House of Golf Chatswood P/L v McManus and OrsMcManus and 2 Ors v House of Golf Chatswood and 5 OrsVardon Golf Co P/L (In Liq) v McManus and 1 Or

[2005] NSWSC 1078

CITATION:	House of Golf Chatswood P/L v McManus & OrsMcManus & 2 Ors v House of Golf Chatswood & 5 OrsVardon Golf Co P/L (In Liq) v McManus & 1 Or [2005] NSWSC 1078
HEARING DATE(S):	17/06/05
JUDGMENT DATE :	26 October 2005
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
DECISION:	1. Dismiss each appeal; 2. appellant pay the respondents' costs of the appeals.

CATCHWORDS:	PRACTICE AND PROCEDURE - Appeal from Master - Transfer of proceedings from District Court to Supreme Court - Leave to proceed against a company in liquidation - Where defendants in District Court proceedings claim a set-off against debt sought to be recovered by liquidator - Grounds of appeal discussed -Discretion exercised anew - Corporations Act ss 500(2), 553C - Master's decision upheld.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Supreme Court Rules 1970 (NSW) District Court Act 1973 (NSW)
CASES CITED:	Gye v McIntyre (1991) 171 CLR 609 House v R (1936) 55 CLR 499 BHG Nominees Pty Ltd v Ellis Young Investments Pty Ltd (1998) 16 ACLC 1539 Capita Financial Group Ltd v Rothwells Ltd (No. 2) (1989) 15 ACLR 348 Nommack (No 100) Pty Ltd v FAI Insurances Ltd (in liq) (2003) 45 ACSR 215 Vagrand Pty Ltd (In Liq) v Fielding & Ors (1993) 10 ACSR 373; 41 FCR 550
PARTIES:	House of Golf Chatswood Pty Ltd v John Patrick McManus & Ors John Patrick McManus & 2 Ors v House of Golf Chatswood Pty Ltd & 5 Ors Vardon Golf Co Pty Ltd (In Liq) v John Patrick McManus & 1 Or
FILE NUMBER(S):	SC 6445/03; 4583/04; 2971/05
COUNSEL:	Appellant (6445/03, 2971/05): C R C Newlinds, A Lo Surdo Respondent (6445/03, 2971/05): L Einstein
SOLICITORS:	Appellant (6445/03): Corrs Chambers Westgarth Appellant (2971/05): Gray & Perkins Respondents (6445/03, 2971/05): Cowley & Hearne Lawyers

LOWER COURT JURISDICTION:	Supreme Court (Master)
LOWER COURT FILE NUMBER(S):	6445/03; 4583/04; 2971/05
LOWER COURT JUDICIAL OFFICER :	Master McLaughlin

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

WHITE J

Wednesday, 26 October 2005

6445/03 House of Golf Chatswood Pty Ltd v John Patrick McManus & Ors
4583/04 John Patrick McManus & 2 Ors v House of Golf Chatswood & 5 Ors
2971/05 Vardon Golf Co Pty Ltd (In Liq) v John Patrick McManus & 1 Or

JUDGMENT

1 HIS HONOUR: In these proceedings Vardon Golf Company Pty Ltd (In Liq) (“Vardon”) appeals from orders made by Master McLaughlin, as McLaughlin AJ then was, granting leave to Mr and Mrs McManus and North Shore Golf Pty Ltd to proceed against Vardon pursuant to s 500(2) of the Corporations Act 2001 (Cth), and removing proceedings commenced by Vardon against Mr and Mrs McManus in the District Court to the Supreme Court to be heard together with proceedings 6445/03.

2 In the District Court proceedings, Vardon sued Mr and Mrs McManus for $473,768.17 and interest in respect of golfing equipment supplied by it to Mr and Mrs McManus between July 2002 and 31 August 2003. Mr and Mrs McManus then operated a business of selling golfing equipment by retail at stores at Crow’s Nest and Chatswood.

3 In proceedings no. 6445/03, the House of Golf Chatswood Pty Ltd, (“House of Golf Chatswood”), seeks an order for specific performance of an agreement made by Mr and Mrs McManus as vendors and it as purchaser of the stock and business of the Chatswood Store, or damages in lieu of specific performance. It claims damages for alleged breaches of the agreement. Mr and Mrs McManus and North Shore Golf Pty Ltd have filed a cross-claim in those proceedings. Vardon is the third cross-defendant to that cross-claim. The Master granted leave to the cross-claimants to that cross-claim to proceed with the cross-claim against Vardon.

4 The other cross-defendants to that cross-claim are the House of Golf Chatswood, the House of Golf Australia Pty Ltd, Byron Golf Corporation Pty Ltd, Mr Phillip Dominic McKinnon and PD&L McKinnon Nominees Pty Ltd. It is alleged that Mr McKinnon was a director, and in some cases the sole director, of each of the corporate cross-defendants and that he, or he and his wife, or McKinnon Nominees, were shareholders.

5 Mr and Mrs McManus allege that in 2002, they and Mr McKinnon agreed that they would establish a franchise network in NSW for the sale of golfing equipment by retail. Mr and Mrs McManus would operate their retail businesses at Chatswood and Crow’s Nest as a franchisee within the franchise network. There would be a head franchisor company in which Mr and Mrs McManus, Mr McKinnon, and a Mr Robertson, through their respective companies, would be shareholders. Mr McKinnon was to be responsible for the day-to-day conduct of the head franchisor. Mr and Mrs McManus would be charged a franchise service fee for sales made at the Chatswood and Crow’s Nest businesses, but in turn would be entitled to a fee on the turnover of all of the NSW stores in the proposed franchised network, in consideration of the franchise network being allowed to use their trading name. A new franchise store would be opened at Bondi Junction to be used as a training centre for franchisees, which would be controlled by the three parties, but initially be under Mr McKinnon’s supervision. Mr McKinnon would cause Vardon to pay for the golfing equipment purchased by Mr and Mrs McManus and other franchisees within the franchise network and then invoice them for the amounts so paid by Vardon to wholesale suppliers. Any rebates which Vardon received would be passed on.

6 Mr and Mrs McManus allege that from about June 2002 until about November 2003, they conducted the Chatswood and Crow’s Nest businesses as a franchisee under the name “Big John’s – The House of Golf”. Other franchised stores also became part of the franchise network. These operated from Bondi Junction (through a company controlled by each of the three parties), and at seven other locations.

7 They allege that from about August 2002, Mr McKinnon and Vardon took over most of the management of their financial affairs relating to the Chatswood and Crow’s Nest businesses, including maintaining the books of account and financial records for those businesses, becoming signatories to the McManus’s bank accounts, arranging for payment on behalf of Mr and Mrs McManus of amounts calculated by them to be owing to trade creditors of Mr and Mrs McManus, and providing financial advice to Mr and Mrs McManus in relation to their retail golfing business, including advice concerning stock levels, advertising and staffing levels.

8 Mr and Mrs McManus allege that from approximately August 2002, to the knowledge of Mr McKinnon, Mr McManus suffered from depression and an anxiety disorder such that he was in a position of special disadvantage in making business decisions. They allege that Mr McKinnon and Vardon took advantage of Mr McManus’s condition and that Mr McKinnon made certain representations, which resulted in their agreeing to sell the Chatswood business, and their business name “Big John’s Discount Golf”, and their shares in the franchisor and other franchisee companies. The alleged misrepresentations included representations as to Mr and Mrs McManus’s solvency, and the value of the Chatswood business. It is alleged that Mr McKinnon represented that for them to remain solvent, Mr and Mrs McManus would have to sell these assets, but as it was likely there would be some delay before a buyer could be found for the Chatswood business, the McKinnon interest would form a transitory entity to purchase the Chatswood business, and Mr McKinnon would do all that was reasonably necessary to maximise the return to Mr and Mrs McManus from the sale of the Chatswood business. These representations are alleged to have been false and misleading. Mr and Mrs McManus allege that their financial position had not been as dire as Mr McKinnon had represented it to be, that it had not been necessary for them to sell their assets, that the value of the Chatswood business at the time was greater than it was represented to be, and that Mr McKinnon had not intended to assist them by forming a “transitory entity” to purchase the business and maximise the return for them, but rather House of Golf Chatswood, a company of which Mr McKinnon was the sole director and shareholder, was incorporated to purchase the business for substantially less than its fair market value. It is alleged that Vardon knew of these facts. Mr McKinnon and his wife were its directors, and they and McKinnon Nominees were its shareholders. It is alleged that Vardon had a duty to disclose the true position to Mr and Mrs McManus and failed to do so, and thereby breached fiduciary duties which it owed to them. It is alleged that Vardon, by not disclosing the falsity of what Mr McKinnon represented, itself engaged in misleading and deceptive conduct.

9 It is alleged that Mr McKinnon threatened to cause Vardon to call in the debt which he represented to Mr and Mrs McManus that they owed to Vardon, and that if the debt were called in, they would be unable to repay a debt owed to the ANZ Bank secured over the home of Mr McManus’s parents with the result that his parents would lose their home. It is alleged that in this way he took advantage of Mr McManus’s position of special disadvantage and overbore Mr McManus’s will.

10 It appears to be common ground that on or about 31 August or 1 September 2003, House of Golf Chatswood took possession of the Chatswood store and commenced operating the business. Mr and Mrs McManus claim to have suffered damage, being the loss of the value of the benefits which they would have derived from conducting the Chatswood business from 1 September 2003 and, if the sale transactions are not set aside, the difference between the fair market value of the assets sold and the price for which they were sold. Those damages have not been quantified.

11 A claim is also made against Vardon for equitable compensation for the alleged breaches of fiduciary duty in connection with its failure to disclose the alleged misleading and deceptive conduct of Mr McKinnon. The amount of such compensation is also not quantified, but presumably would be the same as the damages claimed for the alleged breaches of the Trade Practices Act 1974 (Cth).

12 Mr and Mrs McManus also claim that instead of deducting 2.5% of the turnover of the Chatswood and Crow’s Nest businesses as a franchise service fee, Mr McKinnon caused 4% of the turnover of those businesses to be deducted and paid into the bank account of House of Golf (NSW). The full amount of this claim is also unquantified, but it is said to be at least $53,797.85. It is alleged that by permitting this payment to be made, Vardon breached its fiduciary duties to the McManuses.

13 There is a further claim that Vardon failed to pass on to Mr and Mrs McManus rebates received by it in respect of golfing goods purchased by them for the Chatswood and Crow’s Nest businesses. The rebates alleged to have been retained by Vardon and not passed on are alleged to have amounted to $4,768.50.

14 There is a further claim that Mr McKinnon and Vardon caused $23,100 to be transferred from Mr and Mrs McManus’s trading account to House of Golf Australia, to which money that company had no entitlement.

15 There is also a claim against Vardon that it has failed to deliver up the McManus’s books of account and financial records, as a result of which Mr and Mrs McManus have suffered loss and damage, in particular, the incurring of accountancy fees. That claim is not yet quantified.

16 Finally, Mr and Mrs McManus have foreshadowed seeking leave to amend the cross-claim to include a claim in respect of goods transferred from their Crow’s Nest and Chatswood stores to the Bondi store between late August 2002 and 13 September 2002, allegedly at the direction of Mr McKinnon. It was alleged in correspondence to the solicitors for the House of Golf - Bondi Pty Ltd that Mr McKinnon failed properly to account for those transfers and a claim was made totalling $109,514.79. In reply, the solicitors for the House of Golf – Bondi Pty Ltd, asserted that any goods transferred from Chatswood to Bondi were transferred at the direction of Vardon, and that House of Golf – Bondi Pty Ltd purchased the goods from Vardon, not from Mr and Mrs McManus. Mr and Mrs McManus have foreshadowed they will seek leave to amend the cross-claim to maintain a further claim against Vardon in respect of these transactions.

17 The cross-claim is complex. It will raise issues of credit, particularly as between Mr McKinnon and Mr and Mrs McManus. It will require expert evidence to establish the value of the Chatswood business and the financial position of Mr and Mrs McManus at the time the representations were allegedly made. It is likely to require medical evidence as to Mr McManus’s mental health. This is evident from the pleadings.

Reasons of the Master

18 The learned Master held that it was appropriate to grant leave to the cross-claimants to continue the cross-claim against Vardon and that the District Court proceedings should be transferred to the Supreme Court. This would allow the issue of the setting-off of the respective claims to be heard in the one court, and would prevent inconsistent findings being made in two separate proceedings in separate courts. In relation to the grant of leave under s 500(2) of the Corporations Act, the learned Master said that he did not consider the claims of Mr and Mrs McManus to be hopeless. He also said that there was considerable substance in the submissions made to him by counsel for Mr and Mrs McManus regarding set-off. Mr and Mrs McManus submitted that pursuant to s 553C of the Corporations Act, and having regard to Gye v McIntyre (1991) 171 CLR 609, they were entitled to set off their claim, against Vardon’s claim in the District Court proceedings against them for the price of goods sold and delivered. The learned Master said:

“ 20 Vardon also submits that the reference to the setting off of any claim made by Mr. and Mrs. McManus’s against Vardon against the claim by Vardon against the Mr. and Mrs. McManus pleaded in the District Court proceedings is irrelevant to the question of whether or not the leave presently sought should be granted or is, to adopt the phrase of Senior Counsel for Vardon, ‘a red herring’. Vardon points to the fact that liquidators constantly deal with these questions relating to set off.
21 It seems to me, however, that there is considerable substance in the submissions regarding set off. If the claim by Vardon against the Mr. and Mrs. McManus is to be determined by a Court in circumstances where the underlying involvement of the sole director and principal shareholder of Vardon is relevant not only to the District Court proceedings but especially to the claim brought against Vardon by the Mr. and Mrs. McManus, grounded upon the assertion of misleading and deceptive conduct under the Trade Practices Act, and to the claim for equitable compensation, then it seems to me, in accordance with the principles enunciated by the High Court in respect to a bankrupt in Gaye v McIntyre , that the question of set off has considerable significance.
22 If the claim by the one is heard by a Court, then it is inappropriate that a claim by the other be determined, at least in the first instance, by a liquidator. ”

Appellants’ Contentions

19 Vardon accepted that as it appealed against an adverse exercise of discretion, it was necessary to establish that the Master had acted upon a wrong principle, or taken into account irrelevant matters, or mistaken the facts, or not taken into account material considerations, or that the result was so manifestly unreasonable that the exercise of his discretion must have miscarried. (House v R (1936) 55 CLR 499 at 504-505). It contended that the Master made the following errors:

(a) He concluded that it was inevitable that if a proof of debt was lodged, the liquidators would reject it; when there was no evidence to justify that conclusion and the conclusion was contrary to unchallenged evidence of the liquidator, Mr Shepard, that if a proof of debt was lodged he was willing to investigate it and determine its validity in accordance with his statutory obligations;

(b) the Master was heavily influenced by the concept of set-off, whereas that was irrelevant, because a liquidator was perfectly able, when dealing with a proof of debt, to deal with questions of set-off;

(c) the Master assumed that Mr and Mrs McManus had a larger claim than the monetary claim to the extent it had been quantified, and thereby took into account an irrelevant consideration;

(d) the Master failed to take into account a relevant consideration namely, that there was no evidence before him as to what Mr and Mrs McManus’s defence to the District Court proceedings would be. He wrongly rejected the liquidator’s submission that the question of whether there were related issues between the cross-claim and the District Court proceedings could not be determined at that stage in the absence of a defence having been filed in the District Court;

(e) the Master erred in not coming to a view as to the strength or weakness of Mr and Mrs McManus’s claim which appeared to be very weak;

(f) most importantly, the Master failed to take account of the fact that Mr and Mrs McManus brought the application for leave, having made a conscious decision not to lodge a proof of debt; and

(g) the Master failed to take into account that a grant of leave would substantially interfere with the order of winding-up of Vardon and have an adverse effect on the company and its shareholders, failed to take into account the shortfall to unsecured creditors of Vardon, and the unlikelihood that Mr and Mrs McManus would recover more from litigation than if their claims were admitted to proof.

20 I will deal with the submissions in this order.

Inevitable Rejection of a Proof of Debt

21 Notwithstanding the terms of its notice of appeal, I did not understand Vardon in its submissions to challenge the relevance of the likelihood of a proof of debt being rejected and of there being an appeal from such a rejection. It is clear that this is a relevant consideration as to whether leave to proceed against an insolvent company should be given. (See for example BHG Nominees Pty Ltd v Ellis Young Investments Pty Ltd (1998) 16 ACLC 1539 at 1544; Capita Financial Group Ltd v Rothwells Ltd (1989) 15 ACLR 348 at 352; Nommack (No 100) Pty Ltd v FAI Insurances Ltd (In Liq) (2003) 45 ACSR 215 at [18]). Rather, the challenge is that the Master made a finding which was contrary to unchallenged evidence from the liquidator.

22 It is not clear what weight the Master placed upon this matter. He recorded (at [13]) the submission made on behalf of Mr and Mrs McManus that it was inevitable that if a proof of debt was lodged and was rejected by the liquidator, there “may” be an appeal to the Supreme Court which would raise the same allegations. The learned Master did not find that it was inevitable that if a proof of debt was lodged it would be rejected. He was entitled to find that if a proof of debt was lodged and was rejected, then Mr and Mrs McManus would appeal from the rejection. There was unchallenged evidence from Mr McManus to that effect.

23 The learned Master would also have been entitled to reach the view that although the liquidator would carry out his statutory duty to give due consideration to a proof of debt, it was likely that he would reject it. There were two reasons for this view. The most important is the complexity and the nature of the claims brought by Mr and Mrs McManus. On their face they are claims whose resolution would require the cross-examination of Mr and Mrs McManus and Mr McKinnon, the consideration of expert evidence, and substantial legal argument. There was also evidence before the Master that Mr Shepard had expressed the view that the cross-claim did not have much merit. The liquidator in an affidavit had objected to the reception of this evidence, but it was included in the materials provided to me and formed part of the records before the Master. It did not appear from the materials provided to me that the Master had rejected the evidence. In any event, there is fresh evidence since the trial to support the view that it is likely that a proof of debt would be rejected. The liquidator’s amended notice of appeal and his submissions contend that Mr and Mrs McManus’s action is weak.

24 As I have said, it is not clear to me to what extent the learned Master took the first alleged irrelevant consideration into account. However, in my view, he was entitled to take into account that it was inevitable that if a proof of debt were lodged and rejected, there would be an appeal from the rejection. He was also entitled to form the view that it was likely that a liquidator would not accept a proof of debt against Vardon from Mr and Mrs McManus for a substantial sum for damages or equitable compensation arising from the alleged misrepresentations and misconduct of Mr McKinnon.

Set-off

25 The ground of appeal was that the Master erred in taking into account the irrelevant consideration that unless leave was granted, the respondents would lose an entitlement to set off their claim against that brought by the appellant against them in the District Court of New South Wales in accordance with s 553C(1), and that he failed to take into account that any entitlement the respondents may have to set off their claim against that brought by the appellant against them in the District Court, could be determined by the liquidator upon the respondents lodging with him a proof of debt.

26 These contentions do not accurately reflect the Master’s reasons. It is plain from the last sentence of paragraph 20 of the Master’s reasons, which I have quoted above, that the Master did not dispute that liquidators, in dealing with proofs of debt, can deal with questions of to set-off. The thrust of the Master’s reasons in paragraphs 21 and 22 of his judgment, is that the same claims which Mr and Mrs McManus seek to raise against Vardon in their cross-claim, and which, if leave to continue the cross-claim against Vardon were refused, would be subject of consideration by the liquidator, are claims they would be entitled to ventilate in the District Court, by way of defence to the claim brought by Vardon against them.

27 This ground of appeal would only have substance if the learned Master was wrong in holding that Mr and Mrs McManus would be entitled to rely upon s 553C of the Corporations Act in their defence to the District Court proceedings, relying upon the grounds in their cross-claim. Vardon did not point to any authority which would preclude Mr and Mrs McManus from relying upon those principles in their defence to the District Court proceedings. In Gye v McIntyre the High Court said (at 622):

“ Section 86 is a statutory directive (“shall be set off”) which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon ‘the option of either party’. ”

28 It is apparent from this passage that Mr and Mrs McManus would be entitled in the District Court proceedings to rely upon the statutory set-off under s 553C of the Corporations Act to contend that nothing can be recovered against them in proceedings by the trustee. The Master was correct in saying that it would be undesirable for the same questions to be determined in the District Court and by the liquidator.

29 I see no error in this part of the Master’s reasons.

Amount in Issue

30 The appellants’ submissions that the Master took into account an “assumed larger claim than that particularised” does not do justice to the Master’s reasoning, or the case propounded by Mr and Mrs McManus. It is not necessary on an application for leave that the claim for damages be fully quantified. (Vagrand Pty Ltd (In Liq) v Fielding & Ors (1993) 10 ACSR 373 at 377, 380). The Master was dealing with the liquidator’s submission that the amount claimed in the proposed cross-claim had been particularised at no more than $4,678.50. Although the learned Master did not say so, that submission was wrong. There have been other quantified claims. In any event, the Master was correct in saying, as he did, that the Court should not disregard the claims for damages or equitable compensation which have not yet been quantified. The cross-claimants assert that the quantification of the claim depends upon expert evidence. It is not necessary that an applicant for leave adduce evidence of every element of the claim. (Vagrand Pty Ltd (In Liq) v Fielding & Ors supra at 377). There was also evidence that the McManuses solicitor is awaiting discovery from the cross-defendants before the claim can be completed.

Commonality of Issues in the District Court

31 No defence had been filed in the District Court when the proceedings were heard by the Master. No defence was due. Vardon contends that the Master erred in not averting to the fact that there was no evidence before him at all as to what, if any, defence there might be to those proceedings and hence no evidence as to what issue, if any, there was in those proceedings. However, the Master was entitled to take the view, which he did, that the matters raised in the cross-claim would, by virtue of s 553C of the Corporations Act, be relied upon by way of defence in the District Court. That is what Mr and Mrs McManus submitted.

Strength of the Claim

32 The appellant submitted that it was incumbent upon the Master to come to some view as to the strength or weakness of the cross-claim and it was not sufficient for the Master to conclude that the cross-claim was “not hopeless”. The relevant question was whether Mr and Mrs McManus had established that their cross-claim against Vardon has a solid foundation and gives rise to a serious dispute. (Vagrand Pty Ltd (In Liq) v Fielding (1993) 41 FCR 550 at 556). I do not understand their Honours in Vagrand Pty Ltd (In Liq) v Fielding to propound a different test from whether the application raises a serious question to be tried. (At 556-557). Although the Master did not express himself in those precise terms, it is plain that he considered that the affidavits of Mr McManus which were before him gave rise to a serious question to be tried. I agree. It is true that there was not evidence establishing a prima facie case that all elements of the causes of action were established. That is not to be expected where expert evidence will be necessary to do that. It is not necessary that there be evidence of all such elements. It will no doubt be a nice question to decide when Mr McKinnon was acting in a personal capacity, or when he was acting as an officer of Vardon. There is prima facie evidence of the alleged representations having been made by Mr McKinnon. If they are found to have been misleading or deceptive, it will no doubt be a nice question whether knowledge of the alleged falsity of the representation should be attributed to Vardon, whether any duties Vardon assumed to Mr and Mrs McManus extended to requiring it to disclose such matters, or whether it engaged in misleading or deceptive conduct either through Mr McKinnon or by not disclosing such matters. It is enough to say that the evidence before the Master disclosed that there is a serious question to be tried. It was not necessary, and it would have been undesirable, for the Master to go further than to conclude that that was so.

Respondents Decided not to Lodge a Proof of Debt

33 Vardon contended that the most important relevant factor which the Master failed to take into account, was that Mr and Mrs McManus, for reasons only known to themselves, brought the application for leave to proceed against Vardon, having made a conscious decision not to lodge a proof of debt. This was not a matter which the Master overlooked. He recorded Vardon’s reliance upon the failure of Mr and Mrs McManus to lodge a proof of debt. For myself, I do not understand the importance of this contention. The fact that Mr and Mrs McManus sought leave to proceed against Vardon, rather than by proceeding by way of lodgement of a proof of debt, throws up the issue as to whether leave should be granted. I do not see why it is itself a reason for refusing the grant of leave. The reason Mr and Mrs McManus have not lodged a proof of debt was explained in submissions before the Master as being that the nature of the claim against Vardon was such that the liquidator was unlikely to be able to come to an informed decision on the merits of the case, and that the overwhelming likelihood was that any proof of debt lodged would be rejected. Mr McManus had deposed that if it were rejected, he would appeal from the decision. It was submitted on his behalf that he would be bound to appeal from a rejection of a proof of debt to preserve his right of set-off. I consider these to be valid considerations and I do not consider that the Master erred.

Interference with the Orderly Winding-Up and Adverse Effect Upon the Company and its Shareholders

34 Before the Master, the liquidator submitted that if leave to proceed against Vardon were granted, it would interfere with the orderly winding-up of the company. Mr Shepard deposed that the only matter that needed to be attended to before the finalisation of the liquidation was the recovery of Vardon’s debtors. The only substantial outstanding debtors were Mr and Mrs McManus and a company of which Mr McManus is a director and shareholder. Mr Shepard gave evidence that but for the cross-claim, he anticipated being in a position to finalise the affairs of Vardon within 12 months. He said that if leave to proceed were granted against Vardon, he would be unable to determine what dividend, if any, would be payable to its creditors until the cross-claim was determined. He also said that Vardon would incur significant costs in defending the cross-claim and that the amount of the liquidator’s remuneration would be significantly higher if leave were granted, because the liquidator would be required to administer the defence of the proceedings. He deposed that if leave were granted, and Mr and Mrs McManus were successful, then there was a real prospect that as unsecured creditors they would recover nothing. There was, in his view, a better prospect of their being able to recover something in respect of their claims if their claims were admitted to proof.

35 His conclusion that Mr and Mrs McManus as judgment creditors might recover nothing seemed to assume that all of the remaining funds would be exhausted in the costs of litigation and additional administration.

36 There is no doubt that these are relevant considerations to the question of whether leave should be granted. The learned Master did not expressly deal with them except to record that he had the benefit of the parties’ detailed written submissions, and that in all of the circumstances he considered the case was one where it was appropriate for the court to grant the leave sought. I doubt that the Master overlooked these submissions. His was an ex tempore judgment and it is perfectly understandable that he should not have referred specifically to each of the matters on which the liquidator relied. However, I accept that by not referring to these considerations, and not referring to the extent to which he accepted or rejected them, or the comparative weight he gave them, he failed to give adequate reasons for his conclusion. It will therefore be necessary for the Court to exercise the discretion under s 500(2) afresh.

Re-exercise of Discretion

37 I agree with the Master’s order granting the leave sought by the cross-claimants to continue their cross-claim against Vardon, notwithstanding the considerations which the Master did not specifically address raised by the liquidator that the grant of leave would interfere with the orderly winding-up and would result in the incurring of additional costs.

38 The fact that Mr Shepard was not cross-examined does not mean that his opinions on these matters should be accepted uncritically. That is not to say there is not some force in what he says. However, to my mind the balancing exercise which has to be undertaken must include the likely effect on the winding-up of Vardon of an appeal if the proof of debt is rejected in whole or in part. It must also take into account the likelihood of the proof of debt being rejected in whole or in part, and also, the impact upon the winding-up of Mr and Mrs McManus’s defence in the District Court raising, pursuant to s 553C of the Corporations Act, the same issues as arise in the cross-claim. In expressing his opinions about how the grant or refusal of leave might have an impact on the liquidation, Mr Shepard did not address those considerations. Thus, in paragraph 22 of his affidavit of 7 November 2004, Mr Shepard deposed that he anticipated being in a position to finalise the administration in around twelve months’ time but for the proceedings. But, it seems to me, that unless the claims to be contained in a proof of debt were wholly admitted by the liquidator, the finalising of the liquidation would be delayed by new proceedings brought by way of an appeal from a rejection of a proof of debt. The delays might be longer. Such proceedings would have to be joined up in some way or another with the District Court proceedings and the balance of the cross-claim in the Supreme Court.

39 Again, Mr Shepard’s estimate of the costs and liquidator’s remuneration which will be incurred in defending the cross-claim provides no reasonable comparison with the likely costs which would be incurred if separate proceedings by way of an appeal against a proof of debt are instituted, or, if the same issues are ventilated in the defence of the District Court proceedings. Nor did he identify the extent of the work he assumed he would have to do, and the legal costs which would be entailed in giving proper consideration to the proof of debt.

40 As the claims by Vardon against Mr and Mrs McManus and the claims by them against Vardon are the matters holding up the finalisation of the liquidation, prima facie, the most efficient and swiftest means of finalising the liquidation is to ensure that the disputes are heard by one judge.

41 In my view, the complexity of the legal and factual issues, the inevitability of there being an appeal from a rejection of a proof of debt, the likelihood that the liquidator would reject a proof of debt, and the availability of the same issues by way of defence in the District Court are compelling reasons for upholding the Master’s grant of leave and his order for the removal of the District Court proceedings to the Supreme Court to be heard at the same time as the Supreme Court proceedings. It is no answer to say that the liquidator might admit the proof of debt. It is unlikely that the liquidator would be in a position to do so properly, without incurring substantial costs. Nor does it follow that if leave to proceed against Vardon is confirmed, that the liquidator would be bound to contest the claim. If he forms the view during the course of preparation of the litigation that it is well founded, and he can consent to judgment. In my view, there is good reason to depart from the usual procedure of requiring a claimant to lodge a verified proof of debt and determining any rejection of the proof of debt by way of appeal. In the long run, the nature of the claim is such that that course is not likely to be protective of the interests of the company, but to be detrimental to it.

42 The usual condition was imposed upon the Master’s order that the cross-claimants not enforce any judgment against the company without leave of the court.

43 For these reasons, I dismiss the appeal in proceeding number 6445/03.

Transfer of District Court Proceedings

44 Vardon also appealed from the Master’s order for the transfer of the proceedings to the Supreme Court. An order was made pursuant to s 145 of the District Court Act 1973. The appeal was advanced even if the appeal against the grant of leave to continue the cross-claim against Vardon failed. It was submitted that there was no evidence that there was any issue of substance between the parties raised by the District Court action, and that given the comparative delays in the resolution of the District Court and Supreme Court proceedings, it was not in the interests of the company or its creditors for the District Court proceedings to be removed to the Supreme Court. However, the Master was entitled to find as he did that the issues raised by the cross-claim could be raised in the District Court action. It is plainly desirable that both proceedings be heard together as the Master ordered.

45 It was objected by Mr and Mrs McManus that the appeal from a decision of the Master transferring the proceedings pursuant to s 145 of the District Court Act was incompetent. It was submitted that that decision was a final decision, and as a result any such appeal could only be brought to the Court of Appeal. (Supreme Court Rules Pt 60 r 10 & 17(k)). Rather than debate the question of whether an order pursuant to s 145 of the District Court Act was final or interlocutory, senior counsel for Vardon applied orally for an order in the court’s original jurisdiction transferring the proceeding back to the District Court.

46 No authority was cited as to whether an order under s 145 of the District Court Act was final or interlocutory. In my view it was an interlocutory order. It did not decide any of the rights or obligations of the parties. It could effectively be countermanded by an order for re-transfer. Accordingly, the appeal was competent but should be dismissed. I refuse Vardon’s application that the proceedings which were proceeding number 6067/03 in the District Court, and have since become proceeding number 2971/05 in the Supreme Court, be transferred back to the District Court.

47 I dismiss each appeal and order that the appellant pay the respondents’ costs of the appeals.

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