BL & GY International Co Ltd v Hypec Electronics Pty Ltd - [2001] NSWSC 705

Reported Decision:
(2001) 19 ACLC 1622
[2001] NSWSC 705
[2001] ACL Rep 120 NSW 118

New South Wales

Supreme Court

CITATION: BL & GY International Co. Ltd v Hypec Electronics Pty Ltd; Colin Anthony Mead v David Patrick Watson & Ors. [2001] NSWSC 705

FILE NUMBER(S): SC 1933/01; 3832/01

HEARING DATE(S): 17/08/2001

JUDGMENT DATE:
21 August 2001

PARTIES :

BL & GY International Co. Ltd (Plaintiff)
Hypec Electronics Pty Ltd (Defendant)
Colin Anthony Mead (Plaintiff)
David Patrick Watson - Liquidator (Defendant)
BL & GY International Co. Ltd (Defendant)

JUDGMENT OF: Einstein J

COUNSEL : Mr DJ Fagan SC, Mr V Bedrassin (Colin Mead)
Mr SL Bell (BL & GY International Co. Ltd)
Ms R Sofroniou (David Patrick Watson - Liquidator)

SOLICITORS: Etheringtons Solicitors (Colin Mead)
Ian B Mitchell (BL & GY International Co. Ltd)
A R Connolly & Co. (David Patrick Watson - Liquidator)

CATCHWORDS: Company Law-Winding up-Liquidators-Exceptions to rule in Foss v Harbottle- -Contributories motion to bring a derivative cross action and to be permitted to seek leave to set aside a default judgment and to conduct a derivative defence-Whether action may be brought or continued or defended by a contributory in the name of company if this is in the interests of justice-Whether any such a rule applies to companies in liquidation-Considerations applicable to control by the court of company in liquidation-Contributory authorised to use companies name as co- defendant and as cross claimant.

LEGISLATION CITED: Corporations Act 2001 - Sections 236 & 237

CASES CITED: Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250
Biposo Pty Ltd; Condon v Rodgers (No.3) (1995) 17 ACSR 730
Cadima Express Pty Ltd v Deputy Commissioner of Taxation (1999) 33 ACSR 527
Cape Bretton Co v Fenn (1881) 17 ChD 198
Christianos v Aloridge Pty Limited (1995) 131 ALR 129
Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 37 ACSR 465
Direct Acceptance Investments Pty Ltd v Blackwell (1995) 17 ACSR 89
Direct Acceptance Investments Pty Ltd v Blackwell (No. 2) (1995) 13 ACLC 1251
Evans v Bartlam [1937] AC 473
Foss v Harbottle (1843) 67 ER 189
Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd - (No.2) (1984) 9 ACLR 91
Garden Mews-St Leonards Pty Limited v Butler Pollnow Pty Ltd (1984) 9 ACLR 117
Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587
Re Laverton Nickel NL (1979) 3 ACLR 945
Re Lloyd (1879) 12 ChD 447
Lloyd-Owen v Bull (1936) 4 DLR 273
Magarditch v Australia & New Zealand Banking Group Ltd (1999) 32 ACSR 367
Mibor Investments Pty Limited v Commonwealth Bank of Australia (1993) 11 ACSR 362
Partnership Pacific Pty Limited v Aliprandi (1990) 4 ACSR 51
Phillips Oysters v National Australia Bank (Federal Court, unreported, 13 Nov 1992)
Pollnow v Garden Mews-St Leonards Pty Limited (1984) 9 ACLR 82
Russell v Westpac Banking Corporation (1994) 13 ACSR 5
Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 17 FCR 344
Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550
Re Van Loun Ex parte Pattullo [1907] 1 KB 155
Wenham v General Credits Ltd [unreported, 16 December 1988-Butterworths Unreported Judgments-BC 8801203]

DECISION: Application for leave to bring derivative action to be granted - short minutes to be brought in.

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

EINSTEIN J

TUESDAY 21 AUGUST 2001

1933/01 BL & GY INTERNATIONAL COMPANY LIMITED v HYPEC ELECTRONICS PTY LIMITED

3832/01 COLIN ANTHONY MEAD v D P WATSON & ORS.

Background to the bringing of the applications now before the court

1 Mr Colin Mead married Ms Lucy Mead in December 1982. Evidence was adduced before the court to the effect that Ms Mead had been known as Yang Yi-Heng [Affidavit of Mr Mead made on 26 July 2001 paragraph 9 and annexures identified] They separated in November 1996 and were divorced on 16 April 1999. Ms Mead’s sister is Ms Grace Yang.

2 In early March 1995 Hypec Electronics Pty Ltd ["Hypec" or “Hypec Electronics”] was incorporated. At all material times Mr and Ms Mead were the only directors of Hypec each being a 50 percent shareholder in that company. Hypec carried on a computer importing and selling business and up until July 1992 that business was conducted with certain input and involvement from both Mr and Ms Mead.

3 One of the suppliers to Hypec was BL & GY International Co Ltd ["BL"] a company incorporated in Taiwan. BL sourced computer hardware in Taiwan and consigned it to Hypec. Ms Mead was a director of BL and held 44 percent of the shares. Her mother held another 44 percent of the shares and other of her family members held the remaining 12 percent. Apparently an issue arises as to whether Ms Yang was a director of this company [paragraph 3 first cross-claim; paragraph 2 defence to first cross- claim – proceedings 12674/1997. The document at page 10 of Mr Mead's affidavit of 26 July 2001 suggests that at least at an early point in time Ms Mead was recorded in the Articles of Corporation of BL as the one director to carry on the business]. Some purchases from Taiwan were made from the manufacturers direct without the involvement of BL.

4 Mr Mead claims that since he met her, Ms Mead has at all times been the sole effective decision-maker in BL and has controlled its affairs. [Affidavit 3 July 2001 in proceedings 12674 of 1997]

5 Mr Mead's case is that he believed that Hypec had ceased to carry on business from July 1992. Apparently from that month onwards another company, Hypec Technology Group Pty Ltd ["Hypec Technology"] took over all computer sales in Australia. Hypec Technology had been incorporated in late July 1992. Mr and Ms Mead were the sole directors of Hypec Technology and each held a 50 percent shareholding in that company.

6 Mr Mead's case is that he was unaware that Hypec had continued to purchase and import computers from BL after July 1992 in circumstances in which, on his case, dealings with customers in Australia took place in the name of Hypec Technology.

7 Mr Mead's case is that he was excluded from the affairs of Hypec from the date of the marital separation in November 1996 and that Ms Mead remained in defacto control of the company and its business.

8 In his affidavit of 26 July 2001; Mr Mead deposes inter alia:

“4. Throughout the period when I was active as a director in the Company’s trading from 5 March 1985 up to November 1996, I worked almost exclusively on the selling and technology side of the business, as opposed to purchasing or importing.

5. Purchasing, including any negotiations with suppliers, placing of orders and attending to payment, was carried out as follows:

5.1 Up until the Company employed Neil Schroder in 1990, I would investigate products and prices available from local and US suppliers and, to a limited extent, from Hong Kong and Singapore suppliers. I do not speak or write any Asian language. I could only deal with English speaking suppliers. Once I had identified products and prices, Lucy Mead took over the placing of orders and all other aspects of purchase and payment.

5.2 From the time of employment of Neil Schroder, he handled the placing of orders and following up on supply in relation to local and US suppliers. Payment to local and US suppliers (and indeed to all suppliers) continued to be attended to by Lucy Mead.

5.3 Throughout the period 5 March 1985 to November 1996, Lucy Mead handled all aspects of purchasing from Taiwan, to the exclusion of myself and Neil Schroder. Grace Yang worked in the business from time to time during her visits to Australia. In those periods she worked with Lucy Mead in the dealings of the Company with BL & GY under her personal control. She was the only person who attended to payment of BL &GY by or on behalf of the Company.

6. On 23 July 1992 we caused Hypec Technology Group Pty Ltd to be incorporated. It was my understanding and expectation that from that date Hypec Technology Group Pty Ltd would take over and conduct business.

7. However after 23 July 1992 Lucy Mead caused the Company to continue to purchase computers and equipment from BL & GY. The products were imported into Australia, consigned by BL & GY to the Company, and invoiced to “Hypec Electronics Pty Ltd t/a Hypec Technology Group’.

8. From 23 July 1992 dealings with Australian purchasers from our business were conducted in the name “Hypec Technology Group Pty Ltd”.

…….

10. I have never seen any other formal document relating to BL & GY which identifies any person as being a director of that company. Throughout my association with Lucy Mead,

10.1 whenever referring to BL & GY she called it “my company”;

10.2 from time to time she said words to the effect “I have got some big export orders for my company to the United States” and she identified the subject of the orders as travel goods and/or outdoor clothing;

10.3 from time to time I heard her on the telephone speaking to purchasers overseas, including in the US, negotiating and arranging sales and shipments of travel goods and other merchandise from BL & GY and

10.4 when I visited the business premises of BL & GY in Taipei on two occasions between 1982 and 1984, others working in the business referred decisions to Lucy Mead and appeared to act only on her instructions.

………

14. From 9 November 1996, when I finally separated from my wife, I have not had any involvement in the business or affairs of the Company. From that date, my wife has denied me access to the books and records of the Company. I have not attended its business premises, at her request. From that date she has made all decisions in relation to the financial business and administrative affairs of the Company.”

9 The applications now before the Court are brought by Mr Mead seeking leave to act on behalf of Hypec Electronics which was placed into liquidation on 7 May 2001. This follows a default judgment having been entered against Hypec Electronics on 4 December 1997 in the sum of $7,666,998.67 in proceedings 1264 of 1997 in the Common Law Division of the Supreme Court [“the common law proceedings”]. Those proceedings had been commenced in September 1997 by BL against Hypec Electronics as first defendant, Mr Mead as second defendant and Ms Mead as third defendant. The claims against Hypec Electronics were for the balance of a loan account between BL and Hypec Electronics or alternatively on a count of ‘moneys had and received’ by Hypec Electronics for the use of BL.

10 Mr Mead took no part in the exercise by which BL obtained judgment against Hypec Electronics, and I proceed upon the basis that it is a reasonable inference at least from the evidence adduced on the application, that Ms Mead as director and 44 percent shareholder in BL is likely to have been instrumental or at the least to have played some relevant part in relation to the default judgment having been entered. By the time the default judgment was entered, Mr Mead had been excluded from the conduct of the affairs of Hypec Technology for just over one year. It is Mr Mead's case that the computer reselling business had effectively been transferred to yet another entity, Hypec Information Technology Services [“Hypec Information”] this time said to be defacto controlled by Ms Mead, in early 1997. Mr Mead alleges [Affidavit 3 July 2001] that Hypec Information was incorporated on 9 January 1997, that the sole shareholder was Ms Yang and that the directors were Ms Yang’s and Ms Mead’s mother.

11 Mr Mead had himself filed a defence to the original statement of claim in the common law proceedings on 1 December 1997.

12 On 20 December 1997, the registered office of Hypec Electronics was changed by Ms Mead to an address in West Ryde which was her personal and business address.

13 On 9 November 1998, Justice Cohen of the Family Court of Australia made orders in the Family Court proceedings staying those proceedings pending the conclusion of the Supreme Court common law proceedings.

14 On 12 May 1999, Justice Dunford of the Supreme Court made orders cross vesting the common law proceedings to the Family Court.

15 On 7 September 1999, Justice Rose of the Family Court made orders restraining Mr Mead from dealing with the properties jointly held with his wife and further ordered that the common law proceedings be returned to the Supreme Court.

16 On 15 June 2000, BL filed an amended statement of claim in the common law proceedings.

17 On 13 February 2001, Mr Mead filed an application in the Family Court for an interim property order to allow funding of the common law proceedings and the Family Court proceedings.

18 On 19 February 2001, the BL served a Creditors Statutory Demand by registered mail on Hypec Electronics at the West Ryde registered address. On 28 March 2001 the winding up application and supporting affidavits were served by registered mail at the same address.

19 As already mentioned, on 7 May 2001 Mr David Watson was appointed liquidator of Hypec Electronics by the Supreme Court. Mr Mead claims to have been unaware of the winding up application until after the liquidator had been appointed.

20 On 2 July 2001, Mr Mead filed a defence to the amended statement of claim in the common law proceedings.

21 On 2 July 2001, Mr Mead also filed a cross-claim in the common law proceedings against BL, Ms Mead and Ms Grace Yang.

22 The common law proceedings are fixed to be heard between 5 and 9 November 2001.

23 The liquidator has claimed the sum of $2,861,844 from Mr Mead being the sum said to be shown on the accounts of Hypec Electronics as a director’s loan. Mr Mead disputes his liability for a loan in that amount, either solely or jointly with Ms Mead. He apparently acknowledges that moneys were paid out of Hypec Electronics and applied to the purchase of some real property in the names of himself and his wife. His case is that he did not control the making of the payments nor the characterisation of them in the accounts of Hypec Electronics. He in fact seeks to examine the records of Hypec Electronics to ascertain the basis upon which the sum has been attributed to a loan account in the names of himself and Ms Mead.

24 Mr Mead's case is that he is not aware of Hypec Electronics having any liquid funds or any readily realisable assets presently available to the liquidator. He assumes that the liquidator's own fees and those of his legal representatives have been and continued to be funded by BL, as petitioning creditor and as the only claimant upon Hypec Electronics known to Mr Mead.

25 Mr Mead's case is that substantially all of the assets in his name are items of real property which are the subject of an injunction issued by the Family Court of Australia restraining disposition. This injunction was obtained upon Ms Mead’s application in the contested matrimonial property proceedings on 7 September 1999.

26 In February 2001, Mr Mead apparently filed an application in the Family Court for an interim property distribution to fund his legal costs of the Family Court and common law proceedings. The application as now amended is said to be for an order for sale of some of the jointly held real property to enable Mr Mead to use up to 50 percent of the proceeds for his costs in the Family Court and in the common law proceedings. That application was listed for hearing on 23 July 2001 but was not reached and was stood over to 25 and 26 October 2001 – only days prior to the hearing of the common law proceedings.

27 A more detailed chronology of the liquidation and common law proceedings was conveniently prepared by the solicitor for BL [Affidavit of Mr Mitchell 27 July 2001].

The applications now before the Court

28 Mr Mead has commenced two forms of application seeking the same relief. The first is by summons filed in new proceedings No 3832 of 2001 in the Equity Division. Mr Mead as plaintiff in those proceedings has joined Mr Watson as liquidator of Hypec Electronics as first defendant and BL as second defendant. The application is made pursuant to section 237 of the Corporations Act 2001 or in the alternative pursuant to the Court’s inherent jurisdiction, in the following terms:

“1. Order that leave be granted to Colin Anthony Mead to intervene in proceedings no. 12674 of 1997 in the Common Law Division of the Supreme Court of New South Wales entitled BL & GY International Co. Ltd v Hypec Electronics Pty Ltd (CAN 002 896 166) and others for the purpose of:

1.1 taking responsibility on behalf of Hypec Electronics Pty Ltd (in liquidation) (“the Company”) for the said proceedings;

1.2 making an application to the Court to set aside the judgment entered against the Company by default on 4 December 1997;

1.3 filing a Defence on behalf of the Company in the event that the said judgment should be set aside and thereafter conducting the Company’s Defence of the proceedings;

1.4 making an application for leave to file in the said proceedings a Cross Claim against BL & GY International Co. Ltd, Lucy Guitar Mead and Grace Shiow Jing Yang; and

1.5 if leave to file the said Cross Claim be granted, thereafter prosecuting same to judgment.

2. In the alternative to paragraph 1, order that Colin Anthony Mead be appointed receiver of:

2.1 the rights of the Company to defend the said proceedings in the Common Law Division; and

2.2 the Company’s causes of action against BL & GY International Co Ltd, Lucy Guitar Mead and Grace Shiow Jing Yang (as identified in the draft Cross Claim identified upon the hearing of this Notice of Motion).”

29 The second route taken by Mr Mead to the same end is by notice of motion filed in the winding up proceedings No. 1933 of 2001 which generally seeks the same form of relief.

The proposed application in the Common Law Division

30 Mr Mead proposes to apply in the name of Hypec Electronics to have the default judgment against it set aside and for leave to cross-claim. In support of that application his case is that his affidavit, the report of Mr McEwen and the ancillary evidence available from witnesses who are able to provide business records constitutes a strong prima facie case:

· that Hypec Electronics is not indebted to BL for the amount which is the sum of the default judgment entered on 4 December 1997 or for any sum at all;

· that BL is in fact liable to Hypec Electronics for approximately $1.3 million said to be overpaid by Hypec Electronics to BL in relation to goods sold and delivered.

31 Mr Mead by his counsel submits that there is evidence to explain the failure of Hypec Electronics to file a defence and its delay in applying to have the judgment set aside. This consideration, upon an application to set aside a default judgment, is said in any event not to be determinative where a triable issue can be demonstrated. His claim is that BL is unable to point to any prejudice. His claim is that BL has to contest the same issues of fact against Mr Mead who is defending and cross-claiming in his own name as of right.

32 Mr Mead submits that the Common Law Division judge will likely be influenced by the consideration that conflicting judgments of the court may result if the judgment against Hypec Electronics stands and if Mr Mead succeeds on his defence and cross-claim. Hence, Mr Mead submits that it would be manifestly unjust to Hypec Electronics to refuse it leave to defend and cross-claim when Mr Mead submits that he can and will litigate the same factual issues under cover of his own defence and cross-claim. The further submission is that upon the evidence to be tendered in the Common Law Division, the proposed application in the name of Hypec Electronics has strong prospects of success.

33 Other factors relied upon by Mr Mead in the course of submissions go to:

· the suggested improbability of the liquidator bringing the application in the Common Law Division;

· the suggested economy of Mr Mead litigating in the name and interests of Hypec Electronics;

· the suggested detriment to Hypec Electronics if Mr Mead’s application is refused; and

· the submission that the only other contributory of Hypec Electronics is not prejudiced.

34 It is convenient to outline these submissions seriatim.

The suggested improbability of the liquidator bringing the application in the Common Law Division

35 Mr Mead, by his counsel’s written submissions, asserted that the liquidator had not indicated whether he:

(a) opposes the making of the application in the name of Hypec Electronics to set aside the judgment and/or the running of the defence and cross-claim of Hypec Electronics; or

36 The submission is that if the former is the liquidator’s position, then on Mr Mead’s present application, the Court should take into account the material upon which Mr Mead proposes to rely in the Common Law proceedings. This is said to show that, according to the test used in Company’s List applications of the present type, the proposed Common Law proceeding in the name of Hypec Electronics “is not vexatious or merely oppressive, or in other words that it has some arguable foundation”: Aliprandi v Griffith Vintners Pty Ltd(in liq) (1991) 6 ACSR 250 at 252.

37 If it is a case of the liquidator supporting the proposed proceedings but being unable to fund them, Mr Mead submits that the authorities support an order that a person interested in the company’s success and willing to litigate in the name of the company at his own expense should be authorised to do so. The submission is that there is no precedent for refusing such an order in such circumstances and for forcing the interested person to provide funds to the liquidator instead.

38 Mr Mead’s further submission is that he could not, in any event, fund the liquidator to apply to set aside the judgment and to prosecute a cross-claim, separately from and in addition to the funding of Mr Mead’s own defence and cross-claim in the same proceedings.

39 Mr Mead then submits that in addition to the costs of the Common Law proceedings, he has to bear the costs of a complex Family Court dispute with Ms Mead. That case is said to concern approximately 10 parcels of real property in their joint names, three properties in the names of Ms Mead’s family members or associated entities and alleged by Mr Mead to have been acquired from matrimonial funds and property in Ms Mead’s name. The Court has been informed that the final hearing of the property dispute has been adjourned by Family Court order of 9 November 1998 until after the conclusion of the Common Law proceedings.

40 Mr Mead then submits that even if the Family Court should, on 25 October 2001, release some of the restrained matrimonial property to enable Mr Mead to pay his legal costs, funding yet another set of costs (for the liquidator to apply to set aside the default judgment against Hypec Electronics and to institute a cross-claim) would be prohibitive.

The suggested economy of Mr Mead litigating in the name and interests of Hypec Electronics

41 Mr Mead submits that his cross-claim filed in the Common Law proceedings against BL, Ms Mead and Ms Yang is based upon the same factual allegations as those upon which Hypec Electronics’ application to set aside the judgment and prosecute a cross-claim would turn.

42 Mr Mead’s further submission is that there would be very substantial economy in the costs of conducting Hypec Electronics’ cross-claim if it should be in Mr Mead’s hands. The submission is that if the conduct of the proceedings on behalf of Hypec Electronics is not placed in his hands but can only be pursued if Mr Mead puts the liquidator in funds, then Mr Mead would effectively have to fund two sets of costs to litigate the same questions of fact. This is said to be a consideration of justice to Mr Mead which is said to reinforce the position on the authorities which is said to be that where a liquidator lacks funds, the remedy is to permit another interested person to use the company’s name and not to withhold such leave in order to force the interested person to provide funds to the liquidator.

The suggested detriment to the company if the application be refused

43 Mr Mead next submits that if the liquidator does not have funds to conduct the proposed litigation, refusal of the present application would have the practical effect of preventing Hypec Electronics from pursuing the application to set aside the judgment and from litigating its cross-claim. The submission is that this would be a very substantial injustice to Mr Mead where the judgment against Hypec Electronics and its liquidation are alleged by Mr Mead to have been brought about by his former wife pursuing the interests of her family company (BL) and causing Hypec Electronics to be wound up, to the loss of only her husband, as the other 50 percent shareholder in the company.

The other contributory of the company said not to be prejudiced

44 Mr Mead’s submission is then that the circumstances show that the only contributory of Hypec Electronics other than Mr Mead, namely Ms Mead, has interests plainly opposed to those of the company itself in any matter between the company on the one hand and BL and herself on the other. Mr Mead submits that the evidence to be read on the application to set aside judgment and for leave to cross-claim constitutes “a strong prima facie case of breach by Ms Mead of her fiduciary duty to the Company in causing it to overpay her family company, BL, and causing it thereafter to suffer judgment on an account which the prima facie evidence strongly suggests is false” [written submissions paragraph 29].

45 Mr Mead submits that this is a classic case for the granting of leave under section 237 or for the granting of leave pursuant to what is said to be the inherent jurisdiction of the Supreme Court. The submission is that the proposed cross-claim would be against the other contributory, Ms Mead, for breach of her fiduciary duty to the company and against her family company. The submission is that the liquidator running such an action would be in the impossible position of having to keep the details of the conduct of the case by the company confidential from the other contributory. This is said to be exactly the situation in which, exceptionally, it has been regarded as appropriate for there to be a receiver of the action appointed. (Garden Mews St Leonards v Butler Pollnow]. The submission is that for the same reasons, a section 237 order or, alternatively, a grant of leave pursuant to the Court’s suggested inherent jurisdiction is appropriate.

Submissions of BL

46 BL opposes the grant of the relief sought by Mr Mead. As to Mr Mead’s claim to be appointed receiver (made in paragraphs 2 of the Summons and the notice of motion), Mr Bell (BL’s counsel), makes the threshold submission that the application is doomed to failure as it offends s418 of the Corporations Act. This section provides that a person is not qualified to be appointed and must not act as a receiver of property of a Corporation if the person is an officer of the corporation [418(1)(b)] or is not a registered liquidator [418(1)(d)]. The submission is of substance. Even if this were not so, as Ms Sofroniou, (counsel for the liquidator) submitted, a receiver should be a wholly disinterested person (at least absent the consent of all parties to the litigation in which the receiver is involved) and should not himself or herself be a party to the litigation: Re Lloyd (1879) 12 ChD 447.

47 In relation to the question (not presently raised by the summons or application) of whether a properly qualified receiver should be appointed, BL’s submissions were that Mr Mead should be obliged to indemnify such a receiver, to provide security for indemnity and to provide security for the costs of the action. The submission is that because Hypec Electronics is in liquidation, BL will no doubt apply for security for costs of any cross-claim.

48 The submissions on behalf of BL are further to the effect that there has been no formal offer of an indemnity to a properly qualified receiver and no offer of security for the costs of the receiver and for the costs of the BL in the Common Law proceedings.

49 The further submissions on behalf of BL were to the effect that Mr Mead has had a number of opportunities to cause Hypec Electronics to defend the Common Law proceedings and/or to file a cross-claim and/or to make some other application to act on behalf of the company:

· to file a defence in 1997;

· to make an application to set aside the default judgment since 4 December 1997;

· to set aside the statutory demand in 2001; and

· to oppose the winding up in May 2001.

50 The submission is that Mr Mead’s reasons for not taking action “only discloses, at its best, dereliction in his duties as a director of Hypec Electronics”.

51 Mr Bell’s submissions are that these proceedings have only been commenced after the liquidator of Hypec Electronics sought information from Mr Mead in relation to Hypec Electronics. The letter from the liquidator to Mr Mead’s solicitors of 8 June 2001 required Mr Mead to submit a report as to the affairs of the company by 12 June 2001. The liquidator’s affidavit makes plain that Mr Mead has not yet complied with his obligations under the Corporations Act to provide requested material and information, presumably referring to such a report.

52 In those circumstances, Mr Bell submits that it is a reasonable inference that the present proceedings have been commenced by Mr Mead in an attempt to delay the liquidator from beginning proceedings to recover what is said to be in the order of $4.9 million. This amount is said to have been identified by the liquidator as being used by the directors of Hypec for their own personal use.

The submissions advanced on behalf of the liquidator

53 Mr Watson has deposed in his affidavit of 27 July 2001 as follows:

“2. Since my appointment as liquidator of Hypec I have ascertained from the books and records of the Company that the assets of the Company consist of various loans to directors and related companies in the sum of $3,382,523.83. These details are as follows:

(a) Directors Loan – C & L Mead	$2,861,844.00
(b) Lamron Pty Limited	$ 195,339.33
(c) Hypec Information Technology Services Pty Limited	$ 25,000.00
(d) Quoin Island Resort Development Pty Limited	$ 295,300.00
(e) Microtech FPGA Pty Limited	$ 5,040.50
$3,382,523.83

Annexed hereto and marked with the letter “A” is a copy of an extract from Hypec’s General Ledger as at 30 June 1998 showing the said loans.

3. In the course of my investigations as liquidator of Hypec I have examined or caused to be examined voluminous documents from various sources, including bank books and records, cheque books, Hypec files and records, documents relating to real property transactions, receipts, invoices, investment documentation and correspondence.

4. I have not yet finalised my investigations or report into the financial position of Hypec. However, at the date of swearing this affidavit I have identified funds in the sum of $4,907,725 which at this stage in my opinion were funds properly belonging to Hypec but which were used by the Directors of Hypec for their own personal use during the period 1989 to 1997. Annexed hereto and marked with the letter “B” is a schedule of the funds so identified. Notwithstanding this, further investigations are continuing.

5. My investigations to date reveal that the funds, referred to in paragraph 4 above were used by the Directors of Hypec for, inter alia, the following purchasers;

a. Payment of deposits on real property purchased in their joint names;

b. Payment of mortgage instalments in respect of property registered in their joint names;

c. Payment of invoices for construction of improvements to real property registered in their joint names;

d. Payment of lease payments in respect of a 40’ boat in their joint names;

e. Payment of chattels such as furniture and home wares;

f. Payments into education fund for the benefit of the children of the directors;

g. Payment of contributions to a private superannuation fund;

6. It is my opinion as official liquidator of Hypec that the funds referred to in paragraph 4 above were funds properly belonging to Hypec.

7. On 14 May 2001 I forwarded separately to both Directors of Hypec notice of my appointment as Liquidator and various forms required under the Corporations Law to be completed by them and returned to me.

8. I have received the requested material and information from Lucy Mead.

9. Colin Mead has not yet complied with his obligations under the Corporations Law to provide the requested material and information. Copies of the relevant correspondence are annexed hereto and marked with the Letter “C”.

10. On 3 July 2001 I separately requested of both Directors that they repay to Hypec the amount of $2,861,844 which amount equated to the amount declared in Hypec’s books and records as being the amount owed by the Directors to Hypec in respect of their Directors Loan Account.

11. Lucy Mead has acknowledged my request.

12. Colin Mead has not responded to my request.

13. I am presently considering the legal avenues open to me to ensure Colin Mead’s compliance with his obligations under the Corporations Law to provide to me the information requested to enable me to finalise my investigations and report.

14. On 10 July 2001 and 25 July 2001 I requested of Microtech FPGA Pty Limited repayment $5,040.50 which amount equated to the amount declared in Hypec’s books and records as being the amount owed by Microtech FPGA Pty Limited to Hypec in respect of its loan account.

15. On 25 July 2001 I separately requested the repayment of all other related company loans declared in Hypec’s books and records and/or details if amounts are not considered due and payable by the relevant debtors.

16. I am presently considering the legal avenues open to me as liquidator of Hypec to recover from the directors of Hypec:

(a) The amount of $2,861,844 owed to Hypec in respect of the Directors Loan Account; and

(b) The amount of $2,045,881 in addition Hypec funds which I have identified as being used by the Directors for their own use, together with any further monies (if any) so identified pending completion of my investigations.

17. My examination of the books and records of Hypec has not disclosed any minute or record of any resolution authorising the Directors of Hypec to establish a Directors Loan Account or to draw the funds in the sum of $2,861,844 referred to in paragraph 16(a) above against such account. My examination of the books and records of Hypec also has not disclosed any minute or other record authorising the Directors of Hypec to utilise for their own purpose the additional Hypec funds in the sum of $2,045,881 referred to in paragraph 16(b) above.”

54 The liquidator’s submissions commence by making the point that there is nothing in principle to prevent the liquidator from defending the Common Law proceedings or from properly taking responsibility for them, or for the steps in them, on behalf of the company in liquidation within the meaning of section 237(2)(a). Clearly this is so notwithstanding the fact that the other contributory is Ms Mead, nor that the major creditor of the company is said to be BL.

55 The liquidator’s submission is that insofar as the prosecution of claims against a contributory in the interests of the company may be concerned, this occurs whenever a liquidator brings recovery proceedings (see s588E Corporations Act) against the directors of the company or for example for insolvent trading in contravention of s588G(2) Corporations Act.

56 The liquidator then refers, in relation to the position of the creditor, to the liquidator’s obligation to have regard to directions given by creditors of the company, section 479(1). The liquidator however:

· is to use his or her own discretion in the management of the affairs and property of the company and the distribution of its property [s479(4)]; and

· is to act impartially and independently: Re Biposo Pty Ltd; Condon v Rodgers (1995) 17 ACSR 730.

57 The liquidator makes the point that a liquidator acts in a quasi-judicial capacity in dealing with creditor’s proofs of debt. “The liquidator is bound to examine every proof lodged, both from the point of view of the grounds of the debt and of any possible right of set-off, and the fact that the proof is based on a judgment does not prevent or relieve him from performing this duty” [see Re Van Loun [1907] 1 KB 155, 162-3 (in bankruptcy context); O’Donovan, MacPherson The Law of Company Liquidation (4th ed) 569].

58 The liquidator refers to a holding by Young J that in certain instances, a liquidator is estopped from going behind the judgment debt that founds the insolvency pursuant to which the liquidator is appointed to the company. However, the liquidator concedes that such an estoppel probably would not operate in the present case. Reference is made to Direct Acceptance Investments Pty Ltd v Blackwell (1995) 17 ACSR 89, 92 where Young J said:

“when the point to be decided in the winding up proceedings is that a particular debt exists, and the court so finds and on the basis of the finding the liquidator is appointed, then that is an estoppel which is binding in the litigation… the liquidator cannot reject [the debt] in its entirety… as to do so would to say that the claimant was not a creditor. There is an operative estoppel binding the liquidator which prevents him from denying that the claimant is a creditor.”

59 Clearly such an estoppel cannot operate where the judgment was obtained by collusion.

60 Young J amplified upon this estoppel in Direct Acceptance at page 1253:

"[u]nless there is fraud or collusion, in my view,

where there has been a contested hearing

which has determined that the person now putting forward a proof of debt is a creditor for the claim which that person makes, and on the basis of that determination the liquidator is appointed, the liquidator cannot deny the validity of the claim"

61 Clearly there has been no contested hearing or determination in the present case and the liquidator is not estopped from taking part on behalf of the company.

62 The liquidator's further submissions were to the following effect:

“Is the Liquidator prevented from bringing the relevant proceedings?

1. There is nothing in principle to prevent the liquidator from defending Supreme Court proceedings 12674 of 1997 (“the Common Law Proceedings”) or properly taking responsibility for them, or for the steps in them, on behalf of Hypec Electronics Pty Ltd (in Liq.) (“the Company”) within the meaning of CL s237(2)(a). This is so notwithstanding the fact that the other contributory of the Company is Ms Mead, nor that the major creditor of the company is BL & GY International Co Limited (“BL & GY”).

2. As to the prosecution of claims against a contributory in the interests of the company, this occurs whenever a liquidator brings recovery proceedings (defined in CL s588E) against directors of the company or eg for insolvent trading in contravention of CL s588G(2).

(a) is to use his or her own discretion in the management of the affairs and property of the company and the distribution of its property: CL s479(4); and

(b) is to act impartially and independently: Re Biposo Pty Ltd; Condon v Rodgers (1995) 17 ACSR 730.

4. The liquidator acts in a quasi-judicial capacity in dealing with creditors’ proofs of debt. “The liquidator is bound to examine every proof lodged, both from the point of view of the grounds of the debt and of any possible right of set-off, and the fact that the proof is based on a judgment does not prevent or relieve him from performing this duty” [see Re Van Loun [1907] 1 KB 155, 162-3 (in bankruptcy context)]: O’Donovan, McPherson The Law of Company Liquidation (4th ed) 569.

“when the point to be decided in the winding up proceedings is that a particular debt exists, and the court so finds and on the basis of the finding the liquidator is appointed, then that is an estoppel which is binding in the liquidation… the liquidator cannot reject [the debt] in its entirety… as to do so would be to say that the claimant was not a creditor. There is an operative estoppel binding the liquidator which prevents him from denying that the claimant is a creditor”.

The estoppel cannot operate where the judgment was obtained “ by collusion”.

“[u]nless there is fraud or collusion, in my view, where there has been a contested hearing which has determined that the person now putting forward a proof of debt is a creditor for the claim which that person makes, and on the basis of that determination the liquidator is appointed, the liquidator cannot deny the validity of the claim.”

7. There has been no contested hearing or determination in the present case and the liquidator is not estopped from taking part on behalf of the Company.

i. Merits of the proposed defence and cross-claim: Setting Aside Default Judgment and CL Part 5.4

1. The fact that there has been no determination pursuant to a contested hearing is a matter that Mr Mead claims warrants his proposed application to set aside default judgment against the Company. Evans v Bartlam [1937] AC 473 emphasised that there was nothing irregular about a judgment just because it was entered by default (per Wright LJ at 489). This is not a case where the judgment must be set aside ex debito justitiae eg for want of service of the originating process. Rather, the Court must have regard to the merits of the case, the reason for the applicant’s delay in defending and prejudice to the plaintiff.

2. As to the merits of the case, the liquidator has not completed his consideration of his position in respect of CL s237(2)(a). He has undertaken certain investigations and is awaiting the information set out in his affidavit sworn 13 August 2001 before reaching a concluded view.

3. As to the merits which must be demonstrated in order to set aside default judgment (arguably a lower threshold than that to be considered by the liquidator for the purposes of s237(2)(a)), the existence of an arguable case would not automatically result in default judgment being set aside. The liquidator at present is not convinced that a court would be likely to set aside default judgment. In the present case, Mr Mead’s delay from the date of default judgment on 4 December 1997, until the service of the creditor’s statutory demand on 19 February 2001, is arguably not adequately explained. The prejudice to BL & GY in the Common Law Proceedings is obvious when one considers that it could otherwise expect recovery of moneys claimed by it, the Company is in the process of liquidation accordingly and that Mr Mead will be seeking to reopen the case four years after commencement of proceedings by it. The liquidator contests Mr Mead’s submission that BL & GY would in any event be litigating the same matters against Mr Mead since such matters do not arise out of his defence. Submissions as to the nature of Mr Mead’s cross-claim appear at paragraph 18 below.

4. Crucially, Mr Mead’s application to set aside default judgment against the Company takes place in the context of concluded winding up proceedings in respect of the Company. Mr Mead’s application pursuant to CL s237 is effectively an effort in circumventing the regime provided for by CL Part 5.4.

5. CL section 459G enables a company to apply to set aside a statutory demand within 21 days of service, inter alia, upon the ground that there is a genuine dispute as to the existence or amount of the debt claimed: see Mibor Investments Pty Limited v Commonwealth Bank of Australia (1993) 11 ACSR 362. If the company in question does not avail itself of this opportunity pursuant to s459G, CL s459S prevents it from, relevantly, later relying upon a ground it could have relied upon for setting aside the demand, without first obtaining the leave of the court.

6. There is no reason to suppose that Mr Mead’s rights and obligations as director in respect of the Company ceased neither in 1997, when the Common Law Proceedings were commenced, nor in February 2001 when the winding up proceedings were commenced. He presumably, at all material times, enjoyed rights as director of the Company, including the right to obtain (by Court order if necessary) relevant information about the company and access to its books and records. There is furthermore no reason to suppose that he would not have discovered those matters underlying the Company’s proposed defence and cross-claim if he had undertaken them at an earlier time. There is nothing to suppose that he was prevented from raising such matters pursuant to s459G, or applying for leave to raise them under s459S, or even applying to stay the winding up proceedings pending the raising of such matters.

“…it is essential in the present case to bear in mind that Scarel Pty Ltd is in liquidation and that pursuant to the provisions of the Code, the liquidator’s decision as to the termination of the present proceedings has been tested in the Companies Court. The scheme of the statute is that it is the liquidator who is the appropriate party to decide whether to continue for the company litigation such as this, subject to the control of the Companies Court over the liquidator.

“The cases dealing with Foss v Harbottle and the exceptions to it involve going concerns where, by reason of particular circumstances, the orderly exercise of the respective powers of the directors and shareholders did not produce a result whereby the company was taking action to enforce its rights, whether against directors, shareholders or third parties.

“The situation is very different where the company is in liquidation. The ordinary rule there is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide whether the company should take or continue action to recover damages or secure other relief for an injury done to the company…the general proposition is that with the liquidation, both directors and shareholders in general meeting cease to have authority to institute or continue litigation by the company… .

“A decision by the liquidator may be called into question by a contributory pursuant to the statutory provisions in that behalf. That has been attempted without success. What is now sought in the present proceedings is, in substance, by way of collateral attack to re-agitate the question by treating as applicable the rule in Foss v Harbottle and relying upon an exception to that rule in the terms asserted by the applicant.

“when the company went into liquidation, the question of the subsequent carriage of claims of the company was brought within the scope and control of the winding up and of the court having the charge of that winding up. In such a case, it is, in my view, not appropriate to speak of the rule in Foss v Harbottle or exceptions to the rule in Foss v Harbottle which have the effect of taking the carriage of such claims outside the winding up. It has been said on more than one occasion that winding up is a process affecting rights in rem, and there is obviously much sense in the policy of the legislation in confining these questions to the one forum specially designated by legislation to deal with the whole of the subject matter.”

Such dicta do not lose relevance when applied to the current statutory embodiment of the exception to the rule in Foss v Harbottle embodied in CL ss 236, 237.

a) Best Interests of the Company
1. CL s237 does not contemplate the position of a Company in liquidation (see for example, the presumption in ss(3), which contemplates directors making the relevant company decision). This is not to say that such applications have not been made, notwithstanding that the company in question is in receivership or liquidation.

2. In Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 37 ACSR 465, Sackville J permitted the applicant directors to conduct the proceedings in the name of the company, albeit in receivership, apparently upon the basis that, in contrast to the position of a company a liquidation, the appointment of receivers did not displace to the same extent the authority and powers of the directors (at 471-5).

3. Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91, upon which considerable reliance is placed by Mr Mead in his Counsel’s submissions, dealt with a provisional liquidation, which had been ordered pending hearing of the application seeking to resist the winding up of the company. McLelland J held: “the provisional liquidator cannot have the carriage for the company of any defence to the winding up proceedings” (emphasis added), his Honour citing Re Laverton Nickel NL (1979) 3 ACLR 945, 947, which case in turn held that the directors of a company in provisional liquidation retained the power to bring such defence and held that the provisional liquidator did not. The case can be distinguished from the winding up in the present case. Gummow J’s analysis is more apt to the present facts.

4. The difficulty with Mr Mead’s application pursuant to s237 is that the effect of it would be to afford a director (whose powers would otherwise have been suspended pursuant to CL s471A) the power to make decisions for the Company, in respect of that Company’s chose in action against its major creditor and the Company’s co-director. This risks placing the liquidator, administering the Company but for the chose in action, and the director directly at loggerheads in terms of day to day conduct of the Company’s affairs and must involve a practical lack of full authority in the liquidator. This is particularly the case when, as here, the very director seeking to represent the Company is himself a potential target for recovery proceedings, and may in fact be purporting to indemnify the liquidator with recoverable Company funds. This is even more particularly the case when one of the director’s opponents in the proposed litigation is herself a member of the Company. An order under s237 would have the effect that Mr Mead is indirectly acting for himself and his ex-wife (in corporate guise) against his ex-wife and interests he says are associated with her. This is an innate conflict of interests which Mr Mead does not address.

a. Directors’ and related company loans in an amount of $3,382,523.83, of which $2,861,844 is said to be “Directors loan – C & L Mead” (para 2, 17);

b. Funds in amount of $4,907,725 at this stage apparently properly belonging to Hypec but used by the directors for their own personal use during the period 1989 to 1997 (paras 4, 6; such use expanded upon in para 5);
c. Failure of Colin Mead as at date of the affidavit to respond to liquidator’s enquiries, including a Report as to Affairs and records pursuant to CL s475, 483 (paras 7-12).

2. Furthermore, the proposed pleadings put forward by Mr Mead, both on his own behalf and for the Company do not reveal any defence to the Common Law Proceedings statement of claim other than denial of its allegations. The amended statement of claim appears to seek damages for monies loaned to Hypec and the directors, which loans remain unpaid. It also appears to allege negligence against the directors and pleads breach of the CL.
3. The cross-claim filed on behalf of Mr Mead, presumably by way of set-off, pleads overpayment of $1.3 million by the Company to BL & GY. It does not appear in essence to be Mr Mead’s cross-claim but that of the Company. Specifically:

a. The nature of the fiduciary duty said to be owed to Mr Mead, as opposed to the Company, is unclear;

b. The basis upon which Mr Mead could claim, as shareholder, restitution of the Company’s monies allegedly wrongly paid to BL & GY, is unclear;
c. The basis upon which Mr Mead, as opposed to the Company, could claim the monies said to be overpaid by the Company as damages (equitable or otherwise), in the circumstances, is also unclear.

4. Mr Mead would be able to claim monies from the Company as shareholder in the winding up, after all other expenses and creditors are paid. The proposed cross-claim, however, appears to be that of the Company, and not his own. If the Company does not prosecute the claim, it is hard to see how Mr Mead will be able to bring the cross-claim on his own account. On this analysis the best that Mr Mead can achieve absent it is to obtain a successful verdict against the allegations made by BL & GY against him personally. Mr Mead might be said to be seeking to bring the claim of the Company in a bootstraps attempt to afford himself some monetary set-off against BL & GY, regardless of the interests of the Company. This does not amount to a suggestion of mala fides on Mr Mead’s part, but it does raise questions as to whether he is seeking to achieve the purposes of CL s237 i.e. in the best interests of the Company, or whether he is attempting to recruit the Company’s defunct chose in action for his own purposes.

ii. Practical Considerations

1. There do not appear to be any funds available to the liquidator to defend the proceedings. It is putting the cart before the horse to suggest that the Company will be in funds after a successful judgment in the Common Law Proceedings. Should the liquidator find that Company monies are recoverable from the directors he may nonetheless take the view that they should not be jeopardised in attempting to set aside judgment and defending the Common Law Proceedings for the Company, especially if he takes the view, discussed above, that Mr Mead seeks to have the Company’s case agitated in an attempt to argue a set-off of the monies claimed against him personally.

2. The liquidator has an apprehension that the monies proposed to be provided by way of indemnity might be the Company’s monies in any event: see Mr Watson’s affidavit sworn 13 August 2001. Submissions filed on behalf of Mr Mead do not appear to address the question of who will pay costs in the event the Company’s defence and cross-claim are unsuccessful. Costs would in all likelihood follow such event and the Company would be held to be liable to pay. The failure to provide proper or adequate indemnity has been held to be fatal to such applications, as is the failure to provide security, when required by the Court, to support the indemnity: Scarel at 352; Deangrove at 475; see also Phillips Oysters v National Australia Bank (Federal Court, unreported, 13 Nov 1992, per Lockhart J), where security was ordered in circumstances where the directors of the company in receivership, benefiting from the proceedings, deposed that they did not have available funds to satisfy an indemnity and Vouris as liquidator of Cadima Express Pty Ltd v Deputy Commissioner of Taxation (1999) 33 ACSR 527, 544-5.

a) Mr Mead as Receiver
1. Finally, the Court should not appoint Mr Mead receiver in respect of any chose in action of the Company upon the basis that:

a. No chose in action exists for Mr Mead to be appointed receiver of, given that the default judgment against the Company is operative and effective, as at the date of the application for the receivership;

Dealing with the matter

The general scheme of the Corporations Act and the inherent jurisdiction of the Court with respect to the administration of a company in liquidation

63 It is convenient to commence by examining both the general scheme of the Corporations Act legislation as well as the inherent jurisdiction of the Court with respect to the administration of a company in liquidation. The effect of sections 236 and 237 may then be dealt with.

64 The scheme of the then legislation, the inherent jurisdiction of the Court with respect to a company in liquidation and the Court’s jurisdiction to supervise the conduct of a liquidator with respect to litigation proposed in the name of or on behalf of the company, were all matters carefully considered by Austin J in Cadima Express v DCT [1999] NSWSC; 33 ACSR 527. That case involved an application for the appointment of a receiver to pursue a cause of action on behalf of a company in liquidation. Austin J conveniently summarised the principles and referred to a number of relevant authorities:

“38 The application is for the appointment of a receiver to pursue a cause of action on behalf of another. This Court's jurisdiction to appoint a receiver is ample enough to permit such an order to be made. The effect of the orders sought would be to give the receiver control over the chose in action to be pursued in the proceedings, which is a species of property, and to empower and direct the receiver to seek to realise that property by litigation for the benefit of the entity on whose behalf it is realised.

39 Difficulty arises because in the present case the entity whose chose in action is to be asserted is in liquidation. The function of the Court with respect to a company in liquidation was considered by McLelland J in

Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250, 252. His Honour set out the description adopted by the Privy Council in Lloyd-Owen v Bull (1936) 4 DLR 273, 276:

‘

A judge in winding up is the custodian of the interests of every class affected by the liquidation. It is his duty ... to see that all assets of the company are brought into the winding up. In authorising proceedings, especially if they may or will involve some drain on the assets, he must satisfy himself as to their probable success; where ... they involve no possible charge on assets, he will nevertheless be careful to see that any necessary action taken in the company's name under his authority is not vexatious or merely oppressive.’

40 For present purposes it is worth emphasising that the Court's concerns include protection of the assets of the company in liquidation for the benefit of the creditors, and prevention of oppressive or vexatious litigation in the company's name. This necessitates at least a limited investigation of the merits of the proposed litigation.

41 The Corporations Law gives the Court statutory jurisdiction to supervise the conduct of a liquidator with respect to litigation proposed in the name of or on behalf of the company. Section 477(6) states that the exercise by the liquidator of his or her powers is subject to the control of the Court, and any creditor or contributory or the Commission may apply to the Court with respect to any exercise or proposed exercise of any of those powers. (See also s 511 with respect to voluntary liquidation, and s 1321 with respect to appeals to the Court from decisions by a liquidator.) Where the liquidator is invited to commence proceedings to assert rights of the company and declines to do so, the normal course is for an aggrieved creditor or contributory to make an application to the Court under these provisions. The importance of the statutory provisions is emphasised in the judgment of Cole J in Partnership Pacific Pty Limited v Aliprandi (1990) 4 ACSR 51.

42 However, in addition to its statutory powers, the Court possesses an inherent power in the course of the winding up of a company to permit proceedings to be taken in the company's name at the instigation of a creditor or contributory, including a prospective creditor: Russell v Westpac Banking Corporation (1994) 13 ACSR 5. In Aliprandi McLelland J (at 252) confirms that the Court has a power ‘of respectable antiquity and … sanctioned by high authority’ to authorise a procedure based on ‘the same principle on which a man could always have filed a bill in the old Court of Chancery against his trustee to be allowed to use his name to recover the trust property’ (citing Cape Bretton Co v Fenn (1881) 17 Ch D 198, 207).

43 Given that there is a power wide enough for the Court to authorise that proceedings be commenced in the name of the company in liquidation by a person other than the liquidator, upon what basis will that jurisdiction be exercised?

44 Counsel for the applicant in the present case submitted that it was inappropriate for the Court to look at evidence going to the merits of the proposed litigation but instead, the Court should make its decision solely on the basis of the draft pleading. That would mean that if the pleading, considered in isolation, appeared to identify an appropriate cause of action, the Court would allow the proceedings to be commenced and prosecuted regardless of whether there was any evidence to support the allegations made in the pleading. That cannot be correct.

45 The better view is that the Court should consider whether the cause of action asserted in the pleading, together with such evidence as is relied on in the application, demonstrates an arguable case for the relief which the proposed litigation would seek. Thus in Aliprandi, McLelland J (at 253) inquired as to whether there was an arguable case in support of the claims which the applicant wished to make, concluding that there was no arguable case except in one instance. He made his inquiry by reference to the material which was placed before the Court by the parties to the application, not by reference to a draft pleading. In Magarditch v Australia & New Zealand Banking Group Ltd (1999) 32 ACSR 367, 377, 383-4, the full Federal Court approved McLelland J’s formulation and also referred to Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550, 556-7 where it was said that an applicant for leave to proceed against a company in liquidation was required to satisfy the court that the claim had a solid foundation and would give rise to a serious dispute, although it was not necessary for the applicant to establish a prima facie case in the accepted sense. Although the test formulated in Vagrand is not quite the same as McLelland J’s test in Aliprandi, the full Federal Court’s view was that in practice it may be that there is very little to distinguish the two approaches. I respectfully agree.

46 A particularly relevant matter for the Court is the liquidator’s attitude. In Scarel Pty Limited v City Loan & Credit Corporation Pty Limited (1998) 12 ACLR 30 Gummow J at 733 held that the ordinary rule is that the liquidator is the appropriate person to decide whether the company should commence proceedings, subject to review under the statutory provis ions. He considered the authorities on this point and compared them with more general case law on exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. He said that when a company goes into liquidation, it is not appropriate to speak of exceptions to the rule in Foss v Harbottle which would take the carriage of the claim outside the winding up

47 In Partnership Pacific Ltd v Aliprandi Cole J (at 54) said that for the application to succeed, more must be shown than that the liquidator's position is protected by an indemnity. In particular, if the liquidator is of the view that the proposed litigation is soundly based, but he cannot pursue it because of absence of funds, a Court will be more disposed to permit proceedings by a contributory in the company's name than if the liquidator has decided that there is no reasonable foundation for the claim.

48 These two cases indicate that the Court is entitled to have the assistance of the liquidator in making its assessment as to whether an arguable case has been demonstrated, and that the Court will normally give weight to the liquidator’s view.

49 In addition to inquiring whether there is an arguable case or solid foundation for the proceedings, the Court needs to be satisfied that practical considerations support the initiation of the proceedings . The cases to which I have referred indicate that typically the applicant offers to indemnify the company in liquidation and the liquidator in respect of the proceedings, and to conduct the proceedings in such a fashion that liability to pay costs is undertaken by the applicant rather than the company to the extent that it is possible to do so. The Court will wish to be satisfied that the assets of the company in liquidation are not put at risk by the proceedings and that the liquidator is not exposed to personal liability without proper protection, and may also properly have regard to the risks which the litigation poses for the other party, given that the plaintiff is a company in liquidation, the assets of which are to be protected. To these ends, the Court may require that the person who conducts the litigation gives an indemnity supported by security for the benefit of the company and the liquidator, and perhaps also security for costs to protect the other party to the litigation. It may also be possible, as contended by counsel for the liquidator in the present case, for the Court to make an order permitting the liquidator to be excused from the proposed proceedings, in order to protect the liquidator from personal liability with respect to the proposed proceedings. But I doubt whether it would be appropriate to require the proposed receiver to provide a personal indemnity to the liquidator or the company in circumstances such as the present, notwithstanding Brownie J’s observations in somewhat different circumstances in Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587, 593.

50 The liquidator may derive some comfort from the observations of McLelland J in Aliprandi (at 253) to the effect that with a possible exception where the liquidator has been guilty of misconduct, there is no legitimate basis on which a costs order could be made against the liquidator personally in proceedings between the company and a third party to which the liquidator is not a party; and that there is no principle which would justify the making of an order for costs against a liquidator who is not a party where the use of the company's name in the relevant proceedings by some other person was authorised by the Court.

51 Those being the principles which govern an application to the Court for orders permitting a person, other than the company in liquidation or the liquidator, to commence proceedings in the company's name, are there any further or other principles which apply when the application is for the appointment of a receiver to pursue the litigation? This question was addressed by McLelland J in the series of cases, Pollnow v Garden Mews-St Leonards Pty Limited (1984) 9 ACLR 82; Garden Mews-St Leonards Pty Limited v Butler Pollnow Pty Limited (1984) 9 ACLR 91; Garden Mews-St Leonards Pty Limited v Butler Pollnow (No 2) (1984) 9 ACLR 117; and by the full Federal Court in Christianos v Aloridge Pty Limited (1995) 131 ALR 129.

52 In

the Butler Pollnow cases, McLelland J decided to make an order for the appointment of a receiver to conduct litigation on behalf of a company in provisional liquidation. He noted that such a course of action may be appropriate where the provisional liquidator is unwilling to sue and lacks assets to do so. In the circumstances of that case Mr Pollnow would have set up, by way of defence in the winding up proceedings to which he was a party, the substance of the matters which he wished the company to assert in the other proceedings to which he wished to join the company as a plaintiff. His Honour said (at 95):

‘If those matters are to be litigated in proceedings to be brought in the name of the company, it seems to me, as at present advised, likely that those proceedings and the winding up proceedings (or at least the common issues in them) would be heard together. The provisional liquidator cannot have the carriage for the company of any defence to the winding up proceedings ... and it would, therefore, be inappropriate for him to have the carriage for the company of proceedings raising similar issues which are heard together with the winding up proceedings.’

53 His Honour judged it to be appropriate to appoint Mr Pollnow as receiver of the company's chose in action so that it could be pursued. He said (at 95):

‘the court should not allow its processes to be used in a way which would erect procedural barriers or obstacles to the prosecution of these claims on behalf of the company, and the appointment of a receiver of the relevant causes of action (perhaps more accurately rights of action) with power to enforce the same in the name of the company is an appropriate means of avoiding procedural injustice.’

54 He noted that Mr Pollnow offered to assume liability for all legal costs incurred by the company in relation to the proposed proceedings and would give appropriate undertakings regarding his personal liability. In subsequent proceedings (9 ACLR 117) McLelland J decided that Mr Pollnow's appointment as receiver should be terminated, on the ground that he was not qualified to act as receiver having regard to s 323 of the Companies Code (now s 418 of the Corporations Law), but in reaching this conclusion he did not cast any doubt on the principle as to appointment of a receiver which he had enunciated at 9 ACLR 95.

55 In Christianos v Aloridge the full Federal Court applied the principles enunciated by McLelland J in Butler Pollnow, but concluded that the circumstances of the case before the Court did not justify the appointment of a receiver. This was because the company in provisional liquidation was the subject of an unopposed application for winding up and in the circumstances it was appropriate to leave the decision to pursue the claims to the liquidator, once appointed.

56 These cases demonstrate that the Court has the power to appoint a receiver in cases where it decides to permit proceedings to be commenced and prosecuted in the name of a company in liquidation by a person other than the liquidator. Although the appointment of a receiver should not be lightly ordered, the principles by reference to which the order may be made are partly the same as for an order that a creditor or contributory be authorised to take proceedings in the company's name. First, the Court must be satisfied that there is an arguable case or solid foundation to support the relief which the proposed proceedings seek and, secondly, the Court must be satisfied of the practical considerations to which I have referred, relating to protection of the assets of a company in liquidation, the liquidator's personal position and the position of the other party to the proposed proceedings.

57 The cases with respect to receivership demonstrate that an additional consideration is whether, if the liquidator cannot or will not take proceedings, the appointment of a receiver is a mechanism to be preferred to other alternatives which may be available in the circumstances. They suggest that the appointment of a receiver is most likely to be appropriate where the liquidator is prevented from doing so, by some good reason such as the one explained by McLelland J in Butler Pollnow.

58 The Commissioner submits that no case has been decided in which a receiver has been appointed to a cause of action which concerns the liquidation itself. That may be so, but in this case the proposed cause of action does not challenge the validity of the winding-up order; instead it seeks damages in respect of the Commissioner’s conduct in applying for the order and failing to disclose the compromise agreement to the Court. I see no reason in principle why such a cause of action could not be maintained by a receiver in a proper case.”

65 None of the counsel appearing on the applications the subject of this judgment put any submissions to the effect that Austin J had in Cadima misstated any of the general principles. Some questions do however arise with respect to the proper construction of sections 236 and 237 of the Corporations Act.

Sections 236 and 237 of the Corporations Act

66 Section 236 is in the following terms:

“

Section 236 Bringing, or intervening in, proceedings on behalf of a company

1. A person may bring proceedings on behalf of a company , or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:

(a) the person is:

(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or

(ii) an officer or former officer of the company; and

(b) the person is acting with leave granted under section 237.

2. Proceedings brought on behalf of a company must be brought in the company’s name.

3. The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.”

67 Section 237 is in the following terms:

“

Applying for and granting leave

(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

(2) The Court must grant the application if it is satisfied that:

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and

(c) it is in the best interests of the company that the applicant be granted leave; and

(d) if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and

(e) either:

(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.

(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:

(a) the proceedings are:

(i) by the company against a third party; or

(ii) by a third party against the company; and

(b) the company has decided:

(i) not to bring the proceedings; or

(ii) not to defend the proceedings; or

(iii) not to discontinue, settle or compromise the proceedings; and

(c) all of the directors who participated in that decision:

(i) acted in good faith for a proper purpose; and

(ii) did not have a material personal interest in the decision;

and

(iii) informed themselves about the subject mater of the decision to the extent they reasonably believed to be appropriate; and

(iv) rationally believed that the decision was in the best interests of the company.

The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.

(4) For the purposes of subsection (3):

(a) a person is a third party if:

(i) the company is a public company and the person is not a related party of the company; or

(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company.

(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.”

68 The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill of 1998 which led to the enactment of Part 2F.1A dealing with "Proceedings on behalf of a company by members and others," included the following:

“ Proposed Part 2F.1A – Proceedings on behalf of a company and others

6.11 In recent years, a number of reports have recommended the introduction of a statutory derivative action to enable an individual shareholder to bring an action on behalf of a company for a wrong done against the company, where the company is unwilling or unable to do so……

Current position

6.14 Shareholder derivative proceedings may currently be pursued at common law under the so-called exceptions to the rule expounded in Foss v Harbottle that the company is the proper plaintiff for wrongs done to it. However, a number of practical and legal difficulties regarding the operation of the exception have meant that very few derivative actions have proceeded.

6.15 The main difficulties associated with the common law action centre around:

· the effect of ratification of the impugned conduct by the general meeting of shareholders (if effective, the purported ratification by a majority of shareholders could deny the company as a whole, and hence minority shareholders, any right of action against the directors);

· the lack of access to company funds by shareholders to finance the proceedings (where a shareholder seeks to enforce a right on behalf of a company, they are likely to be disinclined to risk having costs awarded against them in a case which will ultimately benefit the company as a whole, not just individual shareholders); and

· the strict criteria which need to be established before a Court may grant leave.

6.16 Appropriate checks and balances will be provided in the legislation to prevent abuse of the proceedings and to ensure that company managements are not undermined by vexatious litigation and that company funds are not expended unnecessarily.

6.17 In summary, the proposed statutory derivative action will allow an eligible applicant, which will include shareholders and directors, to commence proceedings on behalf of a company where the company is unwilling or unable to do so. Proceedings could be commenced in respect of wrongs done to the company and the company would benefit from successful actions……

No right of action except as provided in this part

6.23 The common (general) law derivative rights under the exceptions to the ‘proper plaintiff’ rule in Foss v Harbottle will be abolished. This is designed to promote certainty regarding the nature of the action and avoid confusion between any diverging principles relating to the statutory action and the common law action (proposed subsection 236(3).

6.24 However, the common law personal action exception to the rule in Foss v Harbottle will remain, since under this action a member is not bringing or intervening in proceedings on behalf of the company (proposed section 236 note 3)…..

Criteria for granting leave

6.31 The Court will be required to grant leave if the following five criteria have been satisfied;

· inaction by the company (proposed paragraph 237(2)(a);

· the applicant is acting in good faith (proposed paragraph 237(2)(b);

· the action appears in the best interests of the company (proposed paragraph 237(3)(c);

· there is a serious question to be tried (proposed paragraph 237(2)(d); and

· the applicant gave written notice to the company of the intention to apply for leave, and of the reasons for applying, at least 14 days before making the application, or circumstances are such that it is appropriate to grant leave in any case (proposed paragraph 237(2)(e).

6.32 These criteria are aimed at preventing potentially vexatious or unmeritorious actions that would be detrimental to the company on whose behalf the action was taken. The criteria are based on recommendations of the CSLRC and were endorsed by CASAC and the House of Representatives Standing Committee on Legal and Constitutional Affairs……

Applicant’s good faith

6.36 In assessing whether an applicant is acting in good faith, the Court could be expected to have regard to whether:

· there was any complicity by the applicant in the matters complained of; and

· the application is being made in pursuit of an interest other than that of the company.

6.37 The good faith requirement is designed to prevent proceedings being used to further the purposes of the applicant, rather than the company as a whole.”

69 It seems clear that the legislature had no intention of removing the well-established inherent power of the Court to permit proceedings to be taken in the company's name where a company was in liquidation [See Aliprandi v Griffith Vinters Pty Ltd(in liq) (1991) 6 ACSR 250; Wenham v General Credits Ltd (16 December 1998, Supreme Court of New South Wales unreported]. An application in this regard might be made to the Court to give a direction to the liquidator to take such proceedings. Another approach to the same end, would be for the Court simply to order that a particular creditor or contributory be authorised to use the company's name in taking the proceedings.

70 The matter that the legislature sought to address appears to have been the difficulties which had arisen when under the common law, a party sought to proceed on the basis of an exception to the rule in Foss v Harbottle. The intention behind the enactment of sections of 236 and 237 appears to have been to avoid confusion in that regard and to codify that form of entitlement and right of action. The Explanatory Memorandum gave no attention whatsoever to questions involving the jurisdiction of the Court to permit actions to be taken in the name of a company in liquidation. As has already been seen, this jurisdiction is grounded upon the same principle on which a person could always have filed a bill in the old Court of Chancery against his or her trustee to be allowed to use his or her name to recover the trust property.

71 As there was ultimately no submission but that the Court had the power to make orders in terms of the applications pursued by Mr Mead, I proceed upon the basis that the Court ought, as in any event and prior to the enactment of section 237 had been the case, to closely consider the matters identified in subsection 2 (a)-(d) as well as all of the facts and circumstances in determining the applications. An important fact and circumstance is the fact of the liquidation and of course, the evidence as to the liquidator's position in relation to Mr Mead's quest to have the company make the appropriate application for leave to set aside the default judgment and to participate in the Common Law proceedings, inter alia by pressing the proposed second cross-claim. Whilst for the reasons set out below I incline to the view that section 237 is simply inapplicable to a company which is in liquidation it is unnecessary to decide the matter as the Court’s power to make the same orders under its inherent jurisdiction is conceded by all parties.

72 Although it is unnecessary in the way in which the applications were argued for the Court to determine whether section 236 (3) should be construed as excluding the above described inherent jurisdiction I am clearly of the view that such a construction is incorrect. The subsection simply does not address the Court’s inherent jurisdiction to permit actions to be taken in the name of a company in liquidation.

73 There are clear indications within section 237 to the effect that the section does not extend to and does not contemplate, circumstances in which the subject company on behalf of which an application for leave to bring proceedings or to intervene in proceedings is made, is a company in liquidation. The rebuttable presumption the subject of section 237 (3) contemplates the directors participating in a decision by the company not to bring the proceedings or not to defend the proceedings or not to discontinue, settle or compromise the proceedings. Where a company is in liquidation the directors cannot participate in such a decision. Where a company is in liquidation the scheme of the Corporations Act is that it is the liquidator who is the appropriate party to determine whether proceedings should be brought on behalf of a company or whether any particular step should be taken on behalf of the company in relation to any proceedings. Absent some exceptional leave of the court, while a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company except as a liquidator appointed for the purposes of the winding up; or as an administrator appointed for the purposes of an administration of the company beginning after the winding up order was made; or with the liquidator's written approval; or with the approval of the Court [section 471A(1)]. Hence, as far as directors are concerned, they are unable to exercise their powers except where they obtain either the approval of the liquidator or the approval of the Court. The manner in which the subsection refers to a decision "by the company" also does not suggest that there was an intention to refer to a decision by a liquidator on behalf of a company in liquidation.

Dealing with the applications

74 I have closely examined the pleadings and proposed pleadings in the Common Law proceedings with special reference to the terms of the amended statement of claim; the terms of the proposed defence of Hypec Electronics to that amended statement of claim; the terms of the second cross-claim proposed to be filed Hypec Electronics; and Mr Mead's defence to the amended statement of claim and his cross-claim. I have also examined the other pleadings in the Common Law proceedings. I have also examined the report by Mr McEwen part of exhibit A2 on the applications. I have also read the affidavits by Mr Mead which were relied upon during the course of the making of the applications. I have also read the other affidavits read on the applications.

75 The material presently before the Court does suggest at least the real possibility of it being established that during the relevant period, Hypec Electronics made a substantial overpayment in relation to goods said to have been sold and delivered by BL to Hypec Electronics. My examination of the materials has permitted me to go beyond the pleadings. The claims sought to be litigated by Hypec Electronics appear at least on the materials and evidence adduced on the applications, to have a solid foundation in terms of giving rise to a serious dispute. Furthermore, real questions appear to be raised as to the part played by Ms Mead in relation to the trading activities of Hypec Electronics and to the part played by Ms Yang on behalf of BL in relation to its trading activities with Hypec Electronics. These questions appear to be necessarily closely interrelated with whether or not it is ultimately established that during the relevant period Hypec Electronics made such a substantial overpayment to BL. Whether the material presently before the Court will ultimately withstand the heat of litigious contest is of course another matter, this being precisely the approach taken by McLelland J (as His Honour then was) in Wenham v General Credits Ltd [unreported, 16 Dec 1988-Butterworths Unreported Judgments-BC 8801203].

76 It seems to me that when one adds into the equation:

(1) the questions raised by Mr Mead in his affidavits as to the circumstances in which the registered office of Hypec Electronics was changed in December 1997 to an address which was the personal and business address of Ms Mead;

(2) the general circumstances in which the liquidator was appointed without Mr Mead being aware of the winding up application or of the service of the Creditor's Statutory Demand;

(3) the questions raised as to the de facto control of Hypec Electronics and of the companies which apparently took over from it as earlier stated;

(4) the circumstance that at least on the evidence presently before the court, a number of members of the family of Ms Mead have had an involvement or association with several of the corporate entities -there being a live question which may be litigated as to whether or not Ms Mead authorised Ms Yang to commence the common law proceedings [see paragraphs 9-11 of Mr Mead’s affidavit of 26 July 2001]; and

(5) the Family Court proceedings and their effect in preventing Mr Mead presently from being in a position to offer security to support his offer to indemnify Hypec Electronics against any liability for costs arising out of the proposed applications to set aside the default judgment in the common law proceedings and which may be incurred in relation to the prosecuting of the cross-claim in the common law proceedings;

77 Mr Mead has to my mind established that the claims sought to be made in the name of Hypec Electronics are made by him in good faith and are far from being hopeless. A proper evidentiary foundation for the overpayment claims appears to have been laid. If that cause of action be proven during the hearing then serious questions as to the alleged breaches of fiduciary obligation and participation in such breaches are clearly raised and it seems to me ought not be regarded as hopeless on the evidence adduced before the Court on the applications.

78 I accept that ordinarily the course for Mr Mead to attempt to procure a court order by way of a direction to the liquidator to seek leave to have the default judgment against Hypec Electronics set aside and to permit Hypec Electronics to litigate the claims made against it in the common law proceedings and sought to be pressed by it in its cross-claim, is the preferable course for the reasons identified in Scarel. However, it seems to me that the alternative course which Mr Mead presses namely that he be authorised to sue in the name of Hypec Electronics, is appropriate in the present context. I note in this regard that in Wenham, McLelland J recognised that the contemplated proceedings would not be in the name of the company alone but as co-plaintiff with others and that it was clear that in practical terms the conduct of the litigation would be in the hand of those others. Precisely the same position exists here where Hypec Electronics, if the default judgment is set aside, will be in the position in which the main proceedings are pursued against both the company as well as Mr Mead, and in respect of which Mr Mead as a practical matter, will have the conduct of the defence on behalf of himself as well as the company. Generally and as a practical matter, the same position obtains with respect of the proposed second cross-claim-see the allegations made in the first cross-claim. There is however a particular matter in respect of which the Court has a real concern relating to the apparent conflict in terms of the relief sought by the first cross-claim and the relief sought by the second cross-claim. The matter is dealt with below.

79 There is of course a significant difference as between the circumstances that were before Gummow J in Scarel and the present circumstances. The position in Scarel was that the liquidator's decision as to the termination of the proceedings had already been tested in the Companies Court where Bryson J had dismissed an application for the liquidator to be directed to carry on the Federal Court proceedings, so that in effect the nature of the application before Gummow J was to outflank that result. The position presently before the Court is that instead of approaching the Companies Court, Mr Mead has directly applied for leave to use the company's name as earlier indicated.

80 In his affidavit of 13 August 2001, Mr Watson has deposed that he is considering whether he would be prepared as liquidator of Hypec Electronics, to defend and/or take responsibility for the Common Law proceedings on behalf of Hypec, including applying to the Court to set aside the judgment against Hypec in those proceedings. He has deposed that his consideration is incomplete as at the date of swearing that affidavit. The reasons for this are put in the following terms:

· Mr Watson authorised his solicitors to interview Ms Mead in the presence of her attorney and two of his representatives on 7 August 2001. In the course of that interview, Ms Mead responded to questions prepared by BL and by Mr Mead's respective legal representatives. Ms Mead undertook to prepare detailed answers to issues raised by Mr Mead in exhibit CAM-1 to his affidavit made on 3 July 2001 in the common law proceedings. Ms Mead indicated that she would provide her detailed response to those matters by 10 August 2001. As at 13 August 2001, Mr Watson was still awaiting Ms Mead's response.

· Mr Watson has been invited through his legal representatives to discuss the matters raised in exhibit CAM-1 with the expert witness for Mr Mead namely Mr McEwen. Mr Watson wishes to have a discussion with Mr McEwen once he has had the benefit of Ms Mead's own response to the matters raised in the exhibit.

· Until Mr Watson has had the benefit of Ms Mead’s and Mr McEwen's respective input he does not believe that he is yet in a position to fairly assess whether he would be prepared to cause Hypec to take any further part in the common law proceedings.

· Mr Watson expects to be in a position to make such an assessment within a day or so of receiving Ms Mead's and Mr McEwen's input, which he estimates would be sometime during the course of this current week.

· Mr Watson has informed the court that if he is satisfied that there is a fair prospect on the evidence that Hypec will succeed in the defence and cross-claim proposed by Mr Mead or any other defence-and at the time of making his affidavit he had not yet formed that view-provided Mr Mead paid all costs of preparation and conduct, and provided an effective indemnity for Mr Watson as liquidator against any adverse costs order, he would be prepared to file a motion seeking to set aside the judgment against Hypec in the common law proceedings.

· Mr Watson takes the view that Mr Mead's proposed provision of an indemnity for costs of the common law proceedings is unsatisfactory. That proposal was for Mr Mead to undertake to indemnify Mr Watson as liquidator and the company against any liability for costs arising out of the proposed application to set aside the judgment and to prosecute the cross-claim in the name of the company. In this regard Mr Watson has referred to the interim property proceedings.

· Mr Watson has an apprehension that the matrimonial property which Mr Mead wishes to sell for the purpose of funding of the common law proceedings may, in whole or in part, comprise assets properly belonging to Hypec. Upon this basis, Mr Mead would be offering to indemnify Hypec with its own moneys. In any event, Mr Watson's view as at the date of making his affidavit of 13 August 2001, was that he could not accept as a likelihood that the Family Court would order a sale of assets to permit Mr Mead to conduct the common law proceedings.

· Mr Watson would not be prepared to take on stability for the Common Law proceedings on behalf of Hypec without a satisfactory indemnity for costs. It seems probable that he would also apply for security for costs to support such an indemnity. [Affidavit paragraph 10]

81 The salient consideration it seems to me is the matter referred to in the last bullet point.

82 Mr Mead has clearly established through his oral evidence that he is unable to provide any such security. His evidence was that he is currently working in a business called Microtech Corporation; that his income from that company is approximately $5,200 per annum; that he draws $100 a week from his salary; that he has a de facto partner who also works in the business and who also supports their joint financial needs; that his only liquid asset is the sum of $1200 held in the St. George Bank; and that his indebtedness to his present solicitors in respect of legal fees incurred in the Family Court proceedings, in the common law proceedings and in these proceedings is large, one particular part of it being $350,000. In those circumstances, on the evidence presently before the Court, the liquidator will not make the applications which Mr Mead requests in terms of the company seeking leave to participate in the Common Law proceedings.

83 Ms Sofroniou certainly did submit that paragraph 10 of Mr Watson’s affidavit required to be read in the light of the fact that as at the time he had made that affidavit, and indeed as at the time of the hearing of the applications, Mr Watson had simply not been able to assess the merits of the proposed applications which Mr Mead was seeking that the company take in terms of becoming involved in the Common Law proceedings. Indeed the position during the course of the applications being heard was that Ms Sofroniou stated from the bar table that certain additional materials had now come forward to the liquidator who should be in a position during the following week to better assess his position. No application to adjourn the hearing was however made.

84 In those circumstances the court is in a position to determine the applications on the evidence and to my mind Mr Mead has made good the proposition that the court should grant the applications.

85 I am satisfied that it is probable that on the evidence adduced on the hearing of the applications, the company will not itself bring the proceedings or properly take responsibility for them or for the steps in them and this by reason of Mr Watson’s evidence earlier referred to.

86 As already stated, I am satisfied that Mr Mead is acting in good faith.

87 Subject only to the matter dealt with below and going to the apparent conflict between the relief sought by the first cross-claim and the relief proposed to be sought by the second cross-claim, I am satisfied that it is in the best interests of the company that Mr Mead be granted the leave he seeks.

88 I am satisfied that there are serious questions to be tried of the nature earlier referred to.

89 Insofar as the question of good faith is concerned all of the facts matters and circumstances require to be taken into account. There are no obvious indicia of mala fides. There are no indications that Mr Mead is acting otherwise than in good faith both in pursuing the allegations made in the pleadings presently filed on his behalf as well as in pursuing his quest for Hypec Electronics to pursue the allegations sought to be made in the proposed pleadings sought to be filed its behalf.

90 Insofar as the best interests of Hypec Electronics are concerned it seems to me that there is substance in the submissions put on Mr Mead’s behalf in paragraphs 31 and 32 above. Likewise it seems to me that there is substance in the submissions put on Mr Mead's behalf as set out in paragraphs 41, 42, 43, 44 and 45 above. Insofar as the liquidator's counsel has put forward the possibility that the liquidator administering the company (but for the chose in action) and Mr Mead would be placed directly at loggerheads in terms of the day-to-day conduct of the company's affairs in circumstances where Mr Mead is himself a potential target for recovery proceedings, it seems to me that the far more potent and significant consideration concerns the basal question of whether or not the company in liquidation has a very real asset which should be realised in the interests of all contributories and creditors if it exists. Questions of perspective require to be taken into account. And in the same way, the fact that Mr Mead in being entitled to pursue the company's interests in the Common Law proceedings would have indirect interests which on one view may be regarded as antithetic to the interests of Ms Mead, must surely also be seen from another very important viewpoint, this being that qua her interest as a fellow contributory, the two interests are precisely in line with one another.

91 To the extent that counsel for the liquidator submitted that there may be other creditors apart from BL, it seems to me that this should be regarded as extremely unlikely as on the evidence Hypec Electronics ceased to trade within Australia some 9 years ago and ceased to trade at all in about November 1996 [See the reasoning put by Mr Fagan at transcript page 85].

92 It seems to me also important to take into account the terms of the letter of 2 December 1996 from the accountants O'Neill and O’Brien Pty Ltd, (accountants said to have acted for Mr Mead, Ms Mead and their companies) addressed to Ms Mead and which refers to a 'related party debt' owing by C and L Mead to Hypec Electronics in the sum of $2,856,804. This document gives some room for the suggestion put by Mr Fagan that it is misconceived for Mr Bell to submit on behalf of BL that Mr Mead has only brought the present applications in an endeavour to try to restrict the liquidator from recovering the debt.

93 Insofar as the question of the costs of Hypec Electronics in relation to the Common Law proceedings are concerned the fact is that the indemnity offered by Mr Mead ought not necessarily be regarded as worthless. On the evidence, Mr Mead’s personal financial position is so tied up with the prospects of success by the company in the Common Law litigation and/or by the net result in the Family Court proceedings that the Court ought not infer that the indemnity is writ in water or worthless.

94 Insofar as the serious questions to be tried are concerned, these are clear at least from the evidence adduced before the Court on the instant applications. They extend to a serious question that it is very arguable that leave would be granted for the hearing of an application to set aside the default judgment and that there is a real possibility that the default judgment would be set aside. This matter must of course await a contested application in this regard to be determined upon the then evidence by a Common Law judge.

95 There is then the question of whether Mr Watson may by the end of this current week be in a position to further clarify on an informed basis, some different position, or at least to make clear the net result of his investigations inter alia as to the prospects of success on an application by the company to participate in the Common Law proceedings in the manner requested by Mr Mead. It seems to me that it is not appropriate for the Court, having heard the applications and having heard the evidence on the applications, to now await receipt of the result of Mr Watson’s further deliberations and/or legal advice. Those deliberations whether or not aided by such advice will now have to take into account this judgment and the orders proposed to be made following delivery of this judgment. In the seemingly unlikely event that Mr Watson, following his further investigations, determines that the approach identified in paragraph 10 of his affidavit of 13 August should be altered, then it is possible that an application for the Court to vacate its orders would be pursued by the liquidator and evidence to that effect may be adduced. These matters are sufficiently inchoate or unclear to warrant the Court not holding its hand in now delivering judgment on the applications and on the evidence adduced on the hearing of the applications.

The apparent conflict between the relief sought by the first cross-claim and the relief proposed to be sought by the second cross-claim

96 During the submissions, some attention was paid to the fact that the relief sought by Mr Mead in the first cross-claim seems to be inconsistent with the relief proposed to be sought by the second cross-claim. A close examination of these pleadings suggests that the primary claim and quite probably the only claim in law against Ms Mead for breaches of fiduciary duty is a claim which may be made by Hypec Electronics and not by Mr Mead. Likewise the high likelihood is that the only claim permissible to be made against Ms Yang and against BL for participation in the alleged breaches of fiduciary duty by Ms Mead is a claim which may be made by Hypec Electronics and not by Mr Mead.

97 Mr Mead's counsel appeared to recognise these difficulties at transcript page 21 where Mr Fagan indicated that that if Mr Mead was allowed to conduct the proceedings in the company name, he would undertake to the Court to pursue as his primary objective in the litigation the company's cross-claim for $1.3 million and would not prefer his own cross-claim and that he would provide to the Common Law judge a copy of the order and a note of the undertaking so that it would be seen that he was pursuing the interests of the company first in the Common Law proceedings. Mr Fagan appeared to accept that the primary claim would be that of the company. To my mind, the proposed undertakings would be impossible to police and in any event it is simply inappropriate to permit Mr Mead to represent the company in pursuing the proposed second cross-claim, if the first cross-claim is also to be pursued. In the result, it seems to me that the grant of the relief now sought by Mr Mead should be conditioned upon an undertaking that should a Common Law judge set aside the default judgment and grant leave to the company to defend the proceedings and to pursue the second cross-claim, Mr Mead would consent to his own first cross-claim being permanently stayed.

Short Minutes of Order

98 Mr Mead has succeeded in terms of the Court holding as it does, that he ought have leave to intervene in the Common Law proceedings. Short minutes are to be brought in by his counsel. The short minutes will require to deal with undertakings relating to the first and second cross-claims referred to above where Mr Mead will be obliged to undertake to the Court that in a particular event he will consent to his first cross-claim being permanently stayed. The appropriate order will simply be to give leave to Mr Mead to intervene in the common law proceedings for the purpose of the matters identified in paragraphs 1.1 - 1.5 of the notice of motion.

99 Costs are reserved and submissions will be entertained in that regard.

I certify that paragraphs 1 – 99
are a true copy of the reasons
for judgment herein of the
Hon. Justice Einstein
given on 21 August 2001

Susan Piggott

Associate

Last Modified: 09/20/2001

CITATION:	BL & GY International Co. Ltd v Hypec Electronics Pty Ltd; Colin Anthony Mead v David Patrick Watson & Ors. [2001] NSWSC 705
FILE NUMBER(S):	SC 1933/01; 3832/01
HEARING DATE(S):	17/08/2001
JUDGMENT DATE:	21 August 2001
PARTIES :	BL & GY International Co. Ltd (Plaintiff) Hypec Electronics Pty Ltd (Defendant) Colin Anthony Mead (Plaintiff) David Patrick Watson - Liquidator (Defendant) BL & GY International Co. Ltd (Defendant)
JUDGMENT OF:	Einstein J

COUNSEL :	Mr DJ Fagan SC, Mr V Bedrassin (Colin Mead) Mr SL Bell (BL & GY International Co. Ltd) Ms R Sofroniou (David Patrick Watson - Liquidator)
SOLICITORS:	Etheringtons Solicitors (Colin Mead) Ian B Mitchell (BL & GY International Co. Ltd) A R Connolly & Co. (David Patrick Watson - Liquidator)
CATCHWORDS:	Company Law-Winding up-Liquidators-Exceptions to rule in Foss v Harbottle- -Contributories motion to bring a derivative cross action and to be permitted to seek leave to set aside a default judgment and to conduct a derivative defence-Whether action may be brought or continued or defended by a contributory in the name of company if this is in the interests of justice-Whether any such a rule applies to companies in liquidation-Considerations applicable to control by the court of company in liquidation-Contributory authorised to use companies name as co- defendant and as cross claimant.
LEGISLATION CITED:	Corporations Act 2001 - Sections 236 & 237
CASES CITED:	Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250 Biposo Pty Ltd; Condon v Rodgers (No.3) (1995) 17 ACSR 730 Cadima Express Pty Ltd v Deputy Commissioner of Taxation (1999) 33 ACSR 527 Cape Bretton Co v Fenn (1881) 17 ChD 198 Christianos v Aloridge Pty Limited (1995) 131 ALR 129 Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 37 ACSR 465 Direct Acceptance Investments Pty Ltd v Blackwell (1995) 17 ACSR 89 Direct Acceptance Investments Pty Ltd v Blackwell (No. 2) (1995) 13 ACLC 1251 Evans v Bartlam [1937] AC 473 Foss v Harbottle (1843) 67 ER 189 Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd - (No.2) (1984) 9 ACLR 91 Garden Mews-St Leonards Pty Limited v Butler Pollnow Pty Ltd (1984) 9 ACLR 117 Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587 Re Laverton Nickel NL (1979) 3 ACLR 945 Re Lloyd (1879) 12 ChD 447 Lloyd-Owen v Bull (1936) 4 DLR 273 Magarditch v Australia & New Zealand Banking Group Ltd (1999) 32 ACSR 367 Mibor Investments Pty Limited v Commonwealth Bank of Australia (1993) 11 ACSR 362 Partnership Pacific Pty Limited v Aliprandi (1990) 4 ACSR 51 Phillips Oysters v National Australia Bank (Federal Court, unreported, 13 Nov 1992) Pollnow v Garden Mews-St Leonards Pty Limited (1984) 9 ACLR 82 Russell v Westpac Banking Corporation (1994) 13 ACSR 5 Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 17 FCR 344 Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550 Re Van Loun Ex parte Pattullo [1907] 1 KB 155 Wenham v General Credits Ltd [unreported, 16 December 1988-Butterworths Unreported Judgments-BC 8801203]
DECISION:	Application for leave to bring derivative action to be granted - short minutes to be brought in.