Reported Decision : 50 ACSR 549 New South Wales Supreme Court CITATION : Blundell v Macrocom Pty Ltd [2004] NSWSC 895 revised - 29/09/2004 HEARING DATE(S) : 27/09/04 JUDGMENT DATE : 28 September 2004 JURISDICTION: Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Administrator's application for directions refused. Winding up order made. CATCHWORDS : CORPORATIONS - voluntary administration - pending winding up application - whether administrator has power to compromise pre-existing debt of applicant for winding up - whether power properly exercisable - company insolvent - direction refused - winding up order made LEGISLATION CITED : Corporations Act 2001 (Cth), ss.437A, 442A, 459E Re Ansett Australia Ltd (2001) 39 ACSR 355 CASES CITED : Re NC RE Capital Ltd (1999) 32 ACSR 418 St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851 PARTIES : Barnett Blundell - Plaintiff Macrocom Pty Limited - Defendant FILE NUMBER(S) : SC 4368/04 COUNSEL : Mr A A Loel, Solicitor - Plaintiff Mr T Hall - Defendant SOLICITORS : Toomey Pegg Drevikovsky - Plaintiff Matthews Folbigg Pty Limited - Defendant IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 28 SEPTEMBER 2004 4368/04 – BARNETT BLUNDELL v MACROCOM PTY LTD JUDGMENT 1 The plaintiff is a former employee of the defendant. On or about 12 July 2004, he served on the defendant a creditor's statutory demand under s.459E of the Corporations Act 2001 (Cth) in respect of debts totalling $84,166.75 for unpaid salary. There is a statement in the affidavit of the defendant's sole director that the plaintiff was also a director of the defendant and ceased to hold office as such on 30 June 2003. Relying on the defendant's non-compliance with the statutory demand, the plaintiff filed an originating process on 5 August 2004 seeking a winding up order. 2 The originating process was returnable on 6 September 2004. On 2 September 2004, however, a secured creditor of the defendant acted under s.436C to appoint an administrator. When the winding up application came before the court on 6 September 2004, Campbell J stood it over to 20 September 2004 after noting evidence suggesting that a deed of company arrangement might possibly be proposed. 3 When the winding up application came before me on 20 September 2004, the administrator, Mr Whitton, sought leave to file an interlocutory process containing an application for directions under s.447D of the Act which empowers the court to give directions to an administrator "about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers". The matter in respect of which the administrator thus foreshadowed a request for the court's guidance was whether the plaintiff's claim upon which the winding up application was based might be compromised in such a way that a slightly smaller sum was paid as an expense of the administration, whether that sum should be paid "as a priority creditor claim in the liquidation of the company" and as to the extent to which any security should be provided for the plaintiff against the possibility of a later finding that he was involved in the trading of the defendant while it was insolvent. 4 The administrator's interlocutory process was ultimately filed in court on 27 September 2004 together with his supporting affidavit. I heard the application on that day when the further adjourned winding up application also came before me. 5 The administrator's affidavit incorporates a report as to the position of the defendant. Dealing with the plaintiff's claim, the administrator says that he has established an entitlement to a sum for unpaid salary slightly smaller than that claimed in the statutory demand, "unless evidence to the contrary" [sic]. The sum to which the administrator refers is $82,602, compared with the $84,116.75 claimed. As to the defendant's financial position generally, the administrator reports assets of $1,812,332 compared with liabilities of $44,274,324 representing a deficiency of $42,411,992. The residual claim of the secured creditor by which the administrator was appointed is recorded as $5,234,157. The administrator also mentions having come to the conclusion that, in a winding up, there may be claims for recovery of unfair preferences and in respect of uncommercial transactions and insolvent trading. Finally, the administrator reports his opinion as to the likely fate of the defendant. With no deed of company arrangement proposal having materialised and a situation of clear insolvency existing, the administrator's view is that winding up is inevitable. The second meeting of creditors in the winding up is to take place on 30 September 2004. 6 The administrator's interlocutory process raises two basic questions: first, whether the administrator, acting as such, has power to cause the defendant to pay $82,602 in full satisfaction of the claim upon which the plaintiff bases his winding up application; and, if so, whether the administrator may properly exercise that power in the circumstances of this case. 7 Mr Hall of counsel who appeared for the administrator referred to the broad powers conferred upon an administrator by s.437A: " Role of administrator (1) While a company is under administration, the administrator: (a) has control of the company's business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration. (2) Nothing in subsection (1) limits the generality of anything else in it." 8 Section 437A is supplemented by s.442A: " Additional powers of administrator Without limiting section 437A, the administrator of a company under administration has power to do any of the following: (a) remove from office a director of the company; (b) appoint a person as such a director, whether to fill a vacancy or not; (c) execute a document, bring or defend proceedings, or do anything else, in the company's name and on its behalf; (d) whatever else is necessary for the purposes of this Part." 9 The breadth of these provisions must mean that an administrator has, as a purely abstract proposition, power to compromise a claim made by a creditor in respect of events or dealings preceding the advent of the administration and to cause the company to make a payment accordingly. But that power, it seems to me, is subject to the fundamental limitation reflected in paragraph (d) of s.442A which confers a power to do "whatever else is necessary for the purposes of this Part" [emphasis added]. 10 That formulation makes it clear (if it needs to be made clear) that all powers of an administrator, broadly expressed as they are, exist only for the purpose of carrying Part 5.3A into effect, with the result that a particular exercise of power will be sustainable only if it can be seen to be referable to some aspect of the proper discharge of the functions of a Part 5.3A administrator. An example of exercise of a power to compromise for such a purpose will be found in Re Ansett Australia Ltd (2001) 39 ACSR 355. Additionally, of course, an administrator occupies a fiduciary position vis-à-vis the company and is an "officer" of it as defined by s.9, with the result that, for that reason also, a "proper purpose" requirement with respect to the exercise of powers applies as an incident of both the general law fiduciary duty and the statutory duty arising under s.181. 11 In Re NC RE Capital Ltd (1999) 32 ACSR 418, Santow J had occasion to consider, upon an application for directions under s.447D, the nature of an administrator's duties in a situation where insolvency had not arisen. His Honour said (at paragraph 7): "The present application is made in the absence of precedent, though the guiding principles are clear enough. There are presently no binding statutory provisions precluding the transactions which the administrator has in mind, as described in general terms in his affidavit of 17 June 1999. Until such time as winding up begins, or perhaps, is imminent, the administrator is simply bound by the same general law obligation as would its displaced board, being of a company which faces the prospect of insolvency albeit not yet imminent, namely: to act in the interests of the relevant companies and, thus not to act contrary to the interests of creditors as a whole and to act as between creditors impartially for the benefit of creditors as a whole. When insolvency does become imminent, the matter must be reviewed." 12 In the present case, the presumption of insolvency operates and is clearly confirmed by the assessment made by the administrator. His report suggests that, once the claim of the secured creditor has been satisfied, there will be no funds to meet the claims of any of the unsecured creditors, apart from any (such as the plaintiff) who may enjoy priority under s.561, assuming that the secured creditor's security is of such a kind as to be relevant to that section. This will be the eventuality, on the present evidence, whether the winding up is imposed by order of the court in response to the plaintiff's pending application or as a result of a resolution of creditors at the second Part 5.3A meeting to be held on 30 September 2004. 13 That being so and in view of the fact that the administrator does not point to any beneficial effect of compromise of the plaintiff's claim and payment of the agreed smaller sum, so far as progressing of the administration and attainment of the Part 5.3A objectives are concerned, I see no basis on which the court could properly make the directions the administrator seeks. As things now stand, the company is about to be subjected to winding up, by one means or the other. No advantage to the general body of creditors will be achieved if the administrator agrees to pay $82,602 in satisfaction of the plaintiff's claim and actually makes that payment. In the winding up that now appears virtually inevitable, the secured creditor is likely to realise its security, thereby obtaining whatever assets are available, and prove for the balance of its debt. There will accordingly be, in all likelihood, no funds for unsecured creditors except any preferred under s.561. There is a possibility that, depending on precise circumstances, any payment now made by the administrator to the plaintiff would be susceptible to recovery as an unfair preference (s.588FA). 14 It follows that the directions the administrator seeks will not be made. 15 As to the winding up application, it is said that a winding up order should now be made. It is submitted on behalf of the administrator that this should be preceded by a termination of the administration so that, as in St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851, the "relation-back day" in relation to the winding up will be the date of the filing of the winding up application (5 August 2004) rather than the date of appointment of the administrator (2 September 2004). In the present case, however, no case has been made out for terminating the administration. There is no suggestion that, as in the St Leonards case, a sole director has manipulated matters by putting Part5.3A administration in place with a view to causing the relation-back day to be the day involving the least personal exposure to him. In the present case, it was the secured creditor which initiated the administration. 16 There is no reason why the winding up order should not be made. The presumption of insolvency has arisen. All the formalities associated with a winding up application have been attended to. A positive case has been made by the plaintiff. Section 440A still requires the court to adjourn the winding up application if satisfied that it is in the interests of creditors that the company continue under administration rather than being wound up; however, the administrator's report shows a situation of clear insolvency in which continuation of administration will produce no advantage or benefit to creditors. 17 Mr Whitton, the existing administrator, has indicated in his affidavit his consent to be appointed and to act as liquidator. Because of the work he has already done, there are advantages in his being appointed. 18 The orders of the court are as follows: 1. Order that the administrator's interlocutory process filed in court on 27 September 2004 be dismissed. 2. Order that the administrator's costs of the interlocutory process be costs in the Part 5.3A administration. 3. Order that Macrocom Pty Limited ACN 077 511 794 be wound up in insolvency under the Corporations Act 2001 (Cth). 4. Order that Robert William Whitton of Knights Insolvency, Level 27, The Chifley Tower, 2 Chifley Square, Sydney be appointed liquidator of Macrocom Pty Limited. 5. Order that the costs of the plaintiff of these proceedings be costs in the winding up. ********** Last Modified: 09/29/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.