In the Matter of Fieldsun Pty Ltd (in liq); McDonald, Geoffrey David and Anor

[1998] FCA 784

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 3087 of 1998

IN THE MATTER OF FIELDSUN PTY LIMITED (IN LIQUIDATION) (ACN 065 281 781)

THE APPLICATION OF: 

GEOFFREY DAVID MCDONALD
FIRST APPLICANT

FIELDSUN PTY LIMITED (IN LIQUIDATION) (ACN 065 281 781)
SECOND APPLICANT

JUDGE:

LINDGREN J

DATE:

20 MAY 1998

PLACE:

SYDNEY

REASONS FOR JUDGMENT
(ex tempore)

The first applicant (“Mr McDonald”) is the liquidator of the second applicant (“Fieldsun”). The applicants apply for an order under s 564 of the Corporations Law. Section 564 is as follows:

“564    Where in any winding up:

(a)property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of moneys or the giving of indemnity by creditors; or

(b)expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.”

The application was filed on 6 May 1998. It sought orders under s 477(2A) as well as under s 564. The order sought under 477(2A) was that Mr McDonald be entitled to compromise a debt due to Fieldsun by J.M. Kelly (Project Builders) Pty Limited (“Kelly”) in the terms set out in a form of deed between Kelly and Fieldsun, a copy of which was annexure A to the application. The order under s 564 was an order that Tubemakers of Australia Limited (“Tubemakers”) be given priority over all other creditors of Fieldsun by being paid the balance of all money paid by Kelly to Fieldsun after Mr Rogers had deducted the cost and expenses of the liquidation. I made the order under s 477 (2A) on 6 May 1998. The only matter remaining for determination today is that of the order under s 564.

The background facts can be stated briefly.  Mr Rogers was appointed official liquidator of Fieldsun on 16 August 1996.  In the course of his investigations he discovered that the only asset of Fieldsun was a claim which it had against Kelly for money allegedly owed by Kelly to Fieldsun amounting to $325,433.36.  The creditors of Fieldsun as disclosed in the report as to its affairs prepared by Michael Fearns, a director of Fieldsun, amounted to $364,293.43.  Accordingly, if Kelly had immediately paid the amount which it was alleged to owe to Fieldsun, there would still have been some shortfall although Fieldsun’s creditors would have been paid a substantial dividend.

Fieldsun’s debts included an amount of $189,115.48 owing to Tubemakers and $85,000 allegedly owed by Fieldsun to Mr Fearns.  Tubemakers was by far Fieldsun’s most substantial creditor. Mr Fearns was the second most substantial creditor. The next most substantial creditor was a creditor referred to in the statement of affairs as “Metclad”, to which Fieldsun allegedly owed $24,607.92.

According to the affidavit of Mr Rogers sworn 5 May 1998, there was a policy of trade debt insurance between Tubemakers and Trade Indemnity Australia Limited (“Trade Indemnity”) under which Trade Indemnity agreed to provide trade debt insurance to Tubemakers during the period 1 July 1995 to 30 June 1996.  According to the affidavit, pursuant to that policy Trade Indemnity paid Tubemakers $170,203.93 on 19 November 1996 and is subrogated to the position of Tubemakers as a creditor of Fieldsun.  It will be seen that this amount falls short of the sum of $189,115.48 which Tubemakers said Fieldsun owed to it.

The alleged indebtedness of Kelly to Fieldsun arose out of a subcontract agreement between them made in early August 1995 for the fabrication and erection of structural steel work on a certain “Byron Shire Council Chambers” project at Mullumbimby.  Fieldsun’s business was that of an engineering and steel fabrication business which it carried on at Byron Bay under the business name “North Coast Engineering”.

In early January 1996 Kelly terminated the subcontract, or at least purported to do so, and in June 1996 Fieldsun commenced a proceeding against Kelly in the Common Law Division (Construction List) of the Supreme Court of New South Wales, S55025 of 1996.  In that Supreme Court proceeding Fieldsun claimed $325,433.36 or, in the alternative, damages. Kelly cross-claimed against Fieldsun.  Kelly claimed that it had been entitled to terminate the subcontract. Although the cross-claim does not particularise the loss and damage allegedly suffered by Kelly, Kelly’s solicitors particularised that loss and damage in an amount of $439,686.83.  Accordingly, if the Supreme Court proceeding had gone to hearing and if the respective claims of Fieldsun and Kelly had succeeded totally, the result would have been a net loss to Fieldsun. 

Mr Rogers deposes that since Fieldsun had no cash at the bank and its only substantial realisable asset was its claim against Kelly, he attempted to obtain insurance litigation funding.  He made such an attempt with FAI Insurance but this came to nothing. On 9 May 1997, Mr Rogers retained Gray & Perkins, solicitors, to represent Fieldsun in the Supreme Court proceeding on the basis that those solicitors would be paid only if Fieldsun succeeded in obtaining a judgment against Kelly for the amount claimed or part of that amount.  On 20 May 1997 there was a meeting of Fieldsun’s creditors called for the purpose of determining whether any creditor was prepared to fund the litigation against Kelly.  No creditors attending were prepared to do so.

On 13 June 1997, Kelly filed in the Supreme Court proceeding an application for security for costs but Mr Rogers was unable to provide security.  He instructed Gray & Perkins to correspond directly with Trade Indemnity as to whether Trade Indemnity would be prepared to provide security.  In August 1997, Trade Indemnity agreed to provide security to a limit of $40,000.  Trade Indemnity provided a deed of guarantee which was filed in the Supreme Court proceeding to that end.

The provision of the security for costs enabled Fieldsun to pursue its claim in the Supreme Court proceeding.  There was a without prejudice settlement conference held on 27 April 1998 when an agreement was reached, subject to this Court’s approval, for a settlement of the Supreme Court proceeding.  The terms of the settlement were embodied in a form of deed to be executed on behalf of Fieldsun and Kelly, again, subject to this Court’s approval. 

In summary, the settlement was as follows: Kelly agreed to pay to Fieldsun $250,000 by way of instalments extending over a period from 4 May 1998 to 3 August 1998, the first instalment (of $70,000) to be paid on 4 May 1998.  The instalments were to be paid into the trust account of Gray & Perkins.  It was agreed that the Supreme Court proceeding would be disposed of by consent orders, the effect of which was that Kelly would give up its cross‑claim and there would be mutual releases.  There was to be a judgment in favour of Fieldsun for $250,000. 

The evidence of Mr Rogers was that if the settlement had not been implemented, considerable further costs would have remained to be incurred and there would have been a lengthy hearing before a referee. Apparently the deed of settlement is in the course of being executed.

Mr McDonald’s affidavit shows that the costs and expenses to date of the winding up of Fieldsun are, without any discount (see below), as follows: liquidator’s costs $45,000, solicitors’ costs and disbursements $156,665.59; counsel’s fees $8,600, - a total of $210,265.59.  On the basis that those amounts are paid in full out of the settlement amount of $250,000, only some $40,000 would remain for Tubemakers or Trade Indemnity. 

However, Mr Rogers is prepared to reduce his costs to $39,000 and Gray & Perkins have agreed to reduce their costs to $125,332.47.  Accordingly, the costs and expenses to be paid become as follows: liquidator’s costs $39,000; solicitors’ costs and disbursements $125,332.47; counsel’s fees $8,600, a total of approximately $173,000.  It will be seen that this will leave some $77,000 available to creditors. 

If Tubemakers is given priority over all other creditors so that the total amount of $77,000 is paid to it, it will receive a dividend of approximately $0.41 in the dollar.  If, on the other hand, the sum of $77,000 were to be divided between all creditors of Fieldsun, Tubemakers would receive approximately $39,973 which is a dividend of approximately $0.21 in the dollar. 

It is true, on the evidence, as Mr McDonald concludes, that if Trade Indemnity had not been prepared to provide the guarantee for security as to costs, Fieldsun would not have been able to pursue its claim against Kelly.  Mr McDonald submits that it is fair and reasonable that the Court order that Tubemakers be paid in priority to all other creditors after the costs and expenses mentioned have been paid.

When the matter was previously before me I gave directions with a view to ensuring that all creditors were notified.  There is evidence that they have been notified by a comprehensive letter from Mr McDonald dated 7 May 1998 which sets out fairly the history of the matter and makes it clear to the other creditors that the order to be sought is an order that Tubemakers be given priority over them.  The letter informs creditors that the effect of the order, if made, would be that Tubemakers would receive a dividend of approximately 38 cents in the dollar and that they, that is the other creditors, would receive no dividend at all.  The letter also makes it clear that the application is to be heard today. The creditors have been called today and no creditor appears.

I have been referred to several decisions in which the Court has been asked to make orders under s 564. These include Re Cartco Pty Ltd (1994) 12 ACLC 766, Allquip (WA) Pty Ltd (in liquidation) v Allan (1998) 16 ACLC 34, and Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (in liquidation) (1995) 13 ACLC 1569. Of course each case turns on its own facts.

I think that in the present case, in the light of the history which I  have described, it is appropriate that the full amount of $77,000 be paid to Tubemakers.

The Court orders that the net amount recovered by the second applicant in proceeding S55025 of 1996 in the Supreme Court of New South Wales, Common Law Division (Construction List) remaining after payment of the liquidator’s costs and expenses of the winding-up of the second applicant not exceeding $39,000, the said company’s solicitors’ costs and disbursements of that proceeding not exceeding $125,332, and the said company’s

counsel’s fees of that proceeding not exceeding $8,600, be paid to Tubemakers of Australia Limited.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren

Associate:

Dated:             8 July 1998

Solicitor for the Applicant:	Mr S Polczynski of Gray & Perkins
Date of Hearing:	20 May 1998
Date of Judgment:	20 May 1998