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Papua New Guinea Block Company Pty Ltd (In Liquidation), Re [1982] PGNC 46; [1982] PNGLR 28 (12 February 1982)

Papua New Guinea Law Reports - 1982

[1982] PNGLR 28 - Re the Companies Act 1963; Re Papua New Guinea Block Company Pty Ltd (In Liquidation) 

[1982] PNGLR 28

N363(L)

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

IN RE PAPUA NEW GUINEA BLOCK COMPANY PTY. LIMITED

(IN LIQUIDATION)

Waigani

Miles J

7-9 December 1981

12 February 1982

COMPANIES - Liquidators - Removal of - Relevant considerations - Residence within jurisdiction - Need for personal conduct of winding up - Need to avoid conflict of interest - Companies Act 1963, s. 232(1).

COMPANIES - Liquidators - Reversal of decision by court - Principles applicable - Onus on applicant - Companies Act 1963, s. 279.

Where it is sought to reverse or modify a decision of a liquidator pursuant to s. 279 of the Companies Act 1963, the onus is on the applicant to show either that the decision was based upon an error of principle or that the decision has brought about a manifest injustice.

Section 232(1) of the Companies Act 1963 provides that a liquidator may be removed from office by the court on cause shown.

Where a liquidator:

(a)      at the time of his appointment, did not bring material matters to the attention of the court;

(b)      had since his appointment, resided outside the jurisdiction of the court;

(c)      had (with his agent) breached several statutory requirements;

(d)      had delegated the performance of his duties to the extent that he had not properly exercised his discretion in relation to matters in the winding up;

(e)      had retained an agent in Papua New Guinea who was not an official liquidator nor subject to the supervision of an official liquidator within the jurisdiction; and

(f)      had (with his agent) placed himself in a position of conflict of interest such as to rob himself of the real and apparent independence necessary for the conduct of a proper winding up;

Held

The liquidator ought to be removed from office pursuant to s. 232(1).

Cases Cited

Allebart Pty. Ltd. (in liq.) and the Companies Act, Re [1971] 1 N.S.W.L.R. 24.

Brickles v. Snell [1916] 2 A.C. 599.

Burnells Pty. Ltd. (in liq.), Re [1979] Qd. R. 440; 4 A.C.L.R. 213.

Corporate Affairs, Commissioner for, v. Harvey [1980] VicRp 64; [1980] V.R. 669.

Debtor, In re a; Ex parte the Debtor v. Dodwell (The Trustee) [1949] Ch. 236.

Gabriel Laku v. The State [1981] P.N.G.L.R. 350.

Leon v. York-o-Matic Ltd. [1966] 1 W.L.R. 1450.

Lloyd, Ex parte; Re Peters (1882) 47 L.T. 64 (C.A.).

Shanks Byrne Industries Pty. Ltd. (in liq.), Re [1979] 2 N.S.W.L.R. 880; 4 A.C.L.R. 676.

Steedman v. Drinkle [1916] 1 A.C. 275.

Stewden Nominees No. 4 Pty. Ltd., Re (1975) 1 A.C.L.R. 185.

Wilson v. Kingsgate Mining Industries Pty. Ltd. [1973] 2 N.S.W.L.R. 713.

Notice of Motion

This was an application for an order reversing a decision of a liquidator to rescind a contract for the sale of land and an order for removal of the liquidator.

Counsel

B. C. Nordgren, for the applicant.

T. Glen, for the respondent/liquidator.

J. Gawi, for two of the shareholders.

Cur. adv. vult.

25 February 1982

MILES J: This is an application by way of notice of motion on behalf of Joseph Joe Davis and Lucky Star Cordials Pty. Ltd., for the following orders in respect of Papua New Guinea Block Company Pty. Ltd. (in liquidation) (“the company”).

N2>1.       An order reversing or modifying the decision of the liquidator in July 1981 to rescind a contract of sale of certain land belonging to the company in which the liquidator was the vendor and Lucky Star Cordials Pty. Ltd. was the purchaser.

N2>2.       An order removing the liquator from office.

The order reversing or modifying the decision of the liquidator is sought pursuant to s. 279 of the Companies Act 1963, which provides as follows:

N2>279.    A person aggrieved by an act or decision of the liquidator may apply to the Court which may confirm reverse or modify the act or decision complained of and make such order as it thinks just.

The order for removal is sought pursuant to s. 232(1) of the Act which provides as follows:

N2>232(1) A liquidator appointed by the Court may resign or, upon cause shown, be removed by the Court.

On 15th March, 1977, the then Chief Justice, Sir Sydney Frost, made orders for the winding up of the company and for the appointment of Mr. Michael Edward Wayland as liquidator. The petitioning creditor was Monier (P.N.G.) Ltd. in the sum of K10,982.83. For reasons which were not brought to the attention of his Honour and to which I will later refer, the appointment of Mr. Wayland as liquidator should never have been made.

The statement of affairs dated 27th July, 1977, and filed on 5th October, 1977, shows that the major asset of the company was a piece of land made up of lots 25 and 35, section 32, Boroko. More precisely, the asset was the company’s interest in certain leases from the State over that land. It was then estimated that the value of that land was K105,000 and on this basis it was estimated that the liquidation would result in a surplus available to shareholders of K6,607.

I do not pretend to fully understand the Byzantine complexity of relationships between the various personalities and companies associated with the subject company since the winding up order. It appears that during the two years or so following the winding up order the interests of the unsecured creditors as at the date of the winding up order were acquired by Mr. Joe Joseph Davis. It was also during this time, apparently, that Mr. Davis acquired twenty-four of the one hundred shares issued in the company. The other shareholders in the company were and are Mr. Yano Belo and Mr. Thomas Kavali, the holding of each of these two persons being thirty-eight shares. Mr. Belo and Mr. Kavali were directors of the company at the time of the winding up.

The land was and is subject to a mortgage to the Australian and New Zealand Banking Group Limited in a sum of about K65,000. The bank is the only secured creditor.

On 12th September, 1979, the liquidator entered into a written contract of sale to sell the land to a company, Lucky Star Cordials Pty. Ltd., or its nominee. This company is under the control of Mr. Davis. The contract fixes the purchase price as follows:

N2>(a)      a deposit of ten thousand eight hundred kina (K10,800);

N2>(b)      the balance of ninety-seven thousand two hundred kina (K97,200).

Being an agreement for the sale of an interest in land, the contract was, by virtue of s. 75 of the Land Act 1962, subject to the approval of the Minister for Natural Resources (referred to in argument and some of the documentary material in evidence as the Minister for Lands). I assume that the contract contained a clause to this effect. I have been told, although there is no evidence of it, that the contract was in due course approved by the Minister. I have also been told from the Bar table that the delay in completion or rather attempted completion of the contract was due largely to the delay of the Minister in indicating his approval of the contract.

It is remarkable and may or may not be significant that the Minister whose consent was required for the validity of the contract was the same Mr. Thomas Kavali who is a shareholder in the company and who was a director.

I note that the Minister granted a business lease over the land for a period of seventy-six years and twenty days dating from 20th November, 1979, the actual date of grant being 31st March, 1981. There is undisputed evidence that the value of the land now is in the region of K190,000 and it may be that the value increased dramatically as a result of the Minister’s decision to grant a business lease for a substantial term.

On 19th May, 1981, (the date may be in dispute), the liquidator caused to be served upon Lucky Star Cordials Pty. Ltd. and Mr. Davis a notice to complete the contract “in accordance with the terms of the said agreement”. The notice to complete made reference to the alleged consequences of the purchaser’s failure to complete.

The purchase of the land was not in fact completed upon the date of the expiry of the notice to complete, that date being 2nd June, 1981. As a result of the failure to complete, the liquidator claims the forfeiture of the deposit of K10,800 by Mr. Davis personally and has off-set that amount (together with other amounts) against the total amount owing by the company to Mr. Davis as its principal unsecured creditor. It appears to be common ground between the parties, although it does not emerge very clearly from the evidence, that the liquidator has treated the contract between himself and Lucky Star Cordials Pty. Ltd. as having been rescinded by virtue of the failure to complete.

It is this decision to rescind the contract and the decision to treat Mr. Davis as having forfeited his right to claim K10,800 against the company that is now sought to be reversed or modified under s. 279 of the Companies Act. It may be that this application should be treated as involving two separate decisions on the part of the liquidator, the one to rescind and the other to treat the claim by Mr. Davis to K10,800 as forfeited. Whether the liquidator is regarded as having made one or two decisions does not seem to me to be very much to the point. However, it may well be that different considerations apply to this Court’s approach to the rescission as contrasted with its approach to the forfeiture of the right to K10,800.

Mr. Glen, counsel for the liquidator, has submitted in opposition to the first order sought, that the claim is really a disguised suit for specific performance and that Andrew J. on 25th September, 1981, ordered a permanent stay of proceedings in a suit for specific performance in respect of the same contract on the ground that no reasonable cause of action was disclosed. It is a matter of court record that in fact Andrew J. did make such an order on that date. However his Honour did not publish reasons and I am unable to speculate as to the reasons for his decision. The order was made as a result of an interlocutory motion and there were no pleadings. It has been put on behalf of the applicants that there are well recognized grounds in principle for refusing a decree of specific performance and that the principles relating to grant or refusal of specific performance are not the same as those for reversing or modifying a liquidator’s decision under s. 279 of the Companies Act. However the decision of Andrew J. stands and I must pay respect to it, with this rider: I am unable to say whether and how far it operates as an issue estoppel.

The rescission of the contract for the purchase of the land followed the failure of the purchaser to complete the contract in accordance with a notice to complete. It is curious that in the affidavit of Mr. Hill sworn 28th August, 1981, he refers to and annexes a notice to complete dated 3rd March, 1981. In his later affidavit sworn 22nd September, 1981, he refers to and annexes a notice to complete dated 19th May, 1981. I presume that the latter notice superseded the first. Both these documents are in identical terms. They require payment “in accordance with the terms of the agreement”. The terms of the agreement are not completely in evidence. Neither the notice to complete nor that part of the contract which is in evidence nominates a place or method of payment. Both notices to complete make reference to the consequences of a failure to complete, namely to “either sue you for the breach of the said agreement or without notice to you, resell the property in accordance with the provisions of cl. 9 of the said agreement and claim from you the amount of the deficiency (if any) arising from such sale and all expenses of and incidental to any such sale as provided by the said clause”, and to “exercise all remedies (if any) conferred upon it by reason of your delay or default in performing the said agreement”. There is no particular reference to forfeiture of deposit.

That the deposit has been treated by the liquidator as forfeited is clear from the letter dated 30th September, 1981, and annexed as annexure “A” to Mr. Davis’ affidavit sworn 7th October, 1981. In that letter Messrs Peat Marwick Mitchell & Co., acting presumably as agents for the liquidator, set out the amount admitted by the liquidator as owing from the company to Mr. Davis as an unsecured creditor. In this letter there is reference to “deposit on contract K10,800 by Lucky Star Cordials Pty. Ltd. to be charged to you in accordance with your written declaration to the liquidator”.

The questions therefore to be determined are whether the court ought to reverse or modify the decision of the liquidator to rescind the contract and further, whether it ought reverse or modify the decision of the liquidator that the deposit of K10,800 be forfeited.

The initial point has been taken by the liquidator that Mr. Davis is not a person aggrieved within s. 279 of the Companies Act and that the court therefore has no jurisdiction to make the orders sought. It is of course sometimes difficult to decide such a threshold question without considering the whole of the facts but I think it is well recognized that the jurisdiction of a court to entertain a statutory cause of action includes the jurisdiction to determine those facts which are necessary to establish in order to confer standing on the applicant. For this reason alone I think that I have to consider all the factual material before me. In any event it is conceded, as must be clear, that Lucky Star Cordials Pty. Ltd. is a person aggrieved within the section.

It seems to me that, on the factual findings which I have already outlined, the forfeiture of deposit and the rescission of the contract were inextricably bound together and resulted in the deduction of K10,800 from the amount admitted by the liquidator as owing from the company to Mr. Davis. Mr. Davis is a person aggrieved insofar as his claim against the company has, as a result of rescission, been reduced by K10,800.

Mr. Glen has put before me certain authorities relating to the principles to be applied by a court in determining whether it should or should not reverse or modify the decision of a liquidator. One such authority is Leon v. York-o-Matic Ltd. [1966] 1 W.L.R. 1450, a decision of Plowman J. in the Chancery Division which was tacitly approved and followed by Dunn J. in the Queensland Supreme Court in Re Burnells Pty. Ltd. (in liq.) [1979] Qd. R. 440; 4 A.C.L.R. 213. In both cases earlier English authority relating to the control by the court of a trustee in bankruptcy was considered to apply to a liquidator: firstly the statement by Sir George Jessel in Ex parte Lloyd; Re Peters (1882) 47 L.T. 64 (C.A.), that “the court will not interfere unless the trustee is doing that which is so unreasonable and absurd that no reasonable man would so act” and secondly the remarks of Harman J. in In Re a Debtor: Ex parte The Debtor v. Dodwell (The Trustee) (1949) Ch. 236 at p. 241, that the circumstances in which the court will interfere “... cannot, I think (in the absence of fraud) justify interference in the day-to-day administration of the estate, nor entitle the bankrupt to question the exercise by the trustee in good faith of his discretion, nor to hold him accountable for an error of judgment”.

I do not think that the old English bankruptcy cases are of great assistance in the interpretation and application of the Companies Act of Papua New Guinea. Section 279 of the Act gives a wide jurisdiction to the court at the suit of any person aggrieved by the decision of a liquidator and it is neither necessary nor desirable to add any judicial gloss to the words of the section except to say that the court will not lightly interfere with the exercise of a liquidator’s discretion in the winding up of a company. In accordance with well established principle in this country as well as elsewhere, it would normally be necessary to show either that the liquidator’s decision was based upon some error of principle or that it had brought about some manifest injustice: see Gabriel Laku v. The State [1981] P.N.G.L.R. 350. In order to ascertain whether one or both of these tests are met in the present case, it is necessary to examine the circumstances in which the liquidator made the decision to rescind and further to assess whether any manifest injustice resulted.

Apart from what I have already said, the facts relating to the sequence of events at about the time of the rescission of the contract are not easy to determine. I have already indicated that not even the complete terms of the contract itself are in evidence. There is also a dispute about what happened between the parties on the day or days in question.

Mr. Davis has said that the liquidator agreed to an arrangement whereby Mr. Davis assigned the debts owing to him by the company to the purchaser, Lucky Star Cordials Pty. Ltd. (or possibly Rainbow Holdings Pty. Ltd.), and whereby the company was to credit Lucky Star Cordials as purchaser with the amount of those debts assigned. Mr. Hill, the agent of the liquidator in Papua New Guinea, agrees that this was indicated by him as being an acceptable course but that Mr. Davis was informed that if payment of the purchase monies was to be carried out in that way, it would have to be so arranged that it did not result in Mr. Davis being treated as a preferred creditor, and would probably require the consent of the bank. The fact that the liquidator chose subsequently to debit the amount of the deposit against Mr. Davis and not against Lucky Star Cordials Pty. Ltd. indicates that the liquidator had treated the payment of the deposit as being carried out pursuant to the suggested arrangement. It also suggests that the liquidator was not concerned about the payment of the deposit in that manner constituting a preferential payment in favour of Mr. Davis. If the liquidator was prepared to treat the deposit as having been paid in such manner, why did he not take steps towards securing payment of the balance in like manner?

In part answer to this question Mr. Hill has given evidence that on 1st June, 1981, Mr. Davis indicated to him his intention in effect to abandon the contract and to seek as an alternative measure to purchase or gain control of the shares of the other two shareholders, namely Messrs Kavali and Belo.

In reply to this allegation by Mr. Hill, Mr. Davis has said in evidence that he had made prior arrangements for Messrs Kavali and Belo to assign their shares to him and that although they were so obligated, they had not effected the assignment by 1st June, 1981. In fact those shareholders had, acting on information supplied by Mr. Hill, refused to honour their alleged commitment to assign the shares to Mr. Davis because the value of the company assets and hence the shares had greatly increased since the original agreement to assign the shares.

It has been urged upon me by Mr. Glen that having seen both Mr. Hill and Mr. Davis under cross-examination, I should prefer to accept the evidence of Mr. Hill where it conflicted with that of Mr. Davis. However, I do not think that either witness was appreciably broken down in cross-examination and as far as demeanour is concerned, I do not think that there is much to choose between them. It is I suppose true that Mr. Hill emerged as the more educated and possibly more intelligent. It also appeared that Mr. Davis was labouring under a sense of grievance which lent a self-righteous air to some of his answers. However I am not really able to resolve the conflict in the evidence given by the two men. I also take into account that despite the relative importance of the transaction involving the sale of a piece of land worth at least K100,000 and possibly near K200,000, there is a surprising lack of documentary evidence and I would have thought that documentary material, if any, would be more likely to be kept in the office of the liquidator than in the office, if any, of Mr. Davis.

It is impossible for me on the present state of evidence to determine this issue of fact, namely as to whether Mr. Davis had abandoned his intention that Lucky Star Cordials Pty. Ltd. should proceed to complete the purchase of the land pursuant to the contract. It is an issue on which the liquidator bears the onus.

However it is the task of the applicants to show either that the liquidator has acted on a wrong principle or that his action has resulted in a manifest injustice. I am unable on the material before me to determine that the liquidator acted on any wrong principle except insofar as it may be said that there was such a conflict of interest between the creditors and the shareholders that the liquidator should not have made a decision at all either to proceed with the contract or to rescind it, but that he should have taken the course that is available to liquidators in such a predicament, namely to seek the advice of the court.

On the question of manifest injustice, it is put on behalf of the applicants that the delay in the liquidation is attributable to the acts or default of the liquidator and that that delay has benefitted the shareholders to the detriment of the creditors. I think that it is undeniable that apart from the question of fault, the delay has indeed benefitted the shareholders to the detriment of the creditors. True it is that on the present valuation of assets and liabilities the creditors stand to be paid, but the statement of affairs in July 1977 showed that the creditors stood to be paid even then. It is not clear to me why the liquidation of the assets of this company has taken so long. Rather it seems on the face of it that the liquidator has acted as a manager of a going concern rather than as one whose duty it was to wind up the affairs of the company and to distribute its assets. The liquidator and Mr. Davis each blame the other for the delay. In the light of the evidence I am unable to say whether either or both are correct in attributing such blame. However, one thing that does emerge relatively clearly is that substantial delay was caused by the fact that the contract of sale had to be approved by the Minister who was in fact one of the shareholders who stood to gain by delay in completion. If the consent of the Minister had been forthcoming soon after the date of the contract, it may well have been that the liquidation of the company could have proceeded without delay. An undelayed liquidation would have benefitted the creditors by payment out of their debts but would (so we now know) have denied to the shareholders the increase in value which later in fact occurred. How far the decision of the Minister to grant a business lease for seventy-six years affected this increase in value, I do not know.

It is true, as Mr. Glen has submitted, that at the time of the expiry of the notice to complete, the liquidator was in an impossible position. If he rescinded the contract the shareholders stood to gain by the steep increase in value of the property since the time of the contract. If the contract for sale were completed, then the creditors, notably Mr. Davis, stood to gain substantially for the same reason. The interests of the shareholders and the creditors were irreconcilable. As Mr. Glen has suggested, if the liquidator had proceeded to completion in May 1981, he may have faced an action by the shareholders instead of by the creditors. In his predicament the proper course for the liquidator to take would have been to apply to the court for directions instead of making a decision which inevitably favoured one party rather than the other. I am unable to say that by making the decision in favour of the shareholders instead of making it in favour of the creditors, that the liquidator’s decision was such that it should be overturned by this Court.

However, I think that different considerations apply in relation to the forfeiture of the deposit. As it has turned out, the shareholders have gained an increase in the value of their shares by some K87,000. They have also, by reason of the forfeiture of the deposit, gained a further K10,800. Whilst the forfeiture of a deposit is the normal consequence in law of the rescission of a contract by a vendor, it seems to me that in this particular case the result is an unjust one. The shareholders have done nothing to deserve it. The very rescission of the contract netted them a very handsome profit. For the moment I am unable to see why they should get the forfeiture of the deposit as well. I do not overlook the fact that Mr. Davis himself is a minority shareholder.

Mr. Glen’s submissions on behalf of the liquidator were essentially confined to justify the liquidator’s decision to rescind the contract. Indeed there might be some impropriety in the liquidator seeking to support the forfeiture of the deposit because that step was so clearly in favour of the shareholders as against the creditors. I intend to stand over the question of whether the liquidator’s decision to forfeit the deposit as against Mr. Davis should be interfered with in order to give the shareholders the opportunity to be heard on this question if they so wish.

I turn now to the question of whether the liquidator should be removed from office. Up to this point in my judgment, I have referred to the liquidator as including his servants and agents. From this point onward I refer to the liquidator personally. The findings I make have been arrived at on the civil standard of proof.

The liquidator is resident in Sydney, Australia, and at least since the time of his appointment on 15th March, 1977, has never been resident in Papua New Guinea. At the time of his appointment he was not an official liquidator as required by s. 231 of the Companies Act. This fact was not drawn to the attention of the Chief Justice at the time of the winding up order as it should have been. The Chief Justice should have been informed also that a person proposed as liquidator of the company was not a resident of this country. It is a basic consequence of the appointment of an official liquidator that he acts as an officer of the court. Whilst it may be proper in certain circumstances for such an officer of the court to conduct his professional affairs outside Papua New Guinea as well as within it, it is wholly inappropriate that an official liquidator should be permanently resident outside the jurisdiction of the court.

At the time of the winding up of the company, the Secretary was Mr. Richard Langley Stuart Hill. Mr. Hill was at the same time an employee of the firm of Wayland and Wayland of which the liquidator was a principal. Notwithstanding this contravention of s. 10(1) of the Act, all acts of the liquidator are valid: s. 232(8).

Since his appointment the liquidator has been in breach of other sections of the Companies Act. For instance, the statement of affairs filed under s. 234(2) was not signed by the secretary of the company. The statement of affairs was filed well outside the time limited by s. 234(3). No preliminary report to the court has ever been filed pursuant to s. 235.

On all the material available it would appear overall that the liquidator has delegated so much of his power that it may be said that he has not properly acted as liquidator at all. Apparently he has made visits to Papua New Guinea from time to time and according to Mr. Hill he was kept informed of developments. But in my view the evidence leads to a conclusion that he was not sufficiently closely involved with the events relating to the winding up as they were occurring that he can be properly said to have exercised his discretion to control those events at all. His participation in those events amounted to no more than the ratification of decisions made by other persons as they occurred from time to time. The position of Mr. Hill deserves special mention. Mr. Hill is not an official liquidator although he is apparently a registered liquidator. He has therefore never taken part directly in the liquidation of a winding up by the court. Although he has statutory duties, he is not an officer of the court. At the time of the winding up Mr. Hill was an employee of the liquidator. He later became a partner of the liquidator in the firm of Wayland and Wayland. That firm has now been absorbed into the firm of Messrs Peat Marwick & Mitchell. Mr. Hill has become a member of that latter firm. The liquidator is not a member of that latter firm. I have been told that one of the partners of Messrs Peat Marwick & Mitchell is an official liquidator, but it does not appear that that partner has taken any part in the liquidation of the company. The situation overall then is that the liquidator resides and carries out his practice outside the jurisdiction of the court, whereas the person who has carried on the day to day conduct of the liquidation of the company within the jurisdiction of the court is not an officer of the court. The result is, in my view, that the winding up has not been subject to the supervision of the court as the Act requires in the interests of creditors and members of the company.

It should also be mentioned that Messrs Wayland and Wayland were the accountants acting on behalf of the company prior to its winding up, and that Mr. Hill was a former alternate director of the company. Mr. Hill was also a director of companies which had an interest adverse to that of the company in liquidation and adverse to those creditors. In particular he was and is a director of Hebou Constructions Pty. Ltd. a company which is in occupation of one of the houses on the subject land and which is heavily in arrears with its rental. Mr. Hill says that he has made some demand upon Hebou Constructions Pty. Ltd. in his capacity as agent of the liquidator. Indeed during the course of counsel’s closing addresses, I was told that a cheque for the outstanding rental due from Hebou Constructions Pty. Ltd. to the company had arrived at the liquidator’s solicitors’ office during the course of the day.

Complaint was made of other matters that had arisen during the course of the winding up relating to inconsistent and misleading statements of account, delay in collection of debts and delay in payments to the secured creditor, the ANZ Banking Group, but in the light of what I have already said I do not think that it is necessary to rule upon these further allegations.

The principles upon which the courts will act to remove liquidators from office have been considered in a number of cases recently in Australia. The English cases go back further in time and indicate clearly that misconduct or breach of statutory duty is sufficient but not necessary ground for removal. The Australian cases of course are not binding on the court here but I think they are persuasive and illustrative of the proper principles to be applied in modern times. For instance Marks J. in Commissioner for Corporate Affairs v. Harvey [1980] VicRp 64; [1980] V.R. 669, considered at great length the duties of a liquidator and the circumstances in which the court would remove a liquidator from office. In particular his Honour discussed the questions of conflict of interest that can arise and which I consider do arise in the present case. His Honour pointed out the dangers that arise when a liquidator appoints his own firm to act as agents in a liquidation. This is not quite the case here but it is illustrative of the principle that a liquidator must exercise sufficient control over the liquidation that he can be seen to be exercising matters of discretion personally and not wholly delegating the exercise of discretion. There is statutory power of course to appoint an agent “to do any business which the liquidator is unable to do himself”, but that power does not authorize the liquidator to act in the way in which he has acted in the present case.

There are other cases in which the courts have pointed out the dangers involved in appointing a liquidator who will be in a conflict of interest situation: for instance Re Shanks Byrne Industries Pty. Ltd. (in liq.) [1979] 2 N.S.W.L.R. 880; 4 A.C.L.R. 676, in which the court removed from office a liquidator who was a partner in the company’s auditors who were also the auditors of debtors and creditors of the company. There is a full discussion of the duties of a liquidator in Re Allebart Pty. Ltd. [1971] 1 N.S.W.L.R. 24, and also in Re Stewden Nominees No. 4 Pty. Ltd. (1975) 1 A.C.L.R. 185, where Sir Nigel Bowen said that the guiding principle in the appointment of a liquidator is that he must be independent and must be seen to be independent.

Summarizing the situation in the light of the above factual findings and legal principles, the following grounds for the removal of the liquidator have been established:

N2>1.       At the time of his appointment the liquidator did not bring material matters to the attention of the court.

N2>2.       The liquidator has at all times since his appointment resided outside the jurisdiction of the court.

N2>3.       The liquidator and his agent have been in breach of several statutory requirements under the Companies Act.

N2>4.       The liquidator has delegated the performance of his duties to the extent that he has not properly exercised his discretion in relation to matters relating to the winding-up.

N2>5.       The liquidator’s agent in Papua New Guinea is not an official liquidator nor is he subject to the supervision of an official liquidator within the jurisdiction.

N2>6.       The liquidator and his agent have placed themselves in positions of conflict of interest such as to rob them of the real and apparent independence necessary for the conduct of a proper winding up.

Finally, I must make reference to the way in which the liquidator has personally approached the present application. It was only during counsels’ addresses that an attempt was made to put on evidence by the liquidator himself in the form of an affidavit. There was some attempt to explain the delay as far as the liquidator’s solicitors were concerned, and I accept this explanation. However the liquidator’s affidavit was sworn on 26th November, 1981, and there was no explanation as to the delay between the time of its swearing in Sydney and the time of its arrival in Port Moresby some two weeks later.

Furthermore, it must be noted that the affidavit of the liquidator goes no further than to confirm in general terms the affidavits of Mr. Hill. Mr. Hill of course, having sworn lengthy affidavits, was liable to be cross-examined upon them and in fact he was subjected to lengthy cross-examination. On the other hand the way in which the liquidator himself personally approached the matter has left him absolutely immune from being questioned. There is no explanation at all as to his personal absence from the hearing. I recommend that the appropriate authorities consider taking action under s. 11 of the Act and that the name of the liquidator be removed from the list of official liquidators.

Mr. Michael C. Wilson of Port Moresby, an official liquidator, has indicated in writing to the Registrar in accordance with s. 10(4) of the Act that he is prepared to accept appointment as liquidator of the company.

The orders of the court will be:

N2>1.       that Michael Edward Wayland be removed as liquidator of the company;

N2>2.       that Michael C. Wilson be appointed liquidator of the company.

Otherwise the hearing of the application under s. 279 of the Companies Act is adjourned for further argument until 1.30 p.m. on Monday 22nd February, 1982. I direct the liquidator or his solicitors to serve a copy of these reasons upon Mr. Yano Belo and Mr. Thomas Kavali and upon the Registrar-General. The question of costs is reserved until the adjourned hearing. The matter must proceed on that day.

At the adjourned hearing on 22nd February Mr. Glen continued to appear for the former liquidator, Mr. Gawi appeared for the shareholders Messrs Kavali and Belo and Mr. Sam announced the withdrawal of instructions from the applicants. Mr. Joe Davis appeared in person and sought leave to appear for Lucky Star Cordials Pty. Ltd., which leave was refused. For reasons put forth by Mr. Glen there was no appearance by the present liquidator.

Mr. Glen submitted that, although the forfeiture of the deposit benefited the shareholders, there was no corresponding detriment to the creditors in that the company has at all times had a surplus of assets over liabilities. Insofar as Mr. Davis stood to lose by the forfeiture of deposit, that loss was sustained by him in his capacity as the source of the deposit paid or to be paid on behalf of the purchaser and not in his capacity as a creditor. I think that the submission would be a compelling one if Mr. Davis had in fact paid over the deposit in a tangible form. After all it is of the very nature of a deposit that it is a sum of money paid across by a purchaser to a vendor as a earnest to bind the payer to perform the rest of his obligation (see below). But in this case the payment—if that is the correct term—of the deposit was a purely notional one effected by Mr. Davis purporting to assign to the company, inter alia, his interest in a distribution in the winding-up to the extent of K10,800, the amount of the deposit. See exhibit “B”, the deed of assignment dated 12th September, 1979. (I say purporting to assign because it seems to me, without having the benefit of argument on the point, that what was being done was in the nature of disclaimer or release and not in the nature of assignment. A creditor can assign a debt to a third party but not to the debtor.) This assignment or release, whichever it may be, related to a debt owing by the company to Mr. Davis in his undoubted capacity as a creditor. It seems to me unrealistic to say that in holding Mr. Davis to the assignment or release, the liquidator is dealing with him in some capacity wholly other than that of a creditor of the company.

There is no question as to the court’s jurisdiction to make an order of the nature indicated. It arises under s. 279 of the Companies Act and probably under general equitable principles: see Brickles v. Snell [1916] 2 A.C. 599, or more particularly the equitable jurisdiction to grant relief against forfeiture: see Steedman v. Drinkle [1916] 1 A.C. 275. There is however little direct authority in England.

In other places such as New South Wales and Victoria, the question of the court’s powers to order a return of deposit has been determined partly by reference to statutory provisions which have no application in Papua New Guinea. However the statement of general principle by Wootten J. in Wilson v. Kingsgate Mining Industries Pty. Ltd. [1973] 2 N.S.W.L.R. 713 at p. 735, is I think of great assistance even in this country:

“Notwithstanding the substantial balance of merit in favour of the vendor in terms of the conduct of the transaction, I think that I should give primary attention to the situation created by the retention of the deposit. Referring to the discretion of the court under the subsection, Street C.J. in Eq. said recently in Lucas & Tait (Investments) Pty. Ltd. v. Victoria Securities Ltd. [1973] 2 N.S.W.L.R. 268 at p. 273: ‘Specific instances of its application are to be found in the cases. They all, however, come under the general category of circumstances in which the court held it to be just and equitable to deny to the vendor the enjoyment of a forfeited deposit.’

The purpose of a deposit is that, in addition to being a part payment, it is also an earnest to bind the bargain so entered into, and creates. by the fear of its forfeiture, a motive in the payer to perform the rest of the contract: per Fry L.J. in Howe v. Smith [1884] UKLawRpCh 142; (1884) 27 Ch.D. 89 at p. 101, approved in Sprague v. Booth [1909] UKLawRpAC 47; [1909] A.C. 576 at p. 580. It is a guarantee that the contract shall be performed ((1884) [1884] UKLawRpCh 142; 27 Ch.D. 89 at p. 95) per Cotton L.J. Its forfeiture may also operate as damages to compensate the vendor for the loss of his contract, and he may also have a right to sue for damages: Halsbury’s Laws of England, 3rd ed., vol. 34, pp. 323-324.

It is no doubt important that the court should not adopt an attitude in ordering the return of deposits under s. 55(2a) which would weaken the proper function of a deposit in providing a sanction for purchasers treating the making and completion of a contract with due seriousness and good faith. On the other hand there seems every reason to exercise the discretion in favour of a purchaser who was willing and anxious to complete, but lost his opportunity through the temporary inadvertence of those he had properly employed to act for him.”

I have already outlined in my earlier reasons the circumstances surrounding the rescission as disclosed in the evidence. I am not satisfied that the failure to complete the contract was occasioned purely by fault on the part of Mr. Davis or his company. It is deceptively simple to say that the purchaser was just not able to find the balance of the money and so should suffer the normal consequences. The former liquidator conceded that there had been an arrangement whereby it was contemplated that at least a substantial part of the purchase price would be found by debiting against Mr. Davis the amounts owing by the company to him. Similarly if Mr. Davis had a liquidity problem it was at least contributed to by the failure of the former liquidator to wind up the affairs of the solvent company and pay over to Mr. Davis the amount owing to him. I am still unable to see the justice in allowing the company the benefit of the deposit: conversely it seems to me to enrich unjustly the other members of the company as against Mr. Davis and I intend to make an order accordingly.

I turn now to the question of costs. Mr. Glen for the former liquidator has submitted that his client should not have to pay any of the costs of this application and that in fact his costs should be borne by the company. He submits that the claim for removal was only an afterthought to the claim for reversal of the liquidator’s decision to rescind, that there have been no findings of improper conduct on the part of the former liquidator and that those actions of his which led to his removal have not resulted in loss to the applicants.

However the motivation of the applicants is of little relevance. Once the facts came to light there was no alternative to the liquidator’s removal—in fact he did not oppose it. There were a number of allegations against the liquidator on which I did not find it necessary to rule: however as the rest of the case in support of the application to remove was sufficiently strong, this factor should not influence the question of costs. I am not convinced that the actions of the liquidator have not resulted in loss to the applicants: for instance the failure to personally supervise the winding up of a solvent company has led to delay detrimental to the creditors who remain unpaid to this day. I emphasize again the approach of the former liquidator to this very application: his failure to furnish an affidavit except most belatedly, in the most general terms and in such a way as to completely avoid cross-examination. Mr. Glen submitted that the costs of the issue of the liquidator’s removal did not contribute more than one quarter of the total costs of the application. In my view both parts of the application were closely connected and the costs of the removal should be regarded as approximately one half. I would point out that there are reported cases in which the courts have ordered that a liquidator removed from office should not be entitled to remuneration for the work done in the winding up prior to removal. However I propose to make no such order. It was not unreasonable for the liquidator to oppose the order for rescission and that part of the costs will be borne by the company.

The orders of the court additional to those made on 12th February, 1982 will be:

N2>1.       a declaration that the assignment to the company by Joe Joseph Davis of all his right title and interest to a distribution pursuant to the winding up of the company to the extent of the sum of Ten thousand eight hundred kina (K10,800) is null and void;

N2>2.       an order that the liquidator his servants and agents be restrained from treating Joe Joseph Davis as having forfeited to the company his right to the said sum of K10,800 as the result of the rescission of a contract of sale dated 12th September 1979 and made between the company and Lucky Star Cordials Pty. Ltd., alternatively Rainbow Holdings Pty. Ltd.;

N2>3.       an order that the former liquidator Michael Edward Wayland pay one half of his own costs of this application and one half of the costs of the applicants;

N2>4.       an order that the remaining one half of the costs of the liquidator and of the applicants be costs in the liquidation;

N2>5.       an order that Messrs Thomas Kavali and Yano Belo pay their own costs;

N2>6.       an order that the present liquidator’s costs be costs in the liquidation.

A certificate for overseas counsel who appeared initially for the applicants was not sought and I note that I would need to be persuaded that it should be granted.

Orders accordingly.

Solicitor for the applicants: Peter Sam.

Solicitor for the respondent/liquidator—Michael Edward Wayland: Beresford Love & Co.

Solicitors for the shareholders—Thomas Kavali and Yano Belo: Richard Major, Gawi & Associates.