John Irving and Nicholas David Cooper No. Scciv-01-1639

[2004] SASC 133

IN THE MATTER OF MONAAD CORPORATION PTY LTD
(IN LIQUIDATION)

JOHN IRVING AND NICHOLAS DAVID COOPER
[2004] SASC 133

1. JUDGE BURLEY.             By application dated 28 November 2003, the plaintiffs, who are the liquidators of Monaad Corporation Pty Ltd (In Liquidation) (the company), have applied for the following order:

   “1An order that the court approve the entry, by John Irving and Nicholas David Cooper as joint and several liquidators of Monaad Corporation Pty Ltd (in liquidation) ... into an agreement of settlement and release of a claim brought by Monaad in Supreme Court of South Australia Action Number 172 of 2003 ...”

2. The proceedings were brought against BAE Systems Australia Limited (BAE).

3. The plaintiffs invoke the provisions of Sections 477(1)(d), 477(2B), 479(3), 506(1)(b) and 511 of the Corporations Act 2001.

4. Notice of the application has been given to the creditors of the company.  Initially several creditors appeared by counsel in order to oppose the application.  They initially sought an adjournment of the application to enable further affidavit material to be put on file by them.  That application was refused.  When the matter came on again for hearing at a later date, those creditors applied for orders for production and inspection of documentation by the liquidators.  That application was also refused.

5. On 30 March 2004, when the adjourned application was brought on for completion of submissions, the opposing creditors withdrew their opposition.  On that occasion Mr Slattery QC, counsel for the liquidators, provided written submissions in support of the application for approval of the compromise agreement and, in addition, by way of oral submission, he spoke to the written submissions.

6. The affidavit of Mr Cooper, one of the liquidators, sworn on 28 November 2003, discloses what has been summarised in the recitals set out at the commencement of the settlement agreement, a copy of which is Exhibit NDC10 to Mr Cooper’s affidavit.  Those recitals are as follows:

   “ABAE and Monaad entered into an agreement in 1996 whereby BAE undertook the manufacture of a device known as a Smart Clip (the Contract).

   BMonaad entered into administration on 21 August 1997 and was subsequently placed into liquidation on 11 September 1997.

   CBAE has filed a proof of debt in the amount of $265,000 for  moneys due and owing to it for manufacture and supply of the Smart Clips units (the BAE proof of debt).

   DMonaad has since brought Action No 172 of 2003 in the Supreme Court of South Australia seeking orders for damages, interest and costs from BAE for loss of profits from future sales of Smart Clips and liabilities to overseas distributors of Smart Clips (the Claim).

   EBAE intended to defend the Claim and counterclaim for recovery of its debt from Monaad (the Counterclaim).

   FThe parties have agreed to settle the Claim and Counterclaim and any other disputes arising between them in relation to the Contract on the terms set out in this agreement.”

7. The settlement arrived at required the payment by BAE to Monaad of the sum of $500,000 and the withdrawal of its proof of debt in the sum of $265,000.

8. Clause 3 of the settlement agreement provided that the settlement was conditional upon the liquidators of Monaad obtaining the Court’s approval of the settlement. The liquidators, Mr Irving and Mr Cooper, have applied pursuant to Section 511 of the Corporations Law 1991 (as amended). I have therefore not had to determine whether or not either or both of Sections 477(2A) and 477(2B) of the Corporations Law apply.

9. Whatever the provision of the Corporations Law relied upon, an application for approval of a compromise requires the liquidator to put before the Court evidence that at least a majority of creditors support the application and evidence of the legal advice provided to the liquidator prior to the entry into the compromise agreement: see Robson’s Annotated Corporations Act 2002 at 747.

10. As to creditors’ approval, rather than call a meeting of creditors, the liquidators gave notice of the proposed application for approval of the compromise to the creditors.  As I have said, initially, a number of creditors sought to be heard on the application for approval because they opposed the application.  Eventually that opposition was withdrawn and the application proceeded on the basis that none of the creditors, having been advised of the application for approval, sought to oppose the liquidators’ application.

11. In the circumstances of this case, I am prepared to accept that the non-opposition by the creditors notified of the application constitutes a factual basis in respect of which I may be satisfied that the creditors do not oppose the settlement.  However, I do not mean to be taken that such an approach may be used as a substitute for the calling of a meeting of creditors so that they may be provided with the opportunity of expressing an opinion about the appropriateness of the settlement at such a meeting.  That, in my view, is the preferable course to take.  I accept that the liquidators in this instance did not pursue such a course because, when the settlement was reached in November last year, some of the creditors expressed their opposition to the settlement.

12. The approach to be taken by the Court on an application for approval of a compromise is conveniently set out in the Commentary of Butterworths, Australian Corporation Law, Principles and Practice, Volume 2, p 54,554:

    “In giving approval, or controlling the exercise of the liquidator’s discretion, the court looks to the interests of creditors - or more generally, those who have the interest in the winding up of the company.  This will usually be the creditors, but may also include the contributories.  Whether the proposed conduct is in the interest of creditors is a matter of commercial judgment.  So long as the exercise of the liquidator’s discretion is for the benefit of creditors as a whole, the fact that a minority disagrees with the action does not itself mean that approval will not be given: Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd (1988) 17 FCR 344; 79 ALR 483; 12 ACLR 730; 6 ACLC 213; Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; 10 ACLC 1742.

    Where the approval is for a compromise of a claim involving a large sum of money it is appropriate that legal advice from a senior practitioner be obtained, even though the commercial judgment is to be made by the liquidator: Re Chase Corp (Aust) Equities Pty Ltd (1990) 8 ACLC 1118. A court will not ordinarily interfere in a liquidator’s judgment, unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 86; 10 ACLC 1742 at 1745.”

13. As to legal advice, the liquidators obtained the advice of counsel (now senior counsel) in relation to the claim pursued by them against BAE.  This was by way of a detailed written opinion, a copy of which has been handed up to me.  The liquidators have also had the benefit of further advice from the same counsel by letter dated 24 November 2003, which constituted a confirmation of advice that was given by counsel to the liquidators prior to the settlement agreement being reached on 14 November 2003.

14. I accept the evidence given by Mr Cooper in his affidavit of 28 November 2003.  I accept that the liquidators approached the question of settlement in good faith and that they have not acted by reference to erroneous legal propositions.  In my opinion there are no grounds for doubting the prudence of their conduct.  They were fully advised by counsel;  it was appropriate that they take the advice that was tendered.  In these circumstances I consider that it is in the best interests of the creditors that the settlement agreement should be approved by the Court.

15. In arriving at that conclusion I have borne in mind that it is not the Court’s function on an application such as this to form its own legal opinion in relation to the compromise and thereby to approve the compromise or not depending upon the views formed by the Court.  Rather, the process of approval involves an examination of the conduct of the liquidator and the nature and extent of the advice received by the liquidator in relation to the settlement and judging by reference to those matters whether or not the liquidator has acted prudently.

16. For the above reasons, there will be an order pursuant to Section 511 of the Corporations Law 1991 (as amended) in terms of Minutes of Order this day amended and initialled by me.