Appeal from liquidator’s decision to sell by tender causes of action against directors

Earlier this month Rein J of the NSW Supreme Court refused to grant an interlocutory injunction sought in proceedings brought under s 1321 of the Corporations Act 2001 (Cth) (the Act) appealing from the decision of the liquidator of a company to sell certain assets of the company by tender – see In the matter of SCW Pty Ltd [2013] NSWSC 578.

The company had been placed in liquidation not because of insolvency, but because of a deadlock between the two directors, Ms Cantarella and Mr Schirato. SCW was the holding company of a group controlled by Ms Canterella and Mr Schirato, which included a company Cantarella Bros Pty Ltd, the operator of a successful business as a fresh foods wholesaler specialising in products which included coffee under the Vittoria brand. The assets of SCW included significant real estate.

The liquidator, Jamieson Louttit of Jamieson Louttit & Associates, had been in the process of selling the assets of SCW and the liquidation was close to completion. In 2011 Mr Schirato indicated his interest in purchasing SCW’s rights against Ms Cantarella in relation to her role as a director. Mr Schirato provided the liquidator with an opinion by well-known Sydney silk Robert Newlinds SC. Mr Schirato indicated he, and a corporate entity, would be willing to pay $100,000 for the potential rights of SCW against Ms Cantarella Mr Newlinds discussed in his opinion.

The liquidator considered Mr Schirato’s proposal, and the opinion. He also had the allegations investigated, and obtained an advice from his own solicitors Piper Alderman. On these bases, he formed the view that contrary to Mr Schirato’s contention, SCW had no viable causes of action against Ms Cantarella. Prudently, however, he sought judicial direction under s 479(3) of the Act as to whether he would be justified in not treating with Mr Schirato in connection with the claimed causes of action. Both directors were represented at that hearing before Brereton J. In his decision, his Honour Brereton J held that the liquidator would not be justified in refusing to treat with Mr Schirato. That judgment may be read here, and see [3]-[9] for details of the potential causes of action that Mr Schirato was interested in pursuing.

Subsequently, the liquidator established a process whereby those parties who might have an interest in paying for an assignment to themselves of SCW’s causes of action against any of the corporate officers of SCW would be given an opportunity to tender. Those officers were the two directors Ms Cantarella and Mr Schirato, Ms Wannan (an alternate director) and Mr Jones (the company secretary).

Tenders were invited by a document sent out on 12 April 2013, which included certain aspects –

(1)  A tender must not be less than $100K,

(2)  The liquidator would accept the highest offer received if the terms were complied with, and

(3)  The liquidator would seek judicial approval for the execution of the deed of assignment .

The grounds upon which the applicants, Ms Cantarella and a corporate entity, challenged the decision of the liquidator to take this step included –

1.  The use of a tender process was unfair, as it gave the tenderers no opportunity to better the offer made by another tenderer;

2.  The description of the claims against “any past or present officer of the company other than the liquidator” or any other person connected in any way to any act or omission of any past or present officers of the company was too broad. This would impede a tenderer from offering as much as they might otherwise.

3.  The terms of the indemnity the liquidator sought in the proposed deed of assignment was too broad, which would also discourage a tenderer from making its highest bid.

4.  The tenderers were to provide cheques, to be held in the account of Piper Alderman, until the Court approves the execution of a deed of assignment. This, it was argued, exposed the potential tenderer to the risk that his her or its money would not be returned.

Rein J found it notable that the applicants did not complain about the range of persons to whom the tender letter was sent; it was sent only to the former officers of the company SCW.

His Honour notes the key principles as advanced by the applicants, at [12] –

(1)  The fundamental duty of a liquidator is to obtain the highest possible price for the company’s assets sold by him or her;

(2)  Where an appeal under s 1321(1)(d) against a discretionary decision of a liquidator is brought, the Court will reverse the liquidator’s decision “only when it is satisfied he was acting unreasonably or in bad faith”: Re Jay-O-Bees Py Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565 at [46]; McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690, at [73].

There was no allegation of bad faith, but the applicants asserted that the liquidator was acting unreasonably, for the four reasons outlined above. Rein J took the view that since no point was taken that there was any unreasonableness in sending the invitation to tender only to former officers of the company, the liquidator’s decision to offer Ms Cantarella the opportunity to purchase the rights and thus stymie the claims that it appeared Mr Schirato sought to bring against her seemed fair and reasonable, as did the various aspects of the tender process challenged.

Rein J accepted that a tender process means that each tenderer does not know what the others may have bid, and thus has no opportunity to better other bids. But that is the process. Sale by tender is a legitimate method of selling property and did not appear to involve an unreasonable commercial decision. Whether it was likely to yield a higher or lesser figure than some other process, such as a round table auction, was a matter upon which the liquidator was required to exercise a commercial judgment, and he had done so. His Honour noted that a tender process had the additional advantage of removing the liquidator of involvement in a bidding process involving negotiations, which could be difficult to control.

Rein J held there was no discernible prejudice to the applicants in permitting the tender process to proceed, and he refused the injunctive relief sought.

One can see that the tender process in these circumstances put Ms Cantarella in an invidious, and expensive, position. It is indeed possible that any claims against her could, were they to be pursued, prove to be of insufficient merit. Yet even so, at this point in time, she faced a costly and unpalatable choice.

An interesting decision indeed.

A win for ASIC: High Court holds 7 James Hardie non-exec directors liable for breach of duties, as well as company secretary/general counsel

The High Court has this morning handed down judgment in ASIC’s James Hardie appeal. The full judgment in relation to the non-executive directors can be read here, that for the company secretary and general counsel Mr Shafron can be read here, and a summary for each can be found on the High Court’s website here.

Taken from the summary:  The High Court held that each of the seven non-executive directors of James Hardie Industries breached his or her duties as a director of the company by approving the company’s release of a misleading announcement to the ASX (to the effect that the new entity to which asbestos claims were to be quarantined was “fully funded” to meet present and future claims).

On the question of the minutes of the infamous board meeting of 15 February 2001 at which the ASX announcement was approved, the High Court held that inaccuracies in the February board minutes did not counter their probative value as a contemporaneous and formally adopted record of what was done at the meeting.

ASIC’s appeal was allowed and the matters remitted to the NSW Court of Appeal for further consideration of remaining issues in the appeals to that Court about claims to be excused from liability, penalty and disqualification.

The company secretary and general counsel of James Hardie was also held to have breached his duties of care and diligence as an officer of the company, in two ways. First, Mr Shafron failed to advise either the CEO or the board that the company should disclose to the ASX certain information about a Deed of Covenant and Indemnity governing James Hardie’s separation from two of its subsidiaries. Secondly, that he failed to advise the board that an actuarial study he had commissioned to predict asbestos-related liabilities suffered from critical limitations.

Worth noting is an aspect of Mr Shafron’s case which will be of interest to general counsel in Australia:  He argued that the application of s 180(1) of the Corporations Act 2001 (Cth) should be restricted to those functions he performed in  his capacity as company secretary. He argued the contraventions alleged against him concerned his responsibilities as general counsel, not as an “officer” of the company, and thus should not be subject to s 180(1).

The High Court rejected this. The Court found Mr Shafron’s responsibilites with James Hardie as company secretary and general counsel were indivisible and must be viewed as a composite whole. A closer look at the High Court’s approach in reaching this conclusion will be worthwhile. Mr Shafron’s appeal was dismissed.

I will provide a fuller discussion of the judgments in due course.

Newsflash: High Court to hand down James Hardie judgment

This coming Thursday 3 May, the High Court of Australia will be delivering its judgment in the James Hardie appeal. I posted about the hearing of the High Court appeal last year – you can read that post here.

It will be an interesting judgment indeed. During the High Court hearing in October last year, much of the debate centred around whether the minutes of the now infamous board meeting of 15 February 2001 were accurate. The question of what evidentiary value ought be accorded minutes kept as official records of meetings is of course an important one, of wider significance than just as to what happens in board meetings. The question can arise in many other contexts. One example is that of bankruptcy creditors meetings where a new trustee in bankruptcy is appointed by resolution of creditors, and a dispute later arises as to the nature of that appointment.

I will endeavour to provide an update following delivery of the High Court’s judgment on Thursday, or as soon after as I can.