Imagecolor (SA) Pty Ltd (in Liq) v Haslam & Anor No. Scciv-01-1189

IMAGECOLOR (SA) PTY LTD (In Liq) v HASLAM & ANOR
[2002] SASC 200
Appeal from a Master

DOYLE CJ: The defendants in civil proceedings in this Court appeal against a decision by a Master refusing to order, pursuant to s 1335(1) of the Corporations Law, that the plaintiff corporation be required to give sufficient security for the costs of the defendants.
The plaintiff is a company in liquidation. It was wound up by a resolution of its creditors on 24 July 1996. A liquidator was appointed on that day. The plaintiff has brought the proceedings in this Court at the instance of the liquidator.
Facts
The first defendant is an accountant. The second defendant is a firm of accountants of which the first defendant is a partner. The plaintiff alleges that the defendants provided advice to the plaintiff on a proposal to acquire a business upon the incorporation of the plaintiff, and to assume certain liabilities of the company that previously conducted the business; that as a result of the acquisition the liabilities of the plaintiff substantially exceeded its assets; that the business had been making losses before the plaintiff was incorporated, and continued to make losses after the plaintiff acquired the business; that in the circumstances the acquisition and the later trading losses resulted in the plaintiff incurring the losses that ultimately led to the plaintiff’s insolvency and winding up. The plaintiff alleges that it acted on the advice of the defendants and that in giving that advice they were in breach of contractual and fiduciary duties owed to the plaintiff. If the plaintiff’s claim fails it has no means of paying the defendants’ costs.
On 15 December 1999 the Committee of Inspection resolved as follows:
“That the liquidator’s remuneration in respect of this administration be set at $40,000 plus 25 per cent of gross recoveries from litigation, adjusted to take into account GST from 1 July 2000, and that payment of same be authorised.”
On 11 December 2001 the liquidator submitted to the Committee of Inspection a proposal for the distribution of any proceeds from the action in question. At the date of the application to the Master, the proposal had not been agreed to, but the liquidator expected that it would be agreed to. The proposal was that at least 25 per cent of the “gross recoveries” from the action be distributed to creditors, that the liquidator’s maximum remuneration be “25 per cent of gross recoveries from this action plus GST”, that the liquidator’s remuneration and legal fees be paid equally from the monies recovered after setting aside the 25 per cent payable to creditors, and that any residual amount after paying the liquidator’s remuneration and legal fees be distributed to creditors.
The liquidator has sworn in an affidavit that if this arrangement is implemented, and if the action is wholly successful, he will be paid approximately $175000. The liquidator says that at 1 February 2002 there are unpaid fees due to him of approximately $213000. In other words, under the arrangement the liquidator will recover less than the full amount of his fees calculated on a time basis. I am unsure of the position were the resolution of 15 December 1999 to remain in force. I proceed on the basis that it would not substantially change the position. For what it is worth, I add that under the proposed new arrangement the liquidator anticipates that if the action is successful unsecured creditors will be paid at the rate of 39 cents in the dollar.
The appeal
The appeal is by way of rehearing: Supreme Court Rule 79.03(1). As the appeal is against the exercise of a broad discretion, the Court will not interfere unless there is an error of principle, unless the decision rests on a significant error of fact, or unless the decision is manifestly unreasonable: Remm Construction (SA) Pty Ltd v Wallbridge & Gilbert Pty Limited (1991) 162 LSJS 99 at 105; Troisi Steel Fabrications Pty Ltd v Johns Perry Industries Pty Ltd (1992) 165 LSJS 333 at 334.
It is unnecessary to cite authority for the proposition that under s 1335 of the Corporations Law, the Court has a wide discretion. The fact that the plaintiff company is unable to pay the costs of the defendant if the action is unsuccessful enlivens the Court’s jurisdiction under s 1335. But that fact neither gives rise to a predisposition in favour of the making of an order, nor is it itself a reason not to make an order for the giving of security.
Mr Whitington QC, counsel for the defendants, submits that although the Master correctly identified the general nature of the discretion that he had to exercise, the Master subsequently erred in his approach to certain matters that he identified as relevant to the exercise of the discretion.
The liquidator discharging his duty
Mr Whitington submits that the Master wrongly treated as relevant the fact that the company sues at the direction or instance of the liquidator, who in that respect is discharging his duty to take reasonable steps to recover what he can for the shareholders and creditors of the company. I agree that the Master treated this as a relevant factor, and as a factor counting against the making of an order.
Mr Whitington submits that this reflects an erroneous approach. He submits that the fact that the plaintiff is in liquidation, and proceeds at the instance of the liquidator, cannot be a reason not to make an order for the giving of security. Mr Whitington relies in this respect upon remarks of Meagher JA in Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120. There, Meagher JA pointed out that a distinction should be drawn between cases in which the liquidator personally is plaintiff, and cases in which a company in liquidation is the plaintiff. In the former case, he said that the practice was not to make an order for security for costs against a liquidator, but as he pointed out the position was necessarily different under s 1335. He added that the fact that the liabilities of the company exceeded its assets could not be of itself a basis for refusing to make an order to give security. The fact that the company was in liquidation, or more precisely the fact that the company was unable to meet the plaintiff’s costs (a common result of a liquidation), was the very thing that enlivened the jurisdiction of the Court to make an order for security. Meagher JA concluded by saying (at 123):
“Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.”
In considering this submission it is relevant to bear in mind that what attracted Mr Whitington’s criticism was the Master’s reliance upon the following statement by Bollen J, with which the other members of the Court agreed, in Spiel v Commodity Brokers Australia Pty Ltd (In Liq) (1983) 35 SASR 294 at 302:
“I think it relevant in the exercise of discretion to remember that the claim is really being brought by the liquidator. He is an officer of the Court. He has available to him information which reasonably suggests to him that the appellant owes a substantial sum to the respondent. His duty is to take reasonable steps to recover what he can for creditors and shareholders. Moreover he has a duty to the Court. I need not dwell on that duty.”
It is important to bear in mind that this observation was made by Bollen J in the course of dismissing an appeal against a decision refusing to order security, and that Bollen J said no more than that the matter identified by him was a relevant factor.
The same view was expressed by Lander J, with whom the other members of the Court agreed, in Eddy & Morphett v Mac Audio Pty Ltd (In Liq) [2000] SASC 145 at [39].
Bearing in mind that s 1335 applies whenever the plaintiff is unable to pay the costs of the defendant, I consider that within the range of cases embraced by s 1335, it is a relevant factor that the particular plaintiff sues at the instance of a liquidator discharging statutory functions. To so hold is not to treat the inability of the plaintiff to meet the defendant’s costs, the matter that enlivens the discretion, as a reason not to make the order. It is to look behind that fact to the further fact that the plaintiff is in liquidation, and that the action is brought by the liquidator exercising statutory functions. I agree that this is not a matter of any great weight, but I do not regard it as irrelevant. In any event, authority requires me to accept it as a relevant factor, as did the Master.
The means of the shareholders and creditors
Mr Whitington submitted that the Master also failed to have regard to the burden on the plaintiff to show that those who stood behind the plaintiff, and who would benefit from the action if it were successful, were without the means to enable the plaintiff to meet an order for security were one to be made. That is, if the plaintiff contends that the making of an order for security would frustrate the litigation, the plaintiff must show that those who stand behind the plaintiff could not enable the plaintiff to meet an order if made.
Mr Whitington’s submission is a principle well recognised in this field: see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4.
The Master does not appear to have dealt with this matter in his reasons. But the liquidator’s affidavit indicates that the priority creditors and the secured creditor are claimants for relatively modest amounts, as are the unsecured creditors except for the Australian Taxation Office. The dividend to unsecured creditors is unlikely to exceed 39 cents in the dollar at best.
Under the circumstances, I consider that the Master probably took the view that the creditors could not reasonably be expected to provide to the liquidator the means to meet an order for security, if one were made. Cases in this area have held that if there is no practical prospect of obtaining a significant contribution from the creditors or shareholders, then it is open to the Court to conclude that the making of an order for security will frustrate the litigation.
Under the circumstances, it was open to the Master to so conclude. I am not satisfied that the Master erred in this respect. I am not satisfied that, in the circumstances, this was a case in which it could not be said that the making of the order would frustrate the claim.
The cause of the liquidation
The Master’s reasons indicate that a factor against making an order requiring security for costs was that if the plaintiff made good its allegations, the transaction upon which the defendants advised the plaintiff had led to or had substantially contributed to the plaintiff’s insolvency. That is, but for the acquisition of the business in question, the assumption of the liabilities and the subsequent trading at a loss, the plaintiff would not have become insolvent.
In treating this as a relevant factor, the Master followed previous decisions in this Court treating that as a relevant factor: Jeffcott Holdings Ltd v Paior (1997) 15 ACLC 28 at 33 and Jeffcott Holdings (In Liq) v Paior (1994) 14 ACSR 239 at 241.
Once again, that same authority requires me to treat this as a relevant factor, and the Master was not in error in doing so.
Apart from authority, I regard this as a relevant factor. I agree that not too much can be made of it. It is no more than a relevant factor. It must not be overlooked that the defendants deny their liability, and deny in any event that any advice they gave led to the plaintiff’s insolvency. Nevertheless, I consider that a plaintiff who brings a claim for damages alleging that the defendant’s conduct led to its insolvency is in a better position to resist an application for an order for the giving of security than is a plaintiff whose claim is unrelated to the cause of its insolvency or its inability to meet an order for security.
To say this is not to overlook the fact that the defendants deny their liability. It is merely to bear in mind that the claim which the plaintiff makes is one which, if made good, can be differentiated from a claim unrelated to the plaintiff’s insolvency and inability (if there is such an inability, which is a different question) to meet an order for the giving of security.
I do not accept that it is appropriate for me to scrutinise the facts alleged on either side in any detail. It suffices to deal with the matter in a fairly broad-brush fashion as I have done.
The Master did not err in this respect.
The liquidator’s interest in the action
Much of the argument on appeal related to the arrangement between the liquidator and the Committee of Inspection for the sharing of the proceeds of the litigation.
The liquidator has accepted the prospect of a share of the proceeds of the litigation in substitution for any claim for remuneration. I proceed on the basis that any payments already made to the liquidator in the course of the liquidation are on account of and subject to the existing resolution by the Committee of Inspection, and the revised proposed resolution. That is, I proceed on the basis that the liquidator will not receive payments already made to him and the relevant share of the proceeds of the action.
I also proceed on the basis that the resolution of December 1999 and the latest proposed resolution are retrospective and prospective. That is, they apply to remuneration for work done from the beginning of the liquidation and to work done in the future.
I accept the affidavit evidence of the liquidator that, if the action substantially succeeds, it is likely that he will receive the amount stated by him. That is, it is likely that he will receive less than the amount of his fees calculated on a time basis. I do not overlook the fact that it does not necessarily follow that the liquidator would be entitled to be paid the amount of his fees calculated on a time basis.
Mr Whitington submits that the effect of the arrangements between the liquidator and the Committee of Inspection is that the liquidator has acquired an interest in the claim or in its proceeds, and is in the same position as a creditor of the company or as an outside funder of the litigation who has funded the litigation with a view to financial gain. He submits that on the reasoning of the Federal Court in Bell Wholesale the liquidator is now a person whose means must be considered in deciding whether the making of an order for security will frustrate the litigation. He submits that the liquidator has the means to enable the plaintiff to meet such an order, and that therefore it cannot be said that the making of an order will frustrate the litigation. If that is the appropriate conclusion, I agree that it would substantially undermine the Master’s decision.
Anticipating the answering submission that the liquidator will not recover the full amount of his fees on a time basis under the resolution, and might be better off in that respect if he had not agreed to the resolution, Mr Whitington submits that circumstances must be considered as at the date of the resolution. I take him to refer to the resolution of December 1999. He makes the point that had the present claim been successfully compromised or brought to judgment shortly after December 1999, the liquidator would have collected the agreed payment, but would have done much less work, and so would have fared much better. How much better is difficult to tell, but I am prepared to accept that in the circumstances postulated by Mr Whitington, the liquidator probably would have recovered more than the amount of his fees on a time basis.
Mr Whitington also makes the point that the liquidator has substituted a claim for a share of the proceeds of the litigation for a claim for costs in the liquidation generally. The share of the proceeds is not in substitution only for a claim for fees incurred in respect of the litigation. Mr Whitington argues that this is another reason why the liquidator should be treated as in substance in the same position as an outside funder of the litigation.
I do not accept this submission.
I consider that there is no difference of substance between the position of the liquidator in this case and that of a liquidator who is charging on a time basis, whose fees are unpaid, and whose only prospect of recovering the fees is from the proceeds of litigation before the court. Mr Whitington did not suggest that in such a case the means of the liquidator are to be treated as relevant when considering whether the making of an order will frustrate the litigation. Accordingly, as it seems to me, if I am right in thinking that the liquidator of the plaintiff is in substantially the same position as a liquidator in the circumstances postulated, that is a reason to reject Mr Whitington’s submission.
My reasons for treating this liquidator like the liquidator in the circumstances postulated are these. If there was no resolution for a payment by reference to a percentage share of the proceeds, the liquidator would be entitled to payment of his fees and expenses on a time basis. On the facts, the entitlement if anything might be somewhat greater than the entitlement under the resolution. I can see no reason to treat the resolution for remuneration by way of a lump sum or by way of a percentage of the proceeds of litigation, as essentially different from an agreement for remuneration on a time basis. As well, if the resolution in question had not been passed, and the liquidator had brought the liquidation to its present state in the hope of recovering his fees from the proceeds of the action, the position would be substantially the same as it now is. As I see it, all that the resolution of the Committee of Inspection has done is to convert a claim by the liquidator for fees on a time basis into a claim for a lump sum fee, contingent on the success of the litigation.
I find no reason in this to regard the liquidator as a person whose means are to be treated as relevant in deciding whether the making of an order for security will frustrate the litigation. I consider the position of an outside funder of the litigation as quite different. Such a person does not have the responsibilities of a liquidator. Such a person makes a commercial decision to fund the litigation in the hope of financial gain.
Accordingly, in my opinion the Master was not in error in this respect.
I have considered the position as at the date of the application for the order for security.
Mr Whitington submits that matters should be considered as at December 1999. While I do not agree, I would reach the same result even if I accepted that submission. The only difference is that as at December 1999, were an application for security for costs to have been made, it could have been postulated that were the litigation to be fairly quickly and successfully resolved, the liquidator might get a windfall gain. I am unable to quantify that gain. But it would still be a case in which the liquidator had agreed to a lump sum remuneration, contingent on the outcome of the case, in substitution for his fees. I do not agree that the prospect of a windfall gain of itself radically transforms the situation.
But if I am wrong in that, I rest my decision on the fact that the relevant time is the time when the application for security for costs is made, and at that stage of things it could not be said that the resolution by the Committee of Inspection is anything more than another way of remunerating the liquidator.
In putting this submission Mr Whitington did not attack the validity or propriety of the resolution. Indeed, he relied on the resolution. However, he did cast doubt on the validity or propriety of the resolution, suggesting that it might be champertous or might not be an arrangement that the Court would approve under s 473 of the Corporations Law, had the liquidator been appointed by the Court. This liquidator was not appointed by the Court. The remuneration of this liquidator would not be fixed under s 473(3). The remuneration is fixed by the Committee of Inspection under s 499(3), and may be reviewed by the Court under s 504, on application by a shareholder or creditor or by the liquidator.

Mr Whitington submitted artfully that although he was not attacking the validity or propriety of the resolution, the arrangement reflected by the resolution could not be regarded as an arrangement for remuneration, but should be characterised as an agreement by the liquidator to make a speculative investment in the proceeds of the action. Accordingly, he argued, it could not properly be characterised as an arrangement for the remuneration of the liquidator in connection with the liquidation.
I do not agree. The substance of the arrangement is that the liquidator has agreed to remuneration by way of a contingent lump sum, rather than on a time basis.
As I am not reviewing the liquidator’s remuneration under s 504 of the Corporations Law, I hesitate to comment on the arrangement. But in view of the submissions advanced, I consider it appropriate to make the following brief observations. I do so because Mr Whitington submitted that in this respect the case raised a novel issue of principle. In considering the following observations it should be borne in mind that I was not taken to the relevant case law, if there is any, relating to the review of a liquidator’s remuneration under s 504.
I can see no reason in principle why a liquidator should not be remunerated by an appropriate lump sum, or by reference to an appropriate percentage of the assets dealt with in a liquidation or recovered as a result of litigation. Young J pointed out in Burns Philp Investment Pty Ltd v Dickens [No.2] (1993) 31 NSWLR 280 at 284-285, that in the past it was the practice to remunerate liquidators on a percentage basis, and not on a time basis. It is now apparently the practice to remunerate liquidators on a time-charge basis. I see no reason why, in appropriate circumstances, the former practice could not be adopted. Mr Whitington submitted further that the former practice did not embrace a lump sum or percentage fixed prospectively. He submitted that a lump sum or percentage would be appropriate only if fixed retrospectively, in light of the known course of the liquidation. But the only case to which I was referred, Re Carton Limited (1923) 128 LT 629 does not support his submission. The circumstances of that case are rather complex. But as I understand the facts, in that case the Committee of Inspection fixed the liquidator’s remuneration at 5 per cent on realisations and at 5 per cent on distributions at an early stage of the liquidation. Although this was invalid, because the resolution had to be passed by the company in general meeting, the reasons of Lawrence J contained no suggestion that the prospective fixing of a percentage fee was inappropriate.
As I have said, I am not conducting a review of the liquidator’s remuneration under s 504. I say no more than that I can see no obvious reason why the court would not accept the resolution as an appropriate approach to remuneration. That is not to say that the court will necessarily come to that conclusion, or would necessarily adopt the precise percentage adopted by the Committee of Inspection. I do not regard the possibility that, on a review, the liquidator might recover less than is contemplated by the resolution, as something which has any bearing on the substance of the appeal before me.
Conclusions
I have dealt with the criticisms made by Mr Whitington of the Master’s reasons. I have not found any error of principle by the Master. I might have given less weight than did the Master to some of the matters relied upon by the Master. But that is not a reason for me to interfere. The Master’s decision is not one that is obviously unreasonable. There is no reason for me to interfere with the decision.
Accordingly, I dismiss the appeal.

[2002] SASC 200

25 June 2002