Heyns v Gedling Pty Ltd as trustee for the Forrest Highway Unit Trust
[2019] WASC 312
•29 AUGUST 2019
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: HEYNS -v- GEDLING PTY LTD AS TRUSTEE FOR THE FORREST HIGHWAY UNIT TRUST [2019] WASC 312
CORAM: MASTER SANDERSON
HEARD: 31 JULY 2019
DELIVERED : 29 AUGUST 2019
FILE NO/S: COR 115 of 2019
BETWEEN: ANTHONY STEPHEN THOMAS HEYNS
Plaintiff
AND
GEDLING PTY LTD AS TRUSTEE FOR THE FORREST HIGHWAY UNIT TRUST
First Defendant
MELISSA HUMANN AND SIMON THEOBALD AS LIQUIDATORS OF KINGSHILL HOLDINGS PTY LTD
Second Defendant
Catchwords:
Corporation law - Director seeking approval to conduct litigation in name of company principal
Legislation:
Corporations Act 2001 (Cth)
Result:
Leave refused
Category: A
Representation:
Counsel:
| Plaintiff | : | Mr P Edgar |
| First Defendant | : | Mr A J Aristei |
| Second Defendant | : | Ms T E Healey |
Solicitors:
| Plaintiff | : | Bowen Buchbinder Vilensky |
| First Defendant | : | Stephen Josland Barrister & Solicitor |
| Second Defendant | : | Lavan |
Case(s) referred to in decision(s):
Décor Corp Pty Ltd v Dart Industries Inc (1991) 33 FCR 397
Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988
Deputy Commissioner of Taxation v Soiland Pty Ltd (In Liq) [2010] FCA 168
El‑Saafin v Franek [2018] VSC 450
Lightburn Pty Ltd v Kama Power Products Pty Ltd [2003] SASC 43
MASTER SANDERSON:
The plaintiff in this matter, who is a director of Kingshill Holdings Pty Ltd (in liquidation) (Kingshill), seeks an order under s 198G(3)(b) of the Corporations Act 2001 (Cth) (the Act) that he be permitted to conduct litigation on behalf of Kingshill. The application raises a point of some importance in a context of corporate insolvency.
Relevant facts
The relevant facts can be shortly stated. On 16 October 2018 Kingshill was wound up by order of the Federal Court. Simon Theobald and Melissa Humann were appointed joint and several liquidators of Kingshill. At the time of winding up and as at the date of hearing of this application, the plaintiff was the sole director and shareholder of Kingshill.
Pursuant to a contract for the sale of land dated 29 April 2016, Kingshill sold to the defendant certain property referred to in the papers as the 'Pinjarra Properties' for a purchase price of $8 million plus GST. The settlement date of the contract was 31 May 2016. The purpose of the acquisition of the Pinjarra Properties by the defendant was to develop them into service stations with identical associated food and beverage outlets on either side of the Forrest Highway. The anchor tenant in both properties was Caltex.[1]
[1] Affidavit of Anthony Stephen Thomas Heyns sworn 16 May 2019, [5] ‑ [6].
Subsequent to the signing of the contract of sale the parties entered into a Deed of Variation (the Deed) dated 23 June 2016. As a result of this renegotiated agreement, $3 million plus GST of the purchase price was deferred and was payable by the defendant to Kingshill subject to and conditional upon the defendant obtaining certain levels of profit following the development and subsequent sale of the Pinjarra Properties.[2] For reasons not presently relevant a payment of $320,000 was made by the defendant to Kingshill prior to settlement. That meant that the contingent consideration was in an amount of $2,680,000.[3]
[2] Affidavit of Anthony Stephen Thomas Heyns sworn 16 May 2019, [8].
[3] Affidavit of Anthony Stephen Thomas Heyns sworn 16 May 2019, [13].
The defendant sold the Pinjarra Properties for an amount of $33,500,000. Kingshill called on the defendant to make payment of the contingent consideration. Relying on the terms of the Deed, the first defendant claimed Kingshill was not entitled to any amount. Kingshill and the first defendant are still in dispute as to whether or not any amount is owing by the first defendant to the plaintiff.
It is common ground between the parties the liquidators are without funds and are not in a position to pursue Kingshill's claim against the first defendant. That being the case, the liquidators entered into a Deed of Assignment with the plaintiff pursuant to which they assigned to the plaintiff Kingshill's rights against the first defendant. The first defendant maintains that it is not open to the liquidators to assign any cause of action to the plaintiff; they rely on the terms of the contract. The plaintiff disputes there exists any limitation on the assignment.
Orders sought by the plaintiff
Against that background the plaintiff filed an originating process on 17 May 2019. By orders made 6 June 2019 the plaintiff was granted leave to file an amended originating process, which was filed on that date, and sought the following orders:
(1)An order under Division 90‑15(1) and/or (3)(a) of Schedule 2 Insolvency Practice Schedule (Corporations)(the IPS) of the Corporations Act 2001 (the Act) that the Deed of Assignment (as defined in paragraph 29 of the supporting affidavit of Anthony Stephen Thomas Heyns) ('Heyns Affidavit'), is, in respect of the assignment of the Liquidators (as defined in paragraph 4 of the Heyns Affidavit) rights pursuant to s 477(2)(a) of the Act, valid; and
(2)Pursuant to Division 100‑5(4), an order that the reference in s 477(2)(a) of the Act to the Liquidators should be taken as a reference to the Plaintiff for the purposes of pursuing the Gedling Claim (as defined in paragraph 13 of the Heyns Affidavit);
(3)Further and alternatively, an order under section 90‑15(1) of the IPS granting Court approval pursuant to s 198G of the Act for the Plaintiff to commence or defend proceedings in the name of Kingshill (as defined in paragraph 3 of the Heyns Affidavit) against the Defendants for payment of the Contingent Consideration (as defined in paragraph 8.3 of the Heyns Affidavit);
(4)Declarations pursuant to Rules of the Supreme Court 1971 (WA) O 58 r 10 (the Construction Summons) that:
4.1the Liquidators were not precluded by clause 26.5 of the Joint Form (as defined in paragraph 5 of the Heyns Affidavit) from assigning the rights to sue in the name of Kingshill pursuant to the Deed of Assignment; and
4.2clause 26.5 of the Joint Form (as defined in paragraph 5 of the Heyns Affidavit) did, and does, not preclude the Liquidators from assigning the cause of action underpinning the Gedling Claim from Kingshill to the Plaintiff.
(5)Costs.
The Corporations Act 2001 (Cth)
Orders (1), (2) and (4) in the amended originating process all relate to the assignment. But order (3) stands apart. Although it is expressed to be in the alternative, if an order is made under s 198G then any issues relating to the Deed of Assignment will fall away. With that in mind the parties agreed the matter raised by proposed order (3) would be determined before matters raised by orders (1), (2) and (4). On 6 June 2019, I made orders which effectively mandated that approach.
Relevantly, s 198G(3) reads as follows:
(3)Subsections (1) and (2) do not apply to the extent that the officer of the company is acting:
(a)…
(b)with the written approval of the external administrator of the company or the Court; or
(c)in circumstances in which, despite the fact that the company is under external administration, the officer is permitted by this Act to act.
Under s 124 a company has the legal capacity and powers of an individual. Where a company has only one director all powers may be exercised by that director: see s 198E(1). When a company goes into liquidation a director is prohibited by s 198G(1) from exercising any of the powers he formerly held. He remains a director of the company unless and until he resigns or the company is deregistered. But, he cannot exercise any powers and if he does so or purports to do so, he is liable for a penalty under s 198G(2).
Section 198G(3) provides a number of exceptions. What the plaintiff wishes to do in this case is to conduct litigation on behalf of Kingshill against the first defendant. In other words, he wants to exercise the powers he would have as a director to engage solicitors, conduct negotiations, determine if any settlement offer should be accepted – in short, all of those things which are incidental to litigation. Although the liquidators have no objection to the plaintiff adopting this course of action they have not given their written approval. That is why the plaintiff seeks an order of the court.
A liquidator of a company who is without funds but believes the company has a right of action against a third party has three options. They can seek the assistance of a litigation funder and pursue the claim in the name of the corporation in liquidation. As an alternative the liquidator can sell the cause of action to a third party. That may result in a return which is less than the full value of the action; but at least it provides some return to creditors. The third option is simply to leave the matter rest because no funding is available and it cannot be pursued. All of these options have their drawbacks – particularly the last. But, generally speaking, they are the options available to a liquidator.
The question here is whether there is a fourth option ‑ to allow the plaintiff to conduct the litigation as if he was still a director of Kingshill. On behalf of the plaintiff it was said that s 198G(3) is not qualified. In other words there is no reason why provided certain conditions were met, and provided safeguards were put in place, a director could not be authorised to conduct litigation. On behalf of the first defendant it was said that to allow that to occur would fly in the face of the whole liquidation regime. The point of a liquidation was to take the management of the corporation out of the hands of directors and impose an independent third party to realise the assets of the company for the benefit of creditors or through the deed of company arrangement process to restructure. Allowing a former director simply to carry on as if there was no liquidation in process would be at odds with the legislative framework.
Case law
The cases in which s 198G(3)(b) of the Act have been invoked are limited. They almost always relate to a situation where a company has been placed in liquidation and the directors of the company seek to have that decision reversed. The most recent case on the section is a decision of Colvin J in Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988. The company was seeking a review of a decision by a registrar of the Federal Court to order its winding up. It was acting through its directors. One of the questions considered by his Honour was the circumstances under which leave pursuant to s 198G(3)(b) ought be granted. His Honour adopted the test set out by Barker J in Deputy Commissioner of Taxation v Soiland Pty Ltd (In Liq) [2010] FCA 168. His Honour determined that the following matters were relevant to the proper exercise of the court's discretion:
(a)the establishment of a 'prima facie case' as to the merits of the proposed action (and specifically referring to matters concerning the 'strength of the case');
(b)the protection of the wound up company's resources and the minimising of any risk to creditors; and
(c)the extent to which any conditions need to be attached to any court approval, requiring the company officer to be responsible for the costs of the proposed action.
In this case all three of those requirements were satisfied. Taking them in reverse order counsel for the plaintiff accepted that conditions would need to be attached to any granted leave. At the commencement of the hearing counsel produced a minute of proposed orders. Those orders were nowhere near comprehensive enough to protect the company and the liquidator. Counsel acknowledged that to be the case. He accepted were leave to be granted, careful consideration would need to be given to the form of orders. These would include regular reporting by the plaintiff to the liquidators and a prohibition against dealing with any funds which might be recovered. The crafting of suitable orders presents some difficulties and I will have more to say on this issue later in these reasons.
There was no question that any orders made would impact upon the resources of the company. At the moment the company has no resources. What the plaintiff proposes is to engage a litigation funder who will fund the plaintiff to conduct the litigation. Quite how that will work was not apparent from the papers as they stand. However, the plaintiff anticipates the litigation funder providing funds direct to the company and proposes any such arrangement should be approved by the court. In any event counsel accepted no order could be made unless both the company and the liquidators were held harmless and were assured of being held harmless. That would mean the plaintiff, through the litigation funder or otherwise, would be responsible for the costs of conducting the litigation and the costs which might be awarded against the company should the litigation be unsuccessful.
There was a dispute between the parties as to whether or not the plaintiff had established it had a prima facie case. In my view it was clear on the papers that it did. The Deed which I referred to above contained a clause which provided a mathematical formula for calculating if the contingent consideration was payable.[4] What the Deed did not provide for was a mechanism of determining whether or not any amount was payable. Really, that is a mathematical calculation. As counsel for the plaintiff acknowledged there may be some disputes as to the proper interpretation of some terms of the contract – terms which go to the question of how the contingent consideration was calculated. But a first step was to have an auditor or some expert undertake an analysis to see whether or not the plaintiff had a claim. Counsel submitted, and I accept, that it is arguable there would be implied into the contract a term allowing for an audit.
[4] Clause 2.2(b) of the Deed of Variation ‑ Annexure 'AH-3' to the affidavit of Anthony Stephen Thomas Heyns sworn 16 May 2019.
Counsel for the first defendant did not accept that was the case. He suggested, for instance, that pre‑action discovery might be necessary. He may well be right – that may be the way to approach this issue. But, even if that is the case, someone must apply for pre‑action discovery. It is arguable such an application would succeed. So whichever way the matter is approached it is clear Kingshill has a prima facie case on the merits.
The question remains then whether, as a matter of policy, leave ought be given to the plaintiff. At the conclusion of the outline of written submissions counsel for the first defendant helpfully provided what are described as a 'sample of the relevant cases'.[5] These were cases where s 198G(3)(b) was considered. All of these cases dealt with a review of, or an appeal against, a decision to wind up a company. The only case referred to by either party which stands apart from this pattern is the decision in El‑Saafin v Franek [2018] VSC 450. That case concerned an application by directors seeking interlocutory injunctions against receivers of a company dealing with company property.
[5] First defendant's outline of written submissions filed 25 July 2019, [41].
Conclusion
In the end it is a question of how the undoubted discretion found in the relevant section should be exercised. That in turn raises policy issues. The question can be framed in this way: is it in the interests of justice to allow the director of an insolvent company to run litigation on behalf of that company? Or is the correct course to allow the liquidators to obtain litigation funding and, if that is not possible, dispose of the cause of action to a third party?
On balance I am not satisfied in the circumstances of this case it is appropriate to grant the plaintiff the relief he seeks. I have come to this conclusion for a number of reasons. The starting point is to accept the power to grant leave conferred by s 198G(3)(b) is unfettered. There is nothing in the text of the subsection itself which would restrict an order being made in this case. However the section appears in div 5 of pt 2D.1 of the Act. Part 2D.1 of the Act deals with duties and powers of directors. It is not specifically directed at the interrelationship between directors and liquidators. In fact it appears the primary purpose of the section is to prevent an officer of the company exercising any powers while the company is under administration. That suggests the section (which was inserted in the Act in 2016 and became effective in 2017) is concerned with ensuring that if a company is placed in liquidation the directors can take some steps to establish there are reasons why the company should not have been placed in liquidation.
Furthermore s 477(2) specifically deals with matters concerning powers to commence or defend proceedings on behalf of a company being wound up. As counsel for the first defendant pointed out if the plaintiff's submissions as to the alternative availability of s 198G(3) of the Act were accepted it would render the specific provisions contained in the section 477(2) superfluous. It cannot be supposed that such an outcome was intended by the legislature.
It is also worth bearing in mind the difference between the role of a liquidator and the role of a company director. The liquidator has duties to the creditors of the company and as an officer of the court is obliged to exercise those duties in a fair and responsible manner. The directors have statutory duties and duties to shareholders. While there may be some overlap between the respective duties of directors and liquidators the two officers are separate and distinct. It is difficult to see how if the plaintiff is given power to act in his capacity as a director in pursuing this litigation the responsibilities of the liquidator of the corporation can be discharged. On first principles then a making of an order sought by the plaintiff ought be refused.
In reaching that conclusion I have been mindful of the facts in this case. If ever there was a case for the grant of leave to bring an action to a director this would have to be the case. The action is relatively simple and straightforward and the plaintiff more than any other individual has a grasp of the issues. There are few creditors other than the plaintiff ‑ the Australian Tax Office (ATO) being the most significant of these creditors. The ATO has no objection to the orders being made. The liquidators have no objection to the orders being made. While litigation funding may be available to the plaintiff it is by no means certain that funding would be offered to the liquidators. That raises the prospect no action may proceed.
Taking all of these matters into account I am still not satisfied it would be an appropriate exercise of the court's power to make the orders sought by the plaintiff. The factors I have outlined above against the order being made outweigh what might be described as the utilitarian argument.
Accordingly I am not prepared to grant the plaintiff the leave he seeks. However were I to do so it would be on certain terms and conditions. I will detail these conditions below to illustrate the difficulties of framing orders. However before doing so, there are two points which need to be made.
First, I have doubts about the way in which this matter has been brought before the court. It is difficult to see why action should have been taken against the first defendant in an effort to obtain orders under the relevant subsection. If the liquidators did not provide their written consent then the appropriate course for the plaintiff may have been to issue proceedings against the liquidators. The liquidators are the natural contradictors. Of course, it may be that as the liquidators are without funds they would not appear before the court. Be that as it may, it is difficult to see how a debtor of an insolvent corporation can have an interest in whether or not a party such as the plaintiff is given leave to proceed against the debtor. (Having said that, in this case I was greatly assisted by the submissions of experienced counsel who appeared for the first defendant).
As an alternative to a party in the plaintiff's position issuing proceedings liquidators can always seek judicial advice. It may be that in a situation such as this where it is open to a liquidator to give written approval to the director to conduct proceedings judicial advice would be appropriate. Every case will be dependent on its facts. But in circumstances unusual as these, taking judicial advice may be appropriate. Even when a liquidator takes the view written approval should be given it would, I think, be understandable if judicial advice was taken to approve that stance.
The second point has to do with the requirement the plaintiff establish a 'prima facie case'. Counsel for the first defendant referred to two decisions which refer to the 'strength of the case': Décor Corp Pty Ltd v Dart Industries Inc (1991) 33 FCR 397; Lightburn Pty Ltd v Kama Power Products Pty Ltd [2003] SASC 43 [31] ‑ [32]. I doubt whether an assessment of the strength or otherwise of a party's case is appropriate when the question is whether or not there is a prima facie case. There is no support for undertaking an assessment of the strength of a party's case to be found in the Melking Holdings decision or its predecessor Soiland. In this case I have refrained from attempting to make any assessment of the strength of Kingshill's case against the first defendant.
Were I to have granted the orders I would have framed them in the following way.
Proposed orders
(1)Subject to:
(a)an indemnity being provided by GT Capital Partners Pty Ltd to the liquidator which is approved by the court pursuant to s 477(2)(B) of the Corporations Act; and
(b)the plaintiff and the second defendant establishing by way of affidavit evidence that any purported assignment of any cause of action to the plaintiff is no longer of any force and effect
approval is given to the plaintiff on behalf of Kingshill Holdings Pty Ltd (in liquidation) to commence or defend proceedings against the defendants for payment of the contingent consideration as defined in par 8.2 of the affidavit of Anthony Stephen Thomas Heyns sworn 16 May 2019.
(2)On the 28th day of each month the plaintiff is to report to the second defendants on the progress of any litigation commenced or intended to be commenced including but not limited to:
(a)advice (if any) of counsel as to the prospects of success;
(b)the position in any negotiations which have taken place with any defendants or proposed defendants; and
(c)any other matter relevant to the conduct of the litigation.
(3)The plaintiff is to provide security to the second defendants in a form satisfactory to the second defendants which:
(a)ensures any litigation does not in any way diminish the assets of the plaintiff; and
(b)indemnifies the second defendants against any liability in relation to costs or otherwise as a consequence of the litigation.
(4)There be a liberty to apply to the plaintiff and the second defendants.
As to costs, the plaintiff should pay the costs of the second defendant including reserved costs. As matter stands I am not minded to order the first defendant's costs be paid by the plaintiff but I will give counsel the chance to be heard on this issue.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DG
Associate to Master Sanderson29 AUGUST 2019
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