HN QCV Bottle Tree Village Pty Ltd v QCV Bottle Tree Village Pty Ltd

[2018] NSWSC 1807

Supreme Court

New South Wales

Medium Neutral Citation:

HN QCV Bottle Tree Village Pty Ltd v QCV Bottle Tree Village Pty Ltd [2018] NSWSC 1807

Hearing dates:

6 November 2018; written submissions 12 November 2018

Decision date:

26 November 2018

Jurisdiction:

Equity

Before:

Robb J

Decision:

No orders made. The applicant receiver is invited to suggest short minutes of order having regard to these reasons for judgment, and to submit further evidence and submissions concerning the additional orders that should be made. The receiver’s application for approval of his remuneration and expenses is deferred pending further consideration.

Catchwords:

PARTNERSHIPS AND JOINT VENTURES – Dissolution and winding up of partnership – Court appointed receiver and manager – whether the applicant receiver had the power to enter into and was justified in entering into and performing his obligations and exercising his rights under a deed of settlement entered into by the receiver under which he compromised debts owed by and to the partnership

 

RECEIVERS AND MANAGERS – Power of the Court to provide advice and directions to a receiver appointed by the Court – the limitation on the Court’s jurisdiction to vest powers in a receiver to matters which the partners would have authority to do

 

RECEIVERS AND MANAGERS – Distribution – Whether the applicant receiver is justified in making a pro rata distribution of the proceeds of realisation of the assets of the partnership to the creditors of the partnership on the basis of the receiver’s own adjudication of the amounts properly owed by the partnership to the creditors

 

RECEIVERS AND MANAGERS – Distribution – Whether the Court can empower and should authorise the applicant receiver to call for the submission of proofs of debt by the creditors of the partnership, to adjudicate upon any claims lodged, and to pay the creditors pro rata in accordance with the adjudications made by the receiver

  RECEIVERS AND MANAGERS – Remuneration – Whether the remuneration sought by the applicant should be approved

Legislation Cited:

Uniform Civil Procedure Rules 2005 (NSW)
Corporations Act 2001 (Cth)

Cases Cited:

Mariconte v Batiste (2000) 48 NSWLR 724; [2000] NSWSC 288
Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd [2002] NSWSC 576; (2002) 42 ACSR 240
Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (Young J, 30 April 1998, unreported)
In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440
Niemann v Niemann (1889) 43 Ch D 198
Murray v King (1984) 4 FCR 1; (1984) 55 ALR 559
King v Peters [2007] NSWSC 200
Moloney v Piachniarski [2004] WASC 240; (2004) 54 ACSR 564
Broadway Plaza Investments Pty Ltd v Broadway Plaza Pty Ltd [2017] NSWSC 1660

Texts Cited:

Lindley & Banks on Partnership (19 ed)

Category:

Procedural and other rulings

Parties:

Adam Shepard in his capacity as receiver and manager of the business and assets of the QCV Bottle Tree Village Partnership (applicant)
HN QCV Bottle Tree Village Pty Limited (first respondent)
Qantac LOR Pty Limited (second respondent)
MM2 Group Pty Limited (third respondent)

Representation:

Counsel:
V Whittaker SC and A Campbell (applicant)

  Solicitors:
Hogan Lovells (applicant)
Brown Wright Stein Lawyers (first respondent)

File Number(s):

2016/00165777

Judgment

1. The applicant, Mr Adam Shepard, is the receiver and manager of the business and assets of the partnership known as QCV Bottle Tree Village (the Partnership).

2. The Partnership commenced on or about 1 September 2014 pursuant to an undated deed called the QCV Bottle Tree Village Partnership and Agency Deed (the Partnership Deed).

3. Apparently, the purpose of the Partnership was to construct and operate a workers' accommodation village located at 82 Dawson Street Miles, Queensland. It also appears that the Partnership ceased to trade prior to Mr Shepard's appointment.

4. The Partnership was comprised of three partners (Partners), being HN QCV Bottle Tree Pty Ltd (HN Partner), Qantac LOR Pty Ltd (Qantac Partner) and MM2 Group Pty Ltd (MM2 Partner). Under the terms of the Partnership Deed, the Partners respectively held 25, 25 and 50 Units. The Partnership Deed contained terms whereby the partners were to participate in relation to sharing profits, contributing capital, and being liable to any shortfall to the Partnership's creditors in proportion to the number of Units held by each Partner.

5. In addition to the three Partners, a company called QCV Bottle Tree Village Pty Ltd (the Agent) was a party to the Partnership Deed, by which the Agent was appointed as the agent of the Partners to operate the workers' accommodation village. Further, three persons who each were associated with one of the Partners were parties to the Partnership Deed.

Orders made by the Court

6. In these proceedings, which were commenced by HN Partner against the Agent and the other two Partners, Hallen J made the following orders on 8 June 2016:

3. Orders the Partnership be wound-up under the direction of this Court.

4. Orders that Adam Shepard of Farnsworth Shepard be appointed as receiver and manager ("the Receiver") of the business and assets of the Partnership.

5. Orders that the Receiver is to have all of the powers referred to in section 420(2) of the Corporations Act as are granted to a receiver of property of a corporation and also that he be authorised to pay from the proceeds of sale of partnership assets, any liability of the partnership excluding liabilities to any partner.

…

7. Orders in the event that the Receiver or any of the parties, consider it necessary, that an account be taken, and an inquiry be held, as to the assets and liabilities of the Partnership, all of the dealings and transactions of each of the partners in relation to the said partnership and the respective interests of the partners in the assets of the Partnership.

8. Orders that the Receiver pay or transfer to the partners such amount, asset or fund as may be found to be due pursuant to the account and inquiry referred to in paragraph [7].

…

10. Orders that the Receiver is entitled to reasonable remuneration for the work performed as receiver calculated at the rates disclosed in the Schedule of Rates a copy of which is EX FL 5.

…

12. Further consideration be reserved for any other orders as may be necessary or expedient…

7. On 4 August 2017, on the application of Mr Shepard, Kunc J made the following further orders:

The Court orders that:

1. Adam Shepard in his capacity as receiver and manager ("Receiver") of the business and assets of [the Partnership] is justified in taking all reasonable steps to realise or recover from [the Partners] all amounts due by them under the partnership and agency deed of the Partnership to meet all liabilities of the Partnership in full, including conducting investigations, issuing statutory demands, responding to any applications to set aside statutory demands and commencing winding up applications, but not commencing debt recovery proceedings without further order of the Court.

2. Provided that the Partners are given 28 days’ notice of these Orders, and no objection is received by the Receiver within that period, the Receiver is justified in paying, from the proceeds of realisation of the Partnership's assets, the following sums owed to the following creditors of the partnership: [The names and amounts due to 3 creditors are then set out].

3. The Receiver's remuneration to 28 July 2017 in the sum of $68,748 (excluding GST) is approved.

4. The Receiver's costs of this application are costs in the receivership.

Orders sought by Mr Shepard

8. Following the further performance by Mr Shepard of his duties as receiver and manager of the Partnership, on 14 August 2018 Mr Shepard filed a notice of motion in which he sought orders of the Court justifying certain steps that Mr Shepard proposed to take to permit the completion of the winding up of the Partnership, and for approval of his remuneration and costs. Mr Shepard was given leave to file an amended notice of motion during the hearing that took place on 6 November 2018, and during the course of the hearing Mr Shepard decided to further adjust his claims for relief, which led to him providing draft short minutes of order to the Court, by which Mr Shepard seeks the following orders:

The Court orders that:

1. Adam Shepard in his capacity as receiver and manager ("Receiver") of the business and assets of the [Partnership] is justified in entering into, and performing his obligations and exercising his rights under, the Deed of Settlement and Release dated 7 June 2018 between the Receiver, [HN Partner], [Qantac Partner], QCV Pty Ltd, Thomas Scott and Graham Cleary ("Deed").

2. Provided that the direction set out in orders 3 below are complied with, the Receiver is justified in making a distribution of the assets of the Partnership within his control to creditors of the Partnership on a pari-passu basis in respect of:

(a) the following debts owed by the Partnership:

i. QCV Pty Ltd – subject to the terms of the Deed, $0;

ii. [HN Partner] – $29,598.96;

iii. Qantac Pty Ltd – $46,416.42;

iv. Blacktown Accommodation Services Pty Ltd – $459,570.81;

v. Yoogalu Pty Ltd – $128,816.90; and

vi. Smart Group Trading Company Pty Ltd (in liquidation) ("Smart Group") and Harmon Corporation Pty Ltd ("Harmon") together – $276,026.82, to be shared between Smart Group and Harmon equally, having regard to proofs of debt and supporting evidence provided by Smart Group and Harmon on 29 May 2018 and 30 May 2018 respectively; and

(b) any additional debt or claim the Receiver adjudicates upon in accordance with the directions set out in order 3 below.

3. The Court directs that:

(a) the Receiver is to give 28 days’ notice of his intention to declare a distribution of the proceeds of realisation of the Partnership's assets (less the Receiver's costs, expenses, approved remuneration and future costs, expenses and remuneration from 1 August 2018) to the creditors of the Partnership by publishing an advertisement for a period of 5 consecutive days in a newspaper in circulation in the State of Queensland, including Miles, advertising of this intention ("Notice of Distribution");

(b) the Notice of Distribution is to call for any creditor who has not yet done so to submit a proof of debt;

(c) the Notice of Distribution is to specify a date by which a proof of debt or claim must be submitted to participate in the proposed distribution, such date allowing creditors at least 14 days in which to lodge a proof of debt from the date of the first publication of the Notice of Distribution; and

(d) the Receiver is to adjudicate on any further proofs of debt or claims submitted to the Receiver by creditors of the Partnership pursuant to the Notice of Distribution.

4. The Receiver's remuneration from 29 July 2017 to 31 July 2018 in the sum of $18,438.50 (excluding GST) be approved.

5. The Receiver's internal disbursements incurred from 29 July 2017 to 31 July 2018 in the sum of $533.20 (excluding GST) be approved.

6. The Receiver's estimated future remuneration from 1 August 2018 to completion to the amount of $15,000 (excluding GST) be approved.

9. The orders sought in the draft short minutes of order appear to differ from the orders sought in the amended notice of motion in that order 3 in the latter simply provided that the “Receiver is justified in making an adjudication on any further proofs of debt or claims submitted to the Receiver by creditors of the Partnership, including QCV, Smart Group, Harmon and any other creditors, and to make a distribution in accordance with that adjudication”. Order 3 in the short minutes of order provides for a more formal process for notification, the submission of proofs of debt, and the adjudication on any future proofs of debt received by the Receiver.

10. I note that orders 7 and 8 in the amended notice of motion sought approval for Mr Shepard's estimated future internal disbursements and Mr Shepard's estimated future costs and expenses (including legal fees) from 1 August 2018 to completion respectively. Those orders have been omitted from the draft short minutes of order. I am not sure that the omission was intentional. I will give leave to Mr Shepard to renew his application for those orders, if he continues to seek them.

Powers granted to Mr Shepard

11. By order 5 made by the Court on 8 June 2016, Mr Shepard was granted "all of the powers referred to in s 420(2) of the Corporations Act as are granted to a receiver of property of a corporation and also that he be authorised to pay from the proceeds of sale of partnership assets, any liability of the partnership excluding liabilities to any partner".

12. It is notable that receivers of property of a corporation are granted the power set out in section 420(1) of the Corporations Act 2001 (Cth), which is in the following terms:

(1) Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed.

13. Where that power is granted to a receiver, the receiver will necessarily have ample power to do what is necessary for the attainment of the objectives for which the receiver was appointed. The powers conferred on receivers of the property of a corporation by subsection (1) are not, of course, limitless, because they only extend to what is necessary or convenient to be done for "the attainment of the objectives for which the receiver was appointed". It is therefore necessary to understand what those objectives are, before the powers granted to the receiver can be identified. The effectiveness of the apparent amplitude of the grant of powers in subsection (1) may be diminished in particular cases by the need to determine the relationship between the powers and the objectives for which the receiver was appointed. In this case, Mr Shepard was not given equivalent powers by the order by which he was appointed.

14. Section 420(2) of the Corporations Act, relevantly grants the following powers to a receiver of a corporation (I have only set out the powers that seem to be relevant to the present application):

(2) Without limiting the generality of subsection (1), but subject to any provision of the court order by which, or the instrument under which, the receiver was appointed, being a provision that limits the receiver's powers in any way, a receiver of property of a corporation has, in addition to any powers conferred by that order or instrument, as the case may be, or by any other law, power, for the purpose of attaining the objectives for which the receiver was appointed:

…

(g) to convert property of the corporation into money; and

…

(r) where a debt or liability is owed to the corporation--to prove the debt or liability in a bankruptcy, insolvency or winding up and, in connection therewith, to receive dividends and to assent to a proposal for a composition or a scheme of arrangement…

15. These powers would enable Mr Shepard to get in all of the property of the Partnership and to convert it into money.

16. Order 5 made by the Court on 8 June 2016 authorised Mr Shepard to pay any liability of the Partnership, except to the Partners. This order clearly authorises Mr Shepard to pay in full all of the debts of the Partnership, but it says nothing explicitly about his power to partially pay the Partnership's debts, to adjudicate claims made by putative creditors of the Partnership, or to pay allowed claims pro rata out of the Partnership's realised assets where the assets are insufficient to permit payments to creditors of 100 cents in the dollar.

17. Mr Shepard was not given a power by any order by the Court to compromise the debts owed by the Partnership to any creditors, or to compromise any debt owed by a Partner to the Partnership. The power to compromise such debts is not included in s 420(2) of the Corporations Act.

18. Rule 26.7 of the Uniform Civil Procedure Rules 2005 (NSW) provides:

26.7 (1) The court may authorise a receiver to do (either in the name of the receiver or in the name of the parties or any of them, and either generally or in any particular case) any act or thing that the parties or any of them might do if of full age and capacity.

…

(3) This rule does not limit any power of the court apart from this rule to authorise a receiver to do any act or thing.

19. The learned editors of Richie's Uniform Civil Procedure NSW provide the following note to this rule:

[26.7.5] Orders

In determining what a receiver may be empowered to do regard should be given to the type of orders that are conventionally made in receivership proceedings. This conventional practice is desirable in order to avoid encountering unintended difficulties that might arise in the determination of rights of the parties in relation to the affected property: Kraft v Kupferwasser (1991) 23 NSWLR 236 at 242B-244G.

20. When the Court made the order appointing Mr Shepard as receiver and manager of the Partnership, it ordered that the Partnership be dissolved as and from 8 June 2016, that it be wound up under the direction of the Court, that Mr Shepard get in the Partnership's assets and have power to pay its debts, that if necessary an account and inquiry of the Partnership be taken, and that Mr Shepard pay or transfer to the Partners such amount, asset or fund as may be found to be due pursuant to the account and inquiry.

21. This suite of orders would be apt in the case of the winding up of a solvent partnership, as the orders contemplate that the creditors of the Partnership will be paid, and after any necessary account or inquiry, the balance will be paid to the Partners.

22. In fact, as the orders sought by Mr Shepard in this case now contemplate, the Partnership is insolvent and the assets that have been gotten in are insufficient to enable Mr Shepard to pay the creditors who have not already been paid pursuant to the order made by Kunc J 100 cents in the dollar.

Background

23. Mr Shepard has supported his application by providing comprehensive evidence to the Court. The facts that are material to the first three orders that he seeks may be set out as follows.

24. The total amount of the Partnership's funds that Mr Shepard has been able to get in to cover payments to the Partnership's creditors and the costs of his receivership is $724,576.57.

25. Mr Shepard compiled a table of the Partnership's creditors, which he set out at par 108 of his affidavit made on 13 April 2017. Three of the creditors, who were owed relatively small amounts, had no relationship with the Partners. Those creditors have been paid out pursuant to the authorisation given by Kunc J on 4 August 2017. All of the other creditors are either Partners or have connections with the Partners or the persons who stand behind the Partners as outlined in the table provided by Mr Shepard. The effect of Mr Shepard's evidence is that the business of the Partnership was conducted on a tight basis so that almost all of its creditors were associated one way or another with the Partners. Mr Shepard gave evidence that, notwithstanding that he was appointed more than two years ago, no further creditors have made claims or come to his attention.

26. According to Mr Shepard, the remaining creditors have made claims in the total amount of $2,007,469.78. Mr Shepard has assessed those claims and formed the view that a total amount of $1,501,125.32 of the creditors' claims is payable by the Partnership. Mr Shepard has set out his reasons for his adjudications in his 13 April 2017 affidavit.

27. It is to be noted that Mr Shepard has not asked the Court to approve or order that his adjudications of the creditors' claims is justified.

28. In accordance with the power granted to him by order 5 made on 8 June 2016 and order 1 made on 4 August 2017, Mr Shepard has attempted to recover from the Partners the amount of the shortfall between the total amount of the Partnership's allowed creditors and the amount of the Partnership's funds in Mr Shepard's hands, after allowing for the costs of the receivership. As Mr Shepard as receiver is only able to assert the rights of the Partnership against the individual Partners, he could only seek to recover from each Partner the amount of that Partner's liability to contribute to any shortfall in accordance with the terms of the Partnership Deed. That means that Mr Shepard could only seek to recover amounts of the shortfall that bore the same proportion to the total shortfall that each Partner's units bore to the total number of Units. While individual creditors may be entitled under the law of partnership to seek recovery of 100% of the debt owed to the creditor from each individual Partner on the basis that all Partners are jointly liable for Partnership debts, Mr Shepard as receiver of the Partnership is not legally able to take that course.

23. Mr Shepard instituted winding up proceedings against the MM2 Partner, which led to the Federal Court making an order for the winding up of that company. The liquidator of the MM2 Partner has subsequently advised that there will not be any dividend paid to any class of creditor of the company.

24. Mr Shepard also commenced winding up proceedings against the Qantac Partner for the purpose of attempting to recover that Partner's share of the shortfall.

25. It is sufficient to record that the commencement of these winding up proceedings precipitated a series of negotiations involving the HN Partner, the Qantac Partner, and a creditor of the Partnership called QCV Pty Ltd (QCV), whose only shareholders are the HN Partner and the Qantac Partner, each of whom holds 50% of the shares in QCV.

Deed of Settlement

32. These negotiations lead Mr Shepard to enter into a Deed of Settlement and Release on 7 June 2018 with the HN Partner, the Qantac Partner, QCV and two gentlemen called Graham William Cleary and Thomas James Scott (the Deed of Settlement). The two gentlemen were both parties to the Partnership Deed, and were associated with the Qantac Partner and the HN Partner respectively.

33. In broad terms, the effect of the Deed of Settlement is that Mr Shepard as receiver of the Partnership, agreed to release the HN Partner and the Qantac Partner from their obligations to pay part of the shortfall, in return for QCV releasing Mr Shepard from the need to treat QCV as a creditor for the purpose of distributing the Partnership’s funds to creditors.

34. Mr Shepard decided that this course was in the interests of the remaining creditors, because he was given a statutory declaration made by Mr Scott on behalf of the HN Partner that it had total assets of $43.47 and a net deficiency in assets of $122,004.53. Mr Shepard also relied upon a statutory declaration made by Mr Cleary on behalf of the Qantac Partner that the value of its assets was nil. Mr Shepard also acted on the results of land title searches that disclosed no property owned by these Partners in New South Wales and Queensland.

35. The Deed of Settlement contains in cl 2 a provision that Mr Shepard can terminate the deed on or before 31 December 2018 if the Court refuses or declines to approve Mr Shepard exercising his rights and performing his obligations under the terms of the deed, or substantially similar terms.

36. The Deed of Settlement contains a definition in cl 1.1 of the term "Indebted Amount", which has the effect of fixing the amount of the shortfall for which the HN Partner and the Qantac Partner are liable, after adjusting for certain assumed costs of the receivership, at an aggregate amount of $560,695.41.

37. Clause 3 of the Deed of Settlement provides:

3. Reduction of QCV Claim

(a) QCV accepts the Receiver's assessment of the QCV Claim and agrees that it has and will not make any other Claim against the Bottle Tree Partnership or the Receiver (whether pursuant to the QCV Submitted Claim or otherwise).

(b) From the Effective Date, and subject to clause 5 of this deed, QCV agrees to reduce the QCV Claim by an amount equivalent to the Indebted Amount.

(c) The parties agree and acknowledge that any reduction of the QCV Claim in accordance with clause 3(a) is contingent on and has no effect unless the parties comply with clauses 4 and 5 of this deed.

38. Clause 1.1 of the Deed of Settlement defines "QCV Submitted Claim" in effect as the total of the proofs of debt or claim forms submitted by QCV to Mr Shepard as set out at pars 75 to 78 of his 13 April 2017 affidavit.

39. "QCV Claim" is defined in cl 1.1 as meaning "the part of the QCV Submitted Claim which the Receiver considers can be accepted to proof, being the aggregate amount of $560,695.41, as set out in paragraph 82 of the First Affidavit".

40. It is sufficient to note that, according to Mr Shepard's affidavit made on 14 August 2018, the amount of the QCV Submitted Claim was $1,047,987.76.

41. It is also relevant that "Indebted Amount" is defined in cl 1.1 in the following terms:

Indebted Amount means the proportion of the Shortfall for which the HN BT Partner and the Qantac BT Partner are each liable under the Bottle Tree Partnership and Agency Deed, being the aggregate amount of $532,338.27 up to and including 31 May 2018, subject to further adjustment as a result of any further realisations of property of the Bottle Tree Partnership made by, and remuneration, costs and expenses (including legal costs) incurred by, the Receiver from and including 1 June 2018, up to but not exceeding the aggregate amount of $560,695.41.

42. The Indebted Amount is therefore defined as the amount of the shortfall of the Partnership's liabilities over assets owed by the HN Partner and the Qantac Partner which was $532,338.27 up to 31 May 2018. The final amount owed by those two Partners might change as a result of the final amount of the Partnership's assets received by Mr Shepard and additional costs of the receivership. The definition of "Indebted Amount" provided for the amount owing by the two Partners to increase but only up to $560,695.41.

43. The $560,695.41 is the amount that Mr Shepard has allowed of the $1,047,987.76 debt claimed by QCV, as explained in par 82 of Mr Shepard’s 13 April 2017 affidavit.

44. The first effect of cl 3 of the Deed of Settlement, provided for in par (a), is that QCV has accepted the Receiver's adjudication of $560,695.41, and agreed not to make any other claim against the Partnership or Mr Shepard.

45. The effect of par (b) is that QCV agrees to reduce the QCV Claim (i.e. the $560,695.41) by an amount equivalent to the Indebted Amount. Depending on the final calculation of the amount of the shortfall for which each of the HN Partner and the Qantac Partner is liable, in accordance with the definition of the Indebted Amount, the QCV Claim might be reduced to nil.

46. Thus, if I understand the effect of clause 3 of the Deed of Settlement correctly, it first contains an acceptance of the amount of the QCV Claim as adjudicated by Mr Shepard, and provides that QCV will not make any claim against the Partnership greater than that amount (i.e. $560,695.41), and then goes on to further reduce the amount of the claim by the Indebted Amount, provided the various conditions referred to are satisfied.

47. That understanding of the effect of clause 3 appears to be consistent with Recital E of the Deed of Settlement, as well as Mr Shepard’s explanation of his understanding contained in par 19(c) of his 14 August 2018 affidavit.

48. Clause 5 of the Deed of Settlement effects the various releases contemplated by the parties, including the HN Partner, the Qantac Partner, various entities associated with the HN Partner; each party to the deed releases Mr Shepard from the date the Deed of Settlement becomes effective, which is the date upon which Mr Shepard obtains the approval of the Court for his entry into the Deed of Settlement.

49. Finally, it should be recorded that by clause 6, the two Partners and the two makers of the statutory declarations warrant the accuracy of the statutory declarations.

50. Mr Shepard has explained the practical effect of the Deed of Settlement in par 42 of his 14 August 2018 affidavit, to the effect that the remaining creditors of the Partnership (assuming QCV does not prove) will receive 39.2289 cents in the dollar, rather than 24.5762 cents if the deed is not approved.

51. The commercial effect of the Deed of Settlement therefore is that, in return for QCV agreeing to limit its claim to $560,695.41, and then further reducing its claim by an amount up to a maximum of $560,695.41 (which may have a net effect that QCV makes no claim), Mr Shepard will release two worthless claims that he has against the HN Partner and the Qantac Partner. That will improve the dividend payable to the remaining creditors as discussed in the preceding paragraph.

52. It is in these circumstances that Mr Shepard asked the Court to make order 1 set out in the draft short minutes of order above.

Effect of Mr Shepard’s adjudication of creditors’ claims

53. Order 2 is premised on the fact that Mr Shepard has adjudicated on the claims made by the five remaining creditors and allowed the amounts set out against the name of each creditor in order 2. (The amount for QCV will be nil if the Court approves the Deed of Settlement and $560,695.41 if it does not).

54. The practical effect of Mr Shepard acting in accordance with order 2 will be that he will treat the Partnership as being indebted to the remaining creditors in the amounts stated in the order, and will then distribute the amount assumed to be available for distribution pro rata to the creditors. (The dividend to the remaining creditors will be 39.2289 cents in the dollar if the Court approves the Deed of Settlement and 24.5762 cents in the dollar if it does not.)

55. Although Mr Shepard has not asked the Court to approve his adjudication of the claims submitted by the remaining creditors, the practical effect of Mr Shepard acting upon an order that he is justified in paying the remaining creditors pro rata based upon the amounts adjudicated by him, is that all of the Partnership’s available funds will be expended, which will destroy the utility of any complaint that any remaining creditor may wish to make concerning the validity of Mr Shepard’s adjudication of its claim.

56. That will be so for the simple reason that, even though the making of pro rata payments by Mr Shepard to the remaining creditors based upon his adjudicated amounts of their debts will not have the legal effect of reducing in any way the remaining creditors’ entitlements to be paid the full amount of their debts by the Partnership, there will be no money available to pay any additional amounts. Furthermore, if Mr Shepard acts with the authorisation of the Court, there will be no avenue for the remaining creditors to sue Mr Shepard for breach of duty in respect of the process of adjudication or the making of pro rata payments.

57. As a practical matter, it should be noted in the present case that the claims made by the remaining creditors, and the amounts accepted by Mr Shepard, are set out in a table in par 23 of Mr Shepard’s 14 August 2018 affidavit. The total amount claimed by the remaining creditors was $2,007,469.78, and the total amount allowed by Mr Shepard was $1,501,125.32.

58. Of the difference of $506,344.46, $487,292.35 is attributable to the operation of the Deed of Settlement, if it is approved by the Court, as that is the amount of the reduction in QCV’s claim that will be effected by clause 3(a) of the deed. That reduction will therefore be consensual.

59. Mr Shepard accepted in full the claims of three of the remaining creditors, and only reduced two of the claims. The claim made by Yoogalu Pty Ltd was reduced from $129,433 to $128,816.90, an amount of only $616.10. The joint claim by Smart Group Trading Company Pty Ltd (in liquidation) and Harmon Corporation Pty Ltd of $294,462.83 was reduced to $276,026.82, being an amount of $18,436.01.

60. The two amounts by which Mr Shepard reduced the claims are not substantial relative to the claims, and it must be noted that Mr Shepard has proved that he has served the two creditors with his submissions to the Court on this application and his 14 August 2018 affidavit. The creditors are therefore on notice of Mr Shepard’s application, and the practical consequences of the Court authorising Mr Shepard to act in accordance with orders 1 and 2 which he has sought. Neither creditor has appeared to resist the Court making the orders sought by Mr Shepard.

61. These considerations, both in relation to the claim for authorisation of the Deed of Settlement and the authorisation for Mr Shepard to make pro rata payments to the remaining creditors, direct attention to the fact that what Mr Shepard is trying to do is to conduct an orderly winding up of the affairs of an insolvent partnership in performance of the Court’s order that the Partnership be wound up under the direction of this Court. In doing that, Mr Shepard is seeking protection by asking the Court for its prior orders that he is justified in proceeding in the manner proposed.

Mr Shepard’s submissions

62. After the conclusion of the hearing, Mr Shepard provided additional written submissions for the assistance of the Court on 12 November 2018.

63. As to Mr Shepard's power to proceed in the manner contemplated by him, he submitted in par 4 of his written submissions: "It is not controversial that the receiver has the power to both enter into the deed and pay debts of the partnership. Both are within the ambit of s 420(2) of the Corporations Act 2001 (Cth) with which the receiver was invested upon appointment.

64. Mr Shepard submitted, in par 5, that the issue is whether the Court is empowered to provide him with the guidance he seeks, such that he is protected from any personal liability from adopting those courses.

Power of the Court to give advice and directions

65. It will be convenient to deal with the issue of the Court's power to provide advice and direction to a receiver appointed by the Court first, as the existence of that power is not controversial.

66. In Mariconte v Batiste (2000) 48 NSWLR 724; [2000] NSWSC 288, Austin J said:

[74] Case law on the position of a court-appointed receiver gives only limited guidance as to the circumstances in which it is appropriate for the Court to give directions with respect to the execution of the receiver's responsibilities. There is, of course, a great deal of case law with respect to judicial advice to a trustee. Some of it is no doubt applicable to the position of a receiver. For example, in Re IOOF Australian Trustees Ltd [1999] SASC 461 Debelle J drew attention to the distinction between ruling as to the propriety of the trustee's contemplated exercise of discretion, and ruling as to the wisdom of such exercise. That distinction must be borne in mind, in my opinion, in the present circumstances.

[75] The position of a court-appointed receiver was explored by Young J in Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (Supreme Court of New South Wales, 30 April 1998, unreported). His Honour referred to English authority to the effect that receivers are like officers of the Court, and he cited with approval some observations in Davis v Gray (1872) 83 US 203, 217-218 which described a receiver as 'virtually a representative of the Court, and of all the parties in interest in the litigation wherein he is appointed'. That being so, in my opinion the Court's power to make an interlocutory order for the appointment of a receiver under the Supreme Court Act, 1970 (NSW) must carry with it the implied power to give directions with respect to the discharge of the functions for which the appointment is made - at any rate, where (as here) such directions are necessary in a practical sense to enable the receiver to carry out those functions without exposing himself to a real risk of litigation. The power to do so is reinforced by s23 of the Supreme Court Act.

[76] Where a receiver is appointed under statutory provisions, the function of the Court on an application for directions is analogous to its function with respect to a provisional liquidator: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115; Law Society of New South Wales v Milios (1999) 33 ACSR 396. In performing that function, it is appropriate for the Court to give directions in order to provide guidance to the receiver, not only on matters of law but also on the propriety or reasonableness of the contemplated exercise of discretion.

67. Further, in Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd [2002] NSWSC 576; (2002) 42 ACSR 240, Barrett J (as his Honour then was) said:

[10] I also entertain a doubt as to the applicability of s 63 of the Trustee Act in this case. A court appointed receiver is not a trustee in the strict sense (Vine v Raleigh (1883) 24 Ch D 238), although, of course, fiduciary duties are owed by such a receiver: Nugent v Nugent [1908] 1 Ch 546. Generally speaking, the defined term "trustee" in the Trustee Act refers to "a trustee as known to the law" and does not extend to a fiduciary not within that category: Metcalf v Permanent Building Society (1993) 10 WAR 145. I therefore prefer to look beyond s63 of the Trustee Act for a source of relevant jurisdiction in this case.

[11] The court's general equitable jurisdiction is, I think, a much clearer source of power for the court to give its opinion, advice or direction to a receiver it has appointed. Such a receiver is an officer of the court and, as such, may resort to the court for necessary guidance. An interesting and informative discussion of this aspect of equitable jurisdiction may be found in the judgment of Young J (as his Honour then was) in Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (unreported, NSWSC, 30 April 1998) which concerned an application for judicial advice by a person appointed by the court as "Receiver without security of the Australian Men's Health Unit Trust, with powers to investigate the existence of, get in and convert to money the assets of the Trust and pay those moneys into Court". In that case, it was confirmed that there is a jurisdiction to give judicial advice to such a receiver, although the applicable principles are not necessarily in all respects the same as those which apply in the more commonly encountered cases of judicial advice to trustees and directions to liquidators. The following passage in the judgment of Young J is pertinent:

"I said in Moclair v Moclair, 18 December 1986, unreported, following Re St George (1887) 19 LR Ir 566, that receivers are officers of the court and they should resort to the court for guidance when they think it is desirable to do so.

I stand by what I there said, but I think it should be appreciated that there is a difference between a liquidator, who is doing the work that last century the court did itself in the Master's Office, or even with a trustee, in that those people have unlimited functions, whereas a receiver has a very limited and usually relatively mechanical function. Instead of making a broad statement that receivers may always seek the opinion of the court, it would be better to put the proposition more narrowly, that if a receiver within his own limitations requires the guidance of the court, then normally he should have it.

Accordingly, I do not consider that many of the cases dealing with the sort of advice that is given to trustees, on the one hand, or liquidators, on the other hand, necessarily apply in the case of applications by receivers to get advice."

68. In In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440, Brereton J (as he then was) said, after referring to the decision of Young J in Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (Young J, 30 April 1998, unreported) and the extract from the decision of Austin J in Mariconte v Batiste (2002) 48 NSWLR 724, which is set out above:

[13] The court’s general equitable jurisdiction extends to the provision of the court’s opinion, advice and direction to a receiver it has appointed [Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240, [11]].

[14] However, the jurisdiction to give the opinion, advice and direction of the court — whether to a trustee, a liquidator or a receiver — is not unlimited. Generally speaking, it is concerned with advice or direction as to how the person seeking it should act in conformity with the law. It is not a jurisdiction to authorise departures from the strict legal position, nor one to alter legal rights.

The significance of the powers granted to the receiver

69. Thus, although it is clearly established that, as a receiver appointed by the Court is an officer of the Court, the Court has the power to give the receiver its opinion, advice and direction, what may be done must have regard to the limits on the powers and role of the receiver in the particular case. As the Court does not have the power to authorise the receiver to depart from the strict legal position, or to take steps that alter legal rights, care must be taken to identify the particular receiver’s powers, and to ensure that any authorisation given by the Court is properly confined to the exercise of the powers lawfully given to the receiver.

69. A receiver may be appointed by the Court as an interlocutory remedy to preserve an asset the subject of a dispute between parties for the purpose only of ensuring that the asset will be available to the party who establishes a right to it. Where the subject of the dispute involves a business that is a going concern the receiver may also be appointed as a manager to preserve the business during the pendency of the dispute, again for the purpose only of ensuring that the business remains available to the party who establishes a right to it. Depending upon the context, receivers may be given additional powers, such as powers to sell assets, to pay creditors, and to conduct inquiries and to prepare accounts. The extent of the receiver’s powers in each case will depend upon the orders made at the time of appointment, or by later order to augment the receiver’s powers. There are limitations, however, upon the powers that the Court can grant to receivers, which depend upon the principles that are applicable in the particular context.

70. The present context consists of the dissolution of a partnership comprised of three corporate partners, in circumstances where the partnership and the individual partners are all insolvent.

71. When the Court is asked by a receiver to authorise a course that the receiver proposes to take, the first step must be to determine whether the receiver has the power to take that step. If the receiver has the necessary power, the question will become whether it is appropriate for the Court to authorise the receiver to exercise the power in the manner proposed. If the receiver does not have the power, the Court must first consider whether it is proper to grant the receiver the power; and in a particular case it may be necessary to consider whether the power can be granted retrospectively. If the Court first grants to the receiver the necessary power, it may then authorise the exercise of that power in an appropriate manner.

Issues raised by Mr Shepard’s application

73. I will explain how these issues arise in the present case, before I examine the relevant legal principles.

74. As I have noted above, Mr Shepard has submitted that it is not controversial that he had power to enter into the Deed of Settlement. Yet the principal effect of that deed is that Mr Shepard has agreed to compromise a debt that Mr Shepard has accepted is owed by the Partnership to QCV, in return for compromising debts that Mr Shepard believes are owed by the HN Partner and the Qantac Partner at nil value.

75. As I have said above, the shares in QCV are owned equally by the HN Partner and the Qantac Partner. They will have their own reasons for causing QCV to give up its debt owed by the Partnership in return for those Partners being released from their debts to the Partnership. Those reasons could range from an honourable desire to forbear in favour of the other creditors of the Partnership to a desire to avoid the potential consequences of those Partners being wound up at the suit of Mr Shepard. The Court should not, and does not, speculate as to the reasons why QCV, the HN Partner and the Qantac Partner have taken the course that they have taken. The Deed of Settlement involves a commercial resolution, and it is simply to be noted that there may be many reasons for its making, and the fact that the Deed of Settlement is implemented may have many consequences for the position of the other creditors. The question is whether Mr Shepard has the power to compromise debts owed by and to the Partnership.

76. Mr Shepard is no doubt right when he submits that the Court has already given him power to pay the Partnership's debts, but as a matter of practical reality he has adjudicated upon the proofs lodged by the creditors, and proposes to pay them pro rata in a way that will have the effect that, at least on the basis of the funds in Mr Shepard's hands, once the payments have been made there will be no additional funds available to pay any creditors who may wish to challenge Mr Shepard's adjudication of the proofs of debt. In principle, the Court cannot ignore this reality in deciding whether to give Mr Shepard the authorisation that he seeks.

77. Finally, by order 3 in the draft short minutes of order, Mr Shepard seeks the Court's authorisation to undertake a formal process of calling for proofs of debt from other creditors, adjudicating on any proofs of debt that are received, and in paying all creditors pro rata from the funds in his hands according to his own adjudications of the proofs of debt.

Role and powers of a receiver appointed by the Court

78. The learned editor of Lindley & Banks on Partnership (19 ed) states the following principle on the powers of a receiver of a partnership, at [23-179] (citations omitted):

The functions of a receiver are limited and will not, without the permission of the court, extend to a sale of the partnership assets. The Court cannot confer power on a receiver to do anything which a partner would not have authority to do, whether pursuant to the terms of the partnership agreement or, where relevant, under the general law. A receiver may, as and when required, apply to the court for directions as to the exercise of his powers on any issues where there is doubt.

79. The limitation on the Court's jurisdiction to vest powers in a receiver to matters which the partners would have authority to do is reflected in UCPR rule 26.7 (1), which has been set out above.

80. The source of this principle appears to be the judgment of Cotton LJ in Niemann v Niemann (1889) 43 Ch D 198 at 202, where his Lordship stated the limitation in the following terms:

It is very true the receiver is appointed on behalf of both the parties to the action, but is only for carrying into effect on behalf of both of them those powers which are settled and determined by the contract between them. There is nothing to enable the Court to authorise the receiver to make a new contract between the parties, or to assume to himself that which by the contract between the parties is not given by one to the other. Therefore, in my opinion, it would be wrong to hold that the Court can, by appointing a receiver, enable the receiver to do that which it cannot authorise one partner to do against the will of the other…

81. In Murray v King (1984) 4 FCR 1; (1984) 55 ALR 559 at 565, Sheppard J said:

… But a receiver does not have more than possession of the assets in respect of which he is appointed. His appointment does not in any way affect the right to the property in question. The court itself has possession by its receiver and his possession is that of all parties to the action according to their titles: see Kerr on Receivers, 15th ed, p 130. Furthermore, the receiver is never an agent for the parties entitled except in cases where their rights have been determined: Kerr (ibid), p 131…

82. In King v Peters [2007] NSWSC 200, Hammerschlag J made the following observation concerning the effect of the appointment of a receiver on the rights of parties to the property of which the receiver takes possession:

[16] … the appointment of a receiver to partnership property gives him no more than possession of the assets in respect of which he is appointed and that his appointment does not in any way affect any right to the property in question. The law is that the Court itself has possession by the receiver and his possession is by all parties to the action according to their titles: Murray v King (1984) 4 FCR 1 at 7 citing with approval Kerr on Receivers 15th Ed at 130. In appointing a receiver the Court deals with the possession only, until the right is determined, if the right be in dispute: Kerr and Hunter on Receivers and Administrators 18th Ed at 138 para 6–4…

83. These statements of principle reflect the fact that, except to the extent that the powers vested in the receiver permit the receiver to enter into consensual transactions with third parties, the receiver does not have power unilaterally to affect the rights of third parties in relation to the property of the partnership.

84. Further, in Moloney v Piachniarski [2004] WASC 240; (2004) 54 ACSR 564, Le Miere J was asked to make orders (proposed orders 2(d) and 4) that would empower a receiver to "investigate and enquire into the conduct of the partnership affairs and of all dealings and transactions of or in relation to the partnership"; and within 28 days of the date of his appointment, to provide a written report to the Court and the parties detailing the result of his investigations into certain dealings of the partners. His Honour decided:

[56] I am not prepared to make orders in terms of paras 2(d) and 4 of the second and third defendants' minute. In my view, it is not the function of a receiver and manager to carry out an investigation into the conduct of the partnership affairs by the partners. There are a number of disputes between the parties. If not resolved earlier, they will be resolved in this action.

[57] In any event, I do not consider that the course envisaged by paras 2(d) and 4 of the second and third defendants' minute of proposed orders would be efficacious in this case. The disputes between the parties involve what has happened and been agreed in the past and other questions of fact. A receiver has no power, or indeed means to determine those questions of fact. A receiver has no role to play in the resolution of those disputes.

85. If a receiver cannot be given power to investigate and determine the rights of the partners inter se, then a fortiori it should not be possible to grant power to a receiver to adjudicate the claims made by the creditors of the partnership in a manner that binds those creditors.

86. As the Partnership only has three partners, it does not fall within par (c) the definition of “Part 5.7 body” in s 9 of the Corporations Act, which requires that the partnership consist of more than five members. Were the Partnership a Part 5.7 body, then s 583 of the Corporations Act would have the effect that it could be wound up under Chapter 5 “with such adaptations as are necessary” to accommodate the fact that the Partnership is not a corporation.

87. The winding up of a partnership which is not a Part 5.7 Body attracts significantly different principles and practical consequences to the winding up of a corporation. By operation of the relevant provisions of the Corporations Act, upon the making of a winding up order in respect of a corporation the rights of creditors to enforce their debts are replaced by rights to prove in the winding up. There is a formal process for the giving of notices, the lodgement of proofs of debt, adjudication of the proofs by the liquidator, and formal processes for appeal by creditors from the liquidator’s decisions. The ultimate effect of the winding up and deregistration of the corporation is the formal extinguishment of the creditors’ rights.

88. In the context of the winding up of a partnership such as the Partnership, the partners remain jointly liable for all of the debts of the partnership, and there is no impediment to creditors pursuing the partners for recovery of their debts, save for the practical limitations involved in the pursuit of claims and the availability of assets to meet claims that are established. The fact that a receiver and manager has been appointed by the Court in respect of the business and assets of the partnership only means that control over the assets and the payment of the partnership debts is placed into the hands of the receiver and manager, with whatever powers are granted by the Court to the person so appointed.

89. As the partners of any partnership will generally have power to compromise both debts owed to and debts owed by the partnership, it should be lawful in an appropriate case for the Court to authorise a receiver to compromise the partnership's debts. That is not, however, a power that is ordinarily granted to receivers, and as I have noted above, it is not included in the list of powers in s 420(2) of the Corporations Act.

90. While generally the partners in a partnership will have power to make partial payments of the debts owed to the partnership's creditors, they do not, of course, have any power to adjudicate themselves the amounts payable by the partnership to its creditors when there is any dispute as to whether and if so what amount is payable. Once the Court has given a receiver power to pay the partnership's creditors, the receiver has sufficient power to make partial payments to those creditors. The Court does not, however, have any jurisdiction to grant the power to a receiver to adjudicate on creditors' claims for debts owed by the partnership in a way that would bind the creditors.

91. This result reflects the fact that, where the partners are jointly liable to pay the debts of the partnership, nothing done in the dissolution and winding up of the partnership by the partners themselves, or by a receiver appointed by the Court to exercise the partners' powers, has any effect on the rights of creditors to sue the individual partners, or where the facts permit it, to institute bankruptcy or winding up proceedings against individual partners.

92. I will now return to a consideration of whether the Court should make the orders sought by Mr Shepard in pars 1 to 3 of the short minutes of order that have been set out above.

Consideration of order 1 sought by Mr Shepard

93. As to order 1, I am satisfied that in all of the circumstances the making and implementation of the Deed of Settlement is a sensible commercial outcome in the context of this particular partnership.

94. On the evidence, the three external creditors who were known to Mr Shepard have been paid 100 cents in the dollar. There is no prospect of Mr Shepard recovering any amounts owed by the Partners to the Partnership. The costs of the receivership will be increased pointlessly if Mr Shepard pursues, or further pursues, the winding up of the Partners. It will be pointless for the remaining creditors to take that course. It is desirable for the Partnership to finally be wound up as expeditiously and inexpensively as possible. The practical effect of the Deed of Settlement will be to increase the dividend paid to the remaining creditors from 24.5762 cents in the dollar to 39.2289 cents in the dollar.

95. However, for the reasons I have given above, I do not consider that Mr Shepard had power to enter into the Deed of Settlement, as he has not been given a power to compromise debts owed by or to the Partnership. As the Partners have the power to make those compromises, I take the view that the Court has the jurisdiction to grant the power to compromise to Mr Shepard. Although the granting of that power is not made to receivers as a matter of course, it is an appropriate power to be vested in a receiver when the Court is provided with evidence that establishes that it is in the best interests of the partnership and its creditors that particular debts owed by or to the partnership be compromised in the manner proposed by the receiver.

96. As the Deed of Settlement is conditional upon the Court’s approval of Mr Shepard implementing it, Mr Shepard did not take the course when entering into the Deed of Settlement of binding himself to some consequence without the approval of the Court. In these circumstances, I can see no reason why the Court should not make an order nunc pro tunc granting Mr Shepard power to compromise the debts owed by or to the Partnership in the manner provided for in the Deed of Settlement. It would then be appropriate for the Court to make order 1 as sought by Mr Shepard.

Consideration of order 2 as sought by Mr Shepard

97. As to order 2, Mr Shepard was given the power by order 5 made by Hallen J to pay any liability of the Partnership to the remaining creditors from the proceeds of sale of partnership assets. That power would extend to Mr Shepard making partial payments to each of the remaining creditors. Accordingly, the Court can consider whether it should give the authorisation contained in order 2 without there being any need to grant any additional power to Mr Shepard.

98. The amount of the funds in Mr Shepard’s hands to distribute to the remaining creditors is a matter of fact that will be governed in part by Mr Shepard’s implementation of the Deed of Settlement. As the funds are not sufficient to repay 100 cents in the dollar to the remaining creditors, it would have been proper for Mr Shepard to pay the remaining creditors pro rata if he had accepted all of the remaining creditors’ claims, and it would have been appropriate for the Court to authorise Mr Shepard to take that course.

99. There is a problem, however, in-so-far as Mr Shepard has not accepted all of the remaining creditors’ claims, but has reduced the amounts that he has accepted from the amounts claimed in the manner that I have considered above. In summary, the substantial reduction in QCV’s claim is not problematic because it is consensual as a result of QCV entering into the Deed of Settlement. Mr Shepard has reduced the claims made by Yoogalu by $616.10 to $128,816.90, and the joint claim of Smart Group and Harmon by $18,436.01 to $276,026.82.

100. If the Court makes Order 2, the effect will be to authorise Mr Shepard to apply the remaining funds in his hands (after payment of his fees and costs) pro rata according to his adjudication of the amounts due by the Partnership to the remaining creditors. In considering whether the Court should give Mr Shepard the authorisation contained in order 2, the Court must have regard to the fact that it could not grant Mr Shepard the power to adjudicate creditors’ claims in a manner that bound those creditors, and prevented them from pursuing the whole of their claims against the individual Partners. As in the present case Mr Shepard has in his hands the whole of the assets that were owned by the individual Partners, the proposal for payment of the remaining creditors will have the practical effect that Mr Shepard’s adjudication will be determinative of the amounts received by the remaining creditors. Those creditors can still sue the Partners but that will be a pointless exercise. Consequently, for the Court to authorise Mr Shepard to implement his proposal, the Court will in practical terms be accepting the legitimacy of Mr Shepard’s processes of reasoning in relation to the two remaining creditors’ claims, and will be doing so in circumstances where the Court has denied those remaining creditors any right of appeal, or to be otherwise heard.

101. I do not think that the Court is entitled to proceed upon the basis that the remaining creditors whose claims were reduced by Mr Shepard as a result of his adjudications have willingly accepted those adjudications, solely because all of the remaining creditors were served with Mr Shepard’s notice of motion and the principal evidence upon which he relies (as indicated above). My reason for this view is that the remaining creditors were simply served with the notice of motion, and the relevant parts of the evidence; they were told of the date of the initial directions hearing, and they were asked: “Please let us know if you will be attending”.

102. The remaining creditors were not specifically told that the debts they claimed would be paid pro rata based upon the amounts adjudicated by Mr Shepard, rather than the amounts claimed; that they did not have to accept Mr Shepard’s adjudication if they did not agree with it; and that they would be entitled to challenge that adjudication if they appeared before the Court.

103. I do not think that it would be appropriate, as the application stands at present, for the Court to give Mr Shepard the authorisation that he seeks in order 2. The problem is that, although Mr Shepard has been given power to pay the Partnership’s debts, the proposal that he pay part of the debts claimed by the remaining creditors pro rata on the basis of his own adjudication of the claims, will have the practical effect of making Mr Shepard’s adjudications determinative. That would involve the Court authorising Mr Shepard to take a shortcut in the winding up of a partnership comprising three insolvent corporations that would deprive the remaining creditors of any useful right to challenge the validity of Mr Shepard’s adjudications, which is a right that they would have if the property of the Partnership in Mr Shepard’s hands was left to be distributed in the course of the winding up of the Partners. The fact that Mr Shepard’s proposal may on an overall basis be commercially sensible is not an adequate reason to authorise the Partnership’s assets to be distributed amongst the remaining creditors in a manner that would have the effect, without their consent, of depriving them of rights that they would have in the formal winding up of the Partners.

97. Mr Shepard relied upon my decision in Broadway Plaza Investments Pty Ltd v Broadway Plaza Pty Ltd [2017] NSWSC 1660. In that case, a receiver sought the advice and direction of the Court concerning whether he could properly apply the assets of the partnership in his hands to fully pay a debt claimed by a creditor of the partnership when the receiver had investigated the circumstances in which the debt was incurred and decided that the debt was owed to the creditor, but one of the partners objected to the debt being paid. As a practical matter, the creditor was associated with the other partner. The effect of the judgment was that I held that the Court should authorise the receiver to fully pay a debt claimed by a creditor of the partnership when the receiver after investigation was satisfied that it was a proper debt.

98. The situation in that case, where the receiver seeks to pay fully the debt claimed by a creditor, and the opposition is from a partner, is a different situation from the present where the receiver seeks the authority of the Court to apply the partnership’s funds in his hands pro rata to pay creditors, not based upon the amounts claimed by the creditors, but upon the amounts adjudicated by the receiver. In this case there is no question of the receiver making binding adjudications, but the proposed distribution will make the receiver’s adjudications de facto effective.

99. I have set out the circumstances of the dissolution of the Partnership and its winding up in some detail above. I have noted that there are special features of the present case in-so-far as all of the remaining creditors are related in some way to the Partners.

100. It is appropriate that I consider briefly a number of relevant terms of the Deed of Settlement. Clause 3(c) has the effect that any reduction of the QCV Claim is contingent on the parties complying with cl 4 of the deed. Clause 4 is a confirmation that nothing in the deed varies the rights of any of the Remaining Creditors to participate in any distribution to creditors in relation to the Remaining Claims. “Remaining Claims” is defined in cl 1.1 by means of a list of the five creditors (other than QCV) listed in order 2 of the short minutes of order, with precisely the same amounts set out for the debts owed by the Partnership to those creditors as are set out in order 2.

101. That is a complicated statement, but what it means is that the Deed of Settlement was prepared on the basis that the amounts owed to the remaining creditors were the amounts adjudicated by Mr Shepard. The Deed of Settlement actually requires Mr Shepard to distribute the funds in his hands pro rata in accordance with the adjudicated amounts, rather than the amounts claimed by the remaining creditors.

102. I do not know whether it follows that the remaining creditors have agreed with Mr Shepard’s adjudications.

103. It appears from the table in par 108 of Mr Shepard’s 13 April 2017 affidavit (which sets out the relationship between the creditors and the Partners) that a certain person is a director of both the HN Partner and Yoogalu, and holds 50% of the shares in each. As the HN Partner is a party to the Deed of Settlement, there is a high likelihood that Yoogalu will accept pro rata payment based upon the adjudicated amount.

104. As I understand Mr Shepard’s table, Harmon may not be associated with any of the Partners, but Smart Group’s director is the director of the MM2 Partner. That director also owns directly or indirectly the shares in Smart Group and the MM2 Partner. A doubt arises, however, as to whether Harmon and the Smart Group accept Mr Shepard’s adjudication, because the MM2 Partner is in liquidation and is not a party to the Deed of Settlement.

105. As on an overall basis, the Deed of Settlement appears to be a sensible agreement for Mr Shepard to enter into and implement, even if it requires the funds in Mr Shepard’s hands to be paid pro rata to the remaining creditors on the basis of their claims as adjudicated by Mr Shepard, I will not decline to make order 2; but I will give Mr Shepard an opportunity to make submissions, and to provide further evidence, if appropriate, to support his claim as to why I should give him the authorisation contained in order 2, even though as a practical matter it requires the remaining creditors to accept payment pro rata based upon Mr Shepard’s adjudications, without giving them an opportunity to challenge the validity of Mr Shepard’s reasoning.

Consideration of order 3 as sought by Mr Shepard

113. I will now turn to order 3 as sought by Mr Shepard. If made, that order would authorise Mr Shepard to implement a process for notification, proofs of debt and adjudication by Mr Shepard (without there being any opportunity for creditors to challenge any adjudication made by Mr Shepard). Mr Shepard is not seeking any additional power from the Court that he be able to adjudicate additional claims made by creditors in a manner that binds the creditors. For the reasons I have given above, I do not think that the Court has jurisdiction to grant such a power to a receiver, because the Partners themselves do not have the right to determine in a binding way what they owe to the Partnership’s creditors.

114. Again, however, because the funds in Mr Shepard’s hands are finite, if the Court authorises Mr Shepard to pay all creditors pro rata on the basis of their debts as adjudicated by Mr Shepard, then de facto his adjudications will be effective, and the creditors will be deprived of any practical opportunity to challenge those adjudications.

115. For that reason, I would not make order 3 in the terms sought by Mr Shepard.

116. In my view, even though there are limitations on the powers that the Court can grant to the receiver of a partnership (when it is not being wound up as a Part 5.7 body), and even though the Court should not ordinarily authorise receivers to pay the debts of an insolvent partnership to its creditors pro rata in accordance with adjudications of claims made by the receiver, if the practical effect is to deprive creditors of any means to challenge the receiver’s adjudications, the Court should hesitate to entrench any approach that may prevent the Court being able to utilise the device of appointing a receiver in a manner that permits the cost-efficient and fair winding up of partnerships in appropriate cases. The Court should at least be open to framing the powers that it grants to receivers, and the circumstances in which it will authorise those powers to be exercised by receivers, in a manner that is commercially efficient, while being fair to the partners and all third parties with interests in the partnership property or its business.

117. Difficult questions may arise as to whether the Court has power, in an appropriate case, to require a receiver to advertise for proofs of debt, and to require creditors to lodge proofs of debt or risk the available assets of an insolvent partnership being distributed to creditors who have lodged proofs, so that the practical outcome is that the creditors who do not do so will lose their ability to recover any part of the debts owed to them by the partnership. If the Court does not have appropriate powers, because it lacks the statutory foundation of a regime for the efficient winding up of partnerships with five or less partners, then any receiver appointed to the partnership will necessarily be an interlocutory remedy in advance of actions for the formal bankruptcy of individual partners or the winding up of corporate partners.

118. The primary difficulty may be in determining whether there is a process available to the Court that will lead to creditors being bound, if the creditors do not respond to notices that call for the submission of proofs of debt for the purpose of the winding up of the dissolved insolvent partnership, whether the non-response results from a failure to receive the notice, or some omission by the creditors. For creditors who do respond by lodging proofs of debt, it may be possible for receivers to formulate a series of orders that would permit the Court to adjudicate on creditors’ claims in some manner that binds the partners and the creditors. That could possibly involve the use of a procedure based upon the Court’s jurisdiction to resolve competing claims when money is paid into court.

119. If a process cannot be formulated that protects the rights of the creditors both legally and practically, then there may be no resort short of proceedings for the bankruptcy or the winding up of the partners. Of course, where both the partnership and the partners are insolvent, in other than the most exceptional or simple of cases, the appropriate course for the Court to take is likely to be to leave the rights of creditors of the partnership to be resolved in the orthodox manner by the dissolution and winding up of the partnership, and proceedings for the bankruptcy or winding up of the individual partners.

120. I recognise that this problem is an acute one in the present case, because of the fact that I have recorded above that there is reason to believe that the Partnership has no creditors other than the remaining creditors, who are in one way or another associated with the Partners.

121. It may be that the problem faced by Mr Shepard arising out of the possibility that there are creditors of the Partnership who exist but are not known to him could be resolved properly by some regime of the publication of notices which leads to no additional creditors making claims. If the evidence permitted a finding by the Court that as a matter of fact there were no further creditors, then that might justify the Court making an order that authorises Mr Shepard to pay the property of the Partnership in his hands to the remaining creditors (as discussed in relation to order 2 sought by Mr Shepard). That course would require Mr Shepard to resolve the problem that arises out of his reduction of the debts claimed by two of the remaining creditors as a result of his adjudication. That problem may be resolved if those three creditors consented to the course proposed by Mr Shepard in respect of the two debts.

122. I will give Mr Shepard an opportunity to consider these reasons for judgment and to make further submissions concerning how he wishes the Court to resolve his application.

Approval of Mr Shepard’s remuneration, costs and expenses

123. I now turn to Mr Shepard’s application for the Court’s approval of his remuneration, costs and disbursements.

124. As set out above, at the time Mr Shepard was appointed on 8 June 2016, Hallen J made order 10 by which Mr Shepard became entitled to reasonable remuneration for the work performed as receiver calculated at the rates disclosed in the Schedule of Rates a copy of which was Ex FL 5.

125. On 4 August 2017, Kunc J made order 3 by which: “The Receiver’s remuneration to 28 July 2017 in the sum of $68,748 (excluding GST] is approved”. That is the only order of the Court of which I am aware that has approved any of Mr Shepard’s remuneration.

126. Order 4 of the short minutes of order sought by Mr Shepard would approve Mr Shepard’s remuneration from 29 July 2017 to 31 July 2018 in the sum of $18,438.50 (excluding GST).

127. I note from par 122 of Mr Shepard’s 13 April 2017 affidavit that, for the period 16 June 2016 to 15 March 2017, his remuneration claimed was $57,597.50, his disbursements were $3,671.90, and his legal fees including disbursements were $71,433.73.

128. Mr Shepard has also dealt with his fees, costs and expenses in par 36 of his 14 August 2008 affidavit. He states that his remuneration, costs and expenses up to 28 July 2017 were $184,779. He states that for the period 29 July 2017 to 31 July 2018, his disbursements were $53.40, his internal disbursements were $533.20, his disbursements at cost was $6.82, his own remuneration was $18,438.50, and his legal fees were $80,751.25. Mr Shepard then estimates his future remuneration for the period from 1 August 2018 as being $15,000, his expected future internal disbursements as being $1000, his expected disbursements as being $100, and his expected future legal costs as being $32,000. The amount of $32,000 has been increased to $37,000 in the amended notice of motion.

129. I have noted above that Mr Shepard has omitted from his short minutes of order some of the claims in respect of costs that were made in his amended notice of motion. Additionally, I am unsure as to the rationale of Mr Shepard seeking the Court’s approval of some parts of his remuneration, costs and expenses, but not others (if I understand the position correctly).

130. I propose to defer dealing with Mr Shepard’s application in relation to his remuneration, costs and expenses until his position has been explained to me more fully. This should not cause a problem in relation to the deadline by which the approval to Mr Shepard entering into the Deed of Settlement must be given.

Disposition

131. I propose to publish these reasons for judgment, to give Mr Shepard and his legal advisors an opportunity to consider them, and then to hear further from Mr Shepard at a time to be appointed at 9:30 AM one morning by arrangement with my associate.

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Decision last updated: 05 December 2018