Deputy Commissioner of Taxation v B J Marron & Son Pty Ltd

[1999] VSC 124

SUPREME COURT OF VICTORIA
CORPORATIONS JURISDICTION	Do not Send for Reporting
Not Restricted

No. 4905 of 1995

DEPUTY COMMISSIONER OF TAXATION	Applicant
v
B.J. MARRON & SON PTY LTD (ACN 058 557 305) (IN LIQUIDATION)	Respondent

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JUDGE:	Warren J
WHERE HELD:	Melbourne
DATE OF HEARING:	16 April 1999
DATE OF JUDGMENT:	23April 1999
CASE MAY BE CITED AS:	Deputy Commissioner of Taxation v. B.J. Marron & Son Pty Ltd
MEDIA NEUTRAL CITATION:	[1999] VSC 124

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Sections 473(2), 511 and 564 of the Corporations Law - Distribution of property recovered in the winding-up of a corporation - Discretion of the Court as to the distribution of property - Payment of expenses

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APPEARANCES:	Counsel	Solicitors
For the Liquidator	Mr P.D. Corbett	Hall & Wilcox

HER HONOUR:

1. This is an application by the liquidator of B.J. Marron & Son Pty Ltd (ACN 058 557 305) (In Liquidation) ("the company") for orders that:

(a) pursuant to s.564 of the Corporations Law the sum of $27,037.00 paid by the Deputy Commissioner of Taxation to the liquidator for legal costs be paid out of the net value of the property of the company in priority to other creditors of the company;

(b) pursuant to s.564 of the Corporations Law the sum of $22,833.00 be paid to the Deputy Commissioner of Taxation out of the net value of the property of the company after the payment of priority debts together with the aforesaid costs of $27,037.00 such payments to be made in priority to all other unsecured creditors of the company;

(c) pursuant to s.473(2) of the Corporations Law the fees of the liquidator be approved in the sum of $8,134.30; and

(d)        that the costs of this application be costs in the winding up.

1. This application is made by summons served on the Australian Securities and Investments Commission ("ASIC") and the Deputy Commissioner of Taxation.  The liquidator has also notified each of the creditors of the company of this application by a circular dated 31 March 1999 and which circular advised of the orders sought, the date, time and place of the application and the likely return to creditors if the proposed orders are made.  None of the creditors have indicated that they wish to be heard to oppose the application or otherwise.  I am informed that ASIC does not wish to make any submission in relation to the application and that the application is supported by the Australian Government Solicitor on behalf of the Deputy Commissioner of Taxation.

1. Section 564 of the Corporations Law provides:

"564     Where in any winding up:

(a)        property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of moneys or the giving of indemnity by creditors; or

(b)        expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them."

1. In support of the application there are two affidavits of the liquidator, John David Adams.  The first sworn 16 March 1999 and the second sworn 15 April 1999.  There are also affidavits of service confirming that the summons and amended summons have been served on the Australian Government Solicitor and ASIC and that notices of the application have been given to the creditors.

1. The affidavits show that Mr Adams was appointed provisional liquidator of the company on 17 May 1995 pursuant to an order of this court.  During the period from 17 May to 20 July 1995 Mr Adams investigated the affairs of the company, interviewed the company's directors and sought legal advice as to potential claims available to the company in order that it may pay its creditors and in particular pay group tax liabilities to the Deputy Commissioner of Taxation.

1. After his appointment as liquidator Mr Adams commenced proceedings on behalf of the company against its former solicitors to recover damage suffered by the company as a result of entering into a transaction whereby the company purchased a hotel known as "The Blackhill Hotel" in Ballarat.  The background to the commencement of the proceedings is that at the time of the appointment of the liquidator the company was completely without funds.  The report as to affairs completed by the directors of the company disclosed that most creditors were small but that one of the largest creditors was the Australian Tax Office (the "ATO") with a claim of $22,833.15.  The ATO agreed to indemnify the liquidator in the amount of $5,000 in respect of preliminary legal work.  A further indemnity was given by the ATO to facilitate the obtaining of the opinion of counsel as to the merits of proceedings against the solicitors who acted for the company with respect to the purchase of the hotel.  As a result of such advice, proceedings were issued in this court on 27 February 1995 and eventually fixed for trial in November 1998.  The Deputy Commissioner of Taxation paid all legal costs in respect of investigating and issuing that claim, pursuing interlocutory steps and the preparation for the trial.  The costs totalled $27,037.32. The proceedings were settled shortly before trial on the basis that the defendant pay the liquidator a sum of $130,000.00 inclusive of costs and interest.

1. No contribution was made by any creditors other than the ATO by way of indemnity to the proceedings.

1. The settlement has now been paid and the liquidator seeks an order from this court pursuant to s.564 of the Corporations Law or alternatively a direction pursuant to s.511 of the Corporations Law that he is entitled to pay the Deputy Commissioner of Taxation the sum of $27,037.32 for costs paid by the Deputy Commissioner of Taxation in priority to other expenses of the liquidation and further an order that the debt owed by the company to the Deputy Commissioner of Taxation of $22,833.15 be paid in priority to other unsecured creditors.  The effect of these transactions will mean that after payment of the provisional liquidator's costs and the costs of the winding up, the creditors of the company will receive approximately 10 cents in the dollar. If it were not for the Deputy Commissioner of Taxation providing legal costs to the liquidator to pursue the claim, the liquidator would not have been in a position to fund the proceeding.  The liquidator deposes that there would have been no return whatsoever to the unsecured creditors if not for the indemnity and costs provided by the Deputy Commissioner of Taxation.

1. In similar circumstances the courts have made orders pursuant to s.564 of the Corporations Law giving priority to creditors who have taken the risk of indemnifying a liquidator. The authorities suggest that s.564 of the Corporations Law should be applied liberally and to reward creditors who are prepared to fund a liquidator to pursue proceedings on the behalf of creditors (see Re Ken Godfrey Pty Ltd (In Liquidation) (1994) 14 ACSR 610; Re Cartco Pty Lid (1994) 14 ACSR 357; Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (In Liquidation) (1998) 26 ACSR 22; The Bell Group Limited (In Liquidation) v Westpac Banking Corporation (1996) 22 ACSR 337; and Household Financial Services Pty Ltd v Chase Medical Centre (1995) 18 ACSR 294.

1. In Household Financial Services, Brownie, J of the Supreme Court of New South Wales said at 296‑297:

"The last words of s. 564 provides for, and the authorities accent that need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered, the failure of other creditors to provide indemnity, the proportions assets to be between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered and generally, the totality of the circumstances and there has been a tendency in recent times to adopt a more liberal approach in favour of indemnifying creditors."

1. In that case the learned judge made an order that the Deputy Commissioner of Taxation recover its debt in priority to other unsecured creditors.

1. In Re Ken Godfrey Pty Ltd (In Liquidation), Hayne, J then of this court said at page 612:

"In my view, it is clear that at least in this case and perhaps more generally, creditors who put their own credit at risk by providing indemnity for costs or litigation to be pursued by a liquidator should receive more from the fruits of any successful action and those who, for whatever reason, choose not to hazard any further money in connection with the activities o the company that has gone into liquidation."

1. In Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (In Liquidation) (1998) 26 ACSR 22 at 25 Branson, J of the Federal Court said:

"The authorities recognise that the purpose are high in s.564 of the Corporations Law, and its predecessor provisions, is to give the courts 'a broad and general discretion and one that is to be exercised having regard to the desirability and the public interest of encouraging creditors to indemnify liquidators the desire to pursue claims in the winding up of companies. "

1. In Allquip (WA) Pty Ltd (in liq) v. Allan & Ors (1997) 25 ACSR 765 the Federal Court considered an application under s.564 of the Corporations Law that the net value of the property recovered in the liquidation be paid to the Deputy Commissioner of Taxation on the ground that the Deputy Commissioner was the only creditor who had provided funds to the liquidator to pursue a recovery action.  Carr, J held that while the Deputy Commissioner was entitled to an advantage in the distribution because of the risk taken in financing the recovery proceedings, it was not appropriate that the Deputy Commissioner should receive the entire amount held by the liquidator.  Rather, Carr, J held that it was fair and reasonable that all of the unsecured creditors receive a distribution equal to the amount that they would have received if the recovery proceedings had not been pursued and that the Deputy Commissioner was entitled to the whole of the amount then remaining.  In Allquip the evidence before the court was that the proceedings had been instituted by the company that was the subject of the winding up application and that an order had been made that the liquidator of the relevant company provide security for costs.  The liquidator sought an indemnity from the creditors of the company for the order for security for costs in the sum of $20,000 and, further, invited a contribution to costs of an amount of $20,000.  The Commissioner of Taxation provided the funds for the security for costs order and, also, agreed to provide the liquidator with an indemnity for the further sum of $20,000 for the fees and expenses of the proceeding.  The Commissioner subsequently gave indemnities for further amounts to the liquidator.  No other creditor made any contribution.  A judgment was recovered in the sum of $130,000 and after re‑payment to the Commissioner of the amounts advanced and the deduction of further costs and expenses it was estimated that there would remain a sum of $60,000 for distribution.  The reasons of Carr, J reveal that prior to the funding of the relevant litigation by the Commissioner of Taxation, for a period of approximately three months the relevant proceedings had been funded by the general body of creditors (see p.767) of the judgment).  On the basis that the general body of creditors financed the proceedings prior to the indemnity and financing by the Commissioner of Taxation, the learned judge considered it was not appropriate that the whole of the amount yielded by the judgment from the proceeding should be distributed to the Commissioner.  The learned judge received evidence that if the proceedings had not been continued there would have been an amount for distribution to unsecured creditors of approximately 6.27 cents in the dollar.  Further, if the Commissioner received the whole of the estimated sum for distribution it would represent a distribution of 47.84 per cent of the debt owing to him and other secured creditors would receive nothing.  On the basis of the partial financing by the general body of creditors the learned judge considered that factor to be a distinguishing matter such that it would not be appropriate or fair if the general body of unsecured creditors lost a payment of about 6.2 cents per dollar of their debt.  Accordingly, the learned judge held that all of the unsecured creditors should receive a distribution of 6.27 cents in the dollar and that the whole of the amount thereafter remaining be paid to the Commissioner.

1. In the matter before me there is no evidence of any contribution whatsoever by the general body of creditors to the cost of the proceedings that yielded the successful outcome.  Accordingly, the distinguishing factor that arose in Allquip does not arise in the present matter.  Furthermore, on the basis of the application before me the creditors of the company will receive 10 cents in the dollar.  This amount constitutes a windfall to the creditors.  If the Deputy Commissioner of Taxation had not been prepared to take the risk in funding the proceedings the creditors would, it appears, have received nothing. 

1. The applicant submits that but for the fact that the Deputy Commissioner of Taxation was prepared to fund this litigation there would not have been any recovery on behalf of the creditors.  I am so satisfied.  The Deputy Commissioner of Taxation committed more than $27,000.00 in pursuit of its debt of $22,000.00. The other unsecured creditors (who were essentially trade creditors of the company) are owed amounts which vary between $62.00 and $3,345.00. None of those creditors was prepared to indemnify or contribute toward the cost of the litigation. None of them sought to be heard to oppose the application. The company had no assets or funds (save for the cause of action) which it could realise to fund the proceeding and therefore the liquidator was dependant on a creditor to come forward.  I am satisfied that the proceedings were pursued expeditiously and with a minimum of expense by the liquidator and compromised in a manner which resulted in a return to creditors they would not have otherwise expected.  The applicant submits that this is an appropriate case in which the court should exercise its discretion in favour of the indemnifying creditor and make the orders sought.  On the basis of the authorities, in particular, the principle expressed by Hayne, J in Re Ken Godfrey Pty Ltd (in liq), supra, the applicant has been prepared to take the risk of funding the proceeding that has borne the fruit of the settlement sum. Accordingly, it is appropriate that the applicant should receive more from the fruits of the successful settlement of the proceedings than the creditors who chose not to take any steps that gave rise to that settlement sum. Clearly it is a well established principle that the courts have a broad and general discretion and should exercise that discretion liberally in favour of creditors who are prepared to take the risk of funding or providing an indemnity for the costs of litigation that ultimately yield a successful outcome. Accordingly, I am satisfied that in this matter it is appropriate to make the orders sought under s.564 of the Corporations Law. 

1. In relation to the costs of the provisional liquidator s.473(2) of the Corporations Law provides:

"The provisional liquidator is entitled to receive such remuneration by way of a percentage or otherwise as is determined by the court."

1. Mr Adams has set out the costs and expenses which he incurred and the time spent by him and his staff investigating the claims available to the company and its prospects of success. His costs of $8,134.30 have been calculated in accordance with the relevant remuneration orders as set under the practice notes of this court and are not challenged by any of the creditors or ASIC.  The principles to be applied in determining whether a provisional liquidator is entitled to costs were set out in the decision of Mr Justice Zeeman in Re Fine Food Distributors Pty Ltd (1992) 9 ACSR 599. The rule is that a provisional liquidator's costs are to be calculated on a time basis (as is the case here) and he is entitled to receive reasonable remuneration. In deciding what is reasonable remuneration the court looks to the appropriate scale (which has been applied here) unless there are special circumstances. It is submitted that the provisional liquidator's costs are reasonable and appropriate and should be allowed.  On the basis of the affidavits I am so satisfied.

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