Investigation ordered into Controller’s performance of its functions and powers under s423 of the Corporations Act - Financial Restructuring

BACKGROUND

Quality Blended Liquor Pty Ltd (QBL) was involved in the business of selling alcohol wholesale and was operated by a family through a company they controlled, International Network Consultants Pty Ltd (INC).

The facts are contested, but for the purposes of this article, it may be said that:

QBL invited Warren Tschannen to invest in it, through a company called Toyco Australia Pty Ltd (TA) of which Mr Tschannen's niece was the director.
In late 2013, TA loaned QBL, and companies associated with it, around $1 million. The documents purportedly recording the terms of the loan and security were executed in January 2014.
Relations between QBL and Mr Tschannen deteriorated rapidly and in February 2014, TA claimed that the associated companies of QBL had failed to make repayments due under the loan and appointed Mr Tschannen to be 'controller' of the QBL companies to take day to day control of the business (Controller).
The parties undertook mediation soon after and signed a settlement deed on 27 February 2014. The deed included terms that the QBL interests would be able to access the premises to carry on work; and be provided access to the books and records of QBL.

Separate proceedings arose from the dispute, which included an application for a finding on the validity of the Controller's appointment and an inquiry into the Controller's performance of his functions as a controller.

During the interlocutory steps in the proceedings, the Controller gave an undertaking to carry on the business of QBL in its ordinary course until the matter was resolved.

MATTERS COMPLAINED OF

The matters raised in support of the applications included:

The circumstances and speed of the Controller's appointment.
After the settlement deed was entered into, it was alleged that the Controller denied access to the QBL premises and engaged security guards to prevent the QBL interests accessing books and records of QBL.
Further allegations were made that the Controller:
- effectively ceased any trading on behalf of the QBL business by not paying trade creditors and refusing to purchase stock;
- directed an accountant to make entries in the QBL business records showing a debt of $1.3 million was owed to him;
- informed employees of QBL that they would not have a job following his controllership;
- failed to secure the licenses needed to carry on the QBL business;
- removed the personal files of the QBL interests; and
- sold stock of the business at undervalue.

The Controller did not provide or provided a limited reply to the majority of the allegations.

CONFIRMATION OF PRINCIPLES TO BE APPLIED AND OUTCOME

The Court approved the principles set out in the case of Oswal v Carson & Ors (No 3) (2013) 300 ALR 149 in deciding whether an inquiry under s423 of the Corporations Act should be ordered as follows:

first, the Court must decide whether there is a prima facie case laid out that the inquiry is appropriate; and
secondly, if so, the discretion to decide whether an inquiry should be ordered is enlivened.

The Court also confirmed that it would not lightly interfere with the commercial judgment of a controller.

The Court considered that the factors relevant to the exercise of the discretion once it is enlivened included the strength and nature of the allegations; any answers offered by the controller; any other available remedies; the stage to which the matter had progressed; and the likely amounts of money involved.

On consideration of the evidence, the Court found that whilst the Controller's appointment may have been valid, the circumstances surrounding it and its speed provided a context for the actions undertaken during his controllership which could be taken into account in exercising its discretion. The Court found the actions complained of (which were not contradicted) were of such a concerning nature, that it warranted an order for an inquiry.

In particular, the Court considered that the Controller's purported failure to carry on the business, despite agreeing to do it in the settlement deed and undertaking to do so to the Court was compelling evidence of his failure to faithfully perform his functions. The Court also considered that the failure of the Controller to provide adequate responses to the allegations warranted a further investigation and compelled a conclusion that the Controller did not faithfully perform his functions.

COMMENT

Although the matters complained of in this case are at the higher end of the scale, it is a timely reminder of the Court's willingness to exercise its discretion under s423 of the Corporations Act to order an investigation into the performance of a Controller's functions and powers in a broad manner of circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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