluded [94] and [95]: "[94] I have found that Mr Gould has no entitlement to indemnity out of the assets of Securities. I have expressed the opinion that if costs are sought against a deed administrator as defendant, the normal order should not be limited to the assets of the company under administration. I have found that it was unreasonable for Mr Gould actively to defend the proceedings, given that the gist of the proceedings was to complain, successfully in the result, about Mr Gould's improper conduct. In those circumstances, there is no basis for departing from the normal order. [95] In view of these conclusions, the proposition underlying paragraph 10 of the draft minutes is correct." His Honour then proceeded to say that he had power to make such an order as he thought just under s 447E(1) of the Corporations Act and being satisfied that the administrator had managed the company's affairs in a way that was prejudicial to the interests of some or all of the company's creditors and members, by virtue of his improper conduct and by defending the proceedings for his removal he should make the order 10 in the short minutes which is now order 3 in Set B set out above. 412 His Honour then found that he should make order 11 in the short minutes for the reason he gave in para [96] of his reasons. He said, inter alia: "I have found that Mr Gould is not entitled to an indemnity against Securities in respect of the costs of the proceedings. It therefore follows that he cannot recoup the costs incurred by him as the second defendant and a cross-defendant in these proceedings, and if he has purported to pay any of those costs out of the assets of Securities, he must reimburse Securities for that expenditure." His Honour then made order 4 in Set B set out earlier. 413 The cross-appellant's notice of appeal contained ground 36 that "His Honour erred in declining to follow the decision of Young J in Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730." Needless to say, this ground had some immediate appeal. However, it is necessary to look at the submissions made by the cross-appellant in more detail. It is not necessary in view of what I have already said to consider again the question as to whether Mr Gould's conduct was or was not improper. 414 Mr Rares SC submitted that an administrator is not normally a party to this sort of litigation, and ought, where he or she is a defendant, be treated in the manner which Oliver J held appropriate in Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274. He further submits that Mr Gould was not removed for corruption or maladministration and that my decision in Biposo was correct in holding that, in circumstances such as the present, Mr Gould was entitled to his costs out of the assets of Securities. It is put that he was entitled and indeed, properly ought to have acted to defend the decision to execute the DCA. Further, analogously with what Needham J said in Re Shanks Byrne Industries Pty Ltd [1979] 2 NSWLR 880, 883, the difficulties were created by Far East and Capital on the one hand, and the employees and trade creditors or Mr Kirwan on the other, and Mr Gould's costs were properly to be borne by Securities. 415 Mr Cashion SC put that Mr Gould was a proper defendant to the proceedings and it was entirely appropriate that as the unsuccessful party he bear the costs of the successful parties. Mr Cashion put that Re Biposo merely set out a guideline for the exercise of discretion as Austin J held, but in any event, administrators appointed under a deed of company arrangement accept their appointment voluntarily and in that way at least their position should be distinguished from that of a court appointed liquidator. The Judge held that Mr Gould's conduct was not merely an error of commercial judgment or a failure to make enquiries, but was improper as well as negligent. Thus, as the Judge said [143], there was an obvious contrast between his findings and the lesser findings made against the liquidator in Re Biposo. It was unreasonable for the administrator to defend the proceedings to the extent he did. 416 Mr Rares says that in any event, Mr Gould's liability should be limited to one set of costs. Mr Cashion SC suggests that what the Judge did was quite proper. 417 I should now return to Austin J's judgment on the point and to the principal cases referred to. 418 In Re Wilson Lovatt & Sons Ltd a liquidator had mounted a claim against former directors which failed. He also mounted a preference claim against a bank which failed. Oliver J, as his Lordship then was, analysed what was in the leading textbooks and distinguished a series of situations, particularly the situation where there is a contest between the liquidator and a third party over costs, and where there is a dispute as to who should bear the costs within the company in liquidation's structure. He also distinguished the case where the liquidator is the plaintiff and where he is the defendant. At [45] of his additional judgment, Austin J cited Re Wilson Lovatt & Sons Ltd at 278 for supporting his proposition that: "In the case of a court-appointed liquidator who is a defendant in proceedings, the Court has control of the winding up, and it is common practice in England to deal with a liquidator's claim to indemnity out of the company's assets … by limiting the order that the liquidator pay costs, in its terms, to payment out of the assets of the company. However … English authority suggests that an order limited to the company's assets will be made only where the adverse litigant does not object …". 419 Re Biposo was a case where the administrators of the company became liquidators following a meeting of creditors which resolved that the company be wound up. The liquidators gave me the impression that they were not appearing to behave impartially and I ordered their removal. However, I did not find maladministration or corruption, and said at 740: "I do not consider that the conduct was sufficiently 'odious', to use [counsel's] word to take it out of the general rule that where a liquidator is removed primarily to protect the administration because of perceived problems with impartiality his costs and the plaintiff's costs should come out of the assets. I will reserve further consideration as to costs should the assets prove insufficient." 420 Austin J said at [49] that Re Biposo went beyond Re Wilson Lovatt in two respects: (a) it applied the general rule respecting court appointed liquidators to voluntary liquidators; and (b) it did not confine the circumstances in which a limited order is made to cases where the company's assets are sufficient to meet the costs obligation. With great respect, the second proposition is contradicted by Biposo itself, where further consideration was reserved in case this problem should occur. Austin J records that Mr Gould relied on Biposo as authority for the proposition that a liquidator and administrator will not be ordered to pay the successful plaintiff's costs personally unless corruption, maladministration or misconduct of an equivalent degree is established. Austin J rightly said that the case is not authority for such a narrow proposition. An unreported decision City & Suburban Pty Ltd v Smith (No 2) (Merkel J, Federal Court of Australia, 31 July 1998) supported the proposition. Austin J properly declined to follow this decision on its interpretation of Re Biposo, but he appeared to be convinced that Merkel J got it right and I got it wrong as to when one orders an administrator or liquidator to pay costs. This is rather surprising, as neither the Butterworths nor CCH Company Law Cases which usually pick up any significant decision in the corporations law field avidly, have seen fit ever to report Merkel J's decision. 421 A series of misunderstanding seems to have crept in both the submission and with respect, Austin J's judgment. The first is that there are two aspects to the problem as Oliver J said in Re Wilson Lovatt at 278: (A) as between the liquidator (or administrator) and an adverse litigant; and (B) as between himself and the estate. As to (A), Biposo merely dealt with whether applying a general guideline an order should be made against the administrator/liquidator in that case. (B) was left open for further consideration. It may be that it might have been preferable not merely to reserve further consideration but to make some more precise order at the time when I did make an order, but the competent counsel who appeared in the case did not urge that on me, and as far as I know, there was never any problem with assets. It is reading too much into Biposo to say that it was a policy decision that the successful plaintiff must bear its own costs over and above the assets held by the company. 422 Secondly, on proposition (A), the usual rule applies, viz: (i) costs are in the discretion of the court; (ii) as a general guideline a liquidator or administrator acting appropriately is entitled if unsuccessful that the costs be paid by the company and not by the liquidator or administrator personally. 423 I have no quarrel with the propositions outlined in the bankruptcy case of Adsett v Berlouis (1992) 37 FCR 201, that to say that only a trustee who has recklessly instituted or precipitated litigation should be deprived of the right to recover costs from the bankrupt's estate is too limited a proposition. This is, of course, a class (B) situation rather than a class (A). I also agree that authorities such as Re Beddoe [1893] 1 Ch 547, 558, that the basal question is whether the costs have been properly incurred or not. 424 With great respect, I cannot see two different lines of authority, one stemming from Biposo and the other from Adsett v Berlouis when all the cases are properly read. 425 However, the point should be made that, whilst it might be said that the trial judge made some minor errors in analysing the authorities, any error his Honour may have committed in this area really has no effect on the exercise of discretion. This must be so once one upholds the principle espoused by his Honour contrary to the submissions of Mr Gould that the occasions when a liquidator or administrator may be ordered to pay costs personally are not limited by the restricted interpretation of Biposo given by Mr Gould or endorsed by Merkel J in the City & Suburban case. 426 In [62] to [64] of his Honour's additional judgment, Austin J said first that he interpreted Re Biposo as setting out a guideline for the exercise of discretion given the generally discretionary nature of orders for costs. I would agree. He continued: "It may be that in the case of a court-appointed liquidator, the guideline is very strong, since the liquidator is appointed by the Court as its officer to wind up the company on the court's behalf. In those circumstances one would expect the liquidator's liability to be limited to the assets of the company in liquidation except in extreme circumstances, and therefore that the Court will routinely limit the liquidator's liability for costs as unsuccessful defendant to the assets of the company, even where the assets may not be adequate to meet the costs liability." 427 In [63] his Honour says that it might be appropriate to take the same approach for a voluntary liquidator. He then, however, said in a passage described by Mr Rares SC as providing an extraordinarily unjust outcome: "[64] In the case of an administrator under a deed of company arrangement, however, there is a significantly greater opportunity for the administrator to obtain contractual protection, since in the normal case the deed administrator has previously been the voluntary administrator of the company and in the latter capacity, he or she has had a substantial influence on the contents of the deed. That being so, it seems to me that there will less often be a justification for the Court to limit the liability for costs of an administrator as unsuccessful defendant, where the assets of the company may be insufficient to cover liability and the successful party objects to limitation. Indeed, in my opinion the normal costs order against a deed administrator as unsuccessful defendant will be the same as the normal costs order against a deed administrator as unsuccessful plaintiff – that is, an order that the administrator pay the successful party's costs, without limitation to the company's assets." 428 In [94], Austin J found it was unreasonable for Mr Gould actively to defend the proceedings. His Honour then took the view that it followed that the costs were not reasonably incurred and accordingly, as to (A), Mr Gould should pay the costs of the successful parties, and as to (B) there should be no indemnity. 429 With respect, it does not necessarily follow from Mr Gould's decision actively to defend the proceedings that all the costs incurred by Securities or Mr Gould were unreasonably incurred. It would be almost certain that some of those costs would be necessary to perform the duty of any reasonable administrator in seeking to put before the Court material which the Court would need to decide the issues before it. 430 Further, Mr Rares SC says that it is well recognised in the authorities that the trustee or a person in the role of a trustee is still entitled to be paid his costs out of the estate in a proper case where he has defended the suit for the benefit of the estate though at the same time, defended his own character. This is certainly so; see eg Walters v Woodbridge (1878) 7 Ch D 504, 509. 431 However I respectfully agree with the words of Heydon JA in Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at [35] that: "Parties who see themselves as having a role of assisting the Court in some respects cannot easily also occupy the role of parties advancing positive self-interested claims in other respects – particularly where the arguments advanced by way of assistance to the Court are also strongly in the self-interest of those advancing them. Sacro egoismo is not a quality which a statutory office holder can easily claim." 432 In my view, because of what I have just said and because I have taken a different attitude to the degree of impropriety of Mr Gould, and because, at least to a minor extent I consider Austin J did not quite apply the right tests, this Court must exercise afresh the discretion as to costs. 433 In doing so, I bear in mind the principles that have already been adverted to in the submissions. In addition, some account has to be taken of provisions in the Corporations Act such as s 443C that the administrator is not liable for the company's debts except as provided by the Act, and s 443D that the administrator ordinarily is entitled to an indemnity for debts which he or she has personally incurred or his or her remuneration as fixed. 434 I will put aside for a moment s 447E of the Corporations Act upon which Austin J relied for the order he made. Apart from that section one would have thought that the order for costs so far as principle (A) is concerned that the administrator should pay the costs of the successful plaintiffs. So far as principle (B) is concerned, the administrator is entitled to be indemnified in so far as the costs were properly incurred out of the assets of the company. The matter should be referred to a costs assessor to work out what costs were properly incurred. As to the balance, there should be no indemnity. 435 If the assets of the company are insufficient, it will follow that the administrator will not be able to get in dollars and cents the amount for which he is entitled to be indemnified. 436 As to whether more than one set of costs should be allowed, it is necessary to see the structure of the litigation and the roles that the various parties played. Far East was the plaintiff, Securities, Mr Gould and Capital were the defendants. Capital then made a cross-claim against Securities, Mr Gould and Mr Kirwan as well as Far East. Both the originating process and the cross-claim sought that the DCA be terminated and that the share allotment of Mr Kirwan be set aside. The cross-claim sought much the same thing. Indeed, Austin J said at [3] of the judgment of 28 February 2001: "In substance, the cross-claim raises the same issues as Far East's statement of claim." 437 As far as I can see, no comment was made until the time that costs were discussed as to whether there should be separate representation of the two interests. Because Far East and Capital were on different sides of the record, they could not be represented by the same counsel and solicitors. The general rule is that where one has separate claims resulting from the same act of the defendant, ordinarily each claimant is entitled to costs; see Oppenshaw v Whitehead (1854) 9 Ex 384; 156 ER 163 and Greir's case (1889) 45 Ch D 606. 438 It does not seem to me that Far East and Capital were sufficiently in the same interest for the cases requiring people in the same interest to join together with the penalty of only getting one set of costs. Even if this were possible, as I have said, the parties were on different sides of the record so that joint representation just could not occur. 439 Accordingly, in my view the order as to two sets of costs was appropriate. However, the costs assessor will doubtless be able to assess what is proper and to avoid duplication of effort in the light of the fact that two parties were pursuing the same end. 440 The issue involving costs needs also to be considered from another perspective. 441 Austin J relied on s 447E of the Corporations Act to justify orders Set B 3 and 4. 442 This is a general section empowering the Court to supervise administrators. It has its equivalent, although not exact equivalent, so far as liquidators are concerned, in s 536. So far as s 536 is concerned, in Re Anderson Group [2002] NSWSC 764, Barrett J held that the supervisory power of the Court under s 536 could properly be exercised with respect to an objection against a claim by a liquidator for his remuneration under s 473 so long as the appropriate parties were before the Court. With respect, this seems a wise and sensible decision. 443 By analogy the, Austin J could exercise the powers vested in him under s 447E of the Act so long as the creditors or a representative of them were parties. Indeed, despite a very verbose amended notice of cross-appeal there does not appear to be any challenge to the power to make these orders under s 447E. 444 To my mind, the orders are supportable under that section. Indeed, it is not uncommon, in cases of liquidators, (vide Re Network Welding Pty Ltd (No 2) [2001] NSWSC 809) or lawyers (vide Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134) for such orders to be made. 445 The proper order for costs against the administrator can be supported by s 447E of the Corporations Act as well as under a power to award costs under s 76 of the Supreme Court Act. However, in my view the costs which should be paid by Mr Gould under 447E are the same as under s 76, that is, the costs over and above those which were properly incurred in defending the DCA (even though some of those costs may have also gone to preserve Mr Gould's reputation). 446 8. It follows that the appeal should be allowed to the extent that it is made a condition of the order setting aside the allotment of shares that Mr Kirwan be paid $100,000 plus interest at the appropriate rate. Unless there are further submissions to be made as to the rate, it should be that under Schedule J to the Rules. On this basis and calculating interest from the date of filing the originating process, the interest payable is $23,500. No argument was put to us as to whether there should be any special order as to costs. I would think that order 1 of Set B as to costs of the hearing should be modified so that the following is added: "Except in so far as those costs relate to the issue of whether the allotment of shares to Mr Kirwan should be set aside on which issue the plaintiff and third defendant are to pay the fourth defendant's costs. 447 As to the costs of the appeal, the appellant is entitled to his costs against Far East and Capital and probably jointly against the other respondents as well. 448 In my opinion, the cross-appeal should be dismissed with costs but there should be a variation of the order for costs in accordance with what I have outlined above. 449 Having now read the reasons of Meagher and Giles JJA, the following orders would seem to follow: (1) Appeal allowed in part. (2) Set aside declaration 7 made on 8 March 2001. (3) Vary declarations 5 and 6 made on 8 March 2001 – (a) by adding at the commencement of declaration 5 "Upon condition that the first defendant repay to the fourth defendant the sum of $100,000 subscribed for the shares," and (b) by adding at the commencement of declaration 6 "Upon the same condition,". (4) Vary order 1 made on 10 September 2001 by adding at its conclusion, "save so far as the fourth defendant's costs relate to the issue of repayment to the fourth defendant of the sum of $100,000 which costs are to be paid by the plaintiff and the third defendant". (5) Declare that the first defendant is also liable to pay the fourth defendant interest on the said sum of $100,000 in the amount of $23,500. (6) Order that the said sum of $23,500 be paid by the fourth defendant to the first defendant. (7) Order that the respondents pay the appellant's costs of the appeal. 450 On the cross appeal the orders set out by Giles JA in para 264 reflect the views of the majority and should be the orders of the Court. 451 In view of the complications and the fact that counsel have not been able to address on what orders for costs should be made in the light of these reasons the parties should be directed to bring in agreed short minutes or, if they are unable to agree, competing short minutes and written submissions in support of the competing versions before the end of term. In the absence of agreement, the orders to be made will be finally determined on the written submissions. *********************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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