Gerah Imports Pty Ltd v The Duke Group Ltd (in Liquidation) - [2010] SASC 315

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
GERAH IMPORTS PTY LTD v THE DUKE GROUP LTD (IN LIQUIDATION)
[2010] SASC 315
Reasons of Judge Burley a Master of the Supreme Court
12 November 2010
CORPORATIONS
Application by liquidator for directions - company administration originally in insolvency - intangible assets recovery achieved a surplus - subsequent solvency of company - liquidator intends to call for proofs of debt from creditors who were unable to prove in insolvency administration - form of notice to potential claimants.
Companies (South Australia) Code s 438, referred to.
Re Kershaw (as liquidator of Equiticorp Tasman Ltd) (2005) 54 ACSR 214, applied.
Austin Securities Ltd v Northgate and English Stores Ltd [1969] 2 All ER 753; Pulsford v Devenish [1903] 2 Ch 625, considered.

GERAH IMPORTS PTY LTD v THE DUKE GROUP LTD (IN LIQUIDATION)
[2010] SASC 315
JUDGE BURLEY:

This is an application by the liquidator of the defendant company (“the company”) for directions pursuant to s 379(3) of the Companies (South Australia) Code (“the Code”). At the hearing of the application Mr R Whitington QC appeared with Mr S Doyle for the liquidator. Two creditors had previously been given leave to intervene on the directions application, namely Genoa Resources and Investment Limited (in liquidation) and LFD Limited. These creditors were represented by Mr F Gleeson SC.
The liquidator relied upon his affidavits sworn respectively on 14 and 15 October 2010. These were admitted without objection. The interveners relied upon the affidavit of the liquidator sworn on 9 October 2007, which was also admitted without objection.
The company was placed in liquidation on 1 July 1989 at a time when it had no tangible assets and debts amounting to approximately $35 million. In due course, the liquidator successfully took proceedings to recover the intangible assets of the company. As a result, between 30 September 1992 and 17 January 2000, he was able to pay in full those claims by creditors which had been allowed by him in respect of indebtedness arising prior to the date of the liquidation.
As at January 2000, after payment of the creditors in full as referred to above, there was a surplus of approximately $12 million. As at the date of this application the surplus is approximately $10 million. The interveners both have claims for post-liquidation interest which, in combination, greatly exceed the $10 million presently held by the liquidator. At paragraph 23 of his affidavit sworn on 14 September 2010, the liquidator has stated:
23.The total of the post liquidation interest claims as at 31 December 2004 were $110,689,261.70. I admitted them in the amount of $56,262,795.80. There is at present approximately $10.3 million in the administration.
If, after the liquidator has called for further proofs of debt, claims are made which are admitted and paid out, such payments will be made in priority to the interveners’ respective claims for post-liquidation interest.[1]
[1] See Gerah Imports Pty Ltd v Duke Group Ltd (in liq) (2004) 88 SASR 419.
As a result of realising a surplus, the administration of the liquidation went from being an administration in insolvency to one where the company in liquidation was solvent. This fact attracts the operation of s 438 of the Code, which is as follows:
438(1) In every winding up, subject in the case of insolvent companies to the application in accordance with the provisions of this Code of the Bankruptcy Act 1966, all debts payable on a contingency and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company, a just estimate being made so far as possible of the value of such debts or claims as are subject to any contingency or sound only in damages or for some other reason do not bear a certain value.
438(2) Subject to sections 204 and 441, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the Bankruptcy Act 1966, in relation to the estates of bankrupt persons, and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section.
The relevant provision under the Bankruptcy Act is s 82(2) which provides that demands “in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy”.[2] Accordingly, the effect of s 438(2) of the Code is that, in an insolvency administration, those who have a claim for unliquidated damages may not prove in the liquidation, except if the claim arises by reason of a contract, promise or breach of trust.
[2] Re Kershaw (as liquidator of Equiticorp Tasman Ltd) (2005) 54 ACSR 214.
Section 438(1) makes it clear that where the company is solvent, the restrictions imposed by s 82(2) of the Bankruptcy Act do not apply.
Section 438 was considered by Barrett J in Re Kershaw (as liq of Equiticorp Tasman Ltd).[3]His Honour said (at [24]):
It follows, in my opinion, that the claims that become admissible under s.438(1) but were previously precluded by s.438(2) must be recognised and dealt in full with[sic] before claims for post-liquidation interest are entertained. Because the recognition of post-liquidation interest in the way emerging from the line of cases culminating in Gerah Imports is something that is to happen in both an insolvent winding up and a solvent winding up, that recognition must, in a winding up that begins under insolvent rules but later comes to be dealt with in accordance with solvent rules, be postponed until all debts and claims admissible on both bases have been dealt with according to their respective amounts as at the commencement of the winding up. There must therefore be a two-staged process. At the first stage, claims admissible under s.438(1) but previously precluded by s.438(2) must be ascertained and paid out of the surplus remaining after dividends totalling 100 cents in the dollar have been paid upon the admitted s.438(2) claims. If that process results in the payment of 100 cents in the dollar in respect of the further claims so admitted and dealt with at that first stage and a surplus still remains in the hands of the liquidator, he will proceed to a second stage under which claims for post-liquidation interest on all previously admitted claims are assessed and that surplus is applied towards satisfaction of those claims.
There was no dispute that, for the purposes of this application, that statement by Barrett J is a correct statement of the applicable law.
[3] [2005] 54 ACSR 214.
Initially, the submissions of the interveners were directed to three matters: first, it was submitted that there was no need to give notice to a certain class of shareholder; second, that the form of the notice was inappropriate, and third, that the directions given by the Court should make provision for cases where the response to the notice is other than the lodgement of a proof of debt.
During the course of submissions at the hearing before me, the parties were able to resolve their differences as to the extent of notification. Consequently, the opposition of the interveners is limited to the manner in which notice is given and the consequences if there are responses by parties that consist other than the lodgement of a proof of debt.
It is convenient to deal with the latter point first. The interveners were concerned that the records of the company held by the liquidator would inevitably prove inadequate in providing the current address of the relevant shareholders. In particular, notices might be returned unclaimed and, in addition, notices given to nominees (ie. the legal owners of the shares who hold the same on trust for the beneficial owners) may respond by saying that they have no current address for the beneficial owners. There may be a variety of additional ambiguous responses to the notice. The interveners were concerned that further considerable delays might be experienced should such complications arise, once the relevant notices have been sent out. It was submitted by Mr Gleeson that I should give a direction that if notices are sent to the address given in the records of the company currently held by the liquidator, that would be deemed to be sufficient notice, notwithstanding that any response to such notice indicated that the notice had not been brought to the attention of the beneficial owner of the shares.
Mr Whitington submitted that I should give no such direction, because the liquidator has not asked for it and it is not open to the interveners to seek such directions.
It seems to me that the resolution of this apparent dispute is to be found in the concluding paragraph of the written submissions provided by the liquidator. In paragraph 31 of that document, counsel has stated that the liquidator:
… seeks to clarify … whether, in order to comply with his obligations, it is sufficient having regard to the authorities and the regulations for … notification to be sent to the last known address of any shareholder identified from the share register as having a potential claim.
This is not specifically reflected in the minutes of order which were handed up during the course of argument. Paragraph 1 of the minutes consists of a direction that:
1.It is sufficient for the Liquidator to discharge his duties to notify creditors to submit formal proofs under Companies Regulation 120(2) by:
1.1 writing to those shareholders who are identified as having held shares at the relevant times as set out in paragraph 2 below in terms of the draft circular attached hereto and marked “A”;
In my opinion, in order to reflect the position taken by the liquidator at paragraph 31 of the written submissions, sub-paragraph 1.1 should read as follows:
1.1 giving written notice (to be sent to the last known address of the shareholder ascertained by reference to the records of the company) to those shareholders who are identified as having held shares at the relevant times as set out in paragraph 2 below in terms of the draft circular attached hereto and marked “A”;
That amendment sufficiently meets the concerns of the interveners.
I turn now to the terms of the proposed notice. It is as follows:
DRAFT CIRCULAR TO SHAREHOLDERS
The Duke Group Limited (In Liquidation)

Australian Company Number: 007 554 690
1.On 11 July 1989 The Duke Group Limited (“Duke”) was placed into liquidation by order of the Supreme Court of South Australia and I was appointed as liquidator. Until 1988 Duke was named Kia Ora Gold Corporation NL (“Kia Ora”).
2.I have previously called for and admitted claims by creditors owed debts by Duke as at the date of my appointment. Following the decision of the High Court of Australia in Sons of Gwalia Limited v Margaretic & others (2007) 81 ALJR 525, and following directions made by the Supreme Court of South Australia, notices were published inviting claims by shareholders of the company. As directed by the Court, notices inviting claims were sent to those shareholders, at their last known addresses, whose shareholding arose as a result of the takeover by Kia Ora (as the company was then known) of Western United Limited in 1987 as it was considered that only those shareholders might be able to make out a claim against the company that was admissible in the winding up of the company in insolvency.
3.All admitted claims as at the date of liquidation have been paid in full. There remain funds in the liquidation. Accordingly, Duke has been returned to a condition of solvency for the purposes of considering claims by creditors of the company. Certain claims that might be available to persons who may have suffered loss and damage as a result of their dealings with the company but which are not admissible in an insolvent winding up may be admissible in the company’s current circumstances pursuant to subsection 438(1) of the Companies (South Australia) Code. It is therefore necessary for me to determine whether there are any such claims.
4.It is possible that shareholders of the company might be able to make out such claims arising from the following:
4.1    Commencing in October 1987 Kia Ora entered into a takeover of a company called Western United Limited, which resulted in diminution of the value of the shares of Kia Ora.
4.2    In June 1988, Kia Ora entered into a reverse takeover of the Duke Group of companies, which also resulted in diminution of the value of the shares in Kia Ora (which changed its name to Duke as part of that reverse takeover).
4.3    Shareholders of Kia Ora/Duke whose shares were reduced in value as a result of either or both of those transactions, may be able to establish a claim for the loss in value of their shares.
5.The above is not an exhaustive statement of the matters that might give rise to claims. Shareholders may be able to establish a claim based on other facts and circumstances.
6.In order to make out a claim in the liquidation of Duke a shareholder would be required, as a minimum, to demonstrate that he or she held shares in the company and that those shares were subsequently reduced in value. Evidence of reliance on information disseminated by the company or its directors may also be required.
7.Attached is a notice inviting proofs of debt by persons who consider that they have a claim in the liquidation of the company.
Dated this                  day of   2010
JOHN SHEAHAN

Liquidator


[Emphasis added.]
In paragraphs 2 and 3 of the draft circular, certain passages have been emphasised. These are the words which the interveners say should be deleted from the draft circular. In addition, it was the interveners’ contention that paragraphs 4, 5 and 6 should be deleted in their entirety. The minutes also refer to annexure B, which is a notice in the form of Form 130 of the Companies Rules. The notice is as follows:
Registered no. 007 554 690    Companies Form                 Paragraph 577(1)(f)

sub-regulation 120(2)
Companies (South Australian) Code
NOTICE INVITING FORMAL PROOF OF DEBT OF CLAIM
THE DUKE GROUP LIMITED (IN LIQUIDATION) (formerly known as KIA ORA GOLD CORPORATION NL)
Take notice that shareholders of the company, who may, by reason of the decision of the High Court in Sons of Gwalia Limited v Margaretic & Ors (2007) 81 ALJR 525, have claims provable, are required on or before the………………..day of………………2010 to prove their debts or claims and to establish any title they may have to priority by delivering or sending through the post to me at my address a formal proof of debt or claim [in accordance with Form 131 or 132] containing their respective debts or claim.
The liquidator has adjudicated on all such claims lodged to date under section 438(2) of the Companies (South Australian) Code and is now obliged to call for a second round of proofs, and to adjudicate upon the same, under section 438(1) of that code.
In default they will be excluded from the benefit of any distribution made before their debts or claims are proved or their priority is established and from objecting to the distribution.
Form of proof may be obtained from me.
Further information may be obtained by accessing the liquidator’s website at this              day of                   2010.
……………………………………………………
John Sheahan as


Liquidator the Duke Group Ltd (In Liquidation)


Level 8, 26 Flinders Street, Adelaide SA 5000


Telephone: 61 8 231 0077 Facsimile: 61 8 231 0370


Email: [email protected]


[Emphasis added.]
Returning to the draft circular, paragraphs 1, 2 and 3 set out the history of the liquidation prior to sending the circular. The interveners’ principal submission was that paragraph 4, 5 and 6 went beyond informing the shareholders of the current position. They complained that that information came close to telling proposed claimants how they should pursue a claim. Within this criticism came the reference in paragraph 2 to the decision of the High Court in Sons of Gwalia Ltd v Margaretic & Ors.[4]In my opinion, the reference in paragraph 2 to that decision does not come within the complaint of undue assistance being given to shareholders.
[4] (2007) 81 ALJR 525.
As to the interveners’ objection to the last two and a half lines of paragraph 2, again I am of the view that it is not inappropriate for the liquidator to make that reference. I accept that when the directions were given after the decision in Sons of Gwalia Ltd, no reasons were published by the Court as to why the directions were given, but there is no reason why the liquidator should not now explain the basis upon which the Court’s direction was sought because, in my view, it leads to a better understanding of a relatively complicated situation.
In relation to the deletions proposed by the interveners to paragraph 3 of the draft circular, in my opinion the proposed alterations, other than the proposed deletion of the final sentence of paragraph 3, improve the clarity of paragraph 3. I would make one additional change, so that the third sentence of paragraph 3 reads as follows:
Certain claims might be available to persons who have suffered loss and damage as a result of their dealings with the company. These may now be admissible because of the company’s present solvency, pursuant to sub-s 438(1) of the Companies (South Australia) Code. It is therefore necessary …
I turn to paragraphs 4, 5 and 6 of the draft circular. In determining whether or not these paragraphs should be included within the notice, I bear in mind the decision relied upon by the liquidator, namely Austin Securities Ltd v Northgate and English Stores Ltd[5] where Edmund Davies LJ said at [757F]:
[I]t is clear that the liquidator has to advertise for claims. Furthermore, advertising is not sufficient where he knows of the existence of claims, for, as was illustrated by the decision in Pulsford v. Devenish,[6] in such a case there is a duty to ascertain by direct enquiry whether the claim is being pressed.
The facts of this case are not as clear as they were in Austin Securities. On the basis of the legal advice received by the liquidator, he is of the view that certain shareholders may have claims against the company if they suffered loss as a result of the unlawful conduct of the company.
[5] [1969] 2 All ER 753.
[6] [1903] 2 Ch 625.
In Austin Securities, before the liquidator was appointed pursuant to a voluntary liquidation, proceedings had been commenced by a creditor against the company. The proceedings had been served and an appearance entered by the company. The liquidator proceeded to ignore those proceedings. It is difficult to imagine a clearer case of breach of duty on the part of the liquidator.
The other member of the Court of Appeal, Lord Denning MR, also referred with approval to Pulsford v Devenish where Farwell J said (at 631):
I consider it to be the duty of a liquidator, namely, not merely to advertise for creditors, but to write to the creditors of whose existence he knows, and who do not send in claims, and ask them if they have any claim …
In my opinion, what was said by the Court of Appeal in Austin Securities and by Farwell J in Pulsford v Devenish, falls far short of requiring the liquidator in these circumstances to set out, as he has proposed to do in paragraphs 4, 5 and 6, the basis of claims that might be made by potential creditors. I think it is sufficient to set out the history as has been done in paragraphs 1, 2 and 3. It is then open to the shareholders to obtain legal advice as to whether or not a claim might be pursued. Consequently, I agree with the interveners that the liquidator has misconceived his duty by seeking to include within the notice paragraphs 4, 5 and 6.

I turn now to the Form 130 notice.
The middle paragraph of that notice refers to s 438 of the Code. In my opinion, this is an entirely appropriate reference, because it provides the link between the terms of the circular and the formal notice inviting proof of debt.
For the above reasons, the minutes and annexure A should be amended in terms of paragraphs 15, 20 and 24 above. There will be an order with directions accordingly.
I will hear the parties as to costs.