Mt Nathan Land Owners Pty Ltd (in liquidation) v Morris
[2008] QSC 239
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- Notable Unreported Decision
- Appeal Determined (QCA)
- Mt Nathan Land Owners Pty Ltd (in liquidation) v Morris[2008] QSC 239
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Mt Nathan Land Owners Pty Ltd (in liquidation) v Morris[2008] QSC 239
Mt Nathan Land Owners Pty Ltd (in liquidation) v Morris[2008] QSC 239
SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO/S: | |
Trial Division | |
PROCEEDING: | Civil Trial |
ORIGINATING COURT: | |
DELIVERED ON: | 3 October 2008 |
DELIVERED AT: | Brisbane |
HEARING DATES: | 8, 9, 11, 14, 15, 16, 17, 18, 21, 22, 23 April, 29 May, and 11 June 2008 |
JUDGE: | Atkinson J |
ORDERS: |
|
CATCHWORDS: | CORPORATIONS – CONSTITUTION AND LEGAL CAPACITY – MEMORANDUM AND ARTICLES OF ASSOCIATION – INTERNAL DISPUTES – where a group of neighbours entered into legally binding arrangements to develop and subdivide land of which they were owners – where land owners were not professional land developers – where each landowner was a shareholder – where there were disputes and personality clashes between shareholders –where the development did not perform well financially – where the company was beset by a shortage of cash – where a voluntary administrator was appointed CORPORATIONS – CORPORATE FINANCE – SHARES – CLASSES OF SHARES AND SHAREHOLDERS – where a group of neighbours intended to form a company to carry out a proposed development and subdivision – where a shareholders’ agreement was entered into – where the parties to the shareholders’ agreement entered into interdependent contracts of sale with the company – where consideration for the interdependent contracts included the company’s entry into the agreement and the allocation of a share to each respective party – where a deed of variation between the company and the shareholders was drawn up – where the deed of variation was executed to clarify transactions contemplated by the shareholders’ agreement – where each party to the shareholders’ agreement received different classes of shares – where each class of share represented the proportion of land contributed by the shareholder and that shareholder’s share of any profit or return once the land was sold – where loan accounts were raised for the predicted proportionate sale amount in favour of each shareholder – whether shareholders were creditors CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DIRECTORS AND OTHER OFFICERS – CRIMINAL AND STATUTORY CIVIL LIABILITY OF OFFICERS – DUTIES TO ACT HONESTLY AND EXERCISE CARE AND DILIGENCE – where the directors entered into a deed of compromise with one of the shareholders – whether directors breached their statutory duties to act within the company’s constitution CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DIRECTORS AND OTHER OFFICERS – CRIMINAL AND STATUTORY CIVIL LIABILITY OF OFFICERS – DUTIES TO ACT HONESTLY AND EXERCISE CARE AND DILIGENCE – where directors sought and acted on legal advice – where legal advice was that company was insolvent or likely to become insolvent – where directors appointed a voluntary administrator – whether it was reasonable for the directors of the plaintiff company to resolve that the company was insolvent or likely to become insolvent when they appointed a voluntary administrator CORPORATIONS – VOLUNTARY ADMINISTRATION – DEEDS OF COMPANY ARRANGEMENT – CREDITORS UPON WHOM BINDING – where directors acted on legal advice – where directors were of the opinion that the company was insolvent or likely to become insolvent – where directors unanimously resolved that the company was insolvent or likely to become insolvent – where directors resolved to appoint a voluntary administrator – whether opinion was genuinely formed and in good faith TORTS – NEGLIGENCE – ESSENTIALS OF ACTION FOR NEGLIGENCE – DUTY OF CARE – SPECIAL RELATIONSHIPS AND DUTIES – PROFESSIONAL PERSONS – where a firm of solicitors gave advice to the directors of the company that the company was or was likely to become insolvent – where the solicitors relied in part on financial statements prepared by a firm of accountants – where directors relied on the legal advice – whether or not solicitors were negligent in advising the directors that the company could be put into administration TORTS – NEGLIGENCE – ESSENTIALS OF ACTION FOR NEGLIGENCE – DUTY OF CARE – SPECIAL RELATIONSHIPS AND DUTIES – PROFESSIONAL PERSONS – where the directors of the company resolved to appoint a voluntary administrator – whether the administrator should have accepted appointment and remained in the position of administrator Corporations Law s 45A, s 95A, s 293, Part 5.3A, s 435A, s 436A, s 436E, s 437A, s 438A, s 438B, s 439A, s 439C, s 444A, s 444B, s 446A, Part 5.7B Crimmins v Glenview Home Units Pty Ltd (in liq) [2001] NSWSC 699, applied Darkinjung Pty Ltd v Darkinjung Local Aboriginal Land Council [2006] NSWSC 1008; (2006) 203 FLR 394, cited Downey v Crawford [2004] FCA 1264, cited Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd [2003] QSC 205 ; (2003) 178 FLR 1, applied HML v R [2008] HCA 16, cited Hymix Concrete Pty Ltd v Garrity (1977) 2 ACLR 559, cited Kazar v Duus 29 ACSR 321, applied Lewis (as liq of Doran Constructions Pty Ltd (in liq) v Doran [2005] NSWCA 243, cited Sandell v Porter (1966) 115 CLR 666, applied Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, applied Tru-Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632, cited Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663, distinguished |
COUNSEL: | S Anderson for the plaintiff T Morris in person J McTaggart in person T Sullivan for the fifth defendant J Dalton SC and D Clothier for the sixth defendant |
SOLICITORS: | Lindwall Lawyers for the plaintiff Rudkin Hitchcock Lawyers for the third defendant Minter Ellison for the fifth defendant Brian Bartley Lawyers for the sixth defendant |
[1] Twelve years ago, in 1996, a group of neighbours entered into legally binding arrangements together to develop and subdivide some of the land of which they were individual owners (“the land owners”). This litigation unfortunately has revealed the unforseen perils of that course, perhaps suggesting that, in accordance with the views of the curmudgeonly neighbour in Robert Frost’s poem “Mending Wall”, “Good fences make good neighbours.”
[2] The neighbours owned property set in bushland a few kilometres west of Nerang on Mt Nathan Road which is the road between Beaudesert and Nerang. It is a heavily treed area with relatively inexpensive houses set amongst the trees. The land owners had more land than they needed and decided to form a company together to develop and subdivide the balance of their land and so, they hoped, create a greater return than they would have if they had each acted alone. The company they formed was the plaintiff, Mt Nathan Land Owners Pty Ltd (hereinafter referred to as “Mt Nathan Land Owners” or “the company”).
[3] A critical question in this case is whether or not it was reasonable for the directors of the plaintiff company to resolve that the company was insolvent or likely to become insolvent on 13 October 1999 and so appoint a voluntary administrator. Three of those directors, Trevor Douglas Morris, John McTaggart, and Kevin Francis Gill are the first, second and third defendants respectively. The remaining director was James Graham, the fourth defendant, but the proceedings have never been served on him and so have been discontinued against him. The voluntary administrator appointed was Robert Eugene Murphy, the fifth defendant. In appointing the administrator the directors acted, at least in part, on the advice of Deacons Graham & James (“Deacons”), a firm of solicitors, the sixth defendant in this litigation.
[4] It is also necessary to determine whether or not the solicitors were negligent in advising the directors that the company could be put into administration and whether the administrator should in the circumstances have accepted appointment as, and remained in the position of, administrator.
[5] In this action the plaintiff claimed damages against the first, second and third defendant for breach of statutory duties, fiduciary duties and duty of care to the company; against the fifth defendant, damages for breach of statutory duties, contract, fiduciary duties and duties of care; and against the sixth defendant, damages for breach of contract and duty of care to the company.
[6] In order to determine whether or not any of those causes of action has been made out it is necessary to consider in some detail the history and facts in this matter.
[7] The land owners who agreed to enter into the common enterprise were not professional land developers but just a group of neighbours with the diverse skills and experience one would expect to find amongst residents in an outer urban semi-rural area. The first defendant, Mr Morris, was a pensioner and a retired plumber; the second defendant, Mr McTaggart, a bank employee, and Amanda Thom, a legal secretary; the third defendant, Mr Gill, was retired and Leah Gill, a secretary; the fourth defendant, Mr Graham, a manager, and Ketty Campbell, a croupier; Peter Goodier, a mechanical engineer, and Barbara Goodier, a clerk; Kenneth Richardson, Elizabeth Richardson, Charles Johnston and Catherine Johnston were all tradespersons; John Carabetta was a backhoe operator; Vanessa Etridge, retired; Raymond Lane, a building designer, and Marie Lane, a clerk; and Robin Moore, a secretary. They did not have, nor profess to have, any particular expertise in running a company. They conducted feasibility studies and, in November 1995, applied for zoning approval from the Gold Coast City Council (“GCCC”) for the subdivision.
[8] Mr Morris, Mr Gill and Mr McTaggart each gave evidence at the trial. Mr Morris and Mr McTaggart were not legally represented and Mr Gill was represented by a solicitor who assisted Mr Morris and Mr McTaggart to a certain extent. Each of them gave their evidence honestly and carefully, consistent with a view I was able to form of them as directors, that they did their honest best at all times.
Initial legal arrangements
[9] A shareholders’ agreement was entered into on 19 January 1996 but was soon replaced by another shareholders’ agreement entered into on 29 March 1996 and it is the latter shareholders’ agreement entered into in March 1996 that will be referred to as the “shareholders’ agreement”. It was the operative original agreement. Its effective date was 30 June 1996. The shareholders’ agreement recited that the parties intended to form a company to carry out the proposed development and subdivision. The contract provided that it was subject to two conditions precedent, the first of which is not relevant for present purposes. The second is set out in clause 2(a)(ii) which provided as follows:
“(ii)the parties hereto, within one (1) month of the effective date hereof, entering into binding and enforceable contracts of sale with the company (hereinafter referred to as ‘the interdependent contracts’) of those parts of their respective properties (collectively comprising the land) discernible in the plan forming part of Schedule 2 hereto. The interdependent contracts shall be on terms and conditions considered necessary and appropriate by the company and shall provide, inter alia, that consideration for the interdependent contracts shall include the monetary consideration listed against the relevant property in Schedule 5 hereto and the company’s entry into this Agreement and the allocation to each respective party of the shares provided in the proposed Articles of Association to be allocated to them. This Agreement is also conditional upon the settlement of all of the interdependent contracts in accordance with their terms and the parties expressly agree with the company and with each other that if, for any reason, the relevant interdependent contract (pursuant to which the company is to take a transfer of the relevant part or parts of the property) does not proceed to settlement then they will take all steps reasonably required by the company to ensure that all shares in the company which may have issued to that party shall be surrendered, cancelled or transferred as the company may direct and the party shall have no further claim against the company or the other parties in relation to any of the matters referred to in this Agreement and the parties, jointly and severally, are hereby deemed to have irrevocably nominated, constituted and appointed the company and the directors of the company for the time being as their and each of their several attorneys jointly and each of them severally to be the true and lawful attorneys and attorney of the parties to execute or procure execution, lodgement and registration of any documentation deemed by the attorneys to be necessary for the carrying into effect of the provisions of this clause 2 and in the name of and as the act and deed of all or any such parties to execute and lodge any such documentation with any government department or other authority.” (emphasis added).
[10] Under Schedule 5 of the shareholders’ agreement, Mr Morris put in Lot 28 on RP 140670 for the consideration of $921,000; Mr Graham and Ms Campbell, Lot 480 on WD 5707 for $146,100; Mr and Mrs Goodier, Lot 19 on RP 140670 for $139,200; Mr and Mrs Richardson and Mr and Mrs Johnston, Lot 20 on RP 140670 for $149,700; Mr and Mrs Gill, Lot 1 on RP 159605 for $234,300; Mr Carabetta, Lot 4 on RP 159605 for $230,700; Mrs Etridge, Lot 1 on RP 140670 for $277,500; Mr McTaggart and Ms Thom, Lot 2 on RP 140670 for $258,600; Mr and Mrs Lane, Lot 3 on RP 140670 for $228,000; and Ms Moore, Lot 4 on RP 140670 for $242,400. The total consideration for the land to be sold by the shareholders to Mt Nathan Land Owners was $2,827,500.
[11] In addition, each of the ten shareholders were to be allocated one share upon the payment of $1. Each had contributed a different amount of land with Mr Morris contributing the largest amount, about one third of the land. The articles of association reflected this by providing that the respective classes of shareholders were entitled to a share of any profit or return of capital in the following proportions: shareholder one, Mr Morris, was to receive one A class share with a proportionate share of 32.36%; shareholder two, Mr Graham and Ms Campbell, one B class share with a proportionate share of 5.21%; shareholder three, Mr and Mrs Goodier, one C class share with a proportionate share of 4.96%; shareholder four, Mr and Mrs Richardson and Mr and Mrs Johnston, one D class share with a proportionate share of 5.34%; shareholder five, Mr and Mrs Gill, one E class share with a proportionate share of 8.30%; shareholder six, Mr Carabetta, one F class share with a proportionate share of 8.18%; shareholder seven, Mrs Etridge, one G class share with a proportionate share of 9.82%; shareholder eight, Mr McTaggart and Ms Thom, one H class share with a proportionate share of 9.16%; shareholder nine, Mr and Mrs Lane, one I class share with a proportionate share of 8.08%; and shareholder ten, Ms Moore, one J class share with a proportionate share of 8.59%. The proportionate shares reflected the relative value ascribed in Schedule 5 to the land they contributed to the company. Under clause 70(b) of the articles of association, each share entitled its holder or holders collectively to one vote.
[12] Clause 5(b) of the shareholders’ agreement provided that a decision by the Board required the unanimous approval of all directors except any decision on certain matters which must be approved by holders of at least 75 per cent of the shares. Those matters included Mt Nathan Land Owners’ entering into any commitment or liability which was not in the ordinary course of business and any other matter referred to the shareholders by any director in respect of which the Board had not reached a unanimous decision.
[13] By clause 6(b) of the shareholders’ agreement, the parties agreed that Mt Nathan Land Owners would appoint the Commonwealth Bank of Australia as initial bankers, Roycliffe Pty Ltd as the project manager, Michael Joseph Smith of Nerang as solicitor of the company, Leah Gill as the initial secretary of Mt Nathan Land Owners and the initial board members as initial bank signatories for and on behalf of the company. The directors were Mr Morris, Mr McTaggart, Mr Gill, Mr Lane and Mr Goodier. Mr Morris was appointed chair of the company in December 1997. Mr Goodier was replaced as director by the fourth defendant, Mr Graham. The initial bankers were changed to Suncorp Metway. I have been particularly assisted by the minutes of meetings of the company kept by Mrs Gill which appear to be detailed, accurate and highly reliable.
[14] In March 1996, Frank Crichlow was appointed as the sales agent and the firm of Teefy Suchowiecki was appointed as the company’s accountants.
[15] The Memorandum and Articles of Association of Mt Nathan Land Owners was appended to the shareholders’ agreement. The incorporation of the company was registered on 4 April 1996. Clause 55 of the Articles of Association provided that Mt Nathan Land Owners indemnified every director, secretary, executive officer and auditor of the company against any liability incurred by that person in his or her capacity as officer of the company.
[16] At an early meeting of the Board of Directors,[1] it was resolved to call the subdivision “Mt Nathan Park.”
[17] On 24 May 1996, the company received an offer of finance from QIDC for $1,965,000 secured by a first registered mortgage over the land, first registered fixed and floating charge over the assets of the company and guarantees by the shareholders limited to the percentages in which they were entitled to share in the profits.
[18] The company’s legal documentation had been drafted by Mr Smith who practised as a sole practitioner in Nerang. He first received instructions in late 1995. He subsequently drafted contracts of sale between Mt Nathan Land Owners and each of the land owners for their excess land (“the land sale contracts”). Those land sale contracts were entered into on 11 December 1996 between the company and each of the members of the company who had signed the shareholders’ agreement. In the land sale contracts Mr Smith acted for Mt Nathan Land Owners. Each had similar special conditions in addition to the standard REIQ terms. It is sufficient to set out an example and I do so by setting out the special conditions from the land sale contract with Mrs Etridge which were as follows:
“1.The Seller agrees to sell to the Buyer part of their land Lot 1 Mt Nathan Road Nerang currently described as Lot 1 on RP 140670 in the County of Ward Parish of Nerang Title Reference 15296135 (‘the lands’) for the sum of $277,500.00 and further in consideration of the provisions of the Shareholders Agreement the effective date of which is the 30th June, 1996 (‘the Shareholders Agreement’).
2.The parties agree that the consideration shall be deemed to have been paid by the issue to the Seller of One (1) “G” Class Ordinary Share in the capital of Mt Nathan Land Owners Pty Ltd (ACN 073 540 619).
3.The Seller agrees, at the direction of the buyer, which direction is hereby given, to transfer the lands as provided in the forms of Transfer annexed hereto.
4.The Seller also agrees to co-operate in any manner required by the Buyer in the granting of the following easements:
EASEMENT ‘B’ RP 907495EASEMENT ‘E’ 907496
EASEMENT ‘A’ RP 907495EASEMENT ‘D’ 907496
5.This Contract is subject to and conditional upon the granting of an exemption from compliance with the provisions of part 2 of the Land Sales Act 1984 (as amended) pursuant to the provisions of Section 19 of that Act if necessary. The parties shall co-operate in seeking, and complying with any conditions of any such grant.
6.The Contract is conditional upon the contemporaneous completion of various Contracts of Sale between the buyer herein as buyer and the other shareholders in the buyer company for the sale and purchase of various parts of those shareholders’ lands situated in the vicinity of Mt Nathan Road, Nerang and defined in Schedule 5 of the Shareholders Agreement PROVIDED ALWAYS that the Buyer may elect to proceed with the completion of this Contract notwithstanding that one or more of those other Contracts may not be executed or complete.” (emphasis added).
[19] It can be seen that clause 2, which deemed the consideration to have been paid by the issue of a share in the capital of Mt Nathan Land Owners, was different from the provision in clause 2(a)(ii) of the shareholders’ agreement which provided that the consideration should include the monetary consideration, the company’s entry into the shareholders’ agreement and the allocation of a share to each respective party. As the sixth defendant submitted, the reasons for this variation remain unclear. While the shareholders’ agreement remained in its unaltered form, cl 2(a)(ii) was consistent with directors’ loans being raised if the company did not have the resources to pay the monetary consideration at the time of transfer of the land.
[20] Settlement of the land sale contracts was effected on 13 February 1997. Upon settlement, Mr Smith sent to each of the shareholders a stamped duplicate of their land sale contract together with a photocopy of a deed dated 13 December 1997 which was said to be supplementary to the shareholders’ agreement. Mr Smith gave evidence that the deed dated 13 December 1997 between the company and each of its members was executed in order “to clarify the transactions contemplated by the shareholders’ agreement” (the “amendment deed”).
[21] The amendment deed dealt with a number of matters. The first was in relation to temporary easements. The second, which is more significant for the purposes of this litigation, was amendment of the shareholders’ agreement, deemed to have been effected on the effective date of the shareholders’ agreement. The changes relevant to this litigation were to clause 2(a)(ii) of the shareholders’ agreement:
(1)the words “within one month of the effective date hereof” were deleted;
(2)the following words were deleted: “the interdependent contracts shall be on terms and conditions considered necessary and appropriate by the company and shall provide, inter alia, that consideration for the interdependent contracts shall include the monetary consideration listed against the relevant property in Schedule 5 hereto and the company’s entry into this Agreement and the allocation of each respective party of the shares provided in the proposed Articles of Association to be allocated to them.”
[22] They were replaced with the following words:
“The interdependent contracts shall be on terms and conditions considered necessary and appropriate by the company and shall provide, inter alia, that consideration for the interdependent contracts shall include the company’s entry into this agreement and the allocation to each respective party of the shares provided in the proposed Articles of Association to be allocated to them.
For the purposes of this agreement and the transaction generally the parties agree that the value of each shareholders property is the amount listed against the relevant property in Schedule 5 hereto.” (emphasis added).
[23] It should be noted that the company was a party to the amendment deed but not the shareholders’ agreement; the land sale contracts did not mention the company’s entry into the amendment deed; and the provision for consideration in the interdependent contracts was said to be inclusive not exclusive. However, in the interdependent contracts the provision with regard to consideration said that it was deemed to have been paid by the issue of one share in Mt Nathan Land Owners. Through this method, the land owners became shareholders entitled to a proportionate share on the sale of the whole of the land but were not paid or otherwise entitled to payment for the sale of their land to the company. Although the shareholders, or at least those who wished to, had obtained independent legal advice on the shareholders’ agreement, there is nothing to suggest that they did so with regard to the amendment deed or that any of them, other than perhaps those who gave instructions to Mr Smith, had their attention drawn to the fact that, or understood that, it changed their legal entitlements.
[24] Mr Smith said that his instructions came from Mr Lane and Mr Etridge. Mr Lane was the managing director of the company. Mr Etridge was described in the first minutes of the Board of Directors of Mt Nathan Land Owners which took place on 24 May 1996 as “legal advisor”. He was the husband of Vanessa Etridge one of the shareholders of Mt Nathan Land Owners. He described his role, in a letter dated 8 December 1997 to the Chairman of the company, as being “to the best of my not inconsiderable ability, to give correct and impartial advice to the Board when sought (or when, unsought, if I thought it in the interests of the company to give it).” Solicitors acting for Mrs Etridge said in a letter dated 30 September 1999, that they were instructed that Mr Etridge had assisted Mr Smith in drafting the shareholders’ agreement.
[25] Mr Etridge did not give evidence in these proceedings but played a significant role in the structuring of the venture and in the problems which later beset it.[2] He was a former solicitor and a bankrupt. He had bankrupted himself as a consequence of owing money to the Australian Tax Office. He referred to his bankruptcy as “arguably the most profitable exercise upon which I have ever engaged”.[3] His view of what was being done was set out in an undated note he wrote to one of the shareholders at about the time the scheme was being structured. He wrote:
“What is contemplated in the Agreement is that after excision of the existing house sites (in your case whichever block you want to retain) the balance of the lands are transferred to the Company at a price close to the estimated profit for each shareholder. The Company, of course, will not have the money to pay for the land and the transfer price therefore will not be paid straightaway. It will be paid, on a pro-rata basis, to the shareholders as the Company sells the developed blocks. As far as possible the priority will be to pay off the Company’s debt to whoever finances the development. When the monies are distributed they will not attract tax because they will be distributed by way of pro-rata payment of the Company’s outstanding debt to each of the shareholders in respect of the original transfers to the Company. There will not be any dividend unless, of course, the venture is more successful than we anticipated – in which case I would guess that we will all be so pleased that we will not mind paying tax on the dividends we get.” (emphasis added).
Similar sentiments were expressed in a letter Mr Etridge wrote on 17 October 1995 to Mr Lane with regard to capital gains tax. He therefore appeared to think that the consideration for the purchase of the land included a monetary consideration which was owed by the company as a debt to each of the shareholders. Why this was changed in the land sale contracts and the amendment deed was unexplained. None of the shareholders or directors involved in this litigation nor Mr Etridge appeared to attach any significance to it prior to the administration.
[26] Finance for the development was obtained from two primary sources: from an external lender and from the holders of one of the shares, Mr and Mrs Gill. Mr and Mrs Gill lent $200,000 to Mt Nathan Land Owners under a loan agreement dated 30 May 1996 (the “Gill loan”). The Gill loan provided the capital the development needed to commence. The bank required the company to contribute that money to the headworks and civil construction costs. The Gill loan was for a period of 18 months, could be repaid earlier without penalty and was thereafter immediately due and payable. The loan was therefore due and payable on 1 December 1997. Mr and Mrs Gill raised that money by mortgaging their residential property to Equitiloan Pty Ltd. Mt Nathan Land Owners agreed to pay the interest on the Gill loan. Mr and Mrs Gill also lent $45,000 to Mr Carabetta so that he could reduce his mortgage debt and allow the balance of his land to be contributed to the venture unencumbered. This was treated as a debt to be repaid by the company as the venture could not have gone ahead without it.[4]
[27] On 4 February 1997, Mt Nathan Land Owners entered into a written agreement with QIDC Limited (subsequently Suncorp Metway Limited) (“the bank”) to borrow funds for the purpose of developing the property owned by it, which was secured by a mortgage and fixed and floating charge given by the plaintiff to the bank and guarantees by the shareholders given in proportion to their interest in the venture (“the loan agreement”). The post-settlement conditions included provisions that the company was to provide to the bank each month an actual construction progress report; a marketing report; and major cashflow movements. The bank was to receive 90% of gross sales proceeds from the sale of developed lots: 85% would be credited to permanent debt reduction and 5% for interest payment. The bank would allow for the repayment on the Gill loan of a maximum debt of $210,000 to Equitiloan Ltd once a minimum of five sales with a minimum gross realisation of $550,000 had settled. As the amount of interest capitalisation provided in the initial funding of $100,000 was insufficient to carry the project until debt to the bank was repaid, the company and guarantors acknowledged and agreed to ensure that a sufficient sales volume occurred to provide for interest payments otherwise the company/guarantors would need to make future cash contributions in order to meeting the monthly interest cost of the bank loan.
Accountants
[28] The accountants for Mt Nathan Land Owners were Teefy Suchowiecki. Mr Etridge also had extensive dealings with them at the time the venture was structured. They prepared financial statements for the financial year ending 30 June 1998 which showed liabilities exceeding assets by $642,792 (the “1998 financial accounts”). This took account of shareholders loans of $2,839,500, the value attributed to the land sold by the shareholders to Mt Nathan Land Owners, which were accounted for as shareholder loans. It was conceded in the Statement of Agreed Facts,[5] that the 1998 financial accounts were “in error” as “liabilities incorrectly included shareholder loans of $2,839,500.” However that “error” was included in the financial statements prepared by Teefy Suchowiecki at all times prior to the administration.
[29] It appears that the venture was structured so that the anticipated profit on the sale of the land for each shareholder was set as the value of the land. The land was sold in exchange for a share in the company. Each share in the company gave rise to a right to share proportionately in the final sale value of the land. That was dealt with in the accounts by raising a loan account for the predicted proportionate sale amount in favour of each shareholder. In that way, as Mr Etridge intended, the payments to the land owners once the subdivided land was sold would not be regarded as a distribution of profit by the company, on which tax would be payable, but rather repayments of loans, on which tax would not be payable. As a result of the price of the land transferred being the expected profit which was then notionally loaned to the company, those of the shareholders[6] who had purchased their land after the introduction of the Capital Gains Tax (CGT) in 1985, became immediately liable for CGT which was paid in the first instance on their behalf by the company so as not to disadvantage them against other shareholders. These amounts were to be repaid out of (but only out of) those shareholders’ eventual share of the profit.
[30] It appears that the amendment deed when read with the land sale contracts effected a significant change to the shareholders’ financial position with regard to the company which was not reflected by any change to the accounting treatment. The first financial accounts after the land was transferred to the company, the accounts for the year ended 30 June 1997 (the “1997 financial accounts”) were prepared by Teefy Suchowiecki. The 1997 financial accounts show total borrowings of $4,139,350.62, made up of the Gill loan of $200,000, $1,099,850.62 owing under the bank loan, and loans from the shareholders of $922,200 from Mr Morris, $147,300 from Mr Graham and Ms Campbell, $140,400 from Mr and Mrs Goodier, $150,900 from Mr and Mrs Richardson and Mr and Mrs Johnston, $235,500 from Mr and Mrs Gill, $231,900 from Mr Carabetta, $278,700 from Mrs Etridge, $259,800 from Mr McTaggart and Ms Thom, $229,200 from Mr and Mrs Lane and $243,600 from Ms Moore. The deficit shown in the 1997 financial accounts was $133,610.61.
[31] By the time of the 1998 financial accounts, the borrowings had increased to $4,955,997.58. The increase was entirely accounted for by a slight increase in the Gill loan to $201,034.08 and a significant increase in the bank loan to $1,915,463.50. The loans from shareholders in the amount of $2,839,500 remained the same. The remaining land was said to be valued at $4,189,452.70, almost $1,000,000 more than the latest valuation by Herron Todd White (“HTW”) in April 1998, and $600,000 more than the list price by Ray White dated 3 June 1998. The accumulated losses increased to $642,801.67.
[32] The 1997 financial accounts were presented to the shareholders at a meeting of the company shareholders on 13 March 1998. The minutes of that meeting show that Mr Mealing explained the accounts and answered questions from shareholders. He explained the amounts showing for shareholder loans. The 1997 financial accounts were adopted at the 13 March meeting.
[33] I am satisfied that the directors, their solicitors and Mr Murphy relied on the accuracy of the 1997 and 1998 financial accounts when they later came to consider the appointment of an administrator. I am also satisfied that they were entitled to do so. The accounts had been prepared by qualified accountants and the 1997 financial accounts which detailed loans of $2,839,500 from shareholders, repeated in the 1998 financial accounts, had been adopted without dissent by the shareholders.
Financial and other difficulties
[34] Development approval was granted by GCCC in January 1997 and the civil works necessary for the subdivision were carried out between March and September 1997.
[35] The optimism felt by the shareholders when the venture was first mooted gave way to increasing gloom and acrimony. There were a number of reasons for this. The value attributed to the land sold to the company was artificially inflated to decrease the eventual tax liability of the shareholders. There were disputes between shareholders about representations made to them and whether one or more shareholders had been relatively advantaged or disadvantaged. There were personality clashes. There were arguments about whether the land on the northern side of Mt Nathan Road was as attractive or easy to sell as land on the southern side, the blocks on the northern side being steeper than the blocks on the southern side.
[36] The venture did not perform financially as well as had been hoped. The land did not sell quickly. Marketing of the land started in April 1997 and the development was launched in September 1997 when the subdivision was completed but by March 1998 only one block of the 39[7] then available for sale had sold, and that was to Mr Lane’s son. The directors met on many occasions to try to work out strategies to increase the rate and value of sales. Prices were reduced and double commissions offered. It was proposed to build a display home to attract potential buyers but the money set aside for that purpose from the sale of Lot 18 to Ray Lane’s son had to be used to pay capital gains tax and interest on the loan.
[37] The poor performance was blamed on a number of factors: delays in completing the subdivision, high prices, a lack of demand, competition from a nearby estate, Mt Nathan Forest, which was much better presented and promoted, a lack of building activity and a lack of interest by local agents. The topography of the land was difficult and the quality and condition of the existing homes were poor. The company could afford only modest advertising. All of these facts and an unexpected bond payment of $27,215 to the GCCC led to financial pressure and required new arrangements being made with the lender. The company was beset by a shortage of cash to pay debts as and when they fell due and insufficient cash to seek legal and other advice. For example, at the meeting of the shareholders of the company in March 1998, the company did not have the $1,000 necessary to instruct a solicitor with a view to recouping the $27,215 from the GCCC. There was also insufficient cash available to present the subdivision in a professional way and attend to maintenance. Restrictions were imposed by the GCCC so that residences could only be constructed within building envelopes on the land. The company lowered the prices of the land in December 1997.
[38] There was a particularly acrimonious meeting of shareholders on 7 December 1997 which ended with Mr Etridge telling Mrs Goodier that he would not stay in the same room as a “fucking ignorant woman” like her, and Mr and Mrs Etridge, who had both been drinking, telling the group to “get fucked” before, as Mr Gill explained in his evidence, they stormed off. On the next day, Mr Etridge wrote a confronting and emotional letter to Mr Lane concluding that “under no conceivable circumstances am I prepared to give further assistance to a group of people which, some notable exceptions apart, are the chaff to which I earlier referred.” The “chaff” referred to earlier were “the socially offensive, the ignorant, the suspicious, the loud mouthed, the uncultured and the uneducated” whom he said “must offend the sensibilities of anyone with a reasonable degree of culture and education.” Thereafter neither he nor his wife attended any meetings of the company until 12 September 1999 when they had become agitated about the settlement of a dispute between the company and Mr and Mrs Goodier; the company’s declining to take up Mr Etridge’s offer to negotiate with the GCCC about a $27,000 bond for a success fee of $4,000; an alleged breach of building envelope restrictions by a neighbour of the Etridges; the dispute with Mr Crichlow; and a number of other complaints set out in a letter by Mrs Etridge and an attachment by Mr Etridge both dated 4 August 1999.
[39] At the end of November 1997, the loan to the company from Mr and Mrs Gill was due for repayment. It became due and payable but was not repaid as the company had no money or resources from which to pay it. From that point on no matter what view is taken of the existence or otherwise of the shareholders’ loans, the company was insolvent. Mr Gill did not press for repayment because he knew that the company could not repay it, but that does not mean that it was not due and payable, but rather that it was due and payable but unable to be repaid.
[40] A cash flow forecast prepared by Mr McTaggart for February 1998 to January 1999 showed a projected deficit of income over expenditure for February and March but he expected that to change on the sale of the remaining lots. His optimism was misplaced. In March 1998, the company requested an increase in its loan facility from the bank as only one block of land had been sold and there were some unexpected expenses and the company was experiencing a “short term cash flow problem.” The company was at that point unable to meet its debts from its available resources. Projections of income were attached, which, it must be said, were not in fact achieved.
[41] The bank did not agree to any increase in the loan facility but allowed the company to use the funds obtained from the sale of the land sold to Ray Lane’s son to be used to meet capital gains tax liabilities and interest. In addition on 14 May 1998, the bank imposed the following loan variations:
“1)[The bank] is to receive 85% of Gross Sales Proceeds from the sale of developed lots. Release Consideration is to be no less than 85% of the adopted valuation of the lots as per the revised HTW valuation dated 7th April 1998 – these funds will be credited against permanent debt reduction only.
2)These variations to the Loan Facility are for a period of six (6) months from the date of this letter and are subject to:
a)Borrowers presenting the Estate in a tidy manner.
b)Professional marketing to be implemented immediately with an Agency acceptable to the Bank.
c)Maintaining a satisfactory ‘Rate of Sale’ over the six (6) month period in the 1 to 2 sales per month range.”
In fact only four sales were made in the six month period from 14 May to 13 November 1998.
[42] An updated valuation of the estate dated 7 April 1998 by HTW (together with letters dated 9 and 23 April), which the company had to pay for, showed that the land had decreased in value by 24 per cent. By this time no more blocks had sold. The value of the remaining 38 lots was said to be $3,265,000. Prices of the land were reduced but that did not lead to any immediate increase in sales. Ray White Nerang was appointed selling agent at the end of May 1998 in place of Frank Crichlow whom Mr McTaggart had described in a letter to the shareholders on 8 May 1998 as “rude, negative, impatient and threatening.” Ray White provided a list of prices of the remaining 37 lots on 3 June 1998 totalling $3,561,300. Double commissions were offered to real estate agents but the selling rates continued to be poor. The company had insufficient cash resources to pay for a proper marketing campaign.
[43] There was also dissatisfaction with the performance of Mr Lane as manager and in July 1998, Mr McTaggart took over as managing director of the company from Mr Lane. The meetings continued to be acrimonious even without the presence of Mr or Mrs Etridge because of the dissension which attended the replacement of the sales agent and the managing director and general disappointment with the poor sales performance of the subdivision.
[44] Mr McTaggart gave telling evidence of the company’s difficulties in paying debts as and when they fell due. The company had been unable to meet its land tax bills[8] and he arranged for payments to be deducted from each sale as an interim measure. The next land tax assessment (due for payment on 28 October 1999) was also going to create a cash flow problem and he was uncertain if further arrangements would have been satisfactory to the Office of State Revenue (OSR). Advertising had been scaled back as sales were extremely slow and the company did not have funds available to meet any further significant advertising expenditure. GCCC rates were another ongoing commitment which was affecting cash flow. Rates due were not able to be paid by the due date.[9] The arrangements made with the OSR and the GCCC were not contractual nor did they create an equitable estoppel. The debts remained due and payable. The OSR was at first prepared to allow the outstanding debt to be paid from sales of blocks of land but subsequently required monthly payments of amounts in arrears.
[45] With the bank as secured lender taking 85% of gross sale proceeds there was little left to assist cash flow after land tax, rates and sales commissions were taken into consideration. Ongoing maintenance of the land, such as slashing, also needed to be completed but there were insufficient funds available to pay for it to be done.
[46] Mr and Mrs Gill were keen to have their loan repaid and at the meeting of directors on 4 June 1998 correspondence was tabled “recalling the loan guarantee on their home after the sale of five or six blocks.” The letter from Mr and Mrs Gill dated 25 May 1998 was a demand for repayment of loan “as soon as it is possible (after the sale of 5 or 6 lots).”
[47] At the shareholders’ meeting of 27 June 1998, it was said that there continued to be “very little money”. The cost of the professional services of the solicitor, Michael Smith, was considered high and he was replaced by Price & Roobottom.
[48] At the directors’ meeting on 26 August 1998, Mr McTaggart reported that there was $2,000 in the company’s bank account and $14,000 in unpaid bills and although he was “reasonably happy being able to pay the bulk of the bills”, he said that the company must plan what to do “when the money runs out.”
[49] The sixth sale of lots (lot 27) occurred on 30 September 1998 but there was still insufficient money to pay the debt owing to Mr and Mrs Gill.
[50] In the financial report at the meeting of the Board of Directors dated 13 November 1998, Mr McTaggart described the financial situation as “looking grim”.
[51] On 19 November 1998, Mr McTaggart on behalf of the company wrote to the bank requesting an easing of the conditions of repayment. Mr McTaggart knew that if such an accommodation were not granted, the company would not be able to pay its interest as and when it became due. It addition, minutes of meetings at that time show no funds available to do the required landscaping and dissatisfaction with the performance of the new sales agents.
[52] The company at its directors’ meeting on 31 December 1998 approved the 1998 financial accounts and resolved that the company was solvent. Mr McTaggart explained that the accountants prepared those minutes and they were agreed to without consideration. By this time 11 blocks had been sold but the Gills’ loan had not been, and was not able to be, repaid even though repayment was due and payable.
[53] By the time of the directors’ meeting in February 1999, Mr McTaggart had been able to have a cash bond of $27,215 which the GCCC required, replaced by a bank guarantee which increased the company’s borrowings from the bank but would release the cash once the bank guarantee was received. Prices of the lots were increased by $2,000 per lot.
[54] By the time of the directors’ meeting on 19 March 1999, the company was doing somewhat better financially, with 17 blocks sold but there were still difficulties: the valuation of some of the land had dropped;[10] the company lost a court case brought by Mr Crichlow claiming $2,425 commission; the Gill loan had still not been repaid; and complaints by land owners had increased with fears expressed that Mr and Mrs Goodier might take legal action against the company.
[55] The company asked the bank for funds to pay out the Gill loan. That request was rejected. The internal bank documents in April 1999 show the bank’s reasons for declining the request. They refer to the development’s “chequered history” and that it has not performed “overly well”. The bank was unwilling to allow its exposure to be increased by allowing the repayment of the Gill loan. It said it would be prepared to favourably consider the request in six months time “provided the required sales rate of at least 1.5 blocks per month has been maintained over that period.” In fact in the six months from mid April to mid October 1999 only three blocks were sold by the company. Far from achieving sales of at least 1.5 blocks per month, the company achieved sales of only one block every two months, one-third of the rate required by the bank.
[56] On 11 June 1999, Mr Etridge wrote to the company offering to persuade the GCCC to waive the $27,000 bank guarantee referred to earlier, so long as he was engaged in writing and promised a success fee. The fee was to be $4,000. There does not appear to have been any legal basis for such a waiver; but rather he would attempt to use his contacts with a councillor to have the bond waived. The company did not take up his offer. This appears to have infuriated Mr Etridge.
[57] During 1999, the rate of land sales dropped. On 10 May 1999, Leah Gill reported to shareholders that 18 blocks had sold and five were under contract, three of which were unconditional and two subject to finance. Ray White did not wish to continue as agent and its former employee, Peter Verstappen, had agreed to act as an independent agent. After April 1999, and prior to the administration, there was only one sale on 29 June 1999 and one new sale on 16 September 1999. Another lot was resold on 16 September 1999 for less than had been paid for it in May of 1998.
The Goodier compromise
[58] A dispute arose between Mr and Mrs Goodier, the holders of the C class share and Mt Nathan Land Owners in relation to a complaint by the Goodiers about the loss of access their property had to Mt Nathan Road as a result of the proposed development contrary to representations made to them by Mr Lane that that would not occur. Mr Goodier conducted an engineering workshop on his property at 103 Mt Nathan Road and the business required ready access to Mt Nathan Road. Mr Goodier had been concerned about the lack of access for some time and had made attempts to have the problems rectified by the company. It is reasonably clear that the Goodiers would not have transferred their land to the company and signed the shareholders’ agreement unless they had been assured by Mr Lane that their access would not be affected, an assurance Mr Lane knew not to be true. The subdivision would have been much more difficult without the Goodier land.
[59] Finally, Mr and Mrs Goodier consulted experienced solicitors, Corrs Chambers Westgarth, who, on 12 April 1999, wrote to Mr McTaggart, as managing director of Mt Nathan Land Owners, asserting that their clients had suffered loss as a result of misrepresentations made by Mr Lane on behalf of the company and seeking compensation failing which they were likely to take legal action to recover damages of at least $100,000.
[60] Mr McTaggart spoke to the company’s solicitors, Price & Roobottom. The directors were very concerned as each of them was convinced from his own experience that the Goodiers’ claim that they had been misled by Mr Lane was likely to be true. Indeed Mr Gill had made a note, which I accept as accurate, of a conversation he had in March 1996 with Mr Lane at the time where Mr Lane admitted that he had not told Mr Goodier the truth about his road access to prevent him leaving the company. The directors were concerned about the cost of any litigation, that the company would have difficulty in paying any damages awarded, and that the Goodiers might place a caveat over the land, effectively preventing any further sales. A decision was taken by the directors, in consultation with the company’s solicitors, for the Board to seek to resolve the dispute directly with the Goodiers, in part, “to avoid any uncertainty and volatility that might otherwise arise from consideration of the issue by all the shareholders.”[11] Price & Roobottom prepared a draft deed of compromise.
[61] On 10 June 1999 Mt Nathan Land Owners entered into a deed of compromise with Mr and Mrs Goodier (“the Goodier compromise”). The Goodier compromise had the effect of cancelling the right of Mr and Mrs Goodier to participate in the profits of the development upon the payment to them of $50,000 compensation. It also had the effect of extinguishing their loan account. However, they remained as guarantors of their share of the debt to the bank. Given the potential claim by the Goodiers, it appears to have been a fair compromise. Certainly it was reasonable for the directors to view it as a fair compromise.
[62] The Goodier compromise, amongst other matters, recites in the introduction:
“E.The Goodiers sold certain land owned by them to the Company by a Contract of Sale dated 11th December, 1996. The deemed consideration for such sale was a sum of $139,200.00 which was satisfied by means of a loan account raised in the Company’s books of account in favour of the Goodiers for $139,200.00 (‘the Loan Account’). However, there has been no exchange or payment of funds to the Goodiers.
F.The intention of the Company was that upon completion of the subdivision of certain land owned by the Company the Company would repay all shareholders’ loan accounts and, if any surplus profits were available at the end of the development process they would be distributed to shareholders in certain proportions including 4.9% to the Goodiers.”
[63] This gives an account of the understanding of the directors of the financial relationship between the company and its members as at 10 June 1999. The deed was drafted by the company’s solicitors in accordance with those instructions. By this time, Mr McTaggart was of the view, however, that it was unlikely that those loans would be repaid in full let alone that there would be any surplus after the shareholders’ loans had been repaid.
[64] On 4 August 1999, Mrs Etridge complained in writing to the directors about a number of matters. She said that the directors had breached the shareholders’ agreement by entering into the Goodier compromise and sought answers to specified questions. She asserted that she was about to sue the GCCC with regard to its granting building approval to a house on a neighbouring property outside the required “building envelope”. She demanded to inspect certain documents. She complained about the company’s failing to take up her husband’s offer to “negotiate the waiver by GCCC” of the $27,000 guarantee. Following a number of further allegations, demands and questions, she concluded that if she did not receive a full and frank reply within fourteen days she would take the “necessary steps to bring about such full, frank and proper reply.” She appended a three page note from Mr Etridge written in a strikingly similar tone asserting to the terms of various conversations he said he had had with various directors. He also asserted with regard to the subject of building envelopes:
“It was all a huge, and very interesting, legal mess. I, at this point at least, am the only person who has full knowledge of the facts and those facts point to a legal nightmare both for [the GCCC] and the company.”
[65] A special meeting of the Board was called for 10 August 1999 to deal with the letter from Mrs Etridge and the note by Mr Etridge. As a result Mr McTaggart wrote to her on behalf of the company on 17 August 1999 answering a number of questions, with a number of those and other issues to be discussed at a meeting of shareholders planned for 12 September 1999.
[66] On 24 August 1999, Mr Etridge wrote to Mr McTaggart personally in response to the company’s letter to Mrs Etridge of 17 August 1999 which Mr Etridge said he had opened in her absence interstate. In a long letter he attacked Mr McTaggart’s honesty and the competence of the directors and the company’s lawyers. He asserted that there was “a chasm between the Board and at least thirty per cent of the Members of the Company.” He asserted that, in spite of not having a practising certificate, he, Mr Etridge, had given legal advice to Mr Crichlow in his action against the company and that he had given legal advice to many people including some directors and shareholders. He concluded by expressing curiosity as to what those who perceived themselves to be defamed by his letter would do about it. The letter’s virulent and aggressive tone seems calculated to escalate any intra-company dispute and is in marked contrast to the measured tone of the company’s letter of 17 August 1999. Mr McTaggart sought legal advice from Witheriff Nyst with regard to the defamatory aspects of the letter. Mr McTaggart thought Mr Etridge was trying to bait him “to take [Mr Etridge] on legally.”
[67] On 6 September 1999 Mrs Etridge wrote to the directors of Mt Nathan Land Owners asserting that she had not received any substantive reply to the questions set out in her letter of 4 August 1999 and asking further questions of the directors and foreshadowing litigation against the company and the directors. She requested that the meeting to be held on 12 September 1999 be tape-recorded “so as to ensure that there is an accurate record of precisely what is said at a meeting which looks set to be a step on the road to litigation.” She appended to the letter a draft direction pursuant to s 293 of the Corporations Law requiring the preparation of a financial report and directors’ report for the financial year ended 30 June 1999, that those reports be sent to all shareholders, and that the financial report be audited although she reserved her position as whether or not to actually give the direction because of what she described as the “cost which will further erode the company’s financial position.”
[68] On 8 September 1999, Mr Graham wrote to the company complaining of the change to his driveway access to Mt Nathan Road and the consequent problems for him. He demanded payment for work to rectify his property (the attached quote is for work to the value of $22,335 and $9,750) failing which he would put the matter in the hands of his solicitor. It appears that the claim was not limited to the works quoted. The company did not have the capacity at that time to pay any such claim nor the moneys to fight any claim made against it. This was yet another of its apparently unresolvable problems.
[69] On 9 September 1999, Mr McTaggart on behalf of Mt Nathan Land Owners sent to the shareholders apart from Mrs Etridge, a copy of the recent correspondence from her and said that the issues referred to and any other questions or concerns would be dealt with at the 12 September meeting. He also provided a copy of the letter to him from Mr Etridge, as Mr Etridge would be attending the meeting as proxy from Mrs Etridge.
[70] On 12 September 1999 Mrs Etridge wrote to Mr Morris as chair of the Board of Directors about the meeting to be held that day, identifying what she alleged were defects in the notice of meeting and asserting that while she did not wish to “stand in the way of the meeting”, it “would be invalidated if it were to be challenged.”
[71] A meeting of the shareholders was held on that day. The meeting was chaired by Trevor Morris. Those present included John McTaggart, James Graham, Ray and Marie Lane, Rick Etridge as proxy for Vanessa Etridge, Robin Moore, Kevin Gill, Ken and Beth Richardson, Slim and Moreen Johnson, John Carabetta and Michael Carabetta and Leah Gill as secretary. Barry Thornton, a partner of Price & Roobottom, was present because the directors were concerned about the threatening nature of the correspondence from the Etridges. The Chair raised the letter by Mrs Etridge with regard to alleged defects in the notice of meeting but it was resolved that the meeting continue. The directors’ report presented to the shareholders (the “12 September directors’ report”) set out the items on the agenda and attached a financial report; and separate reports on the change of solicitors, the change of sales agent, the Goodier compromise, projected cash flows and a detailed transaction report.
[72] Mr McTaggart presented the financial report which was a document entitled “Mt Nathan Land Owners Pty Ltd Financial Report as at 12/9/99” (the “12 September financial report”). It dealt with the reduction in debt; the remaining debt; and the sales history with just under half of the lots being sold in the two years since the estate was launched.
[73] The 12 September financial report then dealt with payments made to various shareholders. Mr Etridge immediately entered into an argument about whether or not $16,000 which he was to receive as an ex gratia payment had been made to him. It appears that the Board had determined to make the payment by way of landscaping work on Mrs Etridge’s property. There was then an argument about whether or not the work that was done was worth more or less than $16,000.
[74] There was then an acrimonious discussion about the change of solicitors and change of sales agents. The 12 September directors’ report set out that the change of solicitors was made primarily for economic reasons. The company’s previous solicitor, Mr Smith, charged fees for each sale that settled and a lesser fee for each sale that did not proceed. On the other hand, Price & Roobottom charged fees only for settled sales, which had saved the company money with no diminution in service. The report referred to dissatisfaction with the previous sales agent and what was said to be clear breach of his duty to the vendors. The previous agent had commenced legal action against the company in which he succeeded and they were required to pay commission on a sale together with court costs. Mr Etridge confirmed to the meeting that he had acted as legal advisor to Mr Crichlow in his suit against the company.
[75] The Goodier compromise was then discussed. The written report in the 12 September directors’ report sets out the history of the claims by Mr and Mrs Goodier, the likely cost of the claim to the company particularly in view of the likely success of the claim and therefore the value of the compromise to the company. In addition to the detailed report in the 12 September directors’ report, documents relating to the compromise were shown on a screen to the meeting but paper copies were not made available to shareholders and it was said that they could not be unless the persons obtaining the documents signed a confidentiality agreement with regard to the documents as the Goodier compromise required that it remain confidential. Mr Thornton advised the meeting that he was confident that the Board’s decision was a good one and made in good faith on the information available to them. Nevertheless, the Goodier compromise was not ratified at the meeting. It was clear that if, as seemed likely, Mr Etridge retained the support of Mr Lane and Mr Carabetta, then a 75 per cent majority of shareholders thought to be necessary to ratify the Goodier compromise would not be able to be achieved.
[76] A letter from Price & Roobottom to the Board of Directors dated 16 September 1999 written by Barry Thornton sets out the author’s understanding of what occurred at that meeting. It said that there was concern expressed by shareholders as to the wisdom of the Goodier compromise. Mr Etridge asserted that as the Goodier compromise was not in the ordinary course of business for the company, it required approval of 75% majority of the shareholders pursuant to cl 5(b) of the shareholders’ agreement. Price & Roobottom said that Mr Etridge’s assertion was arguable and that they had not had the opportunity to review the provision of the shareholders’ agreement at the time the decision was made by the Board to enter into the Goodier compromise. Mr Thornton said that with the benefit of perfect hindsight, they considered, as mentioned at the meeting, that it would have been preferable to have the Goodier compromise approved by a majority of at least 75 per cent of the shareholders but that the time it was a far more delicate issue than it now appeared.
[77] The solicitors were right to think it was a delicate issue. The directors believed, probably quite correctly, that if the Goodiers had a valid claim, as the directors believed to be the case, many other shareholders probably had a similar claim. The company did not then have the financial capacity to pay all the claims that might be made against it. The solicitors advised that on balance the outcome reached by the Goodier compromise was very sound and that it entirely removed any risk and uncertainty and enabled the company to maintain control over the costs incurred in respect of the matter. Further, I accept Mr McTaggart’s evidence that Price & Roobottom had advised the directors that it was not necessary to have the shareholders’ approval.
[78] In the circumstances I do not accept the plaintiff’s claim that the Goodier compromise was entered into by the directors on behalf of the company in breach of their fiduciary duties or in breach of their duties to act honestly, with care and diligence, and in the interests of the company as a whole. The directors formed the view that the Goodiers’ claim against the company, that they had been misled about access to Mt Nathan Road, were induced to enter into agreements with the company as a result of that deception and had suffered damage, was likely to be successful. The directors honestly and reasonably believed that it was in the best interests of the company to compromise the Goodiers’ claim so to minimise the exposure of the company. The company did not suffer any loss as a consequence of the Goodier compromise which was a fair compromise in all the circumstances that existed at the time.
[79] The company also alleged that the directors breached their statutory duties under the Corporations Law to act within the authority of the company’s constitution. This allegation is misconceived. The company’s constitution is made up of its memorandum and articles which do not suggest that the directors could not approve such a compromise. Indeed Article 29(a) provides that the directors “may exercise all powers of the company that these Articles and the Corporations Law do not require to be exercised by the company in general meeting.”
[80] The final allegation with regard to the Goodier compromise was that the directors caused the payment of $50,000 to be made without the authority of the company. I presume this allegation to refer to the payment being made in breach of cl 5(b)(v) of the shareholders’ agreement which provided:
“(b)A decision by the board requires unanimous approval by all the directors EXCEPT any decision on the following matters which must be by approval of the holders of at least seventy-five per cent (75%) of the shares:
…
(v)the company entering unto any commitment or liability which is not in the ordinary course of the business.”
[81] I do not accept that an agreement such as the Goodier compromise was outside the ordinary course of business of the company, which included entering into land sale contracts with shareholders. The liability of the company to the Goodiers arose out of misrepresentations made to induce Mr and Mrs Goodier to enter into such a contract. A reasonable compromise of a claim by Mr and Mrs Goodier appears to be within the ordinary course of business of the company and so the directors were not in breach of the shareholders’ agreement. Even if that were not the case, the company has not suffered any loss by reason of entering into a fair and reasonable compromise.
[82] The minutes of the meeting of 12 September record that Mr Etridge said at one point that Mrs Etridge would not dream of suing the company but then later in the meeting he said that “there could be potential litigation if the questions [posed by Mrs Etridge] were not answered.” Mr Etridge also told the meeting that as Mrs Etridge held 10% of the shares of the company she was entitled to avail herself of s 293 of the Corporations Law. Section 293 provided that a shareholder with at least 5% of the votes in a small proprietary company could give the company a direction to prepare a financial report and directors’ report for a financial year and send them to all the shareholders. Such a direction could specify, inter alia, that the financial report was to be audited. It does appear that Mt Nathan Land Owners fell within the definition of a small proprietary company found in s 45A(2) of the Corporations Law. Mr Etridge however asserted that Mrs Etridge did not want an audit done as it “cost a fortune” but that he believed that on the legal advice that Mrs Etridge had received the Board had in fact departed in several instances from the provisions of the shareholders’ agreement and it should not have done so. Mr Thornton said he was in receipt of a letter from Mrs Etridge’s solicitors where she had threatened to sue individual directors. It was said that an audit would cost between $20,000 and $25,000.
[83] The shareholders’ meeting of 12 September 1999 also discussed the cash flow projections in the 12 September financial report. One projection was done on the assumption of 1.5 sales per month with an average sale price of $94,000 and the second was done on the assumption of one sale a month at an average sale price of $92,000. Mr McTaggart was to prepare various scenarios. The difficulty the company was having in selling the remaining blocks of land was discussed. It was no longer achieving a sales rate of one sale per month, let alone 1.5 sales per month. By 12 September 1999, there had been 19 sales over the period of 19 months since the first sale took place but the sales rate was dropping. The income projections were unrealistic because the sales rates were too high, and the projected sales prices too high. Insufficient allowance was or could be made for routine expenses and none for unforeseen expenses. The meeting closed with the disagreements being unable to be resolved and with obvious personal animosity between shareholders.
[84] On the following day, Mr Etridge wrote a fawning letter to Mr Thornton of Price & Roobottom setting out his view of various clauses of the shareholders’ agreement and how invaluable Mr Thornton’s presence at the meeting had been on the previous day. This is in marked contrast to other correspondence by or on behalf of the Etridges asserting Mr Thornton’s incompetence.
[85] On 16 September 1999, solicitors for Mrs Etridge, Adamson Bernays Kyle and Jones (“ABKJ”), wrote to Price & Roobottom, who were then acting as solicitors for Mt Nathan Land Owners, threatening legal proceedings against the directors in respect of the loss allegedly suffered by Mt Nathan Land Owners as a consequence of the directors’ entering into the Goodier compromise. Further, the letter, which was written in an inflammatory tone, asserted that the directors were also in breach of cl 5(b) of the shareholders’ agreement by retaining solicitors to act on behalf of the company in respect of the Goodier compromise and that, for this reason, the company should not pay for the cost of any legal advice given to it by Price & Roobottom. The letter further alleged that Price & Roobottom had a conflict of interest and could not continue to act for the company nor should it act for any of the directors. The letter threatened an application to court for various declarations unless their client received satisfactory information within seven days. Price & Roobottom sent that letter to Mr McTaggart and arranged for it to be sent to each of the directors. They asked for instructions. Price & Roobottom then replied to ABKJ saying that the directors had not refused to show the Goodier material to shareholders but required the shareholders to sign a confidentiality agreement prior to seeing it.
[86] On 17 September 1999, Mr Etridge wrote to Mr and Mrs Lane, Mr and Mrs Johnston, Mr and Mrs Richardson, Mr Carabetta and Ms Moore asserting in forceful and at times colourful language that the Goodiers never had any supportable claim against the company. He also criticised Mr McTaggart for being dishonest and the other directors for being careless and their decisions “silly”.
[87] On 24 September 1999, ABKJ wrote directly to each of the directors threatening to issue Supreme Court proceedings against each of them; requiring them to provide Mrs Etridge with information about the Goodier compromise without her entering into a confidentiality agreement with regard to it; but asserting that even if they did it would not have any effect on their liability to reimburse the company for the money which was paid to the Goodiers.
[88] On 29 September 1999, Mr Etridge sent a written note dated 29 October [sic] 1999 by facsimile to Mr Gill asserting that Mrs Etridge accepted that the Board members acted in good faith and that if they had any personal liability, that loss was recoverable by them against Mr Thornton. He threatened that Mrs Etridge would sue the directors to compel production of the Goodier compromise which would cost them “a whole heap of money in paying her legal costs”. He said that Mrs Etridge would vote to ratify the Goodier compromise if Price & Roobottom paid for the “loss”. That appeared to include the $50,000 together with any subsequent costs (including Mrs Etridge’s legal costs). Mrs Etridge would also require nine enumerated changes to the management of the company which included various demands such a change of solicitors and to use Mr Etridge’s words, “Myself, on a free of costs basis, to be present at all Board meetings to present any point I believe relevant.”
[89] On 30 September 1999, ABKJ wrote to Price & Roobottom confirming that Mrs Etridge refused to accept documents delivered to their offices and threatening to issue forthwith injunctive proceedings restraining the holding of a meeting of shareholders called for 17 October 1999 unless she received the documents relating to the Goodier compromise without any conditions as to confidentiality. They also asserted that “any costs [their] client has incurred to date and may incur as a consequence of the Board’s actions [would] be sought on an indemnity basis from the respondents who at this stage [would] clearly be the individual members of the Board.” However, it also appeared from that letter that the directors had already communicated through their solicitors to Mrs Etridge’s solicitors that they were prepared to allow her to have the documents without any condition as to confidentiality. Price & Roobottom wrote to ABKJ on 4 October 1999, inter alia, confirming their previous advice that the Goodier material already forwarded to them was provided “without condition other than the continued obligation upon Mrs Etridge to abide by the obligations of confidentiality contained in the shareholders’ agreement.”
[90] On 1 October 1999 the directors of Mt Nathan Land Owners met as a Board to discuss the letter dated 16 September 1999 from ABKJ to Price & Roobottom. The Board expressed the view that they must obtain legal advice.
[91] On 1 October 1999 Witheriff Nyst, acting on behalf of Mr McTaggart, wrote to Mr Etridge, with a copy to ABKJ, regarding what they asserted were the many untruthful and defamatory statements contained in Mr Etridge’s letter of 17 October 1999 and warning any further publication would result in legal proceedings. Mr Etridge responded on 7 October 1999 repeating his assertions about Mr McTaggart’s dishonesty. On the same day, Mr Etridge signed what appears to be a statutory declaration setting out what Mr McTaggart had said at a meeting, attributing the information to having come from another person and Mr Etridge’s subsequent conversation with the other person who said, according to Mr Etridge, that he did not give Mr McTaggart that information. Mr Etridge asserted in the statutory declaration that he believed the other person’s account.
[92] On 5 October 1999, ABKJ again wrote to Price & Roobottom in relation to the shareholders’ meeting called for 17 October 1999 to consider a resolution that the shareholders approve the Goodier compromise. In that letter ABKJ said there was insufficient information to consider the resolution and advised that while Mrs Etridge was reluctant to initiate proceedings against the directors for which the directors were likely to be ordered to pay the costs, there was no basis upon which she would be prepared to allow the meeting to proceed until all relevant information was to hand. Price & Roobottom sought instructions from the Board with a copy of a detailed proposed response to the letter from ABKJ which was then sent on 7 October 1999.
[93] On 6 October 1999 Mrs Etridge wrote a letter to the Board of Directors of Mt Nathan Land Owners seeking further information which she said was not provided at the meeting of shareholders held on 12 September 1999 and advised that the matter of the Goodier compromise was in her solicitors’ hands.
Legal advice sought by the plaintiff
[94] The ongoing and escalating dispute with the Etridges, on top of all the other difficulties, meant that the company was becoming more or less impossible for the directors to manage. The directors formed the view that the company needed more expert advice than they were receiving. On 8 October 1999 Mr McTaggart rang Jennifer Forbes, a solicitor in the employ of Deacons, to seek legal advice. The firm of Deacons was suggested by one of the shareholders and chosen because of their expertise in corporate affairs. Mr McTaggart explained to Ms Forbes that one shareholder, Mrs Etridge, was particularly unhappy with the way the company was being run and the directors felt it was difficult for them to run the company, as even when expert opinion was sought and acted upon, the Etridges would be likely to take legal action against the company or the directors. Ms Forbes expressed the view that it appeared that Mrs Etridge was setting things up to enable action to be taken as an oppressed minority shareholder. As a result, she could place the company into liquidation and ensure a full payout of all the money owing to her by the company to the disadvantage of the other shareholders.[12] Ms Forbes suggested that the directors meet with her as soon as possible and bring any relevant documentation.
[95] The directors then met to discuss the further correspondence from Mrs Etridge. At that meeting the directors resolved to appoint Deacons as solicitors for the company and decided to meet with them on 12 October 1999.
[96] On 12 October 1999 the directors, on behalf of Mt Nathan Land Owners, retained Deacons to advise the company. It is accepted that it was a term of that retainer and it was the duty of Deacons that it, its partners, servants and agents would act competently and would exercise reasonable care, skill and diligence in the provision of advice pursuant to its retainer.
[97] Unfortunately the solicitors’ file in relation to this matter has been misplaced. Several affidavits were sworn by Peter Schmidt, a member of the firm Deacons who is a partner in the insolvency area. On being informed in about June 2004 that there may be a claim against Deacons, he located the relevant files which were at that time contained in two boxes. There were two files in the boxes, file number 351043/01 and file number 275389/81. Since then, in the course of documents being shifted between departments in the firm and archiving the documents, files from those boxes went missing. In spite of thorough searches by many people, the missing documents have been unable to be located. Some electronic copies of word documents were found, but not all of them, and all of the handwritten file notes have been lost. I am satisfied that this unfortunate situation is not sinister but it has made the reconstruction of the detail of what occurred some nine years ago considerably more difficult.
[98] Fortunately, the detail of who was present at the meetings and a summary of what was done by the legal team can be found in the electronic billing records which were kept separately by the firm. The details of the meetings attended by the administrator and his staff can be found in file notes and correspondence kept by the fifth defendant. Mr McTaggart prepared a list of the documents which I accept he took to Deacons on 12 October 1999. Mr Morris also took with him a copy of the latest financial statements, prepared by Teefy Suchowiecki, the 1998 financial accounts. The 1999 financial accounts had not yet been produced. Each of the directors who were present has some recollection of what occurred, however the solicitors involved have little or no recollection of anything not recorded in written form. This is hardly surprising. The events were memorable for the directors since they were quite outside their previous experience. For the solicitors this was just one file of many and not one which would have particularly distinguished itself from the many others with which they were dealing.
[99] The memories of the directors are not, however, as reliable as the contemporaneous documents, although not because they were dishonest. It is clear they were decent, honest men doing their best now as they were then. But memory is imperfect. Where there is a conflict between a memory and a contemporaneous document, I am more likely to be assisted in setting out the facts of what occurred by the document rather than the memory. Fortunately Mr Gill did make some contemporaneous notes, the accuracy of which are not disputed.
[100] Another useful document is the list of documents prepared by Mr McTaggart, referred to earlier, which was dated 11 October 1999 and entitled “Mount Nathan Land Owners Pty Ltd List of information provided to Deacon, Graham and James.” It shows that the directors took to their conference with Deacons the shareholders’ agreement and the articles of association of the company, draft minutes of the meeting of shareholders held on 12 September 1999 and the 12 September directors’ report. The directors also took the notice dated 26 September 1999 calling a meeting of shareholders. They also took a bundle of documentation, not specified, and compendiously entitled the “Goodier file”. In addition they took relevant items of correspondence as listed below:
● A letter from Mr Etridge and a letter from Mrs Etridge to Mt Nathan Land Owners both dated 4 August 1999;
● Letters from Mt Nathan Land Owners to Mrs Etridge dated 17 and 29 August 1999;
● A letter from Mr Etridge to Mr McTaggart dated 24 August 1999;
● Letters from ABKJ to Price & Roobottom dated 30 August, 30 September and 5 October 1999;
● A letter from Mrs Etridge to Mt Nathan Land Owners enclosing proxy dated 6 September 1999;
● A letter from Mr Etridge to shareholders dated 17 September 1999;
● A letter from ABKJ to Mr McTaggart dated 24 September 1999;
● A letter from Mr McTaggart to ABKJ dated 30 September 1999;
● Letters from Price & Roobottom to ABKJ dated 4 and 6 October 1999;
● A letter from ABKJ to Witheriff Nyst dated 6 October 1999;
● Two letters from Mrs Etridge to Mr Nathan Land Owners dated 6 October 1999; and
● A letter from Witheriff Nyst to Mr McTaggart dated 7 October 1999.
There is no reliable evidence that they took any land sale contract with them.
[101] The extant records of the sixth defendant show that a conference took place at Deacons between the directors of Mt Nathan Land Owners (Mr Morris, Mr McTaggart, Mr Gill and Mr Graham) and Gregory Mann and Ms Forbes from Deacons.
[102] They discussed the company’s financial problems; the slower than expected sale of the land for lower than expected prices; and the company’s chronic cash flow problems including its inability to pay various liabilities such as land tax and rates as and when they fell due without special arrangements being made. Mr McTaggart wrote a cheque for $2,000 to pay Deacons, being careful to ensure that this did not cause the company’s bank account to be overdrawn. After this payment, the company only had $50 in the bank.
[103] Mr Mann informed the directors about legal action which could be taken by a minority shareholder in a company. Ms Forbes left the meeting to study Mt Nathan Land Owners’ financial statements and upon her return told the directors that the company appeared to be insolvent in view of the amounts owed to the shareholders. The directors were also advised that the articles provided that the company’s directors were entitled to be indemnified by the company. This meant, of course, that any liability incurred by the directors by virtue of their position would have to be met by the company. [13]
[104] Mr Mann told the directors about the risk they faced if they continued to allow the company to trade whilst insolvent and that they should consider appointing an administrator. Mr Mann told the directors that the administrator would take over the management of the company from the directors and complete the sale of the land and finalise the company’s affairs. The insolvency of the company meant that it could be placed into administration, which would also stop the potential of an oppressed minority shareholder action. The directors, although surprised, accepted the advice that the company was insolvent and could therefore be placed into administration. Mr McTaggart said in evidence that, after taking advice from Deacons, the directors appointed an administrator because the company “was either trading insolvently or there was a reasonable expectation that [the company] would become insolvent at some time in the future.”
[105] Neither Ms Forbes nor Mr Mann gave evidence at the trial but there is no reason to believe that oral evidence from them in the absence of their file would have been helpful in determining precisely what occurred. Of more assistance is a record in the company’s minutes of what Ms Forbes told a meeting of creditors on 9 November 1999 about the legal advice given to the company on 12 October 1999. Mr McTaggart confirmed in his evidence that this was both an accurate account of what was said at the creditor’s meeting and an accurate account of the legal advice the company received on 12 October 1999. The minutes record:
“John McTaggart asked Jennifer Forbes to give a summary of their discussions at that meeting. Jennifer Forbes said that some of the information was privileged, from the point of view of the company, however said that when the directors came to them, based on the instructions they provided to them, the company appeared to be or you could reasonably expect the company to be insolvent. She said that the directors, given the situation they were in, were particularly concerned that they were acting in good faith and were carrying out their duties as directors of the company and wanted to ensure that they did everything that they had to do in order to comply with the onus placed on them by the Corporations Law. She said that under the Corporations Law if the company is insolvent or there is a reasonable expectation that the company is going to become insolvent some time in the future, directors may resolve to put the company into administration. She said that if they had not taken the steps that they did at that time, there was a possibility that the company would be trading insolvently and as directors they were sent away to obtain independent legal advice on their positions, but said that if the company is trading insolvently, there are ramifications that flow from that. She said that based on the instructions that were provided with and the advice that was given to the directors on the company’s position, they made the decisions they did.
She said that there was one added aspect to it which was that there was considerable dissent amongst the ranks of the shareholders and they were concerned that an action might be mounted against the company. She said that they were faced with 2 prospects: first that the company may be placed into Provisional Liquidation, or because they were at the point they were they had reasonable expectation that the company would become insolvent they could place it into voluntary administration and give the shareholders the best possible chance at resolving the dispute between them and placing the company into a position where it would trade on to realise the maximum amount of assets for the creditors and shareholders.”
[106] During the conference between the directors and Deacons, Mr Mann telephoned Mr Murphy. Mr Murphy immediately went to Deacons’ offices and met with the solicitors and the directors. Mr Murphy’s notes of that meeting record the nature of the business of the company; that the subdivision was done; and that there was a spoiler in the group, Rick Etridge, and that a possible minority shareholder action was perhaps being set up. There were internal problems within the group. He also noted that there was no directors/officers insurance cover. He noted being told that after 18 months, only a half of the blocks had sold and there was little market demand.
[107] Mr Murphy said he would sign a consent to act as a voluntary administrator.
[108] Another contemporaneous note was provided by Dominique Baker, an employee of the fifth defendant who worked on this matter. On 12 October she recorded that Mr Murphy told her that there was a possible voluntary administration (“VA”) of a company which subdivided land to sell. She refers to there being 18 lots left to sell at $90,000 each ($1,620,000); that Suncorp Metway were secured for $580,000; that the original land vendors put proceeds back in therefore these were “unsecured loans”; and also that a “shareholder/director/creditor” was entitled to $200,000. She recorded that it could be done via a Deed of Company Administration (“DOCA”).
[109] Mr Murphy explained to the directors what would happen if an administrator was appointed and advised that “it was a way to ensure the best possible return to shareholders.” This is consistent with object of Part 5.3A of the Corporations Law as articulated in s 435A which provides:
“Object of Part
The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”
[110] Deacons prepared draft minutes of an extraordinary meeting to be held by the directors appointing a voluntary administrator to Mt Nathan Land Owners and a form for Mr Murphy to sign giving his consent to act as administrator of Mt Nathan Land Owners. Mr Murphy gave his consent to act as voluntary administrator.
[111] The plaintiff submitted that Deacons advised the directors of Mt Nathan Land Owners that voluntary administration was a course of action available to them at a time when it knew or ought to have known that the company was neither insolvent nor likely to become insolvent and/or at a time when it knew or ought to have known that the directors were acting for the improper purpose of protecting themselves personally against litigation. This allegation cannot be sustained. The solicitors relied, as they were entitled to do, on the financial accounts prepared by qualified accountants which showed that the company had more debts than assets and that even if the assets were realised, there would not be enough money to pay the debts. Further the company was not able to pay debts it incurred, such as land tax, as and when they became due and payable. This entitled the solicitors to form the view that the company was insolvent as defined by s 95A of the Corporations Law. In addition, the information given to them by the directors showed that even if the company was not then insolvent, it was likely to become insolvent.
[112] Insolvency is a question of fact to be determined in the particular circumstances by the application of legal principle.[14] The classic exposition of insolvency is found in the statement of Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670:
“Insolvency is … an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.”
[113] The statutory definition of insolvency relevant to this matter was found in s 95A of the Corporations Law:
“Solvency and insolvency
(1)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2)A person who is not solvent is insolvent.”
[114] The principle expressed in Sandell v Porter has been qualified to specify that courts should have regard to commercial realities. A useful statement of the current law is found in the judgment of Chesterman J in Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd (2003) 178 FLR 1 at 26; [2003] QSC 205 at [75] where his Honour referred to the principles set out by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSW LR 213 as follows:
“1.Whether or not a company is insolvent … is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole.
2.In considering the company’s financial position as a whole, the court must have regard to commercial realities. These will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable.
3.In assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with the terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency.
4.The commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, of itself, warrant a conclusion that the debts are not payable at the time contractually stipulated and have become debts payable only upon demand.
5.In assessing solvency the court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence proving to the court’s satisfaction that: -
- There has been an express or implied agreement between a company and a creditor for an extension of the time stipulated for payment; or
- There was a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or
- There has been a well established and recognised course of conduct … between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditor’s terms of trade or are payable only on demand.
6.It is for the party asserting that a company’s contract debts are not payable at the time contractually stipulated to make good that assertion by satisfactory evidence.”
[115] In this case, there were a number of factors which enabled a conclusion to be drawn that the company was then insolvent. They included:
(1)The company was entirely dependent for its cash flow on land sales and sales had slowed in the six months prior to the administration in spite of prices being reduced and double commissions offered. The company and its bank had consistently forecast that it had to make one to two sales a month to pay its debts but that was not achieved. The company’s only asset was its land but that was not readily realisable by selling the land or by raising money on the security of the land. Previous attempts to borrow further funds from the bank had been refused. The company did not have the funds to promote sales any more vigorously by improving the presentation of the estate or by increasing advertising.
(2)The company did not just have a temporary lack of liquidity, it had a long history of financial difficulties and endemic shortage of cash with consistently late payment of its debts. It was unable to meet even its statutory obligations such as rates and land tax without significant indulgence from its creditors and it was not known if that could continue. There was, to use the words of Jacobs J in Hymix Concrete Pty Ltd v Garrity (1977) 2 ACLR 559 at 566 “an endemic shortage of working capital.”
(3)The company’s current liabilities included interest payments due to the bank, the loan owed to Mr and Mrs Gill, repayment of which they had sought,[15] and other creditors such as the OSR which was owed over $16,000 in respect of land tax due in October.[16] The company did not have the funds to meet any of those obligations. There were no settlements of the sale of blocks of land due until November. Even if one has regard to the commercial reality that some or all of its creditors may not have insisted on payment of moneys the company did not have, the debts were due and payable and the only reason for an indulgence was the company’s incapacity to actually pay the debts that were undoubtedly due.[17] There were no readily realisable assets to pay them.
[116] Further and additionally, there were a number of factors suggesting the company was likely to become insolvent even if it was not already insolvent. While, as Palmer J said in Crimmins v Glenview Home Units Pty Ltd (in liq) [2001] NSW SC 699 at [48]-[49], actual insolvency, as defined in s 95A of the Corporations Law, is a question of fact determined in all the circumstances of the case, taking into account the commercial realities of the company’s position, a determination of likely insolvency is much more subjective.
“Likely insolvency is much more a matter of opinion upon which minds may differ. Some directors, more cautious and apprehensive than others, might conclude that insolvency is likely where other more robust colleagues may see no cause for alarm. It is for this reason that the only criterion for judging whether an opinion as to likely insolvency has properly been formed for the purposes of s 436A is whether that opinion has been formed genuinely and in good faith: see eg Kazar v Duus 29 ACSR 321, at 333.
(1)Section 95A of the Corporations Law mandates a “cash flow” rather than a “balance sheet” approach to actual solvency. Nevertheless the company’s balance sheet showed a massive deficit between its assets and liabilities and even if the company could delay paying the loans to the shareholders shown in its accounts until after all the land was sold, the company would still be unable to repay those debts in full. Mr Geroff’s assessment of the solvency of the company on a balance sheet test set out in paras 14 to 17 of his affidavit sworn on 10 July 2007 was based on later acquired knowledge and assessment and is irrelevant to what the directors, the solicitors and the administrator knew or believed at the time.
(2)There was a very real prospect that the company would become involved in litigation which it could not afford whether as a result of an oppressed minority action, claims by shareholders against the directors which would have to be met by the company or claims by shareholders directly against the company. Even if litigation did not eventuate, the disputation apparent in the company would be likely to require extensive and on-going legal advice which the company simply could not afford. After seeking legal advice on only one occasion from Deacons the company had only $50 left in the bank with no immediate prospect of any income.
[117] However the defendants do not have to show that the company was insolvent or likely to become insolvent at the time the administrator was appointed. Rather the plaintiff must show against the first to third defendant, that the directors did not have reasonable grounds to believe that the company was insolvent or likely to become insolvent as at 13 October 1999; against the sixth defendant, that the advice given was negligently given; and against the fifth defendant that a reasonably prudent insolvency practitioner would not have accepted appointment as administrator on the basis of the information before him on 13 October 1999. In view of the matters to which I have referred, notwithstanding Mr Geroff’s view to the contrary, these allegations have not been made out.
[118] There was in my view sufficient reliable material before Mr Murphy to satisfy him that the company was insolvent or likely to become insolvent. He was not in the circumstances required to make further enquiries before accepting appointment. It is not a case like Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663, relied upon by the plaintiff, where the minute of the resolution purportedly appointing administrators disclosed matters which should have put the proposed administrators on notice of the need to inquire into the regularity or validity of the resolution purportedly appointing them. Of course that is not the only circumstance where a proposed administrator will be put on notice that his appointment may be invalid, but there were no circumstances which should have put the administrator on notice in this case. The duty of an administrator to investigate the company’s affairs under s 438A arises only once he or she has been appointed and the administration has begun.
The administration
[119] On the evening of 13 October 1999, the directors, Mr Morris, Mr McTaggart, Mr Gill and Mr Graham, met at Mr Gill’s home and unanimously resolved that Mt Nathan Land Owners was insolvent or likely to become insolvent at some future time and appointed Mr Murphy as voluntary administrator of Mt Nathan Land Owners. The minutes of the meeting record the terms of the resolutions which had been drafted by Deacons. The directors were of the opinion, as they were required to be under s 436A of the Corporations Law, that the company was insolvent or was likely to become insolvent at some future time and an administrator should be appointed. That opinion was genuinely formed and held in good faith. Thus the precondition for the exercise of the power to appoint an administrator (as to which see Kazar v Duus (1998) 29 ACSR 321 at 333 per Merkel J) was satisfied.[18] They relied on their own knowledge of the poor financial state of the company and the advice given to them by the company’s solicitors. In the circumstances, no improper purpose has been made out. As the directors were not acting for any improper purpose, it cannot be said that reasonable enquiries by Deacons would have revealed to Deacons that they were.
[120] On the following day Mr McTaggart faxed the minutes to Mr Murphy and the list of current creditors from the 1998 financial accounts and subsequent debts incurred by the company.
[121] Mr Murphy then set about to do the actions and investigations required by a newly appointed administrator to take control of the company’s business property and affairs pursuant to s 437A of the Corporations Law. On 14 October 1999, he completed a notification to the corporate officer of the appointment of himself as administrator. He provided that to the directors, together with a notice under s 438B(2) of the Corporations Law about the company’s business, property, affairs and financial circumstances. He sent correspondence to those entities, including Teefy Suchowiecki and Price & Roobottom, who were in possession of any company records requiring those records to be sent to him. He informed the bank of his appointment. He sent a notice to creditors convening the first meeting of creditors under s 436E of the Corporations Law to be held on 20 October 1999, enclosing a form 529A (notice of first meeting of creditors under administration); a form 532 (proxy form) and a form 535 (formal proof of debt or claim). The notice of meeting to creditors stated, consistently with s 436E(1) and (4) that the purpose of the meeting was to determine whether to appoint a committee of creditors and, if so, who its members should be; and that at the meeting the creditors might also remove the administrator from office and appoint someone else. He spoke to the real estate agent and gave notification of appointment to suppliers of essential services. His initial work continued through to 15 October 1999.
[122] As a result of the resolutions of 13 October 1999 and the consequent appointment of the administrator, the meeting of shareholders of Mt Nathan Land Owners called for 17 October 1999 did not proceed.
[123] On 14 October 1999, Mr Etridge sent another long letter to the Board of Directors virulently criticising Mr McTaggart and Mr Thornton and objecting to benefits received by his wife being described as payments in kind for legal services provided by him. He included the comment in bold and underlining, “… because I am not a shareholder and therefore I am not under any restriction at all in suing the company.” Unaware of the directors’ visit to Deacons, he excoriated the directors for the poor quality of the legal advice they had received on behalf of the company.
[124] In the report as to affairs of the shareholders dated 18 October 1999 the directors included the loan accounts to the shareholders other than Peter and Barbara Goodier as amounts claimed by the creditors with the amount admitted as owing being the “relevant percentages of remaining company assets at last sale.” Each of the directors expressed the same view in their report as to affairs of the company. By then, as Mr McTaggart said, it was obvious that the company was not going to be able to repay the whole of the shareholder loans.
[125] On 18 October 1999, Mr Murphy received completed questionnaires from the directors. Mr McTaggart said that he first realised that the company might go into administration after his telephone discussion with Ms Forbes on 8 October 1999. Mr Gill said he first realised this on 13 October 1999 as a result of advice from Deacons. Mr Morris said he realised this on 12 October 1999 as a result of the solicitors’ advice. Mr Graham added the detail that he realised it as a result of advice from Deacons “on possible action by a shareholder”. In answer to the question, “What do you consider are the cause or causes of the failure of the company that caused you to appoint a Voluntary Administrator?” Mr McTaggart wrote, “Initial structure made the company insolvent (technically) from inception. Action by an individual shareholder prompted legal advice being sought.” Mr Gill wrote, “Advice from solicitors as to the track one of the shareholders could be takeing [sic].” Mr Morris wrote, “Advice of solicitor re minor shareholder pressing for liquidation (also land sold below list price).” Mr Graham wrote, “The company has not failed, however the potential claim by a shareholder as an oppressed minority shareholder could make the company insolvent.”
[126] The plaintiff argued that the answers given by the directors show that they were motivated by an improper purpose which was known or ought to have been known by the fifth and sixth defendants. The plaintiff submitted that the answers show that it was not reasonable for the directors to come to the view that the company was insolvent or likely to become insolvent which is the necessary precondition for a voluntary administrator to be appointed.
[127] Essentially, however, the directors were of the view that the company faced irresolvable problems; or at least, that the problems could not be resolved without recourse to litigation which the company could not afford which would result in the company being put into liquidation either in an oppression action or because it had become insolvent. They also accepted the advice given to them by the solicitors that the 1998 accounts showed that the company had been insolvent from its inception because the loans to directors and other liabilities exceeded the company’s assets. It was reasonable for them to rely on that advice. They were part-time lay directors of a small private company who were wisely seeking the advice of an experienced commercial law firm.[19] Indeed it might be considered foolhardy of them not to have done so.
[128] They also knew of the ongoing difficulties the company faced because of its inability to pay its debts as and when they became due and payable. This meant that they were satisfied of both requirements of s 436A: that is not only that the company was insolvent or likely to become insolvent, but also that an administrator should be appointed. I am satisfied that they were acting in good faith and in the interests of the company as a whole and exercising reasonable care and diligence. They did not prefer their own interests to those of the company and were not motivated by any improper purpose. The power to appoint an administrator was exercised in furtherance of the object of Pt 5.3A of the Corporations Law as set out in s 435A.[20]
[129] On 18 October 1999, Mr Murphy wrote notes for a meeting with the bank which set out his views at the time for the reasons for his appointment by the Board:
“(a)Because the company is likely to become insolvent;
(b)To limit the exposure of the Board to personal liability;
(c)To allow a Deed of Company Arrangement (‘DOCA’) proposal to be put to creditors, most of which are the ‘investors’
(d)To assist in resolving a dispute between ‘investors’ own finances.”
[130] Price & Roobottom lodged a proof of debt for their unpaid legal fees of $1,296.50 on 15 October 1999. Mr and Mrs Gill were still owed the $200,000 they had lent the company and were keen to have that money repaid particularly as their borrowing was secured by a mortgage over their own home. They had made requests for repayment on many occasions. They put in a formal proof of debt on 18 October for that $200,000 and interest of $9,000 as well as $234,300 owing on the shareholders loans and moneys owing on the Carabetta loan. Mr McTaggart also lodged a formal proof of debt on that date for $258,600 said to be owing for the sale of his land to the company; his company, Bottom Line Technology Pty Ltd lodged a proof of debt for $94. Mr Graham and Ms Campbell submitted a proof of debt for the shareholders’ loans of $146,100. On 25 October 1999, the GCCC submitted a proof of debt for $213 for bulk water charges and monthly administration fee.
[131] On 19 October 1999 Mr Etridge telephoned Mr Murphy and told him that Mrs Etridge had received a notice of first meeting of creditors, that she was not a creditor of Mt Nathan Land Owners and that she would attend the meeting as a shareholder/observer and that he might attend as an observer. Mr Murphy then telephoned Ms Forbes of Deacons and informed her of what Mr Etridge had told him. She had no idea of the basis for Mr Etridge’s assertion.
[132] The first meeting of creditors, required under s 436E of the Corporations Law, was held on 20 October 1999. The creditors who had lodged proofs of debt were: Mr and Mrs Gill ($499,300); Price & Roobottom Solicitors ($1,296.50); Mr Morris ($921,000); Mr McTaggart and Ms Thom ($258,600); Ms Moore ($242,400); Bottom Line Technology Pty Ltd ($94); Mr and Mrs Richardson and Mr and Mrs Johnston ($149,700); Mr Lane ($229,200); Mr Carabetta ($230,100); and Mr Graham and Ms Campbell ($146,100). All of the shareholders, apart from Mrs Etridge, had lodged proofs of debt for amounts said to be owing under the shareholders’ agreement. Each of them apparently honestly believed that the moneys for which they had lodged a proof of debt were owing to them by the company.
[133] At the meeting, Mrs Etridge signed as an observer who was present in her capacity as a shareholder and Mr Etridge signed as an observer present in that capacity. At that meeting, Mr Etridge asserted that Mt Nathan Land Owners did not owe any money to the shareholders for the sale of their land to the company. Mr Murphy informed them that the company’s financial accounts showed otherwise. Mr Murphy was confirmed as Voluntary Administrator by resolution at the meeting. He informed them of the steps that would or could be taken and his legal obligations under the Corporations Law.
[134] The appointment of a voluntary administrator meant that Mt Nathan Land Owners was in breach of the terms of its loan agreement with the bank. As a result on 21 October 1999, the bank appointed Richard Dennis and Roy Connolly of Ernst & Young as receivers to Mt Nathan Land Owners. On 25 October 1999, the bank served a notice of demand for payment of the outstanding debt on the company. The company was then unable to pay that debt and it was certainly insolvent unless and until it was able to raise finance to repay that debt and the other debts which were undoubtedly owing, proofs of which had been provided. This is so even if the shareholders’ loans are not considered as debts and any other doubtful debts are discounted.
[135] The receivers obtained an updated valuation of the remaining land from HTW as at 1 November 1999. There were 16 unsold allotments (Lots 40 and 41 had been sold but not yet settled). The valuation reports the falling level of demand for “park residential” allotments from 1994 to 1999, and the increasing prices between 1992 and 1998 and the fall in prices in 1998-1999. It compared the favourable sales rate at the nearby Mt Nathan Forest estate with less favourable sales rate at Mt Nathan Park estate and other similar estates. HTW prepared a valuation of the remaining lots if they were sold in an orderly way with proper marketing over a period of 18 months (HTW(2)). If the allotments were to be sold over a period of six to eight months they would be sold at discounts of approximately 15% (HTW(3)).
[136] The diminution in market value can be seen from a comparison of the HTW valuation of 7 April 1998, and the HTW valuations as at 1 November 1999.
Lot No. | HTW 7 April 1998 | HTW Valtuation (2) – 1 November 1999 | HTW Valuation (3) – 1 November 1999 |
19 | $80,000 | $80,000 | $70,000 |
29 | $90,000 | $85,000 | $75,000 |
30 | $85,000 | $80,000 | $70,000 |
31 | $95,000 | $85,000 | $75,000 |
33 | $75,000 | $75,000 | $65,000 |
34 | $95,000 | $85,000 | $75,000 |
36 | $75,000 | $70,000 | $60,000 |
42 | $95,000 | $80,000 | $70,000 |
44 | $95,000 | $90,000 | $70,000 |
45 | $85,000 | $85,000 | $70,000 |
46 | $75,000 | $75,000 | $60,000 |
47 | $95,000 | $80,000 | $65,000 |
48 | $85,000 | $75,000 | $60,000 |
49 | $80,000 | $75,000 | $60,000 |
50 | $75,000 | $70,000 | $60,000 |
53 | $90,000 | $90,000 | $75,000 |
TOTAL | $1,370,000 | $1,280,000 | $1,080,000 |
[137] On 22 October 1999 ABKJ wrote to Mr Murphy asserting that the shareholders were not creditors of Mt Nathan Land Owners and enclosing correspondence from Jeff Mealing of Teefy Suchowiecki to the shareholders. Teefy Suchowiecki had amended the 1998 financial statements (“amended 1998 financial accounts”) to remove the shareholder loans and to show an excess of assets over liabilities of $2,196,708.[21] This amendment to the 1998 financial accounts was done without the company’s authority and certainly without any reference to the administrator of the company. This was quite extraordinary given the role of an administrator under s 437A of the Corporations Law. Teefy Suchowiecki merely faxed a copy of the amended 1998 financial accounts in response to Mr Murphy’s notice of 14 October 1999, seeking the company’s records. No mention was made in that facsimile that the accounts had been amended. It appears it was done on the instructions of ABKJ acting for Mrs Etridge at Mr Etridge’s behest. It was done without the knowledge of the directors or the administrator.
[138] Also enclosed with the ABKJ letter of 22 October 1999 was a copy of the land sale contract between the company and Mrs Etridge. It was suggested to Mr Murphy that he had copies of the land sale contracts given to him by Deacons on 18 October 1999 and he quite properly conceded that was possible. In its written submissions the plaintiff submitted that the proofs of debt received by Mr Murphy from Mr Morris and from Mr and Mrs Johnston and Mr and Mrs Richardson attached the land sale contracts. The plaintiff relied as its only evidence of this that the land sale contracts were with the notice of rejection of each of these proofs of debt. That does not prove that the land sale contracts were attached to the proofs of debt submitted on 20 October 1999. In fact the only proof of debt which says on its face that the proof of debt attached a copy of the land sale contract is one from Mr Morris dated 9 November 1999. It was not suggested to Mr Murphy that he received a land sale contract with any proof of debt on 20 October 1999. Notwithstanding Mr Murphy’s concession of the possibility of receiving a land sale contract a few days earlier, I am satisfied that 22 October 1999 was the first time Mr Murphy saw or was given a copy of a land sale contract. In any event this difference is of little moment.
[139] On receipt of that letter, Mr Murphy made a note to the following effect:
“Fax from ABKJ – M Kyle
COMMENTS
The loan and F/S generally together with other info available to the directors allowed them to form the view they did to appoint a VA
The VA exists and remains in place until the 2nd meeting.
I intend to hold the position until the 2nd meeting, dealing with options to be recommended.
I am unable to say that the Committee of Creditors are not creditors as Kyle has said, simply because the purchase price may not be owed. Other claims possibly exist and most certainly for Gill.”
[140] Mr Mealing of Teefy Suchowiecki rang Mr McTaggart and told him, in what Mr McTaggart described as a very abusive and threatening telephone call, that as a result of speaking to Mr Etridge, he was of the view that the accounts should be changed to delete the shareholders’ loans. Mr McTaggart was shocked as he had always believed that there were loans to the shareholders based on the way the company had been set up and the advice given by Mr Etridge and Mr Mealing. The company financial records had always shown the amount of shareholder loans and these had been provided to the bank and had been used to prepare the personal taxation returns of the shareholders.
[141] Mr Mealing rang Ms Baker, who worked for Mr Murphy, and told her that the company was not insolvent as loans were not outstanding and that land sale contracts made the previous land owners shareholders. She told him that the fifth defendant had received advice that the appointment of the administrator was valid.
[142] On 22 October 1999 Mr Murphy wrote to Mr Smith seeking, inter alia, company records and documents. He asked in particular for the land sale contracts. This was entirely appropriate as he had just been given a copy of the land sale contract with Mrs Etridge.
[143] Mr Smith in evidence had very little recollection of what had occurred and had been unable to find the relevant files. It appears from the documentary evidence that on 22 October 1999 Mr Smith sent to Mr Murphy a copy of the land sale contract with Mr and Mrs Goodier and registration documents relating to the registration in the name of Mt Nathan Land Owners of the land formerly belonging to the land owners. It does not appear that he sent any other company records and documents to Mr Murphy. He did not send the shareholders’ agreement or, more significantly, the amendment deed to Mr Murphy.
[144] It appears from a file note made by Mr Smith on 19 October 2006 in response to a request from the present liquidator of the plaintiff that in 2005 he informed some other interested party, whom he is not now able to identify, that all his files relevant to this matter had been destroyed years ago. In October 2006, however, he checked his safe custody register and retrieved the documents in it which were a valuation report from HTW Valuers, the shareholders’ agreement and the amendment deed. He then sent those documents to the plaintiff’s solicitors.
[145] Mr McTaggart gave evidence that the outstanding loan to Mr and Mrs Gill together with the cash flow problems the company encountered persuaded him that, even if the shareholder loans were incorrectly recorded, the company was reasonably likely to become insolvent, and based on the legal advice they received, the directors would be in breach of the Corporations Law if the company continued to operate as it was.
[146] On 22 October 1999, Mr Etridge also wrote to Mr Murphy and to Price & Roobottom asserting that none of the shareholders was a creditor of Mt Nathan Land Owners, except perhaps Mr and Mrs Gill; that the placing of Mt Nathan Land Owners into administration was improperly used by the directors to avoid further shareholder inquiry into the directors’ conduct; and that Mt Nathan Land Owners was not insolvent. As I have already said, I am satisfied that the directors were not acting for such an improper purpose and therefore the sixth defendant could not have known that they were. On the material available to Deacons it certainly appeared that the company was insolvent, if not presently, then it would certainly become so. It would not have been consistent with their retainer, if they had failed to advise the directors of that.
[147] Mr Etridge referred in his letter to the land sale contracts and shareholders’ agreement but not to the amendment deed. His letter to Mr Murphy contains the following mixture of flattery, self-congratulation and threat:
“Events have moved too fast for me to have had time to research the question of possible interaction between the Corporations Law and a 436A appointment made in violation of an express Agreement. And in any case, my wife is rather relieved that the responsibility for the Company’s decisions is now in the hands of someone who will make sensible commercial decisions without the inconsequential subjectivity which has been inflicted on the Shareholders for the past 15 or so months. Even if your appointment was to come to an end tomorrow there would be much merit in having you on the Board or at least able to advise it. It is clear that, for subjective reasons, the Board does not want me to advise it. Yet it desperately needs somebody competent. One of these reasons advanced against taking my advice on anything is that, as a discharged bankrupt, I cannot possibly be able to advise anybody on anything to do with money. In the circumstances I find that exquisitely humorous. My bankruptcy, the petitioning creditor being the Commissioner for Taxation who got precisely nothing, was of my choosing and was arguably the most profitable exercise upon which I have ever engaged. It did not change the course of my life, or the sum of my wife’s assets, for one instant.
Of immediate importance is the question of your costs now that you are aware of the Shareholders Agreement. If those who appointed you pay your costs then obviously the other Shareholders have no problem. If, however, the Company pays you, then because the Board for at least the second time in the past six months has breached 5(b)(v), this time by appointing you without 75% Shareholder approval, any aggrieved Shareholder may seek, and would obtain, an Order that those who appointed you pay back into the Company any costs which have been paid to you by the Company.
Looking into the crystal ball I can see a mitigation argument when the four Directors have to pay your costs back into the Company. I would expect that thought already to have crossed your mind while reading this letter.”
[148] Mr Murphy did not receive that letter until 25 October 1999 when it was faxed to him by Mr Etridge.
[149] On 25 October 1999 Mr Murphy wrote two letters to Deacons enclosing the letters of 22 October and attachments from ABKJ and from Michael Smith. Mr Murphy wanted advice to address his concern as to whether, if the shareholders were not creditors of Mt Nathan Land Owners, the company may not have been “technically insolvent” at the time of his appointment. He asked what recommendation should be put to the creditors in light of the contracts of sale and the shareholders’ agreement and which creditors were entitled to vote at the second meeting of creditors. In seeking legal advice as soon as he became aware of the basis for the contention that the shareholders were not creditors, Mr Murphy behaved entirely appropriately.
[150] Mr Murphy and Ms Baker from his office met with Gregory Litster, then a partner of Deacons, and Ms Forbes on 26 October 1999 at 12.30pm. That was Mr Litster’s first involvement in this matter. Some of the directors thought he was present at the meeting of 12 October 1999, but I am satisfied that they were mistaken. Mr Litster gave advice to Mr Murphy. The plaintiff alleged that the sixth defendant should have advised Mr Murphy that he was required to terminate the administration or seek directions from the court.
[151] In the absence of the file, Mr Litster cannot now recall what his advice was. Given his general views about administration he thought it likely that Mr Murphy’s notes of what he told him were correct. Mr Murphy was by then satisfied that the company was insolvent independently of the shareholders’ loans. The debt to the bank was due and payable; the debt to Mr and Mrs Gill was due and payable; as were a number of other debts. No evidence suggests that the company was then able to pay its debts which were due and payable.
[152] Mr Litster said there was some doubt as to whether or not Mr Etridge was correct. The conflict between the shareholders’ agreement and the land sale contracts justified this doubt. Neither Mr Litster not Mr Murphy were given or knew of the amendment deed. Mr Murphy concluded that he was prepared to recommend that the administration should end and the company revert to its directors if the “Etridge matter is sorted out.” However he did not think that desirable in view of the internal problems and the company’s financial difficulties. Mr Litster advised against returning the company to the directors because of the hostility within the company. He advised that a DOCA would resolve any doubts about the status of the shareholders as creditors and prevent the company being embroiled in oppression proceedings.
[153] Given that Mr Murphy was satisfied that the company was insolvent, and the company was in receivership there cannot be any valid criticism of Mr Litster’s advice. The option of seeking directions from the court was open but, given the company’s lack of financial resources[22] and its incapacity to resolve its internal disputes and install a management team acceptable to all the shareholders, it was at the time unrealistic compared to the option of entering into a DOCA. Mr Litster did not suggest that such an application be made. It seems highly unlikely that an application to end the administration of a company, properly regarded by its administrator as then insolvent, would have been successful. There was little realistic chance that a company in receivership without directors who could command the confidence of the shareholders would be able to refinance the debt. When refinancing was achieved by Mr Murphy, the financier insisted on a DOCA being in place. Mr Litster’s view of the insurmountable difficulties caused by the ongoing hostility within the company was vindicated on the following day.
[154] On 27 October, Mr McTaggart and Mr Gill met with Mr Etridge to try to settle their disagreements. Mr Etridge proposed that he and Mr Gill and Mr McTaggart take over the company. All talks which were aimed to see if there was any way to put the company back on the rails without an administrator failed. Mr Etridge’s conditions were not acceptable to Mr Gill or Mr McTaggart. Those conditions included the directors’ paying $100,000 to the company, being the $50,000 paid to the Goodiers together with $50,000 in costs; immediate payment of the share entitlements to Mrs Etridge, Mr and Mrs Lane and Mr Carabetta, and that when they come out of receivership, that he, Mr Gill and Mr McTaggart make up a new management committee. It is not difficult to understand why these onerous conditions were not acceptable to Mr Gill or Mr McTaggart. Mr Gill estimated it would cost $800,000 which the company did not have. Mr Gill and Mr McTaggart were unwilling to work with someone who had threatened to sue them and accused them of incompetence and/or dishonesty. A management team made up of Mr Gill, Mr McTaggart and Mr Etridge had no prospect of being sufficiently harmonious to be able to pull the company out of its many difficulties or be able to resolve the many problems that beset the company. The disputes within the company were unable to be resolved and it remained insolvent.
[155] On 28 October 1999, Mr Murphy conferred with Ms Forbes as to what should be included in the DOCA to resolve the various disputes. The OSR informed Mr Murphy that $16,848 land tax was outstanding together with interest accruing on a daily basis. Mr Murphy informed Mr Kyle that the company was technically insolvent as it had not paid its land tax or the debt to Mr Gill. There can be no suggestion that those debts could be paid. Mr Murphy said he was reluctant to recommend a return to prior control and that liquidation or a DOCA were the options.
[156] On 29 October 1999, Mr Murphy issued his report to creditors pursuant to s 439A(4) of the Corporations Law and called a meeting of creditors for 9 November 1999. The report recites an accurate summary of the circumstances in which the company was put into administration and the reasons for doing so; and records the inconsistency between the shareholders’ agreement, the contracts of sale of the land and the accounting treatment of the consideration on sale of the land as recorded in the company’s financial statements prior to their unauthorised amendment. Mr Murphy correctly told the creditors that under s 439C at a meeting convened under s 439A the creditors may resolve:
“(a)that the company execute a Deed of Company Arrangement, specified in the resolution (even if it differs from the proposed Deed (if any), the details of which accompany the notice of the meeting); or
(b)that the administration should end; or
(c)that the company be wound up.”
[157] He fairly put the arguments for and against each option. He was obliged to form an opinion pursuant to s 438A(b) as to which of the options was in the creditors’ interests. He expressed that opinion in the following terms:
“Based on the information above and the draft Deed and summaries provided, it is my opinion that it is in the creditors’ interest for them to resolve for the company to execute a Deed of Company Arrangement. My reasons for this opinion are:
1.Because the creditors will be given the opportunity to decide which creditors may make claims against the company under the Deed of Company Arrangement, and given that the proposal submitted by the directors indicates that some shareholders may be willing to compromise the company’s debts to them under the Deed of Company Arrangement, it is likely that the Deed of Company Arrangement will result in a better return for the company’s creditors than may result from the immediate winding up of the company; and
2.Creditors will be given an opportunity to resolve the management issues in the Deed of Company Arrangement, so that when the terms of the Deed of Company Arrangement are fulfilled, the company will be returned to a new management without all the problems the company was previously experiencing; and
3.My investigations have not revealed any transactions that a Liquidator may seek to recover under Part 5.7B of the Corporations Law.”
[158] He attached a document entitled “Proposed matters for discussion and possible inclusion in a possible DOCA” on which he had taken legal advice from the sixth defendant and which provided:
“1.Shareholders will be entitled to vote on this proposal on the basis that a debt exists for voting purposes only for an amount equal to the price at which their land was purchased by the company.
2.In reference to the debt referred to in 1 above, the Deed will acknowledge that whether such claim is valid or not, shareholders will no longer have any entitlement to any claim based on this.
3.The debts referred to above will be renounced upon the execution of Deeds of forgiveness on behalf of each shareholder.
4.The Deed will acknowledge that the company does not intend to proceed with any actions for claims if any exist against the directors for past acts.
5.The company indemnifies the directors against any claims which as directors they may have incurred in good faith.
6.Possible variations to the Shareholders Agreement.
7.The entitlement of shareholders to the surplus based on the designated percentages identified in the company’s Memorandum and Articles of Association.
8.The possible continued appointment of the Administrator of the Deed of Company Arrangement until the realisation of all of the assets and the collection of funds.
9.The distribution of the funds by the Administrator of the Deed of Company Arrangement in accordance with the terms agreed to in the Deed.
10.The secured creditor or creditors being Suncorp Metway and/or other parties will be initially paid out of available funds to release the security held.
11.The costs and outlays of the Administrator and the Administrator of the Deed of Company Arrangement will be met in the priority under the Corporations Law which allows these costs to rank only after the secured creditor.
12.The unsecured creditors which include trade creditors and Kevin and Leah Anne Gill for payment of the loan amount of $200,000.00 plus interest which debt arose as a result of an agreement with the company and Mr and Mrs Gill, will be given next priority.
13.Other claims against the company will be assessed on the basis of merit and if approved by the Deed Administrator will be paid next.
14.The possibility of the shareholders and the company releasing each other from all claims they may have now or in the future against each other including claims for compensation for loss of value of property.
15.The residual after meeting each of the above priorities will be distributed to shareholders in accordance with their percentages of entitlement.”
[159] It appears that given the irresolvable conflict between the management and some of the shareholders and the dispute which had not been resolved over whether or not the shareholders were creditors and the financial situation in which the company found itself, unable to afford litigation, whether to seek the court’s opinion or otherwise, to resolve its internal disputes, there can be no criticism of Mr Murphy’s recommendation. This is even more apparent when it is recalled that Mr Murphy had not been provided by Mr Smith with a copy of the amendment deed. It was reasonable for the fifth defendant to hold the view which he did that, irrespective of the shareholder loans, the company was insolvent or likely to become insolvent and it was reasonable for him to form an opinion pursuant to s 438A of the Corporations Law that it was in the interests of the company’s creditors for the company to execute a DOCA rather than for the administration to end or the company be wound up.
[160] On 2 November 1999, the bank gave a notice of exercise of power of sale over the remaining land.
[161] On 3 November 1999, ABKJ wrote to the shareholders of the company setting out what they said were the facts. They asserted that the land sale contracts extinguished the debt owed by the company to the individual landowners. They made reference to the shareholders’ agreement but not to the amendment deed. The letter concluded with the statement that as Mrs Etridge’s financial interests had been damaged, she would be “seeking redress for that pursuant to her rights as a party to the shareholders’ agreement.” They said she believed it was in the interests of the company for the administration to end and for the bank to terminate the appointment of receivers but that the bank would not do that unless “competent management had been installed and that there is no longer division within the company.”
[162] Since it appears that the price of ending division was meeting all of Mr Etridge’s demands and installing Mr Etridge, Mr Gill and Mr McTaggart together to manage the company, when it was clear that they could not work together, the ABKJ proposal had no prospects of being successful and a DOCA appears to have been inevitable.
[163] On the following day, ABKJ sent a copy of their letter to shareholders to Mr Murphy asserting that he intended to allow shareholders to vote at the creditors’ meeting, despite knowing that they were not creditors. It concluded, “Our client earnestly requests that you strive to achieve an outcome which will result in the mortgagee being sufficiently relaxed to withdraw the receiver.” This letter was referred to Deacons.
[164] On 8 November 1999, Mr McTaggart and Ms Thom advised Mr Murphy that they were making a claim against the company and lodged a proof of debt for that claim.
[165] On 9 November 1999, the second meeting of creditors of Mt Nathan Land Owners held under s 439A of the Corporations Law, commenced and was adjourned to 30 November 1999. Those creditors present and voting resolved that the company execute a DOCA. Once that resolution had been passed under s 444A(1), s 444A and s 444B of the Corporations Law provided for what then had to happen. Those sections provided:
“s 444A Effect of creditors’ resolution
(1)This section applies where, at a meeting convened under section 439A, a company’s creditors resolve that the company execute a deed of company arrangement.
(2)The administrator of the company is to be the administrator of the deed, unless the creditors, by resolution passed at the meeting, appoint someone else to be administrator of the deed.
(3)The administrator of the deed must prepare an instrument setting out the terms of the deed.
(4)The instrument must also specify the following:
(a)the administrator of the deed;
(b)the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors’ claims;
(c)the nature and duration of any moratorium period for which the deed provides;
(d)to what extend the company is to be released from its debts;
(e)the conditions (if any) for the deed to come into operation;
(f)the conditions (if any) for the deed to continue in operation;
(g)the circumstances in which the deed terminates;
(h)the order in which proceeds of realising the property referred to in paragraph (b) are to be distributed among creditors bound by the deed;
(i)the day (not later than the day when the administration began) on or before which claims must have arisen if they are to be admissible under the deed.
(5)The instrument is taken to include the prescribed provisions, except so far as it provides otherwise.
s 444B Execution of deed
(1)This section applies where an instrument is prepared under section 444A.
(2)The company must execute the instrument within:
(a)21 days after the end of the meeting of creditors; or
(b)such further period as the Court allows on an application made within those 21 days.
(3)The board of the company may, by resolution, authorise the instrument to be executed by or on behalf of the company.
(4)Subsection (3) has effect despite section 437C, but does not limit the functions and powers of the administrator of the company.
(5)The administrator of the deed must execute the instrument before, or as soon as practicable after, the company executes it.
(6)When executed by both the company and the deed’s administrator, the instrument becomes a deed of company arrangement.
(7)Division 12 provides for consequences of the company contravening subsection (2).”
[166] The creditors at the meeting resolved that the DOCA be drafted in accordance with the draft presented at the meeting. Mr Murphy informed the meeting that he had not engaged Teefy Suchowiecki to prepare amended accounts and only he could do so. In any event, the bank had appointed receivers to recover what it was owed and as Mt Nathan Land Owners could not pay the bank, it was presently insolvent. Mr Murphy also reported to the meeting that because of the extent of disputes surrounding the claims by shareholders, he would not consider the votes by those parties for those debts. He advised that on the basis of advice given to him by his solicitors, those shareholders who were claiming as creditors for the debts would not be allowed to vote at the meeting. He told the meeting that the creditors who had lodged proofs of debt which fell outside that were Kevin and Leah Gill for $209,000; John McTaggart and Amanda Thom for $14,200; Bottom Line Technology Pty Ltd for $94; and Price & Roobottom Solicitors for $1,296.50. Mr Murphy said that the other parties at the meeting would be treated as observers but that their input into the meeting would be welcome. Only those who had been nominated as creditors would be allowed to vote at the meeting. Mr Murphy acted prudently in not allowing the shareholders who were claiming under the shareholders’ agreement to vote when he was not certain whether or not they were creditors.
[167] As previously set out, the minutes accurately record the effect of the advice given to the company by Deacons by recording what Ms Forbes who was present at the meeting told the meeting. The variety of complaints raised by the shareholders or their representations at this meeting, in particular by Mr Lane, Mr Carabetta and Mr Etridge, provides a graphic example of how difficult the operation of the company had become. Mr Etridge, who was present as an observer, would not agree to a term in a DOCA whereby the shareholders indemnified each other as he said his wife was undecided whether she would sue the directors.
[168] On 15 November 1999, ABKJ wrote to the shareholders saying that Mr Etridge had been treated with hostility at the meeting of 9 November and that Mrs Etridge would not agree to any proposal which involved a modification of her rights under the shareholders’ agreement. They repeated their threat of litigation and indicated her preparedness to be bought out for $95,000.
[169] On 17 November 1999, a financier procured by Mr Murphy, LM Investment Management Ltd (LM Investment), sent a conditional approval to Mr Murphy of a loan which would pay out the bank loan. It was accepted by Mr Murphy as administrator of the company on 22 November 1999. A contemporaneous note of the discussions between Mr Murphy and a representative of LM Investment, which I accept as accurate, records that funding by LM Investment was subject to execution of the DOCA.
[170] On 22 November 1999, Mr Murphy produced a further report to creditors annexing the proposed DOCA in the terms discussed at the creditors’ meeting of 9 November 1999. He informed the creditors that if the company did not execute the DOCA by 30 November, then pursuant to s 446A the company would automatically be placed into liquidation. This is the combined effect of sections 444B(2), 446A(1)(b) and 446A(2)(a) of the Corporations Law. Mr Kyle telephoned Mr Murphy on receipt of the draft DOCA and said that Mrs Etridge would not sign it. On 24 November, Mr Murphy wrote to Ms Forbes saying that after his discussions with Mr Kyle on the previous day, he was of the view that there was still capacity for negotiations to resolve the remaining differences once a financier was put in place to replace the bank. It was uncertain if refinancing could be achieved if the company went into liquidation and so, in the interest of creditors, he gave instructions for an application to be made to extend the time for the DOCA to be executed.
[171] On 25 November 1999, Mr Murphy received a letter from Mr Etridge, which he immediately sent to Ms Forbes. Mr Etridge asserted that the shareholders’ loan accounts “do not, and never did, exist.” Given what Mr Etridge wrote at the time the scheme was being set up, where he said that the original arrangement was to create a debt from the company to the shareholders so that tax would not be payable on profits, this was at best a disengenuous statement. Mr Etridge alleged that Mr Murphy was not acting in the interests of the company but the directors’ personal interests. Mr Etridge put Mr Murphy on notice that he would be making complaints to the relevant regulatory bodies about Mr Murphy and that Mrs Etridge would be taking legal proceedings for damages. He asserted Mrs Etridge would not execute the DOCA. This letter obviated the need for an application to be made to the court to extend the time for executing the DOCA since it made it clear that negotiations would be fruitless. Mr Etridge would not agree even to the limited release given to the directors in the draft DOCA for acts performed honestly and reasonably in the exercise of their duties. Mr Murphy’s employee, Ms Baker, made a note to file dealing with the many accusations made by Mr Etridge and recorded her view that the company was insolvent as it was unable to pay its debts as and when they became due and payable.
[172] On 30 November 1999 the adjourned second meeting of creditors resumed. Mr Murphy told the meeting there were effectively three alternatives open to the company: it could be returned to the directors (who would have to arrange refinancing of the bank debt and continue to deal with the Etridges’ criticism), he could continue as administrator under the DOCA and arrange refinancing of the bank loan, or the company could go into liquidation. Mr Murphy became administrator of the DOCA of Mt Nathan Land Owners when it was executed on 30 November pursuant to the resolution of 9 November 1999.
[173] The essential terms of the DOCA were set out in clause 3 which was necessary if the ongoing disputes and uncertainty within the company were to resolved and the company returned to its directors. Clause 3 provided:
“3.1The operation of clauses 9, 11 to 13 inclusive and 17 of this Deed are conditional upon the following terms being satisfied within 12 months of the signing of this Deed:
(1)all of the Shareholders agreeing to release and discharge each other from all claims they may have against each other as at the Appointment Date;
(2)the Company negotiating and entering into, with the approval of the Committee and in consultation with the Shareholders, a refinancing agreement which is sufficient to discharge and release the Suncorp Security and the [sic] achieve the retirement of the Company’s Receivers;
(3)the Company granting, with the approval of the Committee and in consultation with the Shareholders, a fixed and floating charge and registered mortgage in favour of the New Financier;
(4)all of the Shareholders acknowledging that the debts recorded in the Company’s accounts which appear as Annexure 1 to the Deed should be reversed and that they have no entitlement to the debts as recorded in the accounts;
(5)the Company and Shareholders releasing and discharging the current and retired directors of the Company in respect of any acts performed by them honestly and reasonably in the exercise of their duties up to the Appointment Date;
(6)the Shareholders entering into an agreement and carrying out all things necessary to update the individual Shareholder’s profit share proportions;
(7)the Shareholders releasing and discharging the Company from all claims or actions against the Company in respect of compensation for loss of value of property.
Clause 9 dealt with how the DOCA could be terminated; clauses 11 to 13 with discharge of debts, extinguishment of claims and bar to creditors’ claims; and clause 17 dealt with termination of the DOCA when it had achieved its purpose.
[174] Once the DOCA was in place Mr Murphy was able to proceed with the refinancing of the bank loan. He finalised the refinancing of the bank loan with LM Investment and the receivers were paid out on 21 January 2000. In addition there was sufficient funding for the administrator’s costs, legal fees and the marketing of the land. The difficulties Mr Murphy was working under in finalising the loan can be seen from the fact that on 2 December 1999, he requested of the receivers a loan of $6,400 from the bank to enable the searches requested by the financier to take place. That additional funding was declined on the following day. Even after refinancing, Mr Murphy was not able to pay out the Gill loan despite further demand being made on 7 December 1999.
[175] There can be little doubt that Mr Murphy’s evidence that the execution of the DOCA and the settlement of the two sales which were under contract when the company went into administration were necessary before such finance could be finalised, should be accepted. Mr Murphy throughout this difficult period at all times acted in the best interests of the company and its creditors.
Sale of land
[176] Even though the refinancing provided money for advertising, the land continued to sell poorly. A marketing campaign was undertaken which was far more extensive than that undertaken before the company went into administration. Initially, sales picked up in early 2000 but it took almost three years to sell the remaining sixteen blocks of land.
[177] The following table gives a chronological account of all of the sales in the Mt Nathan Park estate between 9 February 1998, the date of the first sale, and 23 May 2002, the date of the sale of the last block to sell.[23] The fall in prices is readily apparent. It is notable that the only block to resell during the period, Lot 39, sold for $80,000 on 1 May 1998 and only $78,000 16 months later on 16 September 1999, before the administrator was appointed.
Sale Number | Lot | Date | Price |
Pre-administration | |||
1. | Lot 18 | 9 Feb 98 | $120,000 |
2. | Lot 39 | 1 May 98 | $80,000 |
3. | Lot 24 | 18 Jun 98 | $90,000 |
4. | Lot 51 | 19 Jul 98 | $77,500 |
5. | Lot 25 | 5 Aug 98 | $110,000 |
6. | Lot 27 | 30 Sep 98 | $107,100 |
7. | Lot 35 | 21 Nov 98 | $73,000 |
8. | Lot 26 | 27 Nov 98 | $104,100 |
9. | Lot 43 | 29 Nov 98 | $97,000 |
10. | Lot 52 | 5 Dec 98 | $78,500 |
11. | Lot 38 | 18 Dec 98 | $82,500 |
12. | Lot 22 | 5 Jan 99 | $88,000 |
13. | Lot 28 | 18 Jan 99 | $100,750 |
14. | Lot 37 | 27 Jan 99 | $75,000 |
15. | Lot 21 | 25 Feb 99 | $97,000 |
16. | Lot 32 | 26 Feb 99 | $106,000 |
17. | Lot 40 | 9 Mar 99 | $104,900 |
18. | Lot 20 | 24 Apr 99 | $93,000 |
19. | Lot 23 | 29 Jun 99 | $101,900 |
20. | Lot 41 | 16 Sep 99 | $90,000 |
| Resale Lot 39 | 16 Sep 99 | $78,000 |
Post Administration | |||
21. | Lot 53 | 8 Feb 00 | $85,000 |
22. | Lot 42 | 8 Feb 00 | $89,000 |
23. | Lot 29 | 8 Feb 00 | $71,000 |
24. | Lot 31 | 16 Mar 00 | $77,500 |
25. | Lot 47 | 16 Mar 00 | $81,000 |
26. | Lot 49 | 12 May 00 | $73,500 |
27. | Lot 46 | 14 Jun 00 | $77,000 |
28. | Lot 30 | 3 Jul 00 | $80,000 |
29. | Lot 45 | 12 Jul 00 | $81,000 |
30. | Lot 48 | 29 Aug 00 | $75,000 |
31. | Lot 34 | 27 Mar 01 | $76,000 |
32. | Lot 50 | 29 Mar 01 | $73,500 |
33. | Lot 33 | 18 Apr 01 | $73,500 |
34. | Lot 44 | 21 May 01 | $79,000 |
35. | Lot 19 | 24 May 01 | $87,500 |
36. | Lot 36 | 23 May 02 | $73,000 |
[178] The first three sales by the administrator were contracted on 8 February 2000. A further seven lots were sold between March and August 2000, and five in the three months from March to May 2001, and the final sale was in May of 2002. A question arose as to whether the land sold at market value. Almost all of the properties sold at a price between the valuations in the two HTW valuations of 1 November 1999. Lots 19, 36, 42, 46, 47, and 50 sold above HTW’s higher value and only Lot 29 sold below HTW’s lower value. The lots sold after the administrator was appointed sold for a total of $1,252,500. This compared favourably with HTW’s higher valuation on 1 November 1999 of $1,280,000 and HTW’s lower valuation of $1,080,000. It could not be said in these circumstances that the land was sold at an undervalue.
[179] There are conflicting reports from valuers as to the market value but I accept Mr Brett’s assertion that “as a general premise and subject to proper examination, the price paid by the market for a subject site is primary evidence of value.” These are blocks that had been on the market from April 1997 to the administration in October 1999 and yet had failed to sell. The rate of sales after administration does not suggest a fire sale. As Mr Brett observed, if they were under priced, one would have expected them to sell more quickly than they in fact did. The prices achieved were consistent with the HTW valuations of 1 November 1999.
[180] It seems most unlikely that, if the company had not gone into administration, any higher prices would have been achieved. The company would have continued to have insufficient funds to present, maintain and market the land. This at least was able to be addressed by the administrator. There were, however, ongoing problems which continued whether or not an administrator had been appointed. It was competing with the much more attractive Mt Nathan Forest estate, most of the land which remained was generally inferior to those blocks that had been sold, the estate suffered from a lack of quality home construction, the land available was subject to strict building envelope restrictions and had been on the market a long time at a time when the price of land of its type had been dropping. In these circumstances it cannot be said that the company has demonstrated that it suffered a loss as a result of Mr Murphy’s appointment in relation to the sale of the land.
[181] As the terms of cl 3.1 of the DOCA were not met, in accordance with its provisions, Mr Murphy became the liquidator of Mt Nathan Land Owners on 13 September 2002. Mr Murphy was replaced as liquidator of Mt Nathan Land Owners by Peter Geroff by court order on 16 October 2002 on an application made by Mrs Etridge, Mr and Mrs Lane and Mr Carabetta. The action was then brought by the company in 2004.
Conclusion
[182] The plaintiff has not been able to show that the first, second or third defendants breached their statutory duties, fiduciary duties or duty of care to the company; nor that the fifth defendant has breached its statutory duties, fiduciary duties, duty of care or has been in breach of contract; nor that the sixth defendant acted in breach of contract or in breach of its duty of care to the company.
[183] The plaintiff’s claims against the first, second, third, fifth and sixth defendants have, therefore, been entirely unsuccessful and should be dismissed. The claims for indemnity and contribution by the various defendants against one another, with the exception of those between the fifth and six defendants which have been compromised, against one other are therefore of necessity dismissed. I shall hear argument as to costs.
Footnotes
[1] 22 August 1996.
[2] A medical certificate dated 17 April 2008 tendered on the eighth day of the trial showed he was on that day a patient in hospital and would not be able to give evidence for at least a week. This did not explain why he was not called to give evidence in the plaintiff’s case. The only effect of his not giving evidence was that where evidence was given by others of what Mr Etridge said or did, it was more likely to be accepted in the absence of any evidence from him to the contrary: HML v R [2008] HCA 16 at [303].
[3] Letter Rick Etridge to the fifth defendant dated 22 October 1999.
[4] Minutes of Meeting of Directors: 13 February 1998.
[5] Ex 1 para 40.
[6] Mr McTaggart and Mr Graham.
[7] Of these 39, lots 15, 16 and 17 (which appear to have been the Carabetta land) were not sold as part of Mt Nathan Park, leaving only 36 lots.
[8] See letter from OSR dated 19 May 1998; letter Mt Nathan Land Owners to OSR dated 27 May 1998; letter OSR to Mt Nathan Land Owners dated 1 June 1998; Notice of Assessment from OSR dated 30 June 1998 due 3 November 1998; facsimile Mt Nathan Land Owners to OSR dated 21 October 1998; letter OSR to Mt Nathan Land owners dated 23 October 1998.
[9] See letter Mt Nathan Land Owners to GCCC dated 1 September 1998; letter GCCC to Mt Nathan Land Owners dated 28 October 1998; letter Mt Nathan Land Owners to GCCC dated 30 October 1998.
[10]The Minutes of the Board of Directors of 19 March 1999 refer to receipt of “council valuations”. Presumably these are valuations by the relevant State government agency.
[11] Letter from Price & Roobottom to Mt Nathan Land Owners, 16 September 1999.
[12] It appears from a letter from Mr Etridge to Ferrier Hodgson on 15 July 2003 that Mr Etridge was indeed thinking of the appointment of a receiver or provisional liquidator in September 1999.
[13] Memorandum and Articles of Association cl 55.
[14] Tru-Floor Service Pty Ltd v Jenkins (No 2) [2006] FCA 632 at [44]; Lewis (as liq of Doran Constructions Pty Ltd (in liq) v Doran [2005] NSWCA 243 at [79].
[15] Contrary to the view expressed by Mr Geroff in para 22(g) of his affidavit sworn on 10 July 2007.
[16] No arrangement had been made for those moneys to be paid later than they were due and Mr Geroff’s assertion that historically they had been paid upon the sale of land was not completely correct.
[17] In this respect I share the view expressed by Chesterman J in Emmanuel Management v Fosters Brewing at [82] – [86] of the effect of commercial realities in a case where there has been no legal and equitable change to the status of the debt owing.
[18] See also Darkinjung Pty Ltd v Darkinjung Local Aboriginal Land Council (2006) 203 FLR 394 at [242].
[19] See the standard of care expected of such a director referred to by Weinberg J in Downey v Crawford [2004] FCA 1264 at [211].
[20] Kazar v Duus at 335-336.
[21] This was well in excess of the amount that could be expected to be correct given the current valuation of the land by HTW.
[22] Mr Litster’s evidence was that such an application would have cost $7,500 to $20,000, money the company did not have.
[23] Mr Cox reported that lot 41 sold on 1 May 1998 but I am satisfied that it in fact sold, as Mr Brett reported, on 16 September 1999.