Directors Counsel

Professor Bob Baxt reflects on an unusual case that saw a solvent company wound up by a court.

When can a company be wound up?

It is highly unusual for the court, whether it is the Supreme Court of a state or territory, or the Federal Court of Australia, to wind up a solvent company, even if there are certain events occurring in the management of that company that raise concerns for the court.

However, it is certainly within the possibilities of remedies available to a court to wind up a company that is being managed in a way that raises serious questions about the “validity” of maintaining its existence, notwithstanding that it is still solvent. Such a view was adopted both in the Federal Court, by Justice Finn, in Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR1, and by the Chief Justice in the Victorian Supreme Court in ASIC v ABC Fund Managers & Ors (2001) 39 ACSR 443.

In the recent decision of Australian Securities and Investments Commission (ASIC) v Planet Platinum Ltd (2015) VSC 682, the approach in these two decisions was adopted in the second decision involving this particular company, which have been managed by its sole director, John Dennis Trimble (Trimble) (other directors had not been appointed). The earlier case, ASIC v Planet Platinum (2015) VSC 273 saw the company being placed under administration by Associate Justice Efthim.

The facts of the current case displayed a continued unwillingness on the part of the sole director to conduct his obligations in a way which the court regarded as satisfactory, and multitude breaches or potential breaches of the provisions of the Corporations Act 2001 (Cwth) (the Act) were identified. The relevant sole director, Trimble, owned a considerable number of the shares in Planet Platinum (Planet), which was involved in conducting a brothel.

Duty of care

Platinum was solvent at the time this particular action was brought by ASIC, which had growing concerns at the complete disregard by the sole director (and thus the company) of various provisions of the Act. These ranged from the failure to appoint the appropriate number of directors (three directors are required to be appointed if the company is a public company under the legislation). Also, Planet was a company as its shares were listed on the Australian Stock Exchange (the ASX).

Furthermore, the way in which the company was being managed, and the failure of its managing director to pursue debts owed to the company from other organisations raised concerns. Indeed, there were a number of failures displayed on the part of the managing director, including non-compliance with the continuous disclosure provisions of the Act (namely section 674), which were highly relevant in the context of the company whose shares were listed on the ASX.

The judge held that Trimble had breached his statutory duty of care and diligence (section 180 (1) of the Act) in a number of different ways. He had failed to address the collection of loans due to the company and also failed to deal with other property holdings that needed to be pursued, including the way in which certain mortgages had been discharged by the company without going through proper procedures.

In the judge’s view the director of the company had also failed to comply with the accounting provisions of the legislation in the preparation and the consideration of accounts. The breaches concerned companies related to Planet and companies in which Trimble held significant interests.

In ruling that Trimble had failed to comply with his obligations and thus led to the company not complying with various provisions of the Act, it was clear to the judge that Trimble was not acting with appropriate care and diligence. When one added to this fact the evidence that suggested he had favoured his own personal interests to the interests of the company in dealing with various matters, it exacerbated his failure to act with appropriate care and diligence.

It is unnecessary to go through the specific items in the list of matters considered in the judgment. The judge agreed with ASIC’s proposition that there had been a misuse of the funds of the corporation in a number of different ways, and a failure on the part of Trimble to obtain the approval of the shareholders of the company for the use of corporate funds. In addition, it was alleged that the company had failed to comply with various taxation obligations.

All in all, these failures, and the inability or willingness of Trimble and the company to comply with various provisions of the Act dealing with corporate governance and related matters (including the failure to hold annual general meetings and to lodge annual accounts), gave a clear impression to the judge that Trimble (and the company) did not take their various corporate governance obligations seriously. In essence he ruled that the company had been mismanaged in a very significant way.

Winding up

In defence of the claims brought by ASIC, it was strongly argued by the company and Trimble that it was inappropriate for a company which was solvent and was serving certain community needs to be wound up. It was the view of the company and Trimble that a very strong case had to be made before a solvent company was to be wound up.

The court did consider the fact that if a winding-up order was made, a number of persons who were employed by the company would lose their livelihood and that this was a serious matter for the court to consider. Apparently there were at least a hundred employees and sub-contractors involved in the affairs of Planet, and the closing down of the company would seriously impact upon their livelihood. The judge felt that while this was an important issue, it did not derogate from the broader requirement that the company should be managed in an appropriate and legal fashion.

Another interesting aspect of the case brought to the attention of the court was that Trimble and the company had relied on the advice received from a number of experts appointed by the company to assist them in complying with their reporting and disclosure requirements. Associate Justice Efthim referred to the consideration of these matters by Justice Middleton in ASIC v Healey (2011) ALR 618. In that case, Justice Middleton confirmed that it was appropriate for directors to rely on others to carry out important obligations that are imposed upon the company, “but [the directors] are required to place themselves in a position to guide and monitor the management of the company]” (at [103]).

Associate Justice Efthim accepted the submission from ASIC that Trimble had demonstrated “a lack of knowledge of the obligations of [the company] and that he has appeared to have relied entirely on external advisers engaged by [the company] to manage the corporate governance of the [company]“ (at [103]). The ability of directors to delegate is a very important right that was vested in them at the time that the business judgement rule was introduced into the Act. In the view of the judge, there had been no evidence provided to him to suggest that the outside advisers had been given information and guidance, which enabled them to properly advise the company on how the corporate governance obligations should be pursued. He added: “I agree with ASIC that [Trimble] appears to have relied passively on others to advise him as to [the company’s] obligations” (at [104]).

He concluded that the board’s responsibility and thus the responsibility of Trimble, could not be abrogated by simply asserting that someone else had been delegated the task to undertake these matters.

In all these circumstances, Associate Justice Efthim had no hesitation in ordering the winding up of the company, which had previously been placed under the supervision of an administrator. The fact that the company was still solvent, and was running an interesting business in Melbourne, did not persuade the judge to depart from his evaluation that this was clearly a proper case for the just and equitable winding up of the company even though solvent.