Keith v Verge
[2009] WASC 338
•19 NOVEMBER 2009
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: KEITH -v- VERGE [2009] WASC 338
CORAM: MASTER SANDERSON
HEARD: 4 AUGUST 2009
DELIVERED : 19 NOVEMBER 2009
FILE NO/S: COR 110 of 2009
BETWEEN: MALCOLM KEITH
Plaintiff
AND
EVAN VERGE
Defendant
Catchwords:
Corporation law - Appeal against refusal liquidator to assign potential insolvent trading action to creditor - Whether assignment possible
Legislation:
Corporations Act 2001 (Cth), s 509, s 558FF, s 588FH, s 588FI, s 588M, s 1321
Result:
Application dismissed
Category: A
Representation:
Counsel:
Plaintiff: Mr B P Wheatley
Defendant: In person
Proposed Second Defendant : Mr A F Carles
Solicitors:
Plaintiff: Mossensons
Defendant: In person
Proposed Second Defendant : Carles Solicitors
Case(s) referred to in judgment(s):
Movitor Pty Ltd (receiver and manager appointed) (in liquidation) v Sims [1996] FCA 1320; (1996) 64 FLR 380
Tosich Construction Pty Ltd and the Corporations Law [1997] FCA 115; (1997) 73 FLR 219
UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 457
UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667
MASTER SANDERSON: This was the return of two applications. The first in time was the plaintiff's originating process. The application was said to be brought under s 1321 of the Corporations Act 2001 (Cth). This section authorises an appeal against a liquidator's decision. In this case the defendant is the liquidator of Senson Technology Pty Ltd (Senson). The relief claimed by the plaintiff was as follows:
1.The decision of the Defendant to refuse to assign to the Plaintiff any rights which Senson Technology Pty Ltd, or the Defendant (in his capacity as Liquidator), has to recover monies from Richard Martyn or his related entities under the various provisions of the Corporations Act 2001, including without limitation, sections 588FF, 588FH, or 588M of the Corporations Act 2001 ('the Rights'), be set aside.
2.The Defendant assign the Rights to the Plaintiff for a consideration of $2,000.00.
3.The Defendant do pay the Plaintiff's costs of this Originating Process.
The other application was an interlocutory process. Pursuant to that process, Richard Selwyn Martyn (Martyn) applied for the following orders:
1.That Richard Selwyn Martyn be joined as a party as Second Defendant in these proceedings.
2.That pursuant to section 1321 of the Corporations Act the liquidator be given directions as to the extent to which he has any power to assign causes of action to Richard Selwyn Martyn or to the plaintiff, Malcolm Keith, or to any other party.
3.That the Applicant's costs of this application be paid out of the assets of Senson Technology Pty Ltd (In Liquidation) as part of the expenses of the winding up.
At the hearing of the application, the plaintiff and the proposed second defendant, Martyn, appeared by counsel. The defendant appeared in his personal capacity. He advised that Senson was without funds and that he was not in a position to engage legal representation. He indicated he would abide by the decision of the court. However, he did file two affidavits; the first sworn 18 June 2009, the second sworn 3 July 2009.
The originating process was supported by two affidavits of the plaintiff; the first sworn 27 May 2009, the second sworn 3 July 2009. It is convenient to start with a summary of the facts as drawn from these two affidavits.
The plaintiff was a director of Senson between 1995 and February 2003. During that time, he also worked as a consultant for Senson for an agreed figure of $6,000 per month. At the commencement of his consultancy, Senson did not have the capacity to pay the full amount of $6,000 per month. Agreement was reached that Senson would pay at least $500 per week to the plaintiff and the balance was to be recorded in Senson's accounts as a loan to be repaid when funds were available. At all relevant times, Martyn was also a director of Senson and was engaged as a consultant on a similar arrangement. His consultancy fee was $7,000 per month and this was paid to his company, Senson Applied Technology Pty Ltd. When the plaintiff resigned from Senson in February 2003, the accumulated balance of his consultancy fees, less what he had been paid, was $209,492.48. The plaintiff says that Senson's accounts confirmed his entitlement.
When he resigned, the plaintiff entered into discussions with Martyn and one Neil Davies (who was appointed director in April 2002) as to how the accumulated balance of his consultancy fees was to be repaid. By letter dated 4 February 2003, Martyn, on behalf of Senson, made an offer to repay the outstanding balance by payment of $500 per week and 10 % of gross monthly sales subject to sales exceeding $15,000 for the month. The letter says that this offer was based on an annual sales figure of $266,000.
It would appear that agreement was reached based upon that letter. Senson made payments of at least $500 per week to the plaintiff for a period of 18 months. According to the plaintiff, they did not make payments of the 10 % of monthly sales where those sales exceeded $15,000, although in most months that figure was exceeded. After 18 months, payments stopped. As a result, on 23 December 2004 the plaintiff issued proceedings in the District Court against Senson, seeking to recover the payments that should have been made up to that point. The District Court action progressed to the point where it was listed for a five day trial, commencing on 4 August 2008. On or about 22 July 2008, the plaintiff was advised that Senson had been placed in the hands of an administrator. Subsequently the company was placed in liquidation.
Doubtless the plaintiff is much aggrieved by what has occurred. However, there is no question of his action against Senson proceeding. The company is insolvent. Martyn was never a defendant in the proceedings brought by the plaintiff against Senson. There is then no suggestion that the right of action that the plaintiff is seeking to acquire from the defendant is some sort of right of indemnity that Senson may have from Martyn in relation to the plaintiff's claim against Senson. For the purposes of this application, it can be accepted that the plaintiff is a creditor of Senson and is entitled to prove in the liquidation. But the details of the action between the plaintiff and Senson are only relevant to establish that fact - a fact that does not seem to have been in issue between the parties.
What the plaintiff is seeking to do by the originating process is acquire from the liquidator any rights the liquidator may have to take action against Martyn for insolvent trading. That is made plain by the terms of the application itself. Reference is made to s 588FF, s 588FH and s 588M of the Corporations Act. Each of these sections is a variation on the theme. They entitle a liquidator to recover from a third party money paid by the company to that third party when the company was insolvent. That raises squarely the question of whether or not it is open to a liquidator to assign to a creditor of the company a right to take action for insolvent trading.
During the course of submissions, I pointed out to counsel for the plaintiff that it was difficult on the material filed to work out precisely what the insolvent trading action might be. I invited further submissions on this question. Counsel then refined what the plaintiff sought to have assigned to him as
[A]ny rights which the Liquidator has under the Corporations Act 2001 to apply to the Court (on behalf of the company) for relief under section 588FF, 588FH and 588M in respect of the consulting fees paid by the Company in the years 2004 to 2008 inclusive to Martyn, Senson Applied Technology Pty Ltd and/or their associated entities.
It is worthy of note that this formulation of what the plaintiff was seeking is narrower than what was sought in the plaintiff's solicitor's letter of 28 April 2009 - see attachment 'M' of the plaintiff's affidavit sworn 27 May 2009. That, of course, raises the question of whether any appeal against the liquidator's refusal of the assignment is competent given what is now being sought was not actually asked for. That is a factor which counts against the plaintiff on this application.
Further, the reference to 'associated entities' in the offer is of uncertain ambit. No attempt is made to define that term, so the liquidator was not in a position to know against which entities the plaintiff proposed to take action. It is axiomatic that the liquidator should know what he is assigning before he assigns it. Again, this is a factor which counts against the orders sought by the plaintiff being made.
To overcome these problems, counsel for the proposed second defendant suggested that the appropriate method of dealing with the matter was for the court to give directions as to which causes of action (if any) the liquidator is empowered to assign and, if there is such a power, for the matter to be remitted to the liquidator for further consideration. In my view, that was an eminently sensible suggestion. It is the way in which I intend to proceed.
On behalf of the proposed second defendant, it was submitted that while proceeds recovered by a liquidator under s 588FF and s 588M do constitute property of the company and are assignable by a liquidator, the underlying causes of action under those sections rests with the liquidator and are not property of the company which can be assigned. There appear to be differing judicial views as to whether causes of action under s 588FF and s 588M can be assigned by a liquidator.
In Movitor Pty Ltd (receiver and manager appointed) (in liquidation) v Sims [1996] FCA 1320; (1996) 64 FLR 380 at 392 ‑ 393, Drummond J appeared to be of the view that an insolvent claim under s 588M and s 588W of the law was property of the company. He was not prepared to draw a distinction between a sale of a cause of action by a liquidator and a sale by the liquidator of the fruits of that cause of action.
In Tosich Construction Pty Ltd and the Corporations Law [1997] FCA 115; (1997) 73 FLR 219 at 235, Lindgren J referred to Movitor and agreed with the proposition that prospective recoveries were 'property of the company' within s 477(2)(c). His Honour commented that 'it was not to the point that only the liquidator had standing to apply for the remedy which would give rise to those recoveries'.
On behalf of the proposed second defendant, it was submitted that these two statements of principle were obiter and not determinative of the question. Be that as it may, they represent unqualified statements of principle and should be viewed in that light.
The contrary line of authority rests upon the decision of Hansen J in UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667. His Honour was of the view that claims under s 588FB, s 588FC and s 588FF lay with the liquidators and were not assignable: see UTSA (698). On appeal, the Court of Appeal of the Supreme Court of Victoria upheld his Honour's decision: see UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 457. Hayne JA (464) agreed with the primary judge 'substantially for the reasons that he gives' and found there was no basis for interfering with the exercise of the primary judge's discretion. Brooking JA concurred and wished 'only to add my own expression of admiration for the careful and comprehensive judgment of Hansen J'. Phillips JA agreed. There is no basis upon which the opposing views can be reconciled. However, given that the Victorian Court of Appeal has adopted the approach of Hansen J, I propose to adopt the same approach. The aim of the preference provision is for the preferred creditor to 'put the company in the same position as if the transaction had not been entered into'. That is clear from s 588FI(1)(b). Section 588FI(3) then entitles the preferred creditor to prove in the winding up as if the transaction had not been entered into. If a preference claim could be assigned by a liquidator to a third party and was successfully pursued by the third party, then the company will not have been put back in the same position as if the transaction had not been entered into. The preferred creditor will then have been compelled to pay under the preference claim but will be denied the benefit of proving in the liquidation under s 588FI. On this view, an assignment of a preference claim would be inconsistent with s 588FI.
Further, s 588M(3) provides that a creditor aggrieved by alleged insolvent trading 'may, as provided by Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage'. Subdivision B then provides a procedure whereby the creditor may sue for compensation with the liquidator's consent, following the creditor giving the liquidator notice of intention to sue for compensation. For a creditor to purchase from the liquidator an insolvent trading claim as 'property of the company' would be contrary to the words 'but not otherwise' in s 588M(3). The effect of s 588M(3) is to prevent the assignment of an insolvent trading claim by the liquidator to a creditor.
Counsel for the proposed second defendant raised a further impediment in relation to s 588M. As matters stand at present, the affairs of the company have been fully wound up. Under s 509(1) ‑ (3) of the Corporations Act, it is only when the affairs of the company have been fully wound up that the liquidator calls a final meeting and then lodges the relevant notice with the Australian Securities and Investments Commission (ASIC). Notwithstanding the fact that a court order has been made under s 509(6) extending the date for ASIC to deregister the company, the steps taken in s 509(1) ‑ (3) have been completed and the company has been fully wound up. It is an element of insolvent trading under s 588M(1)(d) that the company 'is being wound up'. This element can not be made out where the liquidator has already lodged his final notice with ASIC under s 509.
This is a further reason for not making the orders sought by the plaintiff.
In my view then, the plaintiff's application should be dismissed. I will hear the parties as to how the costs of that application ought be dealt with.
Having reached that conclusion, it would seem that the proposed second defendant's application ought also be dismissed - at least insofar as the application concerns directions to be given to the liquidator. However, the proposed second defendant may wish to persist with his application to be joined as a party to the proceedings. That was not a matter which was canvassed during argument. On publication of these reasons I will allow the parties to make submissions on that question.
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