In the matter of Dungowan Manly Pty Limited

[2015] NSWSC 225

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Dungowan Manly Pty Limited [2015] NSWSC 225

Hearing dates:

11 March 2015

Date of orders:

11 March 2015

Decision date:

11 March 2015

Jurisdiction:

Equity Division - Corporations List

Before:

Brereton J

Decision:

Liquidator’s application for approval of compromise and revocation of leave to bring derivate action dismissed with costs

Catchwords:

CORPORATIONS – external administration – winding up – liquidator’s applications – for directions – for approval of compromise – where leave granted for creditor to bring derivative action against shareholders – where hearing of derivative action imminent – where liquidator negotiates settlement of derivative action but not all necessary parties to settlement have assented to it – where approval would sacrifice hearing at risk that there would be no settlement – where majority of creditors oppose application – application dismissed

Legislation Cited:

(Cth) Corporations Act 2001, s 477(2A), (2B), s 511

Cases Cited:

In the matter of Dungowan Manly Pty Ltd (in liquidation) [2014] NSWSC 856
In the matter of Dungowan Manly Pty Ltd (in liquidation) [2014] NSWSC 1721

Category:

Principal judgment

Parties:

Adam Farnsworth (in his capacity as liquidator of Dungowan Manly P/L) (first plaintiff)
Dungowan Manly Pty Ltd (second plaintiff)
Patrick David McLaughlin (first defendant)
Jennifer Therese McLaughlin (second defendant)
Turner Freeman Lawyers (third defendant)
Cross-Claim:
Patrick David McLaughlin (first cross-claimant)
Jennifer Therese McLaughlin (second cross-claimant)
Adam Farnsworth (first cross-defendant)
Turner Freeman Lawyers (second cross-defendant)
Loafer Pty Ltd (third cross-defendant)
Peter William Brown (fourth cross-defendant)
Louise Jane Brown (fifth cross-defendant)
Garmen Pty Ltd (sixth cross-defendant)

Representation:

Counsel:
S Golledge (plaintiffs)
Mr D McLaughlin (first defendant & first cross-claimant on first cross-claim)
Mrs J T McLaughlin (second defendant/second cross-claimant on first cross-claim)
Mr S J Philips (third defendant/cross-claimant on second cross-claim)
Ms B K Nolan (third and sixth cross-defendants on first cross-claim)

Solicitors:

Somerset Ryckmans (plaintiff)
Turner Freeman (third defendant/cross-claimant on second cross-claim)
Harris & Co (third and sixth cross-defendants on first cross-claim)
Gavin Parsons & Associates (fourth and fifth cross-defendants on first cross-claim

File Number(s):

2014/204311

Judgment (EX TEMPORE – revised 16 MARCH 2015)

1. HIS HONOUR: As it was almost 5.30pm when the hearing of the liquidator’s application - for a direction pursuant to (Cth) Corporations Act 2001, s 511, that the liquidator would be justified in entering into the proposed settlement agreement with the shareholders, orders pursuant to (Cth) Corporations Act 2001, s 477(2A) and (2B) approving that agreement, and an order revoking the leave previously granted to the McLaughlins to prosecute a derivate action against the 3rd, 4th, 5th and 6th cross-defendants – concluded, it was not possible at that hour to deliver an elaborate judgment, but as the substantive proceedings remained listed before Black J the following morning for a further two days it is plainly desirable that the parties have my decision immediately. These reasons are a slightly elaborated version of those I gave ex tempore.

2. A sufficient description, for present purposes, of the background and the substantive proceedings may be found in the judgments of Black J in In the matter of Dungowan Manly Pty Ltd (in liquidation) [2014] NSWSC 856 and In the matter of Dungowan Manly Pty Ltd (in liquidation) [2014] NSWSC 1721. The proceedings were set down for hearing – of the liquidator’s application for directions, and the McLaughlins’ derivative action – for four days commencing yesterday. After negotiations on the eve of the hearing, which continued n the first day of the hearing, an offer was communicated by the solicitors for the cross-defendants to the solicitors for the liquidator in a latter dated 11 March 2015, which is expressed to be conveyed on instructions from their clients, but involves a compromise of the claims against all the shareholders, including those who are not parties and for whom the solicitors do not act.

3. It may be – although I have not had to reach a concluded view – that the proposed compromise would, in commercial terms, be a reasonable one which absent certain features of this case might attract the court’s approval. However, I concluded that in the particular circumstances of this case, the application should be dismissed.

4. The main reason for this was that when the matter was explored with counsel for the cross-defendants, it became clear that there was no offer capable of acceptance that would give rise to a binding agreement with those shareholders who were no parties to the proceedings, but only a proposal by those shareholders who were parties that the claims against the other shareholders be compromised on the same basis. In effect what is before the Court is a proposal by one albeit significant group of shareholders, who are party to the proceedings, claiming that the other shareholders who are not party to the proceedings will accede to the proposed compromise if it is approved, but not asserting any authority to bind them. While the cross-defendants may be confident that the assent of the other shareholders could be secured, there is evidence that suggests that a number of them may be difficult to locate and/or doubtful means. As the evidence stands, it just cannot be known whether or not each of the other shareholders will assent to the proposed agreement, and if even one does not the proposal as it stands would fail.

5. I fully appreciate that the court may give directions under s 511 and approvals under s 477 before a binding agreement is concluded; indeed, it is usually preferable, though not essential, that the court be approached before there is a binding agreement, so that it is not confronted by a fait accompli. But here, an application to revoke the leave granted to the McLaughlins to prosecute their derivative claim is a necessary corollary of the application for approval. In circumstances where the McLaughlins have had to resort to a derivative action because the liquidator would not or could not bring the claim against the shareholders, where they are unrepresented, where they are at risk of being bankrupted on their debt to their former solicitors Turner Freeman, and where they have prosecuted the derivative claim to a final hearing for which they are ready and with which they wish to proceed, it would be quite unreasonable to revoke their leave on the basis of what is no more than a possibility that all the non-party shareholders might assent to a proposed compromise that has belatedly been negotiated by the liquidator - who would not take the proceedings in the first place - with one group of shareholders. To do so would sacrifice the hearing dates, at the risk, if the proposal failed, of having to return to court for a hearing, in many months time, to the significant prejudice of the McLaughlins (and of Turner Freeman). There is quite insufficient evidence that the other shareholders would assent to the proposal so that an acceptable settlement would be concluded , as to justify incurring that risk.

6. Furthermore, both the McLaughlins and Turner Freeman – one or other of whom constitutes the overwhelming majority in value of the creditors, oppose the application. One of the reasons why s 477(2A) requires the court’s approval of compromises is to ensure that the interests of creditors are considered, and their wishes are always relevant, though not conclusive. But in a case such as the present where leave to bring a derivative action has been granted, there is less reason than usual for the court to defer to the liquidator’s commercial judgment. Indeed, the opposition to the application of the overwhelming majority of creditor is a significant additional consideration in concluding that it should be dismissed.

7. It was chiefly for those reasons that I ordered that the interlocutory process be dismissed with costs.

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Decision last updated: 16 March 2015