Hoath v Comcen Pty Ltd

[2003] NSWSC 746

CITATION:	Hoath v Comcen Pty Ltd [2003] NSWSC 746
HEARING DATE(S):	04/07/03
JUDGMENT DATE:	15 August 2003
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Parts of amended originating process struck out. Security for costs refused.
CATCHWORDS:	CORPORATIONS - voluntary administration - directors' statutory duty to assist administrator - whether owed to individual creditor - administrator's duties - whether owed to individual creditors
LEGISLATION CITED:	Corporations Act 2001, ss.438B, 445D, 445G, 1335 Supreme Court Rules, Part 53
CASES CITED:	Brash Holdings Ltd v Katile Pty Ltd (1994) 12 ACLC 472 Indaba Pty Ltd v McVeigh [2000] WASCA 332 Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21 Yandil Holdijngs Pty Ltd v Insurance Co of North America (1985) 5 ACLC 542
PARTIES :	Mark Hoath - First Plaintiff Mortgage.Com.Au Pty Ltd - Second Plaintiff Comcen Pty Ltd - First Defendant Scott Darren Pascoe - Second Defendant Liam Bal - Third Defendant
FILE NUMBER(S):	SC 1756/03
COUNSEL:	In person - First and Second Plaintiffs Mr J.T. Johnson - First and Third Defendants
SOLICITORS:	In person - First and Second Plaintiffs Watson Mangioni - First and Third Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

FRIDAY, 15 AUGUST 2003

1756/03 – MARK HOATH & ANOR v COMCEN PTY LIMITED & 2 ORS

JUDGMENT

1 By an amended originating process filed in court on 4 July 2003 (which is substantially the same as the previously filed originating process), the plaintiffs (Mr Hoath, as first plaintiff, and Mortgage.Com.Au Pty Limited, as second plaintiff) seek

(a) an order under s.445G of the Corporations Act 2001 (Cth) “voiding or setting aside” a deed of company arrangement in respect of Comcen Pty Limited, the first defendant;

(b) alternatively, an order under s.445D terminating the deed of company arrangement “and placing Comcen Pty Limited into liquidation”;

(c) alternatively, damages against the second defendant, Mr Pascoe, the administrator of Comcen Pty Limited;

(d) damages against the third defendant, Mr Bal;

(e) “exemplary and aggravated damages”;

(f) costs;

(g) “such other order(s) as this honourable Court deems appropriate”.

2 The claims depend on the following propositions advanced in the amended originating process:

1. The first plaintiff and the second plaintiff are creditors of the first defendant.

2. The third defendant, as a director of the first defendant, owed a duty, upon the appointment of the second defendant as voluntary administrator of the first defendant, to provide an accurate statement of affairs to the second defendant.

3. The third defendant breached that duty by omitting to include in the statement of affairs he furnished an indication that the first plaintiff and the second plaintiff were creditors of the first defendant; and this was done deliberately so that the third defendant and his associates would have a majority of the votes at the meeting of creditors to approve the deed of company arrangement.

4. The second defendant, as voluntary administrator, owed a duty to creditors of the first defendant and breached that duty by failing to recognise that the first plaintiff and the second plaintiff were contingent creditors and to notify them that the first defendant had gone into voluntary administration, with the result that they did not have an opportunity to vote on the deed of company arrangement proposal, which proposal would not have been adopted had they voted.

3 The specific duty with respect to furnishing a statement of affairs to which the third defendant, the sole director and secretary of the first defendant, is alleged to be subject is wholly statutory and derives from s.438B(2):

“Within 7 days after the administration of a company begins or such longer period as the administrator allows, the directors must give to the administrator a statement about the company’s business, property, affairs and financial circumstances”.

4 Section 438B(4) says that a person must not fail to comply with s.438B(2), while s.438B(5) says that an offence based on s.438B(4) is an offence of strict liability (the significance of which comes from s.6.1 of the Criminal Code). These provisions form part of a section headed “Directors to help administrator”, the general thrust of which is to require directors to deliver documents and books to an administrator and otherwise to provide information and assistance to the administrator. There is no indication that any of the duties created by s.438B is otherwise than a duty sourced in statutory command or that it is a duty owed to or enforceable by any particular person. In particular, there is nothing to show (or to imply) that the duty imposed by s.438B(2) is a duty owed to each creditor or that any right of action arises in a creditor if a director fails to do what the section requires. The section obviously exists to assist the due progress of the administration and, if failure to comply with s.438B(2) causes a private right of action to arise in any person (a question I expressly decline to decide), that person can only be the administrator or, perhaps, the company. If it is suggested by the plaintiffs that the duty of the third defendant to deliver a statement of affairs is somehow an aspect of the statutory duties referred to in ss.180 to 183, the fact that those provisions are “civil penalty provisions” by virtue of s.1317E would mean that a compensation order, in case of breach, could only be sought by ASIC: see s.1317J.

5 To the extent that the postulated duty of the third defendant to deliver a statement of affairs may be seen as an aspect of the general fiduciary duties owed by a director, the company itself is the sole beneficiary of the duty and, even with the assistance of Part 2F.1A, an alleged breach cannot become the subject of proceedings at the suit of a creditor.

6 The plaintiffs’ claims against the second defendant require corresponding analysis. These are based on the proposition that the second defendant, as administrator, owed “a duty to creditors” which was breached by “failing to act with a reasonable degree of care and diligence” by not recognising that the plaintiffs were contingent creditors by reason of the separate proceedings brought by them against the first defendant; or, knowing that there were contingent creditors, failing “to act in good faith in the best interests of all creditors” by failing to notify the plaintiffs (as contingent creditors) that the first plaintiff had gone into voluntary administration.

7 The only conceivable basis on which such a duty of the second defendant as administrator could be said to arise would be under some aspect of ss.180 to 183 or as a fiduciary duty at general law. The nature of the fiduciary duties of an administrator, or aspects of them, were considered by the Court of Appeal in Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21. For reasons already mentioned, duties of these kinds are owed to the company, not to any individual creditor, and a creditor as such has no standing under Part 2F.1A to bring derivative proceedings on behalf of the company in respect of an alleged breach.

8 The plaintiffs have shown no basis on which breach of any of the duties to which I have referred, even if shown, would cause a right of action in damages to arise in any creditor of the first defendant, as against either the second defendant or the third defendant. The claims for damages against those defendants must therefore be struck out. Furthermore, since there is no conceivable basis shown on which either plaintiff can maintain a claim for damages against the company itself (first defendant), the global claims for “exemplary and aggravated damages” apparently directed indiscriminately at all defendants must also be struck out.

9 That leaves for consideration the claims based on ss.445G and 445D, being the claim for an order that the deed of company arrangement be declared void and the claim for an order that the deed be terminated. In each case, the order may be sought by a “creditor of the company”: see s,445G(1) and s.445D(2)(a). Each of the first plaintiff and the second plaintiff professes to be a “creditor of the company”. The first and third defendants say that neither the first plaintiff nor the second plaintiff is a “creditor of the company”. (I note that the addition to the claim based on s.445D of a claim for an order “placing Comcen Pty Limited into liquidation” is not justified by that section and must be struck out.)

10 In this context, “creditor” must, I think, be given the wide meaning recognised in Brash Holdings Ltd v Katile Pty Ltd (1994) 12 ACLC 472, so that it encompasses every person who has a claim against the company, whether present or future, certain or sounding in damages only. It is said by the plaintiffs, but denied by the first and third defendants, that each plaintiff occupies such a position in relation to the first defendant.

11 The first plaintiff’s status as a creditor of the first defendant is said by him to come from an employment or analogous relationship under which the first defendant became bound to pay the first plaintiff for services rendered. The second defendant’s status as a creditor of the first defendant is said to derive from claims it has for damages on various bases, including passing off, breach of bailment, conversion and conduct proscribed by s.52 of the Trade Practices Act 1974 (Cth). These claims of the first and second defendants are asserted by them in proceedings 1599 of 2002 in this Division and are articulated in a statement of claim running to some 41 pages. The first defendant’s position is that neither the first plaintiff nor the second plaintiff is a creditor and that this is borne out by the fact that proofs of debt lodged by the first plaintiff and the second plaintiff have been rejected. The riposte of the two plaintiffs is that, by interlocutory process filed in the present proceedings on 27 May 2003, they have appealed against the rejection of their proofs of debt.

12 It seems to me that to reach any final and concluded view as to whether each plaintiff is truly a creditor of the first defendant, according to the applicable test I have mentioned, it will be necessary to determine a number of the issues (including apparently contested questions of fact) raised on the pleadings in proceedings 1599 of 2002, being issues also relevant to the plaintiffs’ appeal against rejection of their proofs of debt. That is not a task that can sensibly or safely be undertaken on the present application. It is sufficient, at this stage, to say that the claims of the first defendant and the second defendant to be creditors of the first defendant are not so obviously hopeless and devoid of foundation as to warrant the striking out of the claims based on their creditor status, being those under ss.445G and 445D.

13 It therefore becomes necessary to consider the application of the first and third defendants for orders that both the first plaintiff and the second plaintiff provide security for costs.

14 It is said in submissions filed for both plaintiffs that the second plaintiff “is a $4 company and is essentially impecunious”. There is also a statement that the first plaintiff is impecunious. And he, it seems, is clearly enough the only person standing behind the second plaintiff. Neither of these assertions by the plaintiffs is, as I understand it, challenged by the first and third defendants.

15 The application for security for costs is made pursuant to Part 53 of the Supreme Court Rules and, so far as the second plaintiff is concerned, s.1335 of the Corporations Act 2001 (Cth). The court’s inherent jurisdiction is also invoked. The fact that both plaintiffs are without financial resources means that the threshold question upon such an application – whether there is reason to believe that the plaintiffs will be able to pay the costs of the defendants – must be answered favourably to the defendants as applicants for security for costs.

16 The inquiry with respect to the second (corporate) plaintiff therefore moves to the stage described by Murray and Miller JJ in Indaba Pty Ltd v McVeigh [2000] WASCA 332:

“The second stage in the process ... is to exercise a general and unfettered discretion whether or not to make an order and, if so, how much security is to be provided and in what form.”

17 A particular matter to be addressed at this second stage is whether an order for security for costs would operate oppressively to shut the relevant plaintiff out from claims properly maintainable by it or, putting it another way, whether the proceedings would be stultified. The guiding principle was stated by Clarke J in Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 5 ACLC 542:

“(t)he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.”

18 Given the impecuniosity of the second plaintiff (as well as of the first plaintiff who stands behind it), it seems to me that an order for security for costs against the second plaintiff will necessarily mean that it is precluded altogether from litigating the claims it considers itself to have which, on the material I have seen, may be regarded as at least arguable.

19 Turning then to the first plaintiff, I can see no basis on which any of the criteria in Part 53 rule (1)(a) to (d) could be said to be satisfied. Impecuniosity alone is no basis for ordering security against an individual.

20 I make the following orders:

1. Strike out paragraphs 18, 19 and 20 of the amended originating process filed on 4 July 2003 and the words “and placing Comcen Pty Limited into liquidation” where they appear in paragraph 17.

2. Claims in paragraphs 4 and 5 of the interlocutory process of the first and third defendants filed on 13 June 2003 stood over to 10 am on 18 August 2003 before me in the Corporations List.

3. Interlocutory process of the first and third defendants filed on 13 June 2003 otherwise dismissed.

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Last Modified: 08/18/2003