Keith Arthur Russell and Michael Friedlander v Westpac Banking Corporation, Peter Thompson, BDO Nelson Parkhill Services (SA) Pty Ltd, Jeffrey Johnston, John Sheahan, Anthony Sims and a N Broome (Liquidator) No...

[1993] SASC 4202

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA ANDERSON J

CWDS
Practice and procedure - Application to join companies in liquidation as plaintiffs where liquidators have declined to act - opposed - plaintiffs are guarantors of one Company but not able to show in equity or at law that they are creditors or shareholders of both. Cape Breton Co v Fenn (1881) 17 ChD 8, applied. Halsbury, Laws of England Vol 20, paras 202, 209, 315; Aliprandi v Griffiths Vintners Pty Ltd (In Liquidation) 6 ACSR 250 at 253 and Knight v FP Special Assets Ltd 107 ALR 585, considered.

HRNG ADELAIDE, 14, 19 July 1993 #DATE 24:9:1993
Counsel for plaintiffs:         Mr G A Stevens
Solicitors for plaintiffs:     Knox and Hargrave
Counsel for defendants Westpac, Thompson, BDO and Johnston:   Mr A J Besanko
Solicitors:   Kelly and Co
Counsel for defendants Sheahan and Sims:
   Mr P D Corkery
Solicitors:   Piper Alderman
Counsel for liquidator:         Mr C J Townsend
Solicitors:   Cowell Clarke

ORDER
Application refused.

JUDGE1 ANDERSON J The plaintiffs have instituted proceedings claiming damages from the defendants. For present purposes it is unnecessary to further particularize the causes of action as they are pleaded against the separate groups of defendants. 2. The pleadings have not closed. There have been notices served pursuant to Supreme Court Rule 46.20 and applications to strike out various paragraphs of the statement of claim and seeking security for costs from the plaintiffs or one of them. The plaintiffs have filed an amended more explicit statement of claim. None of these applications have been dealt with as it has been agreed between all involved that the plaintiffs' application filed on 23 November, 1992 must be disposed of first. That application seeks orders in the following terms:
     "1. That the plaintiffs be authorised to use the name of
    Seabird Corporation Limited (In Liquidation) and the name of
    Flowertec Limited (In Liquidation) as joint plaintiffs in this
    action.
     2. That the plaintiffs have leave to amend the summons herein
    to name each of the two said companies as plaintiffs and to make
consequential amendments to the Statement of Claim." 3. The application is opposed by all defendants. 4. The companies are in liquidation pursuant to an order of the Court. Mr Craddock is the official liquidator of Seabird and was appointed on 11 October, 1988. Mr Broome is the official liquidator of Flowertec and was appointed on 24 October, 1989. 5. The first plaintiff ("Russell") is a shareholder of Seabird and is also a guarantor of Seabird which has executed a guarantee in respect of the debts of Flowertec, which is wholly owned by Seabird. 6. The second plaintiff ("Friedlander") is a guarantor of Seabird. The guarantee in this regard is in favour of the first defendant ("Westpac") and is in the form of Exhibit A to the affidavit of Ms Field filed in Court on 5 May, 1993. 7. There has been extensive argument over a long period of time in relation to this application. Mr Stevens appeared for the applicant plaintiffs, Mr Besanko for the first to fourth defendants and Mr Corkery for the fifth and sixth defendants. In addition, Mr Townsend appeared for the liquidator Mr Broome. Mr Craddock was not represented although an affidavit indicating he was not opposed to the application was filed by the plaintiffs. Mr Townsend expressed no view as to the relief sought by the plaintiffs and addressed only in relation to what orders should be made to protect Mr Broome and facilitate the preservation of Flowertec should an order be made. Consequently, those submissions need be considered only if the plaintiffs obtain the order sought. 8. The principal area of dispute relates to the competency of the plaintiffs to bring this application. Briefly, Mr Besanko and Mr Corkery submitted that it was necessary for a party to be either a shareholder or a creditor of the Company to enable this application to be brought. It was conceded that Russell has the necessary status in relation to Seabird and submitted that as Friedlander has not in relation to either then it was not possible for the orders to be made. 9. At the first hearing of this application Mr Stevens concentrated substantially upon the topic of what security, and on what terms, should be available to Mr Broome and, to a lesser extent, upon the merits of the statement of claim supported as it is by counsel's opinion which has been disclosed only to the Court. 10. Mr Stevens initially submitted that the plaintiffs were contributories as to each Company because of the nature of the guarantees. As Flowertec was a wholly owned subsidiary of Seabird he submitted that there existed a contingent liability sufficient to ensure they were contributories. It was then suggested, because of the nature of the guarantee, that if they were contributories for Seabird then, because of the nature of its relationship with Flowertec, Seabird should be permitted to bring the action on behalf of Flowertec. 11. Implicit in what Mr Stevens said was that should the orders not be made there may be many further actions arising from the relationship between Westpac and the plaintiffs. Already separate proceedings are underway with the Bank seeking to enforce its guarantee against these plaintiffs. Mr Stevens said this action was by way of defence and referred me to the affidavits filed in that matter being Action No. 440/90. Objection was taken to me looking at them and I have not done so. 12. As a consequence of Mr Besanko's first submissions, Mr Stevens returned in more detail to this crucial question of status at the adjourned hearing. Prior to it commencing each of the plaintiffs paid the sum of $100 to Westpac requiring it to be apportioned as to $50 for each of the debts owing by each company to Westpac. The payment was stated to be made "under protest with a denial of liability and reserving all rights". 13. From what is before me it seems that the cheques have not been presented. This occurred in June 1993. In addition, a further affidavit executed by Mr Schroeder, the plaintiffs' solicitor, and annexing an assignment of debt between Flowertec Limited (In Liquidation) and Rubino Flowers Pty Ltd (Rubino), which purports to assign to the plaintiffs herein portion of the debt due by Flowertec to Rubino to each of the plaintiffs to the extent of $50, that being the sum of the consideration. That assignment is dated 12 July, 1993. It is neither stamped nor executed under seal. 14. The initial hearing of this application was 5 May, 1993. It came on again on 14 July, 1993 and 19 July, 1993. The use of these late affidavits was opposed by both Mr Besanko and Mr Corkery. They submitted that they were too late and were a contrivance. This last point was based no doubt upon the problems the plaintiffs were perceived to have in regard to the status point. The affidavits sought to position them as creditors of at least Seabird. I agree with these submissions. The affidavits are clearly late and evidence an attempt by the plaintiffs to support their argument in a manner which was not in existence when their submissions were first heard. Accordingly, these affidavits are not part of the material I have considered in support of the application. Hence, I do not accept Mr Stevens' subsequent submissions based upon these documents as establishing that the plaintiffs are creditors. 15. Mr Stevens submitted in the alternative, that by virtue of consideration of the provision of sections 315, 363, 431 and 556 of the Companies Code the definition of "creditors" includes a "contingent creditor" and that this was the status of the plaintiffs. 16. In the further alternative, and by virtue of the Guarantee which by Clause 5 thereof makes the liability pursuant thereto a principal obligation, he submitted that the debts of the plaintiffs are principal debts with the obligation established by the guarantee thus making them creditors of the Companies. It followed, he submitted, that in equity it was not necessary to make a payment before that status was achieved. In support of this equitable rule which Mr Stevens put as being that a person who has an obligation to pay under a guarantee or indemnity has an entitlement to enforce his rights prior to payment he relied upon Halsbury, "Laws of England", 4th Edition, Volume 20 para 315. However, this submission is, in my opinion, totally met by Mr Besanko's submissions that the guarantee is between the plaintiffs and the Bank. Even though it be a guarantee and indemnity it does not for that reason alone affect the relationship between the plaintiffs and the Companies. They are at best the beneficiaries of any implied indemnity. 17. Mr Besanko relied upon the common law position relating to the rights of the guarantors against the Company. Nothing in aid was to be found in considering the (pre-liquidation) winding up provision of the Companies legislation. Clearly those who may be creditors, whether contingent or not, may not necessarily have that status, without more, when the official liquidator is in charge and has to consider who is or is not a creditor. This, in my opinion, is a complete answer to the plaintiffs' submissions based upon an extended interpretation of the provisions of the Code. 18. The common law basis for Mr Besanko's submissions is to be found in Cape Breton Co v Fenn (1881) 17 ChD 8. 19. In that case Cotton LJ made it plain that if a liquidator was not to conduct a case for a company in liquidation then only the "creditors and contributories" could. Any such right was to be restricted to "those who are parties to the liquidation". Such a person was not a contingent creditor, submitted Mr Besanko, relying upon Halsbury, "Laws of England", 4th Edition, Volume 20 para 202: "Unless the surety has paid the creditor, the surety's right of indemnification against the principal debtor does not constitute a debt owed to the surety by the principal debtor". 20. Hence, here, as no rights of indemnity exist between the plaintiffs and the Company pursuant to the guarantee (which is restricted to the relationship between the plaintiffs and Westpac) there is only an implied right of indemnity which will arise in the circumstances postulated above. A surety who has not paid is not able to prove in the winding up of the Company (Halsbury, ibid, para 209). 21. Support for this proposition is to be found in the Guarantee at Clause 6, which is the usual clause preventing a claim by the guarantors until the principal has been paid in full. 22. How then does the position in equity relate to this? 23. Paragraph 315 of Halsbury upon which Mr Stevens relied is in these terms:
    "315. Enforcement of indemnity at law and in equity.
     In law an action on a contract of indemnity does not normally
    lie until the promisee has paid the third person's claim. Where
    he has paid, the amount so paid constitutes a debt due to him
    from the promisor which, save in certain exceptional
    circumstances, he may recover with interest in an action. But a
    contract may include a special provision in consequence of which
    the right may be enforced at law before payment has been made.
    Moreover, unless the terms of the contract expressly forbid it,
    and except in the kind of exceptional circumstances already
    referred to, the former rules of equity, now prevailing in all
    courts, enable a person entitled to an indemnity to obtain relief
    as soon as his liability to the third person has arisen and
    before he has made payment. He may therefore, where appropriate,
    obtain an order compelling the person giving the indemnity to set
    aside a fund out of which liability may be met or to pay the
    amount due directly to the third person or even, where the giver
    of the indemnity is under no liability to the third person, to
    himself. But the equitable right to enforce an indemnity does
    not constitute a debt. An indemnified person is not precluded
    from obtaining relief by the fact that his liability to the third
person cannot effectively be enforced against him." That statement of the law is applicable here. The plaintiffs are entitled to indemnity by virtue of their implied contract with the Companies and liability has clearly arisen. However, the status of the plaintiffs does not change to one of creditor by virtue thereof as "the equitable right to enforce an indemnity does not constitute a debt" (see above) and so, in reality, the status of the plaintiffs has not changed. At the end, in these circumstances the equitable position equates with the common law relied upon by Mr Besanko. 24. Consequently, the plaintiffs have failed to bring themselves within the bounds of those entitled to make this application as defined by Cotton LJ in Cape Breton. 25. In effect that concludes the plaintiffs' application but because of the nature of the application it is appropriate that I say something as to the other submissions. 26. The other principal difficulty faced by the plaintiffs was to show that there was a probability of success in the contemplated action and that it was not vexatious or oppressive : see Aliprandi v Griffiths Vintners Pty Ltd (In Liquidation) 6 ACSR 250 at 253. Messrs Besanko and Corkery were most critical of the statement of claim and the alleged gaps as to the "whole story" contained therein. In addition, they pointed out that the liquidators had shown no interest in it because the quantum of Westpac's claim was such that it was unlikely, if they were successful, that there would be anything left for the creditors. 27. As I have said, Mr Stevens contended that this action is a defence to 440/90. 28. The fact that the liquidators have seen fit not to become involved is important, but, on balance, having considered the Statement of Claim in light of the confidential counsel's opinion, I would not be prepared to say at this stage that these proceedings are vexatious and oppressive. That, of course, is not meaningful in relation to the pleadings as they would have changed had the Companies been joined and any such test would not be applied until that time was reached. 29. I would not have been minded to require the plaintiffs to provide security to the defendants as part of this application. There is no reason why that should not be dealt with entirely in the separate applications brought by the defendants. 30. The position of the liquidators is different. 31. Irrespective of their present attitude, should the matter proceed they have a clear entitlement to security in relation to the costs of this application and the ongoing costs of the companies in so far as it is necessary to ensure that they exist so that the litigation can continue. 32. There should be an indemnity in relation to the costs of action as Knight v FP Special Assets Ltd 107 ALR 585 clearly allows for some considerable uncertainty as to the likelihood of costs being awarded against non parties. Whilst, in these circumstances, I think the possibility of such an order remote, the liquidators, as officers of the Court, must be fully protected at all times. 33. I would not be minded to order that either or both liquidators be entitled to have independent legal advice and a presence at trial in the circumstances here existing. Between the liquidators it is common ground that there is no real likelihood that the plaintiffs, if successful, will achieve more than reducing their liability to Westpac on the guarantee. No funds will be left over. Hence, how the plaintiffs conduct the case really only reflects upon them, and does not need supervision from the liquidators who have no actual interest to protect. 34. There is no basis upon which the past costs of either liquidator should be paid had this application been successful. 35. For the reasons given this application must be refused. I shall hear counsel as to costs.