Hakea Holdings Pty Ltd v Stewart William Free
[2018] FCCA 2747
•21 September 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| HAKEA HOLDINGS PTY LTD v STEWART WILLIAM FREE & ANOR | [2018] FCCA 2747 |
| Catchwords: BANKRUPTCY – Bankruptcy Act 1966 (Cth) – application for leave to continue with and take fresh steps in proceeding in the Commercial List of the Equity Division of the Supreme Court of New South Wales – leave granted as appropriate under s.58(3) of the Bankruptcy Act 1966 (Cth). |
| Legislation: Bankruptcy Act 1966 (Cth), ss.58, 117 |
| Cases cited: Allanson v Midland Credit Ltd (1997) 16 ALR 43 Stoker v Starr [2011] FCA 746 |
| Applicant: | HAKEA HOLDINGS PTY LTD ACN 116 147 436 |
| First Respondent: | STEWART WILLIAM FREE |
| Second Respondent: | STEVEN MCGRATH |
| File Number: | SYG 2298 of 2018 |
| Judgment of: | Judge Dowdy |
| Hearing date: | 21 September 2018 |
| Delivered at: | Sydney |
| Delivered on: | 21 September 2018 |
REPRESENTATION
| Counsel for the Applicant: | Mr C. Tam of Counsel |
| Solicitors for the Applicant: | Holding Redlich |
| No Appearance for the Respondents. |
THE ORDERS OF THE COURT ARE AS FOLLOWS:
To the extent that such leave is required, order pursuant to s.58(3) of the Bankruptcy Act 1966 (Cth) that leave be granted to the Applicant as and from 24 April 2018 to continue with and take fresh steps in the case of Hakea Holdings Pty Ltd v Steven McGrath filed on 24 April 2017 in the Commercial List of the Equity Division of the Supreme Court of New South Wales bearing No.122362 of 2017 (the proceeding).
Order that it be a condition of the leave to continue with and take fresh steps in the proceeding hereby given that the Applicant not take any step to enforce any money judgment or money order made in its favour in the proceeding without the prior leave of this Court first had and obtained.
Order that the Applicant’s costs of the Application for leave filed in this Court on 17 August 2018 be dealt with and fall under the Applicant’s costs in the proceeding.
Direct that the Applicant on or before 5 October 2018 give notice to Lloyd’s of London of the making of the within orders.
Reserve to Lloyd’s of London leave to move this Court to discharge these orders within 14 days of having been given notice of the making of them by the Applicant as directed in order 4 above.
Liberty to any interested party to apply on three days’ notice.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 2298 of 2018
| HAKEA HOLDINGS ACN 116 147 436 |
Applicant
And
| STEWART WILLIAM FREE |
First Respondent
| STEVEN MCGRATH |
Second Respondent
REASONS FOR JUDGMENT
Ex Tempore
(Revised from Transcript)
By Application filed in this Court on 17 August 2018 the Applicant, Hakea Holdings Pty Ltd (Hakea), seeks an order under s.58(3) of the Bankruptcy Act 1966 (Cth) (the Act) granting leave to continue and take fresh steps in the legal proceeding by name Hakea Holdings Pty Ltd v Steven McGrath which was filed in the Commercial List of the Equity Division of the Supreme Court of New South Wales (Supreme Court) on 24 April 2017 (the proceeding).
Nature of Case in Commercial List
The facts relating to the proceeding are conveniently set out in the affidavit of Ms Helena Golovanoff and the annexures thereto affirmed on 16 August 2018. In short, the claim for which leave to proceed is sought is a claim against Mr Steven McGrath who was made bankrupt by a sequestration order on 24 April 2018, exactly one year after the commencement of the proceeding in the Supreme Court.
The claim in the Supreme Court seeks equitable compensation for loss and damage suffered by Hakea, due to Mr McGrath’s breach of fiduciary duty to Hakea, during the period from 15 July 2013 to 8 March 2016 when he was a director of Hakea, in connection specifically with a contract between Denham Constructions Pty Ltd (Denham) and Hakea for the design and construction of an aged care facility in Hamlyn Terrace in New South Wales for the lump sum price of $17,700,000.
During the course of the contract from May 2015 to January 2016, Denham claimed progress payments from Hakea for works on the construction of the aged care facility in the sum of approximately $2,400,000 but these amounts were not passed on to the interposed building entity subsidiary of Denham, or to the subcontractors to whom the money or most of the money was in truth payable. Unsurprisingly, that may be connected with the fact that Mr McGrath is alleged to have been at all material times the sole director, secretary, shareholder and general manager of Denham and allegedly also to have been an actual director, shadow director or de facto director of the interposed subsidiary of Denham.
In these circumstances Hakea says in the proceeding that as a director of Hakea, Mr McGrath had a fiduciary duty of loyalty which he breached by failing to disclose that both Denham and its subsidiary had financial difficulties and were insolvent from approximately May 2015, but rather allowed Denham to continue to claim the progress payments when Mr McGrath was aware that it was unlikely that the money paid by Hakea to Denham would be applied to the benefit of either Hakea, the subcontractors or the overall construction of the aged care facility. I have no doubt that a claim of the type made in the proceeding is better dealt with in the Supreme Court where the issues may be more comprehensively considered, evaluated and determined in a contested trial, rather than by the proof of debt procedure available in the sequestration of Mr McGrath.
Further and in any event, the proof of debt procedure would be inapt and inappropriate here because Mr McGrath was insured as a director of Hakea at the time of the relevant actions, events and circumstances under Hakea’s Directors and Officers’ insurance policy underwritten by Lloyd’s of London, who have been notified of a claim under that policy. Accordingly, s.117 of the Act is applicable because that section of the Act has the effect of segregating and precluding claims against the relevant bankrupt for which he or she was insured under a contract of insurance against liability to third parties, as is the case here, and provides that the proceeds of a claim made against such a policy are not to be distributed to the general body of the bankrupt’s creditors, but rather obliges the relevant Trustee in Bankruptcy, here the First Respondent, to pay the proceeds to the creditor whose claim against the bankrupt was insured.
Accordingly, it is entirely appropriate in my view that leave to continue and proceed be granted as sought. I note that I do not need to consider and come to a final and concluded view on whether any part of the relief claimed against Mr McGrath in the proceeding is in respect of a debt provable in his bankrupt estate. This is because as Jacobson J explained in Stoker v Starr [2011] FCA 746 at [13], with reference to the decision of the Full Court of the Federal Court in Allanson v Midland Credit Ltd (1997) 16 ALR 43 at 48:
[13] Their Honours went on to observe that leave may be granted without determining whether s 58(3) is enlivened. This is because the question of whether leave is required may involve difficult and complex questions of law and fact. It is, as their Honours said, therefore, permissible in an appropriate case to proceed on the basis that leave is necessary rather than to involve the parties in the futile exercise of determining, possibly after a series of appeals whether the need for such leave has arisen.
Accordingly, leave may be granted without an actual determination of whether s.58(3) is truly enlivened.
Because as here, in my view, there may well be difficult and complex questions of law and fact to be determined it is appropriate in such a case to proceed on the basis that leave is necessary. I further note that in favour of a grant of leave to continue is the fact that the Supreme Court proceeding was commenced before Mr McGrath’s bankruptcy and the making of the sequestration order. Further, the Trustee of the bankrupt estate of Mr McGrath does not oppose leave being granted.
I certify that the preceding eight (8) paragraphs are a true copy of the reasons for judgment of Judge Dowdy
Date: 26 September 2018
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