Improper purpose? I don't think so!

In Foti v P and S Investments Pty Ltd [2009] FCA 1409 (Foti) (a decision of Besanko J in the Federal Court of Australia) Mr Pasquale Alfredo Foti, a director of P & S Investments Pty Ltd (PSI), commenced an application pursuant to section 447A of the Corporations Act 2001 (Cth) (the Act) to end an administration, on the basis that the administrators had been appointed for an improper purpose.

PSI carried on business involving the purchase, development and sale of properties. PSI had two directors namely Mr Foti and Mr Scott James Salisbury. PSI was conducted in a way similar to a partnership. The business and personal relationship between Mr Foti and Mr Salisbury had broken down. Mr Salisbury appointed the administrators.

The main assets of PSI were two apartments in a project called the Tivoli Apartments and Hotel Redevelopment Project. The precise financial position of PSI was far from clear. By the time the application was argued it was agreed that PSI was insolvent.

Mr Foti alleged that Mr Salibury’s purpose in appointing the administrators was to:

  1. gain control of PSI; and

  2. avoid investigations and possible actions by a liquidator in relation to transactions in which he was involved.

Besanko J found that for Mr Foti to succeed in his application to end the administration, Mr Salisbury’s purpose in appointing the administrators must not only be improper but that improper purpose must be the predominant purpose.

With regards to point 1 above Mr Foti submitted that Mr Salisbury sought to gain control of PSI by issuing shares which formed part of his proposal for a deed of company arrangement (DOCA). Under the DOCA proposal Mr Salisbury would have held ‘the lion’s share’ of shares in PSI.

In rejecting Mr Foti’s first allegation against Mr Salisbury, Besanko J said that the DOCA proposal involved Mr Salisbury providing funds to the company which would see a return to creditors. Besanko J continued that, at least to him, it did not seem at all surprising that Mr Salisbury insisted on some consideration for the money he proposed to advance.

With regards to point 2 above, Besanko J noted that the administrators had in fact suggested that further investigations were warranted into a transaction involving Mr Foti’s interests and another transaction involving Mr Salisbury’s interests.

Mr Foti then sought to rely on the actions of Mr Salisbury in entering into ‘secret negotiations’ with PSI’s bank, and paying out a substantial debt owed to the bank which was followed by the appointment of administrators. Mr Foti submitted that Besanko J should draw an adverse inference against Mr Salisbury in paying the bank debt whilst mediation was occurring in other proceedings. Besanko J held that as the precise inference that was to be drawn against Mr Salisbury was not clear to him he was not prepared to draw any inference from those facts.

Besanko J rejected Mr Foti’s second argument as he noted that Mr Salisbury’s proposal, if it proceeded, had the advantage to creditors of certainty as to payment and amount.

Besanko J ultimately held that there was no evidence to support a conclusion that Mr Salisbury’s predominant purpose in appointing the administrators was to avoid claims against him by a liquidator.

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Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.