Re Quality Blended Liquor Pty Ltd

Alan Wilson J

8 October 2014

This is an interesting decision concerning the appropriate conduct of company “controllers” appointed pursuant to s 418A of the Corporations Act 2001.    The case arose out of a loan allegedly made by Mr Tschennen’s (“Tschennen”) company, Toyco, to the Lewis family’s company, Quality Blended Liquor (“QBL”).  Originally invited to make a capital investment, ultimately, Toyco’s (alleged) investment in QBL was be by way of a loan.  Documents relating to this loan were drawn up and executed in January 2014 and bear the signatures of Tschennen’s niece, Alicia Gorham (“Gorham”), as a director of Toyco, and Eliza Lewis.  Relations between the Tschennens and the Lewises quickly deteriorated and in February Toyco, of which Gorham was, by now, the sole director and shareholder, asserted defaults under the loan and appointed Mr Tschennen to be “controller” of the QBL business.  In the period following this, all interested parties met with a meditator and signed a deed under which Tschennen’s controllership continued and, though not involved in the day-to-day operations of the business, the applicants were to be allowed access to all business premises. [10].  The applicants brought the present proceedings seeking to have Tschannen removed as controller and for an inquiry into his conduct in that role.  [11].  The  applicants alleged that Tschannen manipulated himself into the role of controller of the entire business as a means of gaining unfettered access to its assets and using the available value for his own purposes.  [12]. 

Validity of Appointment

In considering the validity of Tschennen’s appointment as “controller”, there were three separate allegations made by the appellant: (1) that the documents concerning the alleged loan were improperly executed; (2) that, in any event, the default relied upon for appointment never occurred; or (3) that the security documents were void pursuant to s 588FP of the Corporations Act.  [24].  The first two complaints were found to be of no substance.  [36].  Thereupon, the Court considered s 588FP which voids a security interest “if a step is taken by a secured party [an officer of the company or a person associated with a person who is an officer] to enforce [it] within six months [of its creation] . . . without the leave of the court.  [38].  The principle issue before the Court was whether Toyco was an “associate” of Gorham, a director of both QBL and Toyco at the time the security interest was granted – if so, Toyco’s appointment of Tschannen, during Gorham’s directorship, meant that Tschannen’s appointment (being within six months of the creation of the security interest), was invalid.  [39].  The Corporations Act defines “associate” as including “a person in concert with whom the primary person is acting or proposes to act,” and a person is taken to have acted in concert where “they take concerted action with a common purpose or object”.  [40]–[41].  Given that evidence of a common-directorship alone does not satisfy the “associate” requirement of s 588FP, [43], and in the absence of evidence of “an understanding or arrangement between Gorham and Toyco as to a common purpose or object over and above the transaction involving the default notice itself,” [43], the Court held there was no basis for concluding that the actions of Gorham or Toyco violated s 588FP.  See [44]–[46].

Inquiry into Conduct

Having concluded that Tschannen was validly appointed as controller, the Court then considered whether, pursuant to s 423 of the Corporations Act, it ought to order an inquiry into his performance in this role.  [49].  The court’s discretion to order an inquiry is only enlivened where there is a prima facie case that the controller has not faithfully performed their functions pursuant to the instrument by which they were appointed, further, in deciding whether to exercise this discretion, the court will consider a number of matters, including: “the strength and nature of the allegations; any answers offered by the [controller]; other available remedies; . . . the likely benefit to be derived from [the inquiry]; and the legitimate interest of the applicant in the outcome.  [52]; [49]–[50].  Turning to the evidence presented, the Court, though having concluded that the evidence presented by the appellants was not sufficient to warrant a declaration that Tschannen’s appointment was invalid, was troubled by a number of aspects of the process, particularly Tschannen’s inability to produce proof of Toyco’s loan to QBL and his ‘manipulation of Gorham and, by extension, those companies of which she was a director.  [53]–[54], see also [70].  Though these events preceded the appointment, and thus could not be taken into account in determining whether an inquiry was warranted, they did provide a frame of reference for analysing the appellant’s specific allegations regarding Tschannen’s performance.  See [54].  On the evidence provided the Court considered that there was a prima facie case that Tschannen had not properly performed his functions as a controller – there was evidence that he had prevented the appellant’s from accessing both QBL’s physical premise and its records [57]–[59]; and that he had ceased any trading by or on behalf of QBL, failed to pay creditors, purchase additional stock, or undertaken a number of the necessary steps to secure the lawful, effective and continuing conduct of the business, in contravention of both the mediation agreement and a court undertaking.  [60]–[67].  The Court considered that this conduct compelled the conclusion that Tschannen had not faithfully performed his controller functions and that, as a consequence, it was appropriate to order an inquiry.  [73]. 

The Court declared Tschannen’s appointment as controller of QBL valid, however, ordered an inquiry into his conduct in undertaking that role.