In the matter of Freihart Pty Ltd Acn 085 174 830 and the Corporations ACT [2001] ACTSC 95 (28 September 2001)

Last Updated: 11 June 2002

In the matter of Freihart Pty Limited ACN 085 174 830 and the Corporations Act [2001] ACTSC 95 (28 September 2001)

CATCHWORDS

COMPANIES - Winding up - Provisional liquidator - Just and equitable grounds - Insufficient evidence to justify appointment of provisional liquidator.

Corporations Act 2001

Constantindidis v JGL Trading Pty Ltd (1995) 17 ACSR 625

Re Kolback Groups Ltd (1991) 4 ACSR 165

No. SC 474 of 2001

Coram: Master T. Connolly

Supreme Court of the ACT

Date: 28 September 2001

IN THE SUPREME COURT OF THE )

) No. SC 474 of 2001

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: GARRY FRANCIS O'DONNELL

Plaintiff

AND: FREIHART PTY LIMITED

ACN 085 174 830

Defendant

ORDER

Coram: Master T. Connolly

Date: 28 September 2001

Place: Canberra

THE COURT ORDERS THAT:

1. The application be dismissed.

2. The plaintiff pay the defendant's costs.

1. This is an application by Mr O'Donnell for an order that Freihart Pty Ltd ACN 085 174 830 ("the company") be wound up, and that Mr Lo Pilato, chartered accountant, be appointed the provisional liquidator of the company. The interlocutory application was filed on 20 July 2001 pursuant to s 472(2) of the Corporations Act 2001, which provides the power to appoint a provisional liquidator. The ground for the winding up of the company is the "just and equitable" ground now found in s 461(1)(k) of the Corporations Act. A substantive application seeking the winding up of the company was also filed on that day.

2. The matters were first returnable before the Registrar, in accordance with the practice of this court, on 25 July 2001. It was indicated on that occasion that the interlocutory application would be contested, and the matter was set down for hearing in my list on 30 August 2001, with a strict time line for the filing of affidavits. Affidavit material was filed in accordance with the time limits, and on the hearing before me the applicant and Mr Buggy, the director of the company, both were cross examined on their material.

3. At the conclusion of the hearing on 30 August 2001 I indicated that I would dismiss the interlocutory application with costs reserved, and stand over the substantial application generally, with leave to restore. I indicated that I would publish my reasons in due course, and this I now do.

4. It was common ground that the company was incorporated for the purpose of leasing certain hotel premises in Sydney. The company was incorporated on 16 November 1998. Mr O'Donnell was the sole director of the company from its incorporation until 3 May 1999 when Mr Buggy was appointed sole director.

5. It is apparent from the evidence before me that Mr O'Donnell and Mr Buggy were engaged in a joint enterprise surrounding the leasing and operation of the hotel. Mr Buggy claims that the intention was that the hotel would be leased with an option to purchase, and that the company was formed to achieve this end, and to build up the hotel business for profit before purchase of the improved business.

6. It is apparent that there has been a falling out between Mr O'Donnell and Mr Buggy. Mr O'Donnell says that there was never a formal lease for the hotel, only in effect a licence, and that there is accordingly no option to purchase. Proceedings have been launched in the New South Wales Supreme Court by the company against Dexplain Pty Ltd, who own the hotel, in which the plaintiff company seeks orders that there is a valid lease and option to purchase the hotel. Mr O'Donnell, although on Mr Buggy's evidence the party who negotiated the arrangements for the operation of the hotel from Dexplain Pty Ltd, is now to appear in those proceedings as a witness for the defendant denying the existence of the lease.

7. There are also proceedings on foot in the New South Wales Supreme Court in which Dexplain Pty Ltd has served a statutory demand on the company, and the company has applied to have the statutory demand set aside.

8. The New South Wales proceedings have been set down for hearing in September 2001. Counsel for the company stressed that these proceedings would, if successful, have the effect of rendering ineffective the New South Wales proceedings. This was a factor that I had in mind in refusing the relief sought.

9. Mr O'Donnell gave evidence that he was concerned that the company was pursuing hopeless proceedings in the New South Wales Supreme Court, and that the consequence would be defeat and adverse costs orders, thus running down such assets as the company has. Mr Buggy gave evidence that the proceedings were well founded and with merit, and that there had been offers of settlement by Dexplain Pty Ltd.

10. The appointment of a provisional liquidator when the company opposes that step is a drastic measure. A provisional liquidator will not normally be appointed on the just and equitable ground unless there are exceptional circumstances, such as the company being rudderless in the conduct of its affairs, or the assets are in jeopardy. The principles to be applied in considering such an application were set down in the New South Wales Court of Appeal in Constantindidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 at 635 ff. Kirby P accepted that the following principles should apply:

1. A provisional liquidator is not automatically appointed by the court for the mere asking, even when the company presents its own petition.

2. A provisional liquidator may only be appointed after presentation of a duly authorised petition which must disclose a good ground for winding up.

......

4. Whilst the ultimate fate of the petition must be left to the court finally hearing the matter, a provisional liquidator will not usually be appointed unless it appears in the material that a winding up order is likely. This presupposes that there should be adequate evidence adduced on an application for appointment of a provisional liquidator to show that a winding up is, in the absence of material to the contrary, likely.

5. A company seeking the appointment of a provisional liquidator is in no way limited. The circumstances (which may constitute sufficient ground) under which a provisional liquidator may be appointed are infinite. There are no reasons why the public interest should not operate in favour of or against the making of an appointment in particular circumstances.

6. Whilst mere evidence of insolvency alone is usually insufficient to justify the appointment of a provisional liquidator at the instance of a creditor such evidence in the case of an application by a company may be sufficient to show that the application is bona fide and may be capable of constituting a "sufficient ground."

11. In the present case there was no evidence of insolvency at all. While Mr O'Donnell expressed his grave reservations about the solvency of the company, he could not produce any evidence that the company had failed to pay a debt as it fell due. Mr Buggy, for the company, asserted that the company was trading soundly, but the books of the company do not appear to be in good order, there being a dispute between Mr Buggy, Mr O'Donnell and the company's accountant, as to the precise whereabouts of all of the books. A notice for production addressed to the company by the applicant for taxation records did not result in adequate records, but the document that was produced, being the GST for the period April- June 2001, would indicate that the full amount owing was paid to the Australian Taxation Office.

12. It seemed to me that the applicant did not bring sufficient evidence to bear to justify the drastic step of the appointment of a provisional liquidator. It is apparent that this dispute is part of a larger difference between the applicant, the company, Mr Buggy and Dexplain Pty Ltd, which is being played out in the Supreme Court of New South Wales. In these circumstances, judicial comity, it seems to me, requires me to exercise some caution lest I grant relief in this matter which would render nugatory procedures in another jurisdiction. Such considerations would not, of course, outweigh a plain duty to give appropriate relief if justified on the evidence, but the evidence in this matter simply did not convince me that the relief should be granted. There is no evidence of insolvency. The status of the books and records of the company seems less than adequate, but on the other hand there is no evidence of failure to comply with regulatory or taxation requirements, and this is not a ground for appointment of a provisional liquidator. There is a genuine dispute on foot in New South Wales, set down for hearing in September 2001, and while Mr O'Donnell says that this is the ground for his fear that the company will incur substantial costs, Mr Buggy says that it is a legitimate action on which an offer to settle has been made by the other side. The mere fear by a contributory that litigation may go badly does not, it seems to me, amount to a basis for the appointment of a provisional liquidator where there is no evidence that the company is otherwise insolvent, or indeed even in financial difficulties.

13. It was strongly argued by the company that the bringing on of these proceedings when substantive issues involving the company are about to go before a judge in New South Wales amounted to an abuse of process. Parallel proceedings can give rise to such a finding, but not necessarily.

14. Where the ulterior purpose is to bring pressure to bear on a party in proceedings in another place, such a finding may be appropriate. In Re Kolback Groups Ltd (1991)4 ACSR 165 Bryson J found that an application to appoint a provisional liquidator was: "not a sincere approach to the court to obtain justice and protection of the plaintiff's interest as a contributory" but was rather "a manoeuvre and it can only have as its object the assistance of (the applicant's) position in the other litigation by an enveloping attack on (the company)" at 172-3.

15. Counsel for the company noted that many of the grounds of concern set out by Mr O'Donnell go back many months or years, and the urgency of this application bears a distinct temporal link with the proceedings set down for hearing in New South Wales.

16. As I am satisfied that there is insufficient evidence to grant the relief sought a finding that these proceedings were an abuse of process is unnecessary and I will not go further into this issue.

17. For these reasons I declined to grant the relief sought, and dismissed the application.

18. Costs should follow the event.

I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of Master T. Connolly.

Associate:

Date: 28 September 2001

Counsel for the Plaintiff: Mr Erskine

Solicitor for the Plaintiff: Rod J Barnett & Associates

Counsel for the Defendant: DEJ Ryan SC with D Mallon

Solicitor for the Defendant: Stacks the Law Firm as agents for JDK Legal

Date of hearing: 30 August 2001

Date of judgment: 28 September 2001