Commonwealth v Davis Samuel Pty Ltd (No 5)
[2008] ACTSC 124
•14 March 2008
COMMONWEALTH OF AUSTRALIA v DAVIS SAMUEL PTY LTD [NO 5]
[2008] ACTSC 124 (14 March 2008 and 23 May 2008)
CORPORATIONS – Winding up – incidents of – proceedings against company in liquidation – leave to proceed – principles for grant of leave – leave granted nunc pro tunc – Corporations Act 2001 (Cth) s 471B.
Corporations Act 2001 (Cth), s 471B
Corporations Act 1989 (Cth)
Bankruptcy Act 1966 (Cth)
Court Procedures Rules 2006 (ACT)
Acton Engineering Pty Ltd v Campbell (1991) 31 FCR 1
Sydlow Pty Ltd (In Liquidation) v T G Kotselas Pty Ltd and Ors (1996) 65 FCR 234
In re Phoenix Oil and Transport Co Ltd (No 2) [1958] Ch 565
Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314
Thomson v Mulgoa Irrigation Co Ltd (1894) 4 BC(NSW) 33
Re Clarke; Ex parte Clarke (1896) 17 LR (NSW) B & P 85
Re Sydney Formworks Pty Ltd (In Liquidation) [1965] NSWR 646
Vagrand Pty Ltd (in liquidation) v Fielding and Ors (1993) 41 FCR 550
Nommack (No 100) Pty Ltd v FAI Insurances Ltd (in liq) (2003) 45 ACSR 215
Re Addstone Pty Ltd (in liq); Ex parte Macks (1998) 30 ACSR 162
Maher v Taylor [1984] 1 NSWLR 231
Re Summit Design & Construction Pty Ltd (1999) 33 ACSR 301
Stewart v Leppage (1916) 53 SCR 337
Pace Tasmania Pty Ltd (in liquidation) v FAI General Insurance Co Ltd (provisional liquidator appointed) (2001) 10 Tas R 276
Buckingham and Ors v Pan Laboratories (Australia) Pty Ltd (in liq) (2004) 136 FCR 102
Bell v Amberday Pty Ltd and Anor (2001) 39 ACSR 25
Civil & Civic Pty Ltd v R W Bass Pty Ltd (1996) 20 ACSR 16
Re Aro Co Ltd [1980] Ch 196
Meehan and Anor v Stockmans Australian Café (Holdings) Pty Ltd and Anor (1996) 22 ACSR 123
Ibbco v HIH (2001) 19 ACLC 1,093
Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors (2003) 45 ACSR 224
King and Ors v Yurisich and Ors (2006) 59 ACSR 598
Morrison-Gardiner v Car Choice Pty Ltd [2005] 1 Q d R 378
Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409
Oshlack v Richmond River Council (1998) 193 CLR 72
R v The Judges of the Federal Court of Australia and Anor; Ex parte The Western Australian National Football League (Incorporated) and Anor (1979) 143 CLR 190
Witten v Lombard Australia Ltd [1968] 2 NSWR 529
Re A J Benjamin Ltd (in liq) (1969) 90 WN(Pt1) (NSW) 107
Capita Financial Group Ltd v Rothwells Ltd (1989) 15 ACLR 348
Zempilas and Ors v J N Taylor Holdings Ltd (in prov liq) and Ors (No 3) (1991) 55 SASR 108
Fielding & Anor v Vagrand Pty Ltd (in liq)& Ors (1992) 39 FCR 251
O D Transport (Australia) Pty Ltd (in liq) v O D Transport Pty Ltd (1997) 80 FCR 290
Hall v Mercury Information Technology (South Australia) Pty Ltd (2002) 20 ACLC 496
Rousseau Pty Ltd (in liq) v Jay-O-Bees Pty ltd (in liq) (2004) 50 ACSR 565
H P Mercantile Pty Ltd v Australian Rural Group Ltd (in liq) [2005] NSWSC 895
Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245 King v Peters [2007] NSWSC 200
Tolhurst Druce & Emmerson v Maryvell Investments Pty Ltd (in liq) [2007] VSC 271
Ex parte Walker (1982) 6 ACLR 423
Speiser and Anor v Locums Financial Management Pty Ltd (1996) 22 ACSR 478
Re Coastal Constructions Pty Ltd (in liq) (1994) 13 ACSR 329
Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (in liq) (1993) 11 ACSR 516
Pitt-Owen v Lenin (2006) 24 ACLC 964
Re David Lloyd & Co; Lloyd v David Lloyd & Co (1877) 6 Ch D 339
Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002
J J Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (in liq) (1986) 11 ACLR 224
Thames Plate Glass Co v Land and Sea Telegraph Construction Co (1871) 6 Ch App 643
Re Pacaya Rubber and Produce Co Ltd [1913] 1 Ch 218
Re Southern Cross Coaches Ltd (1932) 49 WN(NSW) 230
Re Autolook Pty Ltd; O’Brien v Bills (1984) 2 ACLC 30
Re Berkeley Securities (Property) Ltd [1980] 3 All ER 513
Battiston v Maiella Construction Co Pty Ltd [1967] VR 349
Re Testro Bros Consolidated Ltd [1965] VR 18
Emanuele and Anor v Australian Securities Commission and Ors (1997) 188 CLR 114
Muir v The Queen [2003] ACTCA 2
R v Muir (Unreported, ACTSC, Reasons for Sentence, Gray J, 25 September 2001)
Barnes v Addy (1874) 9 LR Ch App 244
Australian Securities and Investments Commission v Hallmark Gold NL and Ors [1999] FCA 360
Raffles Pty Ltd (in liq) v Cotis [1971] VR 637
McLean v Burns Philp Trustee Co Pty Ltd and Ors (1985) 2 NSWLR 623
BHG Nominees Pty Ltd v Ellis Young Investments Pty Ltd (1998) 16 ACLC 1539
Re H B Harvey (1972) CLR ¶40-051
Wyley v Exhall Coal Mining Co Ltd (1864) 33 Beav 538; 55 ER 478
REASONS FOR JUDGMENT
No. SC 75 of 1999
Judge: Refshauge J
Supreme Court of the ACT
Date: 14 March 2008
IN THE SUPREME COURT OF THE )
) No. SC 75 of 1999
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN:COMMONWEALTH OF AUSTRALIA
Plaintiff
AND:DAVIS SAMUEL PTY LTD
ACN 083 081 984
First Defendant
AND:DAVID JOHN MUIR
Second Defendant
AND:CALLFORM PTY LIMITED
ACN 072 099 668
Third Defendant
AND:PETER MICHAEL CAIN
Fourth Defendant
AND:ALLAN PAUL ENDRESZ
Fifth Defendant
AND:CTC RESOURCES NL
ACN 009 061 036
Sixth Defendant
AND:JOZSEF ENDRESZ
Seventh Defendant
AND:DAWN MAY ENDRESZ
Eighth Defendant
AND:WILLIAM ARTHUR FORGE
Ninth Defendant
AND:KAMANGA HOLDINGS PTY LTD
ACN 003 316 292
Tenth Defendant
AND:PELLON PTY LTD
ACN 082 375 951
Eleventh Defendant
AND:MICHAEL McCANN
Twelfth Defendant
AND:AMATIVE PTY LTD
ACN 082 375 924
Thirteenth Defendant
AND:MARK JOSEPH ENDRESZ
Fourteenth Defendant
AND:BISOYA PTY LTD
ACN 003 016 242
Fifteenth Defendant
AND:WINTON OIL NL
ACN 001 863 878
Sixteenth Defendant
AND:QUANCORP PTY LTD
ACN 002 755 133
Seventeenth Defendant
AND:ALLAN PAUL ENDRESZ as representative of the members of ‘BORDER BASKETBALL ASSOCIATION INC’ an unincorporated association
Eighteenth Defendant
AND:RODNEY JAMES ENDRESZ
Nineteenth Defendant
AND:JOY BEVERLEY ENDRESZ
Twentieth Defendant
AND:TRESMONAY PTY LIMITED
ACN 073 120 635
Twenty-first Defendant
AND:ACT ORGANICS PTY LTD
ACN 008 628 662
Twenty-second Defendant
AND:GRAHAM McCANN PTY LTD
ACN 008 653 969
Twenty-third Defendant
AND:SANDRA ENDRESZ
Twenty-fourth Defendant
AND:LORRAINE OLIVE FORGE
Twenty-fifth Defendant
AND:CHRISTOPHER MUIR
Twenty-sixth Defendant
AND:TNG LIMITED
ACN 008 817 023
Twenty-seventh Defendant
AND:DARREN SMAILES
Twenty-eighth Defendant
AND:SHANE SMAILES
Twenty-ninth Defendant
AND:PETER JOHN CLARK
Third Party
REASONS FOR JUDGMENT
Among the 29 defendants sued in these proceedings commenced on 29 January 1999 by the plaintiff, the Commonwealth of Australia, are two companies which have been placed into liquidation: Kamanga Holdings Pty Limited (in liquidation) (“Kamanga”), and Quancorp Pty Limited (in liquidation) (“Quancorp”). Kamanga is the tenth defendant and Quancorp is the seventeenth defendant in these proceedings. The companies have both been wound up by a court, namely the Supreme Court of Western Australia, on 15 November 2001 and 6 September 2001 respectively. Under s 471B of the Corporations Act 2001 (Cth) (“Corporations Act”), the plaintiff is prohibited from continuing with these proceedings unless leave is granted by a court, which, as defined in s 58AA of the Corporations Act, includes this Court. It is not necessary for this application to be made to the Supreme Court of Western Australia: Acton Engineering Pty Ltd v Campbell (1991) 31 FCR 1 at 16; Sydlow Pty Ltd (In Liquidation) v T G Kotselas Pty Ltd and Ors (1996) 65 FCR 234 at 241.
The plaintiff applied for leave to continue its proceedings against Kamanga and Quancorp and the twenty-seventh defendant, TNG Limited (formerly Hallmark Gold NL), applied for leave to continue with its counter-claim (despite Div 2.6.7 of the Court Procedures Rules 2006 (ACT) described as a cross-claim) against Kamanga and Quancorp.
On 14 March 2008, I granted leave to the plaintiff to continue the proceedings against Kamanga and Quancorp subject to certain conditions commonly imposed in such circumstances. On 23 May 2008, I granted leave to the twenty-seventh defendant to continue its proceedings against Kamanga and Quancorp on similar conditions. These are my reasons for those orders.
The Law
Section 471B of the Corporations Act is in general terms. It provides:
While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:
(a)a proceeding in a court against the company or in relation to property of the company; or
(b)enforcement process in relation to such property;
except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
The section has its roots in the history of corporate regulation where, in the case of a winding up by the Court, the court is conducting the administration of the winding up and retains, subject to the relevant regulative provisions, a degree of control of that administration: In re Phoenix Oil and Transport Co Ltd (No 2) [1958] Ch 565 at 570-1.
The judgment of McPherson J in Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314 at 316 concisely sets out the history of the provision which is now s 471B of the Corporations Act up to the date of the judgment. Since then, I note that the Co-operative Scheme, exemplified in the Companies Codes referred to by his Honour, was replaced by the Corporations Act 1989 (Cth) which enacted what was called the Corporations Law. Section 471(2) of the Corporations Law replaced s 263(2) of the Companies Codes. In 1992, this sub-section was repealed and re-enacted as s 471B in the same terms. In 2001, the Corporations Act 1989 (Cth) and, of course, the Corporations Law were repealed and replaced by the Corporations Act which re-enacted s 471B as that section and in the same terms.
The current section and its predecessors, have been subject to considerable judicial comment, though it might perhaps be said that there is some unclarity surrounding the precise purpose of the provision. For example, McLelland CJ in Eq in Re Sydney Formworks Pty Ltd (In Liquidation) [1965] NSWR 646 said at 649-50:
This view is in keeping with what I consider to be the obvious intention of the section, namely, to ensure that the assets of the company in liquidation will be administered in accordance with the provisions of the Companies Act and that no person will get an advantage to which, under those provisions, he is not properly entitled, and to enable the Court effectively to supervise all claims brought against the company which is being wound up.
His Honour did, however, refer to Thomson v Mulgoa Irrigation Co Ltd (1894) 4 BC(NSW) 33, but at 33, Manning J said
All that s 140 [the relevant predecessor to s 471B of the Corporations Act] means is that a company in liquidation is not to be harassed and its assets wasted by unnecessary [litigation], and the leave of the Court is therefore required as a safeguard. Before any action can be brought or continued against a company, the Court must investigate the intended litigation. I therefore think that the Court has power to make an order granting leave nunc pro tunc …
The judgment refers to “unnecessary liquidation”, but it seems clear Manning J meant “litigation”.
These comments were adopted by A H Simpson J in Re Clarke; Ex parte Clarke (1896) 17 LR (NSW) B & P 85 at 89.
With a careful examination of the history and authorities, McPherson J (with whom W B Campbell CJ and Sheahan J agreed) said in Re Gordon Grant and Grant Pty Ltd, supra, at 316-7:
The precise purpose and function of provisions similar to s 230(3) [the relevant predecessor to s 471B of the Corporations Act] have seldom been explained. From time to time the suggestion has been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably amongst all creditors so that none of them will gain an advantage over others: see eg Re Sydney Formworks Pty Ltd [1965] NSWR 646, 649-50. But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well in some cases as unnecessary. This explanation has been accepted in a number of Canadian cases and appears also to have been adopted by Street J in Re A J Benjamin Ltd (1969) 90 WN (NSW) 107, 109. It is consistent with this that there should be no automatic prohibition upon proceedings against a company in members’ voluntary winding up, where the company is solvent and therefore less likely to be the target of numerous actions.
His Honour is, of course, as described by the Full Federal Court in Vagrand Pty Ltd (in liquidation) v Fielding and Ors (1993) 41 FCR 550 at 555, “a recognised authority on company law”, and as described by Burchett AJ in Nommack (No 100) Pty Ltd v FAI Insurances Ltd (in liq) (2003) 45 ACSR 215 at 221, “a distinguished authority in this area of the law”. Indeed, as a young lawyer entering insolvency practice, I frequently used as the essential vade mecum, the first edition of his Honour’s seminal work on the law of company liquidation.
Clearly, there can be multiple purposes: Re Addstone Pty Ltd (in liq); Ex parte Macks (1998) 30 ACSR 162 at 170-1. For example, as a gloss on the purpose enunciated by McPherson J, above, Hunt J in Maher v Taylor [1984] 1 NSWLR 231 referred to a further consideration that should be taken into account. His Honour noted at 235:
If the proceedings are continued, the liquidator must elect either to expend the company’s assets in defending them or to allow the plaintiff’s claim to go by default. If the proceedings went by default, although the rights of the creditors would be protected, there could in most cases be a considerable effect upon the rights of the company itself and of its shareholders to the eventual return of their funds invested in the company. In those cases it may often be quite inappropriate for the liquidator to allow the plaintiff’s claim to go by default.
The suggestion, from Re Sydney Formworks Pty Ltd (in liquidation), supra, that the purpose of the provision is to prevent a creditor from obtaining an advantage over other creditors is not one that withstands scrutiny. In the first place, as McPherson J points out in the passage quoted above, neither the commencement of proceedings nor the entry of judgment will normally confer an advantage on a creditor. This is, it must be accepted, possible in certain circumstances: Re Summit Design & Construction Pty Ltd (1999) 33 ACSR 301 at 304-5. It cannot, however, be the purpose or even the major purpose of the provision. Secondly, the prohibition is not directed only at proceedings by creditors, but includes proceedings by shareholders and others: Stewart v Leppage (1916) 53 SCR 337 at 351. Finally, as McLelland, CJ in Eq, pointed out in Re Sydney Formworks Pty Ltd (in liquidation), supra, at 651, any alleged priority gained by such proceedings can be qualified by the imposition of conditions on the grant of leave.
Nevertheless, this view of the purpose of the provision seems to persist: Pace Tasmania Pty Ltd (in liquidation) v FAI General Insurance Co Ltd (provisional liquidator appointed) (2001) 10 Tas R 276 at 279; Buckingham and Ors v Pan Laboratories (Australia) Pty Ltd (in liq) (2004) 136 FCR 102. The fundamental principle of rateable distribution between creditors of a company in liquidation is certainly not an irrelevant matter when a court has to consider an application such as this; it simply cannot be a principal purpose: Re Summit Design & Constructions Pty Ltd, supra, at 304-5.
The identification of the purpose, or purposes, of the provision is important to enable the court to identify the relevant, and irrelevant, considerations that may, or must not, be considered. This is especially true in respect of a provision where, as here, the court is given a broad discretion: Bell v Amberday Pty Ltd and Anor (2001) 39 ACSR 25 at 38; Civil & Civic Pty Ltd v R W Bass Pty Ltd (1996) 20 ACSR 16 at 20; Re Aro Co Ltd [1980] Ch 196 at 200.
McPherson J continued in Re Gordon Grant and Grant Pty Ltd, supra, at 317
As a matter of history, a winding up by the court was, and it remains today, an administration conducted by the court: Re Phoenix Oil & Transport Co Ltd (No 2) [1958] 1 Ch 565, 370 [sic]. Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit material: Re Kentwood Constructions Ltd [1960] 1 WLR 646. There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible under modern rules of procedure for the judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so.
The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is therefore reduced largely to one of choosing between alternative forms of procedure. The effect of s 230(3) is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. This is really all that is meant in this context by expressions such as “convenience” and “balance of convenience” that appear in judgments on the matter: see, for example, Re The Queensland Mercantile Agency Co Ltd (1888) 58 LT 878, 879; Stewart v Intercity Distributors Ltd [1960] NZLR 944, 946; and cf Century Mercantile Co v Auckland Provincial Fruitgrowers’ Co-operative Society Ltd [1921] NZLR 272, 276.
These passages, or substantial parts of them, have been quoted with approval in many cases and are clearly a central authority on an application such as this. See, for example, Vagrand Pty Ltd (in liq) v Fielding and Ors, supra, at 555-6; Meehan and Anor v Stockmans Australian Café (Holdings) Pty Ltd and Anor (1996) 22 ACSR 123; Re Summit Design & Construction Pty Ltd, supra, at 304; Ibbco v HIH (2001) 19 ACLC 1,093 at 1,097-1,098; Pace Tasmania Pty Ltd (in liquidation) v FAI General Insurance Co Ltd (provisional liquidator appointed), supra, at 279-80; Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors (2003) 45 ACSR 224 at 229-30. Of course, the decision itself has also been frequently cited in many other cases.
It should be further noted that when a company is placed in liquidation, its assets are certainly subject to the purposes stipulated in the relevant legislation, now almost always the Corporations Act, but it is also to be noted that the liquidator receives those assets subject to such liabilities as then attached to them. Thus, an asset will be received into a liquidator’s control subject to any mortgage or other charge or any trust to which they are already subject: Vagrand Pty Ltd (in liq) v Fielding and Ors, supra, at 552.
The relevant considerations
As noted above the court’s discretion is broad, but also an absolute discretion: King and Ors v Yurisich and Ors (2006) 59 ACSR 598 at 600. Like all broad discretions, it has to be exercised judicially: Morrison-Gardiner v Car Choice Pty Ltd [2005] 1 Qd R 378 at 391. That is to say, the discretion must be exercised “with judicial detachment and fairness” (Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409 at 413-4) and it imports an obligation not to act “arbitrarily, capriciously” (Oshlack v Richmond River Council (1998) 193 CLR 72 at [22]). It means that it should be exercised “on known or stated principles” (R v The Judges of the Federal Court of Australia and Anor; Ex parte The Western Australian National Football League (Incorporated) and Anor (1979) 143 CLR 190 at 204), though not “fettered by ‘rigid rules’ but … depend upon the circumstances disclosed in each particular case … in accordance with what justice seems to require” (Witten v Lombard Australia Ltd [1968] 2 NSWR 529 at 534-5). There has been considerable consideration of the principles and relevant factors to the grant of leave in the cases in which such an application has been considered.
McPherson J in Re Gordon Grant and Grant Pty Ltd, supra, at 317 continued from the passage quoted above:
It, of course, follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed.
Clearly, the applicant for leave must first show that the case he, she or it wishes to progress has some merit so as not to risk dissipating the company’s assets on hopeless litigation. This has, however, caused some controversy in the identification of the precise standard to which the court must be satisfied that the case is one deserving of the leave to prosecute it which the provision permits.
In Thomson v Mulgoa Irrigation Co Ltd, supra, Manning J did not require proof of all the elements of an applicant’s claim, but considered that for leave to be granted in the action, which was a foreclosure suit that was being challenged, required the applicant to “pledge his oath that he had a valid and unimpeachable [mortgage]”.
Although the strength of the case has been referred to subsequently, no clear identification of the test seems to have been expressed until about 1989. In Re A J Benjamin Ltd (in liq) (1969) 90 WN(Pt1) (NSW) 107, Street J, after noting that a further affidavit should have been filed to show the case to be made, but not requiring it because the respondent accepted “the reality of the situation” that such could be done, had commented at 109:
… I do not wish this case, to be taken as a precedent recognising that applicants for leave need not disclose in a prima facie sense the case that they seek leave to bring.
That was repeated as a positive obligation by Hunt J in Maher v Taylor, supra, at 234.
In Capita Financial Group Ltd v Rothwells Ltd (1989) 15 ACLR 348, Rogers CJ in Comm Div identified the test with some precision. His Honour said at 350:
The resources of the company in liquidation should not be frittered away in defending baseless claims.
It seems to me that it is considerations of this nature which have led the courts uniformly over the years to demand that there be evidence showing a prima facie case.
The test in these terms was repeated by Debelle J in Zempilas and Ors v J N Taylor Holdings Ltd (in prov liq) and Ors (No 3) (1991) 55 SASR 108 at 110.
It is, however, not quite true that the courts have regularly expressed the test formally in that way, at least in reported decisions. The matter then came for reconsideration in Vagrand Pty Ltd (in liq) v Fielding and Ors, supra. In the first instance proceedings, Fielding and Anor v Vagrand Pty Ltd (in liq) and Ors (1992) 39 FCR 251 at 254.the trial judge, Morling J had described the test as follows:
In summary, in the exercise of its discretion under s 371(2), the court should only grant leave to proceed where it is satisfied that a real dispute exists between the parties and that in light of all the circumstances it is more convenient (or otherwise appropriate) to allow the matter to proceed to judgment.
On appeal, the court carefully considered the authorities and their substance and context and ultimately held at 556:
Upon a close reading of the relevant authorities, it is apparent to us that the courts have not in fact required applicants for leave to demonstrate a prima facie case against the company in liquidation, in the technical sense of that term. They have required to be affirmatively satisfied that the claim has a solid foundation and gives rise to a serious dispute. Having regard to the course actually taken by the courts, the term “prima facie case” is misleading. Perhaps it should be avoided in the future.
The test which has actually been applied as akin to that now used in considering whether interlocutory relief should be granted: “a serious question to be tried”. See Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153, where Mason ACJ made it clear, with reference to the very same question which arose in the context of an interlocutory debate, that the test of “a serious question to be tried” is generally to be preferred to that of “a prima facie case”.
That is now widely accepted as the appropriate approach: O D Transport (Australia) Pty Ltd (in liq) v O D Transport Pty Ltd (1997) 80 FCR 290 at 294; Hall v Mercury Information Technology (South Australia) Pty Ltd (2002) 20 ACLC 496 at 503-4; Rousseau Pty Ltd (in liq) v Jay-O-Bees Pty ltd (in liq) (2004) 50 ACSR 565 at 588; H P Mercantile Pty Ltd v Australian Rural Group Ltd (in liq) [2005] NSWSC 895 at [24]; Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245 at [6]; King v Peters [2007] NSWSC 200 at [20].
This has meant, however, that the applicant need not prove every element of the claim he, she or it wishes to make out, but that mere assertion, which is not supported by a solid foundation, will not be sufficient: Tolhurst Druce & Emmerson v Maryvell Investments Pty Ltd (in liq) [2007] VSC 271 at [157]-[164].
Apart from the matters referred to by McPherson J, in the extract above, the other considerations are wide-ranging. They include matters such as
·the fact that proceedings have already been in train at the time of liquidation does not necessarily mean that leave should be granted though it is a highly relevant factor: Meehan and Anor v Stockmans Australian Café (Holdings) Pty Ltd and Anor, supra, at 127; Speiser and Anor v Locums Financial Management Pty Ltd (1996) 22 ACSR 478 at 482-3;
·the fact that the company is indemnified by insurance in respect of the claim: Re A J Benjamin Ltd (in liq), supra, at 110;
·where there will be no procedural or substantive prejudice to the creditors resulting from the proceedings: Maher v Taylor, supra, at 234.
·whether the claim is in the nature of a test case for the interests of a large class of potential claimants: Fielding and Anor v Vagrand Pty Ltd (in liq) and Ors, supra, at 255;
·whether the granting of leave will unleash an “avalanche of litigation”: Capita Financial Group Ltd v Rothwells Ltd, supra, at 353;
·whether the liquidator is likely to reject any proof of debt lodged by the applicant so that an appeal to the court will be necessary: Capita Financial Group Ltd v Rothwells Ltd, supra, at 352-3;; Meehan and Anor v Stockmans Australian Café (Holdings) Pty Ltd and Anor, supra, at 127;
·whether the resources of the company are relatively meagre and the cost of any hearing would be considerable: Meehan and Anor v Stockmans Australian Café (Holdings) Pty Ltd and Anor, supra, at 128;
·the fact that the applicant has claims against others raising substantially the same issues in which case there is a real question of the inconvenience of the applicant having to follow different procedures in respect of all its claims: Meehan and Anor v Stockmans Australian Café (Holdings) Pty Ltd and Anor, supra, at 127;
·where it is desirable for the company to be bound by the outcome of the proceedings: Re Addstone Pty Ltd (in liq); Ex parte Macks, supra, at 174;
·mere delay itself in applying for leave will not prevent leave being granted and leave will not be withheld simply as a punishment; Re A J Benjamin Ltd (in liq), supra, at 110; Ex parte Walker (1982) 6 ACLR 423 at 426;
·the extent to which the litigation has proceeded, and if already commenced, the resources already expended which would be wasted if leave were not granted: Speiser and Anor v Locums Financial Management Pty Ltd, supra, 482-3;
·whether the existence of pre-trial procedures, such as discovery and interrogatories, are likely to be required or beneficial: Nommack (No 100) Pty Ltd v FAI Insurances Ltd (in liq), supra, at 221-2;
·the amount and seriousness of the claim together with the degree of complexity of the legal question involved: BHG Nominees Pty Ltd v Ellis Young Investments Pty Ltd (1998) 16 ACLC 1539 at 1544;
·where there would be multiple proceedings were leave not granted, this would be a powerful factor favouring the grant of leave: Sydlow Pty Ltd (in liquidation) v T G Kotselas Pty Ltd and Ors, supra, at 242; thus, where one of a number of claims is permissible, leave may be granted for a weaker, associated claim: Re H B Harvey (1972) CLC ¶ 40-051.
As with any exercise of a wide discretion, there are always a variety of factors that may be relevant and, as McPherson J pointed out, these cannot – indeed should not – be constrained by an attempt to list them. Master Lee QC, as he then was, summarised a number of issues in conducting an application for leave in Ex parte Walker, supra, at 426 which are a useful starting point: Re Coastal Constructions Pty Ltd (in liq) (1994) 13 ACSR 329 at 331-2.
Another useful summary is found in Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (in liq) (1993) 11 ACSR 516 at 520 where Zeeman J said:
Questions relevant to the exercise of my discretion as to whether leave ought to be granted at all include the following:
1.Whether there is a substantial question to be tried.
2.Whether the action would interfere with the orderly winding up of the respondent.
3.Whether the action would serve any sufficient purpose.
4.Whether the action would have any adverse effect upon the respondent and its shareholders.
These questions seem to me to identify the critical issues accurately. Of course, overriding this is the principal question of whether the applicant should lodge a proof of debt and pursue his, her or its rights this way, unless he, she or it can show some good reason to the contrary: Re Gordon Grant and Grant Pty Ltd, supra, at 317; O D Transport (Australia) Pty Ltd (in liq) v O D Transport Pty Ltd, supra, at 294; Pitt-Owen v Lenin (2006) 24 ACLC 964 at 968.
One significant issue, perhaps relevant in this case, is that where a person, the applicant, seeks to recover their own property from the company, the court will normally grant leave as of right: Re David Lloyd & Co; Lloyd v David Lloyd & Co (1877) 6 Ch D 339 at 344; O D Transport (Australia) Pty Ltd (in liq) v O D Transport Pty Ltd, supra, at 294.
This is because such a claim cannot be accommodated within the regime relating to proofs of debt established by the Corporations Act. This includes, as is particularly relevant to these proceedings, a claim by a plaintiff that the defendant company in liquidation holds property in trust for the plaintiff. In these circumstances, leave would ordinarily be granted: Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [40].
Similarly, there are many claims which can only be resolved by court proceedings: rectification (J J Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (in liq) (1986) 11 ACLR 224), specific performance (Thames Plate Glass Co v Land and Sea Telegraph Construction Co (1871) 6 Ch App 643), injunction (Wyley v Exhall Coal Mining Co Ltd (1864) 33 Beav 538; 55 ER 478) or rescission of a contract (Re Pacaya Rubber and Produce Co Ltd [1913] 1 Ch 218).
Prior to the enactment of the Corporations Act, claims in tort for unliquidated damages were not provable in the liquidation of an insolvent company: Re Southern Cross Coaches Ltd (1932) 49 WN(NSW) 230; Maher v Taylor, supra, at 235. This has now been resolved by the wide scope of s 553 in the Corporations Act together with s 553E which limits to a greater extent the application of the rules relating to proofs of debt under the Bankruptcy Act 1966 (Cth). Previously, this would have been a good ground for the grant of leave: Re Autolook Pty Ltd; O’Brien v Bills (1984) 2 ACLC 30 at 33-4; Re Berkeley Securities (Property) Ltd [1980] 3 All ER 513 at 531.
One final matter has been agitated from time to time but has really been clear since the 19th Century. As noted above, the two companies were wound up in 2001. Some, slight proceedings have been conducted since then and a significant directions hearing was held on 14 March 2008. The question is whether these proceedings were null. The short answer is that they were not and the grant of leave is not merely prospective but validates what has already been done.
So much was made clear in Thomson v Mulgoa Irrigation Co Ltd, supra, in the 19th Century and a range of decisions since then have affirmed that leave can be granted nunc pro tunc and that failure to gain leave is no bar to the proceedings if leave is subsequently granted: Re Sydney Formworks Pty Ltd (in liq), supra, at 648-51; Battiston v Mariella Construction Co Pty Ltd [1967] VR 349 at 351-3 (adopting the approach of Sholl J in Re Testro Bros Consolidated Ltd [1965] VR 18 at 33-34). This approach has been approved by the High court: Emanuele and Anor v Australian Securities Commission and Ors (1997) 188 CLR 114 at 124-5, 128-9, 152-4. For a short history of the making of an order nunc pro tunc see that latter case at 131-2.
For recent authority see Oceanic Life Ltd v Insurance & Retirement Services Pty Ltd (in liq), supra, at 521-2.
Bearing all these matters in mind, I turn to the facts.
The Facts – The Commonwealth’s Claim
The plaintiff’s claims arise out of the unauthorised transfer of two large sums of money, one of $6m on 20 April 1998 from a trust account of the Commonwealth of Australia to a bank account of the sixth defendant (“the April transaction”) and the other of $2.725m on 24 September 1998 from the same Commonwealth account into a bank account maintained by Kamanga and Quancorp trading in partnership as Davis Samuel (“the September transaction”). The person effecting the transfers, the second defendant, was convicted of offences arising from his involvement in them: Muir v The Queen [2003] ACTCA 2; R v Muir (ACTSC, Reasons for Sentence, Gray J, 25 September 2001, unreported).
The claim by the plaintiff is that these funds are able to be traced into the hands of Kamanga and Quancorp and the plaintiff’s claim is for a declaration that these defendants hold those funds as constructive trustees for the plaintiff and for orders for their return. See par E1.1.2 of the 6th Further Amended Statement of Claim.
A detailed affidavit of Alexander Holcombe sworn 5 March 2008 set out the documentary evidence which is claimed to show how the funds from the plaintiff are connected with property apparently of Kamanga and Quancorp, that property alleged now to be held on constructive trust for the plaintiff. These items are as follows:
1. $100,000 in a Citibank Mortgage Account in the name of Quancorp.
2. $95,000 in the same account.
3. $15,000 paid into court on 27 October 1999.
4. $2,194,440 paid into court on 14 February 2000.
I will briefly deal with each of these sums on the evidence before me, noting that, with respect to the trial of these proceedings, any findings I now make can only be provisional and cannot bind any defendant, especially the tenth and seventeenth defendants.
1.$100,000 in the Citibank Mortgage Account.
The evidence shows that on 20 April 1998 cheques in the sum of $2,445,000 and $60,536.20 from the funds in the April transaction, were paid from the account of CTC Resources NL (“CTC Resources”), the sixth defendant in these proceedings, to Kamanga.
That same day, an amount of $334,427.50 from the funds in the April transaction was transferred from the account of CTC Resources to the Davis Samuel partnership account. Of that sum it appears that $201,168.85 was paid to Kamanga’s account the next day.
On 21 April 1998, Kamanga paid $210,000 to Quancorp from the funds referred to above. On 28 April 1998, Quancorp then paid $100,000 of these funds into a Mortgage Account it maintained with Citibank.
The plaintiff claims these funds, alleging that they can be traced from the funds in the April transaction and that, as Quancorp is insolvent, it is important that its equitable entitlement is recognised. It is further clear that the plaintiff’s claim to these funds is in the nature of a proprietary claim and so not one which ordinarily could be accommodated within the proof of debt regime applicable to the administration of insolvent companies in liquidation.
2. $95,000 into the Citibank Mortgage Account.
Of the $6m transferred in the April transaction, CTC Resources invested $2,499,614.77 in securities purchased from the Commonwealth Bank of Australia.
The evidence on this application shows that these funds were forwarded, either directly or indirectly, through Davis Samuel, to Kirke Securities to purchase, on or about 29 June 1998, 3,399,995 ordinary 20 cent fully paid shares and 2,885,000 options in Kanowna Lights NL for Kamanga and Quancorp as the Davis Samuel partnership.
Between 1 May 1998 and 22 October 1998, the Davis Samuel partnership purchased a further 1,315,000 options in Kanowna Lights NL.
On 26 October 1998, Hallmark Gold NL purchased 4,200,000 options in Kanowna Lights NL from the Davis Samuel partnership for $336,000. Of these funds, $115,000 was transferred to Quancorp and of these funds $95,000 was paid into the Mortgage Account it maintained with Citibank.
The plaintiff’s claim to these funds is relevantly identical to the first claim: see par 49 above.
3.$15,000 paid into Court.
Of the funds from the April transaction which was paid to Kamanga, various withdrawals from its account were made on or about 21 April 1998. One of those was an amount of $15,000 to one, David Hedge, as a loan, repayable in April 2003.
The plaintiff claimed that sum and Mr Hedge advised that he was prepared to pay it to the Commonwealth. Kamanga, however, claimed an interest in it so Mr Hedge paid it into court on 27 October 1999.
The plaintiff claims these funds on the same basis as set out in par 49 above. As Kamanga has claimed an interest, however, it is important that Kamanga be a party to these proceedings so that the competing claims can be determined, an appropriate order for payment of the funds out of court can be made and all relevant parties are bound by that decision.
4.$2,194,440 paid into Court.
Of the funds paid in the September transaction, $2,524,949.17 was immediately withdrawn and paid to the account that the first defendant maintained with Kirke Securities. With those funds, Kirke Securities purchased 7.4 million shares in Hallmark Gold NL for a purchase price of $2,245,530 including brokerage.
Under an order of Crispin J made on 20 January 2000, those shares were sold for $2.2 million and an amount of $2,194,440 (presumably the proceeds of the sale less fees of some kind) was paid into court on 14 February 2000.
The plaintiff claims these funds. While they were paid into the account of Kirkes Securities in the name of the company, Davis Samuel Pty Ltd, the first defendant, they came directly from an account in the joint names of Kamanga and Quancorp. Accordingly, it must at least be arguable that these defendants may have a claim to these funds on which the court will have to adjudicate. Again, this is a proprietary claim and the comments in par 49 above also apply.
The evidence on which the plaintiff relied to make out the case for tracing the four sums referred to above and for the claim that a constructive trust had arisen was for the most part documentary. Thus, it was not difficult for me to assess whether I could be “affirmatively satisfied” to the relevant degree that this evidenced a claim that the moneys being sought have come from the improperly transferred funds of the plaintiff and could be traced to where they were now claimed by the plaintiff. I was so satisfied.
Of course, for the receipt of improperly transferred funds to give rise to a constructive trust, the recipient must have knowledge of the impropriety to the requisite degree: Barnes v Addy (1874) 9 LR Ch App 244 at 251. This is more difficult to prove at this stage of the proceedings. Nevertheless, the speed with which the funds were dispersed after receipt, the fact that substantial parts of the funds were used for personal purposes, and some other factors mentioned, give rise to a real inference that the recipients knew of the impropriety of the transfer and therefore knowingly received the funds. I am affirmatively satisfied that there is a serious question to be tried.
The Facts – the Twenty-Seventh Defendant
The twenty-seventh defendant, now known as TNG Limited, was formerly Hallmark Gold NL, a company mentioned above. It was the target of a scheme involving the second, fourth, fifth, seventh, eighth and ninth defendants and the third party as individuals and the first, third, sixth, tenth and seventeenth defendants as companies and engineered by some of them.
As noted above Kamanga and Quancorp used part of the funds from the April transaction to purchase options in Kanowna Lights NL, those options being tradable on the Australian Stock Exchange.
It was also shown that CTC Resources, with some of the funds from that same source, purchased shares in that company.
Following the purchase of these shares, interests of the Endresz family purchased 19.9% of the issued capital in the twenty-seventh defendant. They used that stake in the company to cause Mr William Forge, the ninth defendant, and are the second defendant to be appointed to the Board of the company to fill casual vacancies. The company subsequently held its Annual General Meeting and because Messrs Forge and Muir were not the subject of a resolution for their re-election at the meeting, it was subsequently held that they were thereafter no longer directors: Australian Securities and Investments Commission v Hallmark Gold NL and Ors [1999] FCA 360.
Though not at law directors, Messrs Forge and Muir then purported to appoint Mr Peter Clark, the Third Party, as a director and the three purported to hold a directors meeting when they resolved to purchase shares in Kanowna Lights NL from CTC Resources and options in Kanowna Lights NL from Kamanga and Quancorp. See pars 52 and 53 above. Other challenged business, not relevant to this application, was also purported to be conducted.
The shares and options were purchased but at what the twenty-seventh defendant says was a greatly inflated price, thus causing damage to it.
The twenty-seventh defendant has counter-claimed against, inter alia, Kamanga and Quancorp for the losses so sustained.
While such a claim could conceivably be dealt with in the proof of debt regime, that is not entirely clear to me that this would be so. Such a proof would, however, be quite complex. In any event, the proceedings will traverse all the factual and legal issues involved in the twenty-seventh defendant’s counter-claim. This litigation would be a convenient way to resolve the claims of the twenty-seventh defendant. It is unlikely that its claim and the various defendants’ defences to that claim will occupy much additional court time It would also be odd at the very least to excise the claims against the tenth and seventeenth defendants from the rest of the proceedings unless there was a very strong reason to do so. None has been suggested nor readily springs to mind.
Other matters
I note that the liquidator of each company is aware of these applications and, indeed, has had notice of them. There is no opposition to the grant of leave and letters to that effect have been tendered.
Conclusion
Having regard to the matters set out above, it was clear to me that leave should be given to permit the plaintiff on the one hand and the twenty-seventh defendant on the other to continue with these proceedings, claim and counter-claim, against Kamanga and Quancorp nunc pro tunc and I so ordered.
I note that, as was said by McInerney J in Raffles Pty Ltd (in liq) v Cotis [1971] VR 637 at 638
It is ordinary practice, if leave is granted, to impose a condition or to extract an undertaking that the applicant will not, without the leave of the Court, seek to enforce against the company any judgment he may obtain against it in the proceedings to be commenced.
See also, Re Sydney Formworks Pty Ltd (in liq), supra, at 651; McLean v Burns Philp Trustee Co Pty Ltd and Ors (1985) 2 NSWLR 623 at 647.
In each case I made a condition of the granting of the order in these terms.
I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Refshauge.
Associate:
Date: 19 November 2008
Counsel for the Plaintiff: Mr M Slattery QC and Mr J Hogan-Doran
Solicitor for the Plaintiff: Australian Government Solicitor
Counsel for the first, sixth, fifteenth
and twenty-first Defendants: Mr P Cain
Fourth Defendant Self represented
Fifth Defendant Self represented
Seventh Defendant: Self represented
Eighth Defendant: Self represented
Ninth Defendant: Self represented
Counsel for the twentieth Defendant
and Third Party: Mr A Endresz
Counsel for the twenty-seventh Defendant: Mr N Hutley QC and Mr J Giles
Solicitors for the twenty-seventh Defendant: Snedden Hall & Gallop
Date of hearing: 14 March 2008 and 23 May 2008
Date of judgment: 14 March 2008 and 23 May 2008
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