In the matter of MK Floors Qld Pty Ltd
[2020] NSWSC 822
•16 June 2020
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of MK Floors Qld Pty Ltd [2020] NSWSC 822 Hearing dates: 16 June 2020 Date of orders: 16 June 2020 Decision date: 16 June 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Defendants in Schedules B and C joined under r 6.19 Uniform Civil Procedure Rules 2005 (NSW), and relevant proceedings transferred to Supreme Court of New South Wales under s 140 of the Civil Procedure Act 2005 (NSW). Order that separate question as to solvency to be heard together with evidence in one being evidence in the other. Costs reserved.
Catchwords: CIVIL PROCEDURE — Parties — Joinder — Of defendants — Transfers to and from other courts — District and Local Courts — Separate determination of questions — Voidable transaction proceedings in other courts each with common question of company’s solvency — Company’s solvency to be determined as separate question.
Legislation Cited: - Corporations Act 2001 (Cth), ss 588FF(1)(a), 1337K, Pt 5.7B
- Civil Procedure Act 2005 (NSW), s 140
- Uniform Rules of Civil Procedure 2005 (NSW), rr 6.19, 28.5
Cases Cited: - Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525
- Re Bias Boating Pty Ltd [2017] NSWSC 1524
- Re RCG CBD Pty Ltd (in liq) [2016] NSWSC 1489
Category: Principal judgment Parties: Steve Naidenov in his capacity as liquidator of MK Floors NSW Pty Ltd (in liq) and MK Floors Qld Pty Ltd (in liq) (Plaintiff)
The Commissioner of Taxation (First Defendant)
Airlay International Pty Ltd (Second Defendant)
Hanes Innerwear Australia Pty Ltd t/as Dunlop Flooring (Third Defendant)
Forbo Floorcoverings Pty Ltd (Fourth Defendant)
The Victoria Carpet Company Proprietary Limited (Fifth Defendant)
Quest Carpet Manufacturers Pty Ltd (in liq) (Sixth Defendant)
Brintons Pty Ltd (Seventh Defendant)
Gibbon Group Pty Ltd (Eighth Defendant)
Interface Aust Pty Ltd (Ninth Defendant)
Karndean International Pty Ltd (Tenth Defendant)
M.J. Sturgess & Co Pty Ltd t/as MJS Floor Coverings (Eleventh Defendant)
Tuftmaster Carpets Pty Ltd (Twelfth Defendant)
Cavalier Bremworth Pty Ltd (Thirteenth Defendant)
Norman Ellison Carpets Pty Ltd (Fourteenth Defendant)
Cavalier Commercial Pty Ltd (Fifteenth Defendant)Representation: Counsel:
Solicitors:
J Nathan (Plaintiff)
M J Pennini (Second Defendant)
M T Lapirow (Third and Fifth Defendants)
D Dragicevic (Fourth Defendant)
M J Shaw (Eleventh Defendant)
Emerson Lewis Lawyers (Plaintiff)
Hunt & Hunt (Second Defendant)
KHQ Lawyers (Third Defendant)
Polczynski Robinson (Fourth Defendant)
Davis Maloney (Fifth Defendant)
Broadley Rees Hogan (Eleventh Defendant)
File Number(s): 2020/102653
Judgment – ex tempore (revised 17 june 2020)
Nature of the application and background
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By Originating Process filed on 3 April 2020 the Plaintiff, Mr Naidenov, in his capacity as liquidator (“Liquidator”) of MK Floors NSW Pty Ltd (in liq) and MK Floors Qld Pty Ltd (in liq) (“Companies”) seeks orders for leave to join several Defendants identified in Schedules B and C to the proceedings pursuant to r 6.19 of the Uniform Civil Procedure Rules 2005 and, further and in the alternative, an order under s 140 of the Civil Procedure Act 2005 (NSW) that the proceedings identified in Schedule B (and, as emerged from submissions, also Schedule C) be transferred to the Supreme Court of New South Wales.
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An order was originally sought that the proceedings in Schedule B be consolidated under r 28.5 of the Uniform Civil Procedure Rules but that application was sensibly not pressed, given the complexities which consolidation would involve given the number of parties and the number of other proceedings involved. To the extent the other proceedings were transferred to this Court, and a separate question as to solvency is heard in them as the Liquidator also seeks, then an order would likely be made that the proceedings be heard together and that the evidence in one be the evidence in the other in respect of that separate question. The order may well not continue after the separate question is determined, and the separate defences of the several Defendants may well then be determined subsequently.
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The parties have addressed this application in an efficient way and, as events have developed, it appears there is now a significant degree of common ground and the issues in dispute are relatively limited. I will address the evidence before turning to those issues.
Affidavit evidence
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The Liquidator relies on his affidavit dated 2 April 2020, which refers to the fact that he and another insolvency practitioner were initially appointed as joint and several voluntary administrators of the Companies, each of which then transitioned from administration to voluntary liquidation. He refers to steps he took following his appointment and to the commencement of the several proceedings in respect of each of the Companies in the Local and District Courts of New South Wales, immediately prior to the expiry of the relevant limitation period. He notes that separate proceedings were commenced in those Courts because, at the time, it was not apparent whether issues as to solvency would be contentious in each of the proceedings. That approach was reasonable because, if the Defendants had admitted the Companies’ insolvency in the six months prior to the administrators’ appointment in those proceedings, then all that would have remained would have been any separate defences available to particular Defendants, which may be, as some of the Defendants now point out, have conveniently been determined separately in other proceedings. However, by March 2020, it had emerged that each of the Defendants had put the relevant Company’s solvency in issue, whether by denying the allegation of insolvency or by putting the Liquidator to proof of insolvency. In those circumstances, there are now multiple proceedings in the Local Court and the District Court, all of which raise the same issue as to the insolvency of each of the Companies in the six month period prior to the appointment of the voluntary administrators to the Companies.
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By a second affidavit dated 11 June 2020, the Liquidator refers to the preliminary view that he has formed that each of the Companies were insolvent in the six months prior to the relation-back day, that is, the date of appointment of Mr Naidenov as voluntary administrator. He also refers to the fact that an insolvency report is now being prepared by another person within his office, although the preparation of that report has been delayed by matters relating to COVID-19. That affidavit exhibits a helpful schedule as to the status of the Local Court and District Court proceedings, which notes that a number of them are listed for directions in June and August 2020. A further affidavit of the Liquidator's solicitor, Mr Calabretta, dated 12 June 2020 indicates the commencement date with the various proceedings, and there has been no submission by any party that they were not commenced within the statutory limitation period for voidable transactions, and updates the position as to directions in two of the proceedings and as to the position taken by the Defendants in this application. That position has further developed as the application proceeded.
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The Fifth Defendant, which initially opposed the application, although it adopted a more nuanced position as matters developed in the course of this hearing, relied on an affidavit dated 8 May 2020 of its solicitor, Mr Moloney. Mr Moloney rightly pointed to a number of separate defences raised by the Fifth Defendant, in two proceedings involving that Defendant, one in the District Court and one in the Local Court of New South Wales. The existence of two proceedings reflects the fact that claims against the Fifth Defendant are brought by each of the two Companies. Mr Moloney's evidence highlights the probability that, in respect of each of the Defendants, separate issues, by way of defence, will ultimately need to be determined, but that is not a complete answer to the possibility that there is an advantage in hearing the proceedings together, at least the common issue as to solvency. As I will note below, Mr Lapirow, who mentioned the matter on behalf of the Third Defendant and appeared for the Fifth Defendant, acknowledged the possibility of advantages in that course in submissions.
The parties’ positions
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A number of Defendants consent to the orders sought by the Plaintiff in respect of the transfer of the proceedings to this Court and a separate issue as to solvency, and others consent subject to the position as to costs. Ultimately, as I understood it, no Defendant opposed the orders, once the order for consolidation was no longer pressed by the Liquidator, and what was proposed was a transfer of proceedings to this Court, with the proceedings (or at least the common issue as to solvency) to be heard together as necessary, in a way that preserved the existing pleadings in them and avoided the costs of repleading.
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Notwithstanding that there is a significant degree of consensus as to the approach adopted, the Court must nonetheless exercise a judicial discretion in respect of making the orders sought, before I turn to the question of costs and other specific orders sought by particular Defendants. As I noted above, the first order sought is leave to join the several Defendants, which are all of the Defendants in respect of the existing proceedings brought by the two Companies, to the Originating Process. The Originating Process identifies the separate question that is sought to be determined, and identifies the orders sought under s 588FF(1)(a) of the Corporations Act 2001 (Cth) that the Defendants pay to one of the Companies an amount equal to money that those Defendants were paid by the Companies. Those orders are sought on the basis that the transactions are voidable transactions under Part 5.7B of the Corporations Act, taking place at a time that each of the Companies was insolvent. The first proceeding to which all the Defendants would be joined would provide a vehicle for the determination of at least the common issue as to the Companies’ solvency.
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The second order sought, for the transfer of the other proceedings to this Court under s 140 of the Civil Procedure Act, will allow those other proceedings to travel together with the first proceeding, and may well provide a vehicle for the determination of defences in those separate proceedings, using the pleadings that are already in place within them. The application for transfer of the proceedings was brought under s 140(1) of the Civil Procedure Act 2005 (NSW), which provides that the Court may, of its own motion or on an application by a party, transfer proceedings before the District Court or the Local Court to this Court. That section was appropriately relied upon where the order sought was that this Court transfer of proceedings in the Local and District Courts to this Court. By contrast, s 1337K of the Corporations Act, which deals with the transfer of proceedings in lower courts, did not readily apply where that section is directed to an order made by a transferor court rather than, as here, an order made by the transferee court.
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I am satisfied, as it appears all of the Defendants are also now satisfied, that the orders under r 6.19 of the Uniform Civil Procedure Rules and for the transfer of the proceedings should be made. As Mr Nathan, who appears for the Liquidator points out, this case ultimately has the features that are common in cases in which the Court has made orders for the joinder of several defendants in a single voidable transaction proceeding, and the determination of a common issue as to solvency in that proceeding. Mr Nathan draws attention to the decision in Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525 which has since been applied many times as identifying the structure of a "mothership" proceeding in which a liquidator of a company brings unfair preference claims against a number of defendants. Importantly, Mr Nathan points out such orders were made in that case, although those proceedings were commenced as two separate proceedings, and, in that case, defendants were also located in other states.
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Mr Nathan also refers to my decision in Re RCG CBD Pty Ltd (in liq) [2016] NSWSC 1489 at [7], where I summarised the circumstances in which the Court may grant leave under r 6.19 of the UCPR to join several defendants in a single proceeding in respect of voidable transactions claims. I there noted that:
“The most obvious reason for that course is the likelihood that the issue of solvency of the company will be a common issue in such claims, and that it is preferable that that is determined only once, as between the several defendants, and not in separate proceedings running the risk of duplicated costs and inconsistent findings.”
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This case is a clear illustration of that proposition, because here there would be potentially multiple proceedings in each of the District Court and the Local Court, each of which would be determining the same question as to the solvency or insolvency of one of the two Companies over the same six-month period prior to the appointment of the voluntary administrators.
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In Re RCG CBD Pty Ltd above, I also recognised the risk of disadvantage to a single defendant, if it was required to be present while issues affecting other defendants are addressed. Mr Lapirow, who as I noted above appears for the Fifth Defendant, has emphasised that possibility here. However, I also there noted that that disadvantage can be mitigated by case management and, in particular, by determining the common issue of solvency in respect of all defendants in a single proceeding, before potentially deciding the remaining issues in respect of the several defendants, involving defences unique to each defendant, in separate hearings for each defendant. Mr Nathan also refers to the observations of Brereton J in Re Bias Boating Pty Ltd [2017] NSWSC 1524, where his Honour recognised the benefit of determining a common issue of solvency in such matters, and also the fact that the Court may bring together proceedings commenced separately, including by removing those separate proceedings commenced from another court, to achieve that result. That is what is sought here.
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Mr Nathan in turn identifies discretionary factors which support the order that is sought, including the common question as to the solvency of the two Companies in the several proceedings; the possibility of overlap in factual evidence where the two Companies were part of the same group of companies; and the risk of a multiplicity of findings of solvency and inefficient use of the resources of the District and Local Courts if that question had to be determined multiple times in different proceedings. There seems to me to be substantial force in those propositions. Mr Nathan also points out that, so far as the Fifth Defendant points to other matters that are unique to the particular Defendants, then those may be addressed by case management, as I have noted above.
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Turning now to the position of those Defendants who appeared, the Second Defendant's position was ultimately that it consented to the orders sought, but that it sought to have the costs of the District and Local Court proceedings reserved. It seems to me that that is plainly an appropriate course, many of the Defendants supported it, and the Liquidator did not oppose it. If for no other reason, that course should be taken because whether the Liquidator is ordered to pay, or recovers, the costs of the proceedings will likely depend on whether he is successful or fails in them, and the Defendants' ability to recover their costs of the proceedings conversely depends upon their outcome, both in respect of the District and Local Court proceedings and any continuing proceedings in this Court.
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The Third Defendant opposes the orders sought, but did not make submissions, although Mr Lapirow mentioned its appearance. The Fourth Defendant consented to the orders but sought to have the costs of the District and Local Court proceedings reserved, a course that is appropriate as I noted above.
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The Fifth Defendant initially opposed the orders sought, so far as orders for consolidation were sought and so far as that may have involved an issue of repleading in the two other proceedings to which it is party. Mr Lapirow, however, recognised, in the course of submissions, that where an order for consolidation was not now pressed by the Liquidator, and what was contemplated was a joinder of the Defendants to the proceeding, and the transfer of the existing proceedings to this Court in their existing form, then the cost disadvantage of repleading would not arise and there may be an advantage to the Fifth Defendant so as far as it would face only one proceeding rather than two. Ultimately, I did not understand the Fifth Defendant to oppose that course.
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The Fifth Defendant sought its costs of the proceedings in the Local Court and the District Court, on the basis that it was the Liquidator's choice to commence those proceedings, and also sought the costs of this application, which it put as consequential of that choice. I am not satisfied that an order should be made that the Liquidator pay the costs of the Local Court proceedings, where the ultimate position as to costs, as I have noted, will depend upon the outcome of the proceedings. There is no reason to think that the costs of those proceedings will ultimately be wasted, where it is likely that the pleadings in them will be put to use at least in the determination of separate issues as to differences between the parties. Where costs are reserved, that can be taken into account in due course.
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The more significant question, raised by several Defendants, relates to the costs of this application. As other Defendants ultimately accepted, it seems to me that the preferable course in that respect is also to reserve the costs of this application. If the Liquidator fails in the proceedings as a whole, then it is likely that he would be ordered to pay the costs of this application, as part of the proceedings in which he has failed, and that possibility should be left open.
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My preliminary view is that there should be no order as to the costs of this application other than in that situation. I take that view because each party has had a degree of success, in circumstances that each party has moved somewhat from its opening position. Taking the Plaintiff and the Fifth Defendant as an example, the Liquidator originally sought an order for consolidation, which was only abandoned at the commencement of the submissions today. That would have introduced additional costs and complexities, as to which the Fifth Defendant was rightly concerned. The Fifth Defendant in turn opposed the order for transfer, but moved, in the course of submissions, to a more moderate position which recognised the advantages of the transfer, so far as determination of the common issue as to solvency and the existence of a single proceeding concerning it was involved. That is not a matter for criticism for either party, and it should be recognised that both parties and their legal representatives approached the matter in a constructive way, recognising matters that impacted their respective clients' positions as submissions developed. However, that development suggests that there should be no order for costs of this application, at least if the Liquidator is ultimately successful in the proceedings.
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I should add, for completeness, that I am also not persuaded that an order should be made that of the Liquidator pay the costs of this application on the basis that it would not have needed to be made, had the Liquidator commenced these proceedings as a single proceeding in this Court. With hindsight, the desirability of that course is apparent, but it is only apparent because it is now apparent that all Defendants have put solvency of the Companies in issue. If that had not been put in issue, then the continuance of the proceedings in the Local Court and the District Court, where the primary issue raised would have been the individual defences, may well have been a cost effective course. In these circumstances, it seems to me that the issues which now warrant transfer of the proceedings to this Court, and the hearing of a single common issue, have emerged from the position taken by the Defendants as to solvency, and that does not warrant an order against the Liquidator in respect of the costs of this application.
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Other Defendants adopted positions which broadly consented to the orders sought, but sought reservation of the costs below, and, on occasion, costs of this application. I will, without disrespect to their legal representatives, not summarise their arguments, where they generally adopted combinations of the matters which I have already addressed above. I note, for completeness, that the Second Defendant sought to be excused from further attendance until after the separate question as to solvency was determined, and sought to have the Liquidator's legal representatives report to it as to the outcome of directions hearings and any common hearing as to solvency. That matter was agreed as between the Liquidator and the Second Defendant and I need not address that question in any orders that I make.
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For these reasons, I am satisfied that orders should be made, in the modified form in which they developed in the course of the application. I, therefore, make the following orders:
1. Leave to join in the Originating Process each of the defendants named in Schedule B and Schedule C to the Originating Process pursuant to r 6.19 of the Uniform Civil Procedure Rules 2005.
2. Pursuant to s 140(1) of the Civil Procedure Act 2005 (NSW) order that the proceedings identified in Schedules B and C be transferred to the Supreme Court of New South Wales.
3. Order pursuant to rule 28.2 of the UCPR that the Court determine a separate question as to whether MK Floors (NSW) Pty Ltd (in liq) and MK Floors Qld Pty Ltd (in liq) were insolvent in the six months prior to those companies entering into external administration, or at some date in that period.
4. Reserve the costs of each of the proceedings identified in Schedule B and Schedule C and the costs of this application.
5. In respect of the separate question as to solvency, order that these proceedings and the proceedings identified in Schedules B and C be heard together, the evidence in one be the evidence in the other.
6. List the proceedings for further directions in the Corporations Directions List at 10am on 29 June 2020.
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Decision last updated: 02 July 2020
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