McAuliffe v Lidia Perin Memorial Hospital Pty Ltd [2006] ACTSC 88 (8 September 2006)

Last Updated: 13 February 2007

MCAULIFFE v LIDIA PERIN MEMORIAL HOSPITAL PTY LTD

[2006] ACTSC 88 (8 September 2006)

CORPORATIONS - application for removal of liquidator - claim that liquidator failed to comply with statutory duties - further claim that liquidator did not act impartially - applicant not prejudiced by liquidator's breach of statutory obligations which were not, in any event, shown to be deliberate - no support for claim that liquidator lacked independence, or obtained legal advice from inappropriate source - application dismissed

Corporations Act 2001 (Cth), s 503

City & Suburban Pty Ltd v Smith (1998) 28 ACSR 328

Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730

No. SC 663 of 2005

Judge: Weinberg J

Supreme Court of the ACT

Date: 8 September 2006

IN THE SUPREME COURT OF THE )

) No. SC 663 of 2005

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: NOEL MCAULIFFE

Applicant

AND: LIDIA PERIN MEMORIAL HOSPITAL PTY LTD

Respondent

ORDER

Judge: Weinberg J

Date: 8 September 2006

Place: Canberra

THE COURT ORDERS THAT:

1. The application for the liquidator's removal be dismissed.

2. The applicant pay the respondent's costs.

1. This is an application under s 503 of the Corporations Act 2001 (Cth) for the removal of a liquidator and the appointment of another liquidator "on cause shown".

2. The applicant, Noel McAuliffe, is the plaintiff in a medical negligence suit against the respondent, a company in liquidation. He claims that the liquidator, Frank Lo Pilato of RSM Bird Cameron Partners, should be removed on the basis that he has contravened various statutory obligations, and generally failed to discharge his duties in an impartial manner.

3. The background to this application is lengthy and somewhat complex. The applicant's claim against the respondent arose out of two surgical procedures that were conducted on 15 August and 31 October 2002. The applicant claims that the first of these procedures was carried out in a negligent manner, and that this led to the need for the second procedure.

4. On 13 September 2002 the respondent sold its hospital business. Subsequently, on 10 April 2003, Mr Lo Pilato was appointed as liquidator on a members voluntary winding up.

5. Some time shortly before 14 July 2003 the applicant instructed his solicitors, Ken Cush and Associates, to write a letter of demand seeking to resolve his claim for out of pocket expenses and general damages. On 29 July 2003 Mr Lo Pilato received notice of the applicant's claim. He did not respond immediately, and did not admit the claim to proof. He considered that it was not a valid proof of debt. On 7 August 2003, the respondent's solicitors, Meyer Clapham, replied to the letter of demand indicating that liability would be in issue.

6. On or about 3 December 2003 the applicant commenced proceedings against the respondent in the ACT Magistrates Court. The sealed Ordinary Claim was forwarded to Meyer Clapham on 12 January 2004. However, they replied that they did not have instructions to accept service.

7. On 19 December 2003 a meeting of members and creditors of the respondent was held. On 23 December 2003 the Australian Security and Investments Commission received notification of the Presentation of Liquidator (Final) Account and Statement. This was after a final distribution had been made.

8. On 28 January 2004, Mr Lo Pilato received the applicant's Magistrates Court claim. He took no steps to defend that claim. On 18 March 2004 the applicant sought interlocutory judgment. On 23 March 2004 the respondent was deregistered. This followed automatically, under the Corporations Act, from the steps taken by the liquidator in December 2003, and the fact that the requisite period of three months had elapsed.

9. Some time between 18 and 25 March 2004 interlocutory judgment was entered in favour of the plaintiff. On 1 April 2004, that judgment was served upon Mr Lo Pilato.

10. There then followed several months of discussions between the applicant's solicitors and Mr Lo Pilato regarding a range of matters. These included attempts by the applicant's solicitors to ascertain whether, and if so by whom, the respondent had been insured in 2002, or perhaps subsequently. Discussions continued throughout early 2005. On a number of occasions Mr Lo Pilato told the applicant's solicitors that he would speak to Lloyd Perin, formerly a director, but not a shareholder, of the respondent. It was Mr Perin who first informed Mr Lo Pilato that it was possible that the respondent may not have had professional indemnity insurance at the time the applicant's claim was notified.

11. Discussions continued throughout June, July and August 2005 regarding the issue of the respondent's insurance. Ultimately, it emerged that Mr Perin's advice was correct. It seems that there was no indemnity insurance available because the insurer had not been notified of the applicant's claim within the period stipulated by the policy.

12. On 23 September 2005 the Master ordered that the Australian Securities and Investment Commission reinstate the respondent's registration. That was done at the behest of the applicant so that he could pursue his claim against the respondent.

13. On 25 October 2005 the applicant entered judgment against the respondent in the sum of $25,000 plus costs to be agreed or taxed in the ACT Magistrates Court. The following day his solicitors wrote to Mr Perin, forwarding a copy to Mr Lo Pilato, threatening to take action to investigate the transfer of assets from the respondent to "a successor" company, and foreshadowing an application for another liquidator to be appointed to carry out appropriate investigations. The letter asserted that Mr Lo Pilato was in a "conflict of interest situation".

14. On 25 November 2005 the applicant's solicitors made a further request to Mr Lo Pilato that he not continue to act as liquidator. Importantly, on that same day, there was a telephone conversation between Mr Cush and Mr Lo Pilato in which Mr Lo Pilato said words to the effect of "we can resolve", "I will get the shareholders together", "I will send you a letter" and "I will ask the shareholders to make a contribution to the judgment costs". It seems that at about this time there were various discussions regarding possible settlement of the matter, but to no avail.

15. On 7 March 2006 Mr Lo Pilato and Mr Cush spoke by telephone. Mr Lo Pilato indicated that a meeting of the members of the respondent would be called within 14 days and, in his role as liquidator, he intended to advise them that they were obliged to pay the $25,000 plus outstanding costs.

16. On 30 March 2006 Mr Lo Pilato advised the applicant's solicitor that he had suggested to the respondent's members (who were exposed to a possible claw back in the event that the applicant succeeded in his claim against the respondent) that they should either settle the matter, or challenge the final judgment. Once again, Mr Cush responded by suggesting to Mr Lo Pilato that he had a "clear conflict" and that he should not be taking advice from the solicitors for the respondent, or Mr Perin, but should instead seek independent advice.

17. On 2 May 2006 Mr Lo Pilato and Mr Cush had a further telephone conversation. Mr Lo Pilato said that he had obtained advice from the solicitors for the respondent that "it was a 50/50 case", but that he had suggested to the members that it would be "easier to pay". On the same day Mr Lo Pilato informed Mr Cush that, after discussions with Mr Perin, he had decided to apply to have the judgment in favour of the applicant set aside. He said that he would be seeking indemnity from the directors to cover his costs and legal expenses as liquidator, and indemnity in respect of any adverse orders against the company.

18. On 22 May 2006 Meyer Vandenberg (formerly Meyer Clapham) wrote to the applicant's solicitors informing them that they now, again, acted for the respondent on the instructions of the liquidator. On 19 July 2006 they wrote advising that a Notice of Motion was returnable in the Magistrates Court on 8 August 2006 seeking that the judgment entered on 25 October 2005 be set aside. On 29 August 2006 the Magistrates Court ordered that the judgment be set aside.

19. Mr Gillies, who appeared on behalf of the applicant, relied on three distinct matters in support of his contention that the liquidator should be removed. He submitted that the liquidator had:

* repeatedly failed to comply with his statutory obligations;

* misrepresented his position by describing himself as "liquidator" of the respondent at a time when the respondent had been deregistered, and no longer existed; and

* not acted impartially in his dealings with the applicant.

20. Mr Gillies referred to sub-reg 5.6.47(4) of the Corporations Regulations 2001 (Cth), which provides that a liquidator must not reject a debt or claim without notifying the creditor of the grounds of the liquidator's rejection and requiring that a formal proof of debt or claim be submitted for that debt or claim. He also referred to sub-regs 5.6.48(1) and (2). These sub-regulations impose upon a liquidator an obligation to give notice in writing to creditors whose debts or claims have not been admitted of the day or date by which they are formally to prove their debts or claims, and set out any detailed regime by which such notice is to be given.

21. Mr Gillies submitted that it was plain that Mr Lo Pilato had not complied with these requirements after receiving notice in July 2003 of what was clearly a contingent claim against the respondent. He submitted that the matter was compounded by the fact that the same obligations arose again after the respondent had been reinstated in September 2005, and the applicant had obtained judgment against it on 25 October 2005. He submitted that it should be inferred that Mr Lo Pilato had either deliberately ignored his statutory duties, or at the very least, that he had failed to perform them through negligence on his part.

22. Mr Gillies' next submission that Mr Lo Pilato ought not have represented to an insurer to which he had written that he was the liquidator of the respondent given that the letter had been sent at a time when the respondent was deregistered. Presumably, the purport of this submission was that it reflected adversely in some way upon Mr Lo Pilato's capacity adequately to perform his duties as liquidator.

23. Mr Gillies' final submission was that throughout his entire time as liquidator of the respondent, Mr Lo Pilato had displayed an unhealthy willingness to consult closely with Mr Perin, and to take advice from, firstly Meyer Clapham and later Meyer Vandenberg who Mr Gillies contended were Mr Perin's solicitors. He submitted that the evidence suggested that Mr Lo Pilato had been unwilling properly to consider the merits of the applicant's claim against the respondent because he was not impartial. He submitted that it was wrong of Mr Lo Pilato to have obtained advice from Meyer Clapham or Meyer Vandenberg in relation to that matter. By implication, he suggested that a new liquidator might take a different view of the applicant's prospects of success, before his claim went to trial, and might be more willing than Mr Lo Pilato to recommend, or accept, a settlement of the claim.

24. Mr Walker, who appeared on behalf of the respondent, submitted that there was no basis for Mr Lo Pilato's removal. He acknowledged that the liquidator had not complied with the particular statutory duties identified by Mr Gillies. However, he contended that there was no basis for any finding that this had been more than an oversight. He submitted that there was nothing to suggest that the applicant had been prejudiced by the liquidator's breaches of his statutory duties.

25. Mr Walker submitted that there was no substance in Mr Gillies' second point. It was true that Mr Lo Pilato had described himself, in correspondence with the respondent's insurer, as the respondent's liquidator. It was also true that this had occurred at a time when the company was deregistered. He submitted, however, it was plain that Mr Lo Pilato had simply been endeavouring to assist the applicant to identify an insurer that could be sued directly under s 601AG of the Corporations Act, a provision that authorises claims to be brought against insurers of deregistered companies. In other words, Mr Lo Pilato's actions, far from forming a basis for his removal as liquidator, should be viewed as innocuous, well meaning, and clearly intended only to assist the applicant.

26. Finally, Mr Walker submitted that there was no basis for the claim that Mr Lo Pilato had not acted independently or impartially. The evidence made it clear that he had discussed the applicant's claim with Mr Perin on a number of occasions. However, it was submitted that there was nothing improper about that. The claim against the respondent was one of medical negligence. The Corporations Act required former officers of a company in liquidation to provide assistance to the liquidator in evaluating any claims against the company.

27. Moreover, Mr Walker submitted, Mr Perin was not exposed to any risk of a claw back. He was not a shareholder of the company, and there was nothing to suggest that he had any pecuniary interest in the fate of those members who were at risk. In these circumstances, there was no reason why Mr Lo Pilato should not obtain legal advice regarding the merits of the applicant's claim from either Meyer Clapham or Meyer Vandenberg. It made not the slightest difference whether they were, or had been, Mr Perin's solicitors as well.

28. In my view, the respondent's contentions should be accepted. Mr Lo Pilato's various failures to comply with his duties under the Corporations Regulations, serious though they are, do not seem to me to warrant his removal.

29. If the applicant succeeds in his claim against the respondent in the Magistrates Court, the only task still to be performed by the liquidator will be to claw back some of the monies paid to the members upon final distribution. If any difficulty arises at that stage in relation to Mr Lo Pilato's performance of his duties, that would be the time to consider an application for his removal. If the applicant fails in his claim against the respondent, then it is difficult to see how he will have suffered any real prejudice by Mr Lo Pilato continuing to act as liquidator.

30. There is no substance in Mr Gillies' second point. Mr Lo Pilato was plainly acting as a messenger in assisting the applicant to identify, and possibly proceed against, the respondent's insurer. The fact that he described himself, in perhaps a colloquial sense, as the respondent's "liquidator", at a time when the respondent was deregistered, was inconsequential. It led to no conceivable prejudice to the applicant.

31. The evidence does not support Mr Gillies' third point. Mr Lo Pilato appears to have been quite willing to speak to Mr Cush, and did so on a number of occasions. There was nothing to prevent Mr Cush from seeking to persuade him that the applicant's case was strong, and that the respondent should consider settlement. Equally, there was nothing to prevent Mr Cush from seeking to negotiate such a settlement.

32. Far from Mr Lo Pilato appearing to be intransigent, the evidence suggests that he was more than willing to consider settling the applicant's claim. However, it seems that the members were strongly opposed, being of the view that the respondent had a complete defence to it.

33. I should add that the fact that the earlier interlocutory judgment in favour of the applicant has now been set aside, and that the matter must now go to trial, indicates that the magistrate who recently dealt with the applicant's claim regarded the respondent as having an arguable defence with at least some prospects of success. I proceed upon that basis, though of course I know nothing of the merits of the case.

34. The principles under which a liquidator will be removed are not in dispute. They are helpfully set out in City & Suburban Pty Ltd v Smith (1998) 28 ACSR 328 at 336 per Merkel J. His Honour said:

Section 503 of the Law provides that the Court may "on cause shown" remove a liquidator and appoint another liquidator. It has long been accepted that the section and its predecessors were not confined to situations where it is established that there is personal unfitness, impropriety or breach of duty on the part of the liquidator. Cause is shown for removal whenever the Court is satisfied that it is for the better conduct of the liquidation or, put another way, it is for the general advantage of those interested in the assets of the company that a liquidator be removed: see Re Adam Eyton Ltd; Ex parte Charlesworth (1887) 36 Ch D 299 at 306; Re The Mutual Live Stock Financial and Agency Co Ltd (1886) 12 VLR 777; Re George A. Bond and Co Ltd (1932) 32 SR (NSW) 301 at 310; Re Giant Resources Ltd [1991] 1 Qd R 107 at 115 per Ryan J; Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 at 550 per Hayne J; Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 at 734 per Young J and Dallinger v Halcha Holdings Pty Ltd (in admin) (1995) 134 ALR 178 at 183-4 per Sundberg J.

As was said by Bowen LJ in Re Adam Eyton at 306:

"Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation."

One of the more obvious situations where a liquidator ought not to continue to act is when a conflict of interest and duty arises or appears to have arisen: see George A. Bond at 307 and Re National Safety Council of Australia, (Vic Division) [1990] VR 29 at 34-5. As was pointed out by the Full Court in National Safety Council a liquidator must have no interest in and be, and be seen to be, independent of, any matter which the liquidator's duties require him or her to investigate. See also Re Giant Resources at 117."

35. In City & Suburban Merkel J ordered the removal of the liquidator in circumstances where the evidence suggested that the directors of the company had acted in breach of their duties to the company and might be liable as constructive trustees to disgorge profits gained. The liquidator had failed to investigate the matter properly. He had also failed to seek legal advice before making various termination payments to employees. His Honour found that the liquidator's removal would be conducive to the better conduct of the liquidation and for the general advantage of the company's creditors for several reasons. These included the liquidator's natural inclination to justify his past conduct which was likely to raise the real possibility of a conflict between his interest and duty in the further conduct of the investigations and liquidation.

36. All this is a far cry from the present case. I have concluded that there is no evidence of lack of impartiality on the part of the liquidator. I have also concluded that there is no conflict of interest, and that he was entitled to seek and obtain legal advice regarding the applicant's claim from Meyer Clapham, and thereafter Meyer Vandenberg, irrespective of whether they were also solicitors for Mr Perin.

37. When one adds to these findings the fact that the winding up has now been all but completed, the case for Mr Lo Pilato's removal becomes even more problematic. See generally in that regard Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 at 734 per Young J.

38. There is no evidence of corruption or general maladministration on the part of Mr Lo Pilato. The evidence goes no further than to establish error on his part in failing to comply with certain statutory duties. The breaches in question do not seem to have led to any real prejudice to the applicant, and are unlikely to do so in the future. Accordingly, I am not persuaded that there is any "cause shown" for Mr Lo Pilato's removal, or the appointment of a new liquidator.

39. The application for the liquidator's removal must be dismissed with costs.

I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Weinberg.

Associate:

Date: 8 September 2006

Counsel for the applicant: Mr A Gillies

Solicitor for the applicant: Ken Cush & Associates

Counsel for the respondent: Mr P Walker

Solicitor for the respondent: Meyer Vandenberg

Date of hearing: 7 September 2006

Date of judgment: 8 September 2006