Andrew Stewart Home in his capacity as liquidator of Oz-Fresh Produce (Aust) Pty Ltd (In liquidation) v Clyde White

[1993] FCA 523

ANDREW STEWART HOME IN HIS CAPACITY AS LIQUIDATOR OF OZ-FRESH PRODUCE (AUST.)
PTY LTD (IN LIQUIDATION) v. CLYDE WHITE, WILLIAM ABEYRATNE and PANNELL KERR
FORSTER (A FIRM)
No. VG3027 of 1993
FED No. 523/93
Number of pages - 6
Corporations

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
HEEREY J

CATCHWORDS

Corporations - winding up - recovery of payments - payments made before winding up in connection with invalid receivership - whether payments likely to be for the benefit of the company - payment made after commencement of winding up to receiver acting as de facto liquidator - discretionary factors relevant to validation of payments.

Corporations Law ss.267(1)(2), 468(1)

In re International Life Assurance Society (1870) LR 10 Eq 312

Monks v Poynice Pty Ltd (1987) 11 ACLR 637

Re Allan Fitzgerald Pty Ltd (1988) 13 ACLR 215

Re Atlas Truck Service Pty Ltd (1974) 24 FLR 220

Re Wiltshire Iron Co. Ex parte Pearson (1868) LR 3 Ch App 443

Tellsa Furniture Pty Ltd (in liq) v Glendave Nominees Pty Ltd (1987) 9 NSWLR 254

HEARING

MELBOURNE, 28 July 1993

#DATE 4:8:1993

Counsel for the Applicant: Mr P Santamaria

Solicitor for the Applicant: Cornwall Stodart

Counsel for the Respondent: Mr H Fraser

Solicitor for the Respondent: Hall and Wilcox

ORDER

The Court orders that:

1. The third respondent pay the applicant the sum of $10,878. Stay

14 days.

2. Declare that the payments totalling $5,478.43 referred to in

paragraphs 3 and 4 of the respondents' Notice of Motion dated 28 July 1993 are validated.

3. Declare that the charge created by the debenture dated 6 October

1992, registered number 359068, is void ab initio.

4. The third respondent pay three quarters of the applicant's costs,

including resereved costs.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

JUDGE1

HEEREY J Oz-Fresh Produce (Australia) Pty Ltd (the company) was on 16 December 1992 ordered to be wound up by this Court. The liquidator of the company seeks to recover from the respondents certain payments made by the company in early December. The first and second respondents, Mr Clyde White and Mr William Abeyratne, are partners of the third respondent Pannell Kerr Forster, a firm of chartered accountants.

1. The company carried on business as a wholesale fruit and vegetable merchant. Its directors were Mr Lloyd McDowall and Mr Robert Stanley Thompson. By the middle of 1992 the company was in financial difficulty. The uncontested evidence of the liquidator, based on his investigation of the books of the company, was that from 25 May 1992 until the date of liquidation the company was unable to pay its debts out of its own money as they became due.

2. In late September Messrs McDowall and Thompson approached Mr Abeyratne and expressed their concern about the solvency of the company. They told him it was "highly likely" that the company could procure lucrative sale contracts in the forthcoming summer, which was the peak selling period, and that they were anxious to capitalise on those contracts "with a view to either trading the company out of its financial difficulties or at least maximising returns to the secured and unsecured creditors". They also told Mr Abeyratne that they were concerned that the landlord might take possession of the company's storage shed, which was its principal asset. Mr Abeyratne suggested the appointment of an administrator who could protect the business until it was sold for the benefit of the creditors. At a further meeting on 2 October the directors told Mr Abeyratne that the company's bank, the National Australia Bank Limited, was reluctant to appoint a receiver immediately. Mr Abeyratne deposes:
   

"I discussed with the directors the appointment by them of a receiver over the company for debts which were then outstanding by the company to them. The directors were made aware that if the debenture was challenged it was capable of being set aside. It was therefore decided that a debenture would be granted by the company to the directors and a receiver appointed as soon as possible and that a meeting of all suppliers would then be called to discuss the possibility of trading on a co-operative basis."

1. On 6 October a debenture charge was given by the company to the directors and registered with the Australian Securities Commission. The debenture was expressed to secure the sum of $70,500 lent by the directors to the company. In exercise of the powers granted by cl.6(1) of the debenture charge the directors on 8 October appointed Messrs White and Abeyratne receivers and managers of the property of the company. On the same day the company ceased trading. Messrs White and Abeyratne continued to act as receivers and managers of the company until they resigned on 1 December. During that period they arranged numerous meetings with suppliers regarding the proposed co-operative scheme, dealt with the company's landlord regarding his attempts to take over the company's shed, attended to recoveries from debtors and payment of creditors, and to the sale of the company's business, which was subsequently negotiated by the Bank. Mr Abeyratne deposes:
   

"We incurred fees as receivers and managers during this time in excess of $18,000 for which we have not received payment."

1. I was told by counsel that this passage was intended to mean that the receivers had done work to that value, not that they had incurred liability to third parties.

2. On 24 November an application to wind up the company was filed in this Court. It was served on the company on 30 November. That rather significant event is not mentioned in the affidavit of Mr Abeyratne, but I infer that the receivers became aware of it and that their resignation the following day was not merely coincidental. Mr Abeyratne deposes:
   

"After the cessation of the appointment of the receivers on 1 December 1992 the directors of the company requested that Pannell Kerr Foster provide accounting services and non-accounting services to the company. The firm considered its position at the time. It decided it would not cease to offer accounting and non-accounting services because the financial situation of the company was such that it believed that unsecured creditors might be prejudiced if the firm refused to act further. For example, there were serious and pressing issues concerning the realisation of assets, in particular the work shed which was the main remaining asset of value to the company, and there were other pressing issues concerning the collection of debts. The firm saw itself as having become interwoven in the financial activities of the company, in particular in the realisation of assets and in assisting unsecured creditors in maintaining contact with the financial affairs of the company. Since 8 October 1992 when the company ceased to carry on its business, it had ceased to have an office from which telephone contact with unsecured creditors could take place."

1. Mr Abeyratne also deposes that between 1 December and 14 December Pannell Kerr Foster provided various services in connection with the collection of debts, negotiations concerning the company's storage shed and attending to payment of preferential creditors. There was a burglary at the shed and the firm attended to the physical removal of the company's records and computer equipment to another storage facility. During this period the impugned payments with which this application is concerned were made by the company. They fall into two groups. On 1 December payments were made as follows:
   

Robert Thompson $1,482.25 Lloyd McDowall 1,352.48 Lee Kelly and Associates 343.70 Hall and Wilcox 1,400.00 GIS Insurance 900.00 $5,478.43

1. The payments to Messrs Thompson and McDowall were said by Mr Abeyratne to be paid "in connection with employee entitlements incurred before the receivership". The other payments were "for services rendered to me in connection with the receivership".

2. On 4 December the company paid to Pannell Kerr Forster a cheque for $10,000. The payment was debited to the company's bank account on that date. On 14 December Pannell Kerr Forster rendered an invoice to the company for $10,000 for "professional services rendered." Details given in the invoice included: meetings with the directors and the bank concerning the activities of the company and the realisation of its assets, attending to recovery of debtors, discussion with the company's solicitors concerning realisation of the company's assets and the winding up of the company and dealing with creditors, dealing with queries from creditors, attending to storage of books and records and assisting in the realisation of the company's assets. The invoice gave no details in terms of time spent or otherwise as to how the charge of $10,000 was calculated, nor did the evidence on the present application. There was no evidence of discussions with directors either at the time the payment was made or at the time the invoice was rendered as to how the $10,000 was estimated. Apart from the company's bank statement and the invoice, no documentation was produced as to the payment. No evidence was given by the directors.

The payments of $5,478.83
10. The liquidator relied on s.267 of the Corporations Law, which relevantly provides:

"267(1) Where:

(a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and

(b) within 6 months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced; the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and shall be deemed always to have been, void.

267(2) Without limiting the generality of subsection (1), a person who:

(a) appoints a receiver of property of a company under powers conferred by an instrument creating or evidencing a charge created by the company; or

(b) whether directly or by an agent, enters into possession or assumes control of property of a company for the purposes of enforcing a charge created by the company;

shall be taken, for the purposes of subsection (1), to take a step in the enforcement of the charge."

1. Counsel for the respondents accepts that Messrs McDowall and Thompson were "relevant persons" (see s.267(7) and that the appointment by them of Messrs White and Abeyratne as receivers and managers was a step taken in the enforcement of the charge. It follows then, says counsel for the liquidator, that the payments were unlawful appropriations of the company's property and must be returned. The respondents' counsel says that the payments conferred an "incontrovertible benefit" on the company. He referred to Monks v Poynice Pty Ltd (1987) 11 ACLR 637. This case concerned a receiver's claim for payment of his remuneration and expenses out of the assets of a company in liquidation, notwithstanding the invalidity of his appointment by reason of a typographical error. Young J held that in principle the law of restitution required that where the company had benefited incontrovertibly from the acts of the claimant then that claimant had a right against the company to be remunerated. His Honour left to the liquidator the question of deciding whether in fact the actual services rendered by the receiver satisfied that test. His Honour expressed the view that a charge might be allowable even though the work was not 100 per cent for the benefit of the company, or that the company would have survived even if the work had not been done: see 11 ACLR at 640. For present purposes however it is important to note that there was no dispute about "payments (presumably to creditors) which the receiver had made". By consent his Honour made orders under the equivalent of s.468 of the Corporations Law validating those payments: 11 ACLR at 638. Section 468(1) provides as follows:
   

"468(1) Any disposition of property of the company, other than an exempt disposition, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void."

1. In the present case the impugned payments totalling $5,478.43 are part of 27 payments totalling $103,734.04 made by the receivers between 14 October and 1 December. Of those payments, 11 totalling $12,080.21 were made after the filing of the winding up application on 24 November. A further amount of $33,979.94 was paid to the company on closure of the receiver's account. Some of those payments were to persons other than Messrs Thompson and McDowall and also described as being for "employee entitlements". Other payments were to apparent creditors of the company for such matters as group tax, locksmith's services and insurance. Counsel for the liquidator did not suggest any basis for differentiating between the impugned payments and the other payments. The impugned payments were sworn by Mr Abeyratne to be for services rendered to him in connection with the receivership and, in the case of the payments to Messrs Thompson and McDowall, for employee entitlements incurred before the receivership. No further detail was provided but Mr Abeyratne was not cross examined and there is nothing in the circumstances to suggest that by their nature the payments were not likely to be for the benefit of the company. The liquidator's affidavit alleges that the impugned payments gave those creditors a preference priority or advantage over the other creditors but neither the claim as pleaded in the amended statement of claim nor counsel's submissions before me put the case on this basis and, as I have noted, many other creditors were paid. Recovery was not sought from any payee. Messrs McDowall and Thompson's "employee entitlements" on their face appear to be priority payments: see s.556(1)(g) as applied to receiverships by s.433.

2. It is true, as counsel for the liquidator points out, that the debenture charge is unarguably invalid and, on Mr Abeyratne's own evidence, that risk was present to the minds of the parties at the time. However, the payments were not made in respect of liabilities secured by the charge and I do not draw the inference that in making them the receivers were motivated by some improper desire to prefer the interests of their appointers McDowall and Thompson as against other creditors. To accede to the liquidator's request would mean that the company would have received the benefit of the services for which the payments were made, the providers of the services would keep their payments but the receivers would be out of pocket. I do not see that such a result is fair or in the interests of the company or its creditors.

Payment of $10,000
14. Section 468(1) has already been referred to. The payment of $10,000 is caught by the section. Equivalent provisions have appeared in companies legislation since the mid 19th Century. A helpful review of the authorities will be found in Re Allan Fitzgerald Pty Ltd (1988) 13 ACLR 215. The power of the Court under s.468(1) to "otherwise order" is clearly discretionary. There is an underlying theme in the cases in that the courts are inclined to validate payments "related to any need to continue business, and earn income, or save loss, during the pendency of the petition", to quote the words of Fox J in Re Atlas Truck Service Pty Ltd (1974) 24 FLR 220 at 225, approved by the New South Wales Court of Appeal in Tellsa Furniture Pty Ltd (in liq) v Glendave Nominees Pty Ltd (1987) 9 NSWLR 254 at 260.

1. However to my mind the following factors lead to a conclusion that the payment should not be validated. First, the payment was made not to preserve a continuing business so that it could be sold as a going concern. The company had ceased trading some two months earlier; contrast Re Wiltshire Iron Co. Ex parte Pearson (1868) LR 3 Ch App 443 at 446 and In re International Life Assurance Society (1870) LR 10 Eq 312 at 319. Secondly, the winding up application had already been served. Thirdly, there is no evidence that the appropriateness of the payment or the amount thereof were considered by the directors of the company who, following the resignation of the receivers on 1 December, had resumed responsibility for the affairs of the company. There is no evidence as to how the figure of $10,000 was estimated at the time the payment was made. The fact that the payment is sought to be retrospectively validated by an invoice for exactly the same amount rendered ten days later, and which itself contains no details of calculation, does not assist the respondents' case. Fourthly, and in contrast to the consideration for the payments of $5,478.43, the work said to have been done was all done after the service of the winding up application and was in essence liquidator's work - getting in assets and dealing with creditors. Pannell Kerr Forster were in truth acting as de facto provisional liquidators. Generally speaking it is undesirable that this should be done outside the statutory regime, which amongst other things provides for liquidator's remuneration. Fifthly, and following on from the last point, Pannell Kerr Foster succeeded to their role as a consequence of the earlier appointment of Messrs White and Abeyratne as receivers by the directors. The Appeal Division of the Supreme Court of Victoria has recently stressed the importance of a liquidator being and being seen to be independent and not linked with a particular party concerned with the affairs of the company: Re National Safety Council (1990) VR 29 at 34. I think there is even stronger reason for this Court to decline to endorse, by way of a discretionary order validating otherwise void transactions, actions by persons connected with such a party when those actions amount to the carrying out of a de facto provisional liquidation.

Orders
16. I therefore dismiss the liquidator's claim in respect of the $5,478.43 but uphold the claim for $10,000. I will hear argument on the question of interest and costs.