Kerol P/L & Anor v Vergeld Engineering P/L & Ors No. Scgrg-97-1497 Judgment No. S6640

[1998] SASC 6640

KEROL PTY LTD & ANOR  V  VERGELD ENGINEERING PTY LTD (IN VOLUNTARY LIQUIDATION) & ORS

ACTION NO 1497 OF 1997

Judge Burley

By Summons dated 24 October 1997 the plaintiffs have sought the following order:-

“1..... That section 509(5) of the Corporations Law does not apply to Vergeld Engineering Pty Ltd and that the company is not to be wound up until such date as judgment has been handed down in an action between the applicant and the respondent.”

The defendant went into voluntary liquidation, the liquidator has completed the administration and, but for an order of this Court to the contrary, the defendant would be dissolved.  The plaintiffs wish to defer the dissolution of the defendant company so that they can maintain proceedings in the District Court against the defendant.  Those proceedings relate to an alleged breach by the defendant company and others of a restraint of trade clause contained in a contract for the sale of a business.

Because the winding up of the defendant company was a voluntary liquidation, a certificate of solvency was given on the basis that all creditors had been paid out in full and that a surplus had been transferred to the contributories after payment of the liquidator’s costs and expenses of the liquidation.  It is common ground that the only asset which existed after payment of the creditors and costs and expenses was a right to sue the contributories in respect of loans made from time to time by the company to the contributories when they were directors of the company.  It is common ground that the liquidator “assigned” that asset to the contributories.  (Whether what he did constituted an assignment remains to be seen, but I will use the word, adopted by the parties, for the time being.)  In other words, he assigned to the contributories the chose in action consisting of a right to take proceedings to recover the debt.  The assignees happen to be the debtors themselves and, accordingly, on the assumption that there has been an effective assignment, the chose in action has cancelled out the debt of the debtor directors.  I assume that the relevant book entries were to the effect that the debt was shown in the company’s accounts as an asset and that the monetary amount was transferred to the credit of the debtors in the company’s accounts such that that credit was off-set against the debit of the loan accounts arriving at a nil liability.

On the application for deferral of the dissolution, the two former directors, Mr Eldic and Mr Vergelius, were joined as defendants. The liquidator for the defendant company did not wish to be heard on the application and the second and third defendants opposed the application. The plaintiffs rely on the provisions of Section 509(6) of the Corporations Law, which is as follows:-

“On the application of the liquidator or of any other party who appears to the Court to be interested, the Court may, before the end of the period of 3 months referred to in subsection (5), by order, declare that subsection (5) is not to apply in relation to the company and specify the date on which the company is to be dissolved and, where the Court makes such an order, the company is dissolved on the date specified in the order.”

It is the section which operates prior to the dissolution of the company and has the effect, if an order is granted pursuant to it, of deferring the dissolution of the company.  This procedure is analogous to the steps that may be taken in a winding up in insolvency where, at the end of the liquidator’s administration, he or she applies for release as the liquidator but does not seek an order for the dissolution of the company because there may be, for example, investigations by other bodies such as the ASC in relation to whether or not criminal or other proceedings might be taken against the directors.  In the case of a voluntary winding up, there is less likelihood of the need to defer the dissolution because, at the time of winding up, the company was solvent.  Consequently, an order of the Court must be obtained.

Section 509(6) is to be contrasted with Section 571 of the Corporations Law, which is as follows:-

“571(1)     Where a company has been dissolved pursuant to subsection 481(6) or 509(5), the Court may at any time, on application of the liquidator of the company or of any other person who appears to the Court to be interested, make an order declaring the dissolution to have been void, and the Court may by the order give such directions and make such provisions (including directions and provisions relating to the re-transmission of property vested in the Commission under section 576) as seem just for placing the company and all other persons in the same position as nearly as may be as if the company had not been dissolved.

571(2)      The person on whose application the order was made shall, within 14 days after the making of the order or such further time as the Court allows, lodge with the Commission an office copy of the order.”

It can be seen that s509(6) does not empower the Court to give directions as it may do when Section 571 is able to be invoked. The latter section gives the Court power to give directions to put the company (now revived because of an avoidance of the dissolution) in the position, to the extent possible, that it was prior to its dissolution.

It seems to me that the absence of the ability of the Court to give directions under Section 509(6) of the Law indicates that the discretion to defer the dissolution should only be exercised where:

(a).... an interested party who has standing under any of the provisions of the Law, needs to take an application relating to the administration of the liquidation;

(b).... the continued existence of the company is necessary in order to effect some proper purpose.

In this case, (a) would cover any application made to recover the surplus assets from the respective contributories and (b) would cover the maintenance of proceedings in the District Court against the company by the plaintiffs.

On the facts of this case, those two aspects are inextricably interwoven in the sense that there is no point in deferring the dissolution (thereby enabling the District Court proceedings to be maintained against the company) if no useful purpose would be served by so doing.  There is no point in making orders which either directly or indirectly facilitate the maintenance of the District Court proceedings if any judgment obtained in such proceedings could not be satisfied.

The plaintiffs do not dispute that this must be so.  They contend that the useful purpose to be served by deferring the dissolution is not confined to the maintenance of proceedings in the District Court against the company but includes an ability, it was contended, on the part of the plaintiffs to have the liquidator recover (by curial proceedings if necessary) the remaining asset which was distributed to the contributories.  Recovery of the debt would thereby make available funds for the satisfaction of any judgment that may be obtained in the District Court proceedings.

It has not been argued by the plaintiffs that the distribution to creditors could or should be re-opened so as to make funds available.  That seems to me to be an appropriate position to have been taken by the plaintiffs even where it is clear that the second and third defendants did not inform the liquidator of a possible or actual claim being made by the plaintiffs.  If there were power to re-open the distribution to the creditors, the discretion would probably not be exercised in favour of the plaintiffs because the amount paid out to creditors was relatively small and because the process of advertising in the gazettal involved in the winding up process is designed to give those affected by the winding up notice of relevant events.  A creditor (and I assume the plaintiffs are creditors of the company for the purposes of this line of reasoning) runs the risk of missing out if the public notices are not checked.  It is clear in this case that the plaintiffs were not aware of the voluntary winding up of the defendant because they were not aware of the relevant public notices issued during the course of the liquidator’s administration and because no one had otherwise told them of the fact of the voluntary liquidation.

The company now has no assets.  The only possible means by which any judgment recovered by the plaintiffs in the District Court proceedings may be satisfied is if the company/liquidator is able to recover the property distributed by the liquidator to the contributories.

I have previously referred to an “assignment” of a chose in action by the liquidator to the contributories at the conclusion of the liquidator’s administration.  That is how it has been referred to in submissions put by counsel.  However, it is not clear whether in reality there was (or could have been) such an assignment.  I doubt that there could have been an assignment because the contributories could not have been both the assignees and the debtors.  It may have been a forgiveness of debt based on the reasoning that, because the asset of the company at the conclusion of the administration was a debt due by those who were entitled to any surplus, each cancelled the other out.  If it were merely a matter of book entries then the actions of the liquidator are more correctly characterised as a forgiveness of debt rather than to an assignment of a chose in action.

However the actions of the liquidator may be characterised, the essential question to be determined in relation to whether or not any useful purpose is to be served by deferring the dissolution, is whether the company or the liquidator may now take action against the contributories for the setting aside of the assignment or the reversal of the forgiveness of debt.  If the liquidator or the company is unable to take such action against the contributories, the company remains without assets and there is no purpose served in deferring the dissolution because, even if the plaintiffs were successful against the company in the District Court proceedings, they would be unable to satisfy any judgment they obtained.

Mr Tokley, counsel for the plaintiffs, argued that the Court had power to set aside or reverse the liquidator’s distribution of the surplus assets of the company.  He characterised the distribution as a “distribution in specie”, presumably because that was the section heading of the relevant report of the liquidator where reference was made to payments to the contributories in excess of $45,000 each.  I do not consider that what the liquidator did constituted an “in specie” distribution.  That term refers to dealing with tangible property whereas a chose in action is an abstract concept.

Mr Tokley referred me to Section 598 of the Corporations Law, but it does not seem to me that that section can be applicable. It refers to matters of fraud, negligent default, breach of trust or breach of duty which result in the corporation suffering loss or damage. In this case it is the plaintiffs who will be at a disadvantage because of the lack of any assets in respect of which they may levy execution. No loss or damage to the defendant company has been disclosed.

Reliance was placed by Mr Tokley on Section 500(3) of the Corporations Law. That enables a liquidator to apply to the Court for an order for handing over of property to which the company is prima facie entitled. It is contained in Division 3 of Part 5.5 which deals with a creditors’ voluntary winding up. Subsections (1) and (2) refer to events “after the passing of the resolution for voluntary winding up”. It was contended by the defendants that Section 500(3) only applied to a voluntary winding up and I am inclined to agree with this contention. The content of the two previous subsections, the position in which the section overall occurs and the fact that Division 4 deals with “voluntary winding up generally” inevitably leads to such a conclusion. I therefore do not consider that, if the dissolution is deferred, the liquidator may avail himself of the provisions of Section 500(3) of the Corporations Law because the defendant company went into liquidation pursuant to a members’ voluntary winding up.

Mr Tokley referred to Section 477(2)(a) of the Law which enables the liquidator to bring or defend any legal proceeding in the name or on behalf of the company.  He said that such a power enabled the liquidator to bring proceedings against any person for any proper purpose.  In other words, if a cause of action could be pursued by the company against that person, the liquidator was able to bring such an action in the name of the company.

The basis upon which Mr Tokley argued that the liquidator would be able to maintain such proceedings was that there had been a breach of fiduciary duty on the part of the directors. The allegation of breach was founded upon the assertion that the company was put into voluntary liquidation for the purposes of avoiding any claim that the plaintiffs might bring for alleged breach of the restraint of trade clause. It was implicit in Mr Tokley’s argument that if the distribution to them of the surplus assets resulted from their wrongful failure to disclose the potential for, or the existence of, a claim by the plaintiffs for alleged breach of restraint of trade clauses, the Court must have power to set aside the transaction. He suggested that not only could the liquidator rely upon any applicable provision of the Corporations Law but also equitable notions of unconscionability which might give rise, in the circumstances, to a constructive trust. I think there is some force in that submission, at least to the extent that the point is arguable. There is some doubt in light of the decision in Butler v Broadhead [1974] 2 All ER 401 but I do not consider that it is appropriate for me to decide the point on an application such as this. That must be a matter which is fully argued on an application (if any) by the liquidator in the company’s name for the recovery of the surplus assets from the contributories. In my view, it is sufficient for the purposes of the present application if I take into account as a relevant factor the possibility of the company, if it has not been dissolved, pursuing an application against the contributories for the recovery of the surplus assets.

It is one thing to say that the company might be able to recover the surplus assets.  It is quite another to say that action will be taken by the liquidator to achieve that purpose.  If proceedings are to be commenced and maintained in that regard, he must be indemnified for his costs and expenses, such that those expenses may be promptly met when incurred.  The plaintiffs have agreed to indemnify the liquidator in respect of such prospective action on his part but no detail has been given.  No doubt that could be worked out between the plaintiffs and the liquidator.

The deferral of the dissolution can only be by order deferring the event until a specific date.  If before that time the liquidator thought that the plaintiffs were not giving a sufficient indemnity or were not attending to the application to recover the surplus assets with proper diligence, he could come back to the Court for the appropriate direction which might, in turn, result in an order being made bringing about the immediate dissolution of the company.  At this stage those are matters of conjecture but I mention them because I think they are necessary matters to bear in mind when considering whether or not to exercise the discretion to defer the dissolution.

In the exercise of the discretion conferred by s509(6), I also take into account the position of the liquidator in relation to the District Court proceedings. If the dissolution is deferred, the applicants will be able to continue with the District Court proceedings. The liquidator will need to decide whether he is able, and if so whether he should, defend those proceedings. If he has no funds to cover the cost of carrying out the appropriate investigations and (if applicable) defending the proceedings, his duty ceases with a request for funding to any persons who have an interest in defending the District Court proceedings if such a request is not met. Consequently, I do not consider that the position of the liquidator, in the event of an order for the deferral of the dissolution, detracts from the making of such an order.

For the above reasons, because I consider that there is an arguable possibility of the company being able to recover the surplus assets, and because I also consider that the plaintiffs can be kept to their intentions with regard to the liquidator making an application to recover those assets and indemnifying the liquidator accordingly, it is appropriate to defer the dissolution for a period of time to enable the proceedings in the District Court to be continued against the company.

A judgment must be made in due course as to when any action would be taken to seek to recover the surplus assets.  It would make sense to defer such an application until after completion of the District Court proceedings because, if the plaintiffs in the District Court proceedings are unsuccessful against the company, there will be no need to take action to recover the surplus assets.  However, assuming that the liquidator was adequately funded, a decision to await the outcome of the District Court proceedings could only be made if there is no possibility of the proposed claim by the company or liquidator to recover the surplus assets being defeated by reason of laches or by reason of the provisions of any applicable statute of limitation.

The plaintiff should bring in Minutes of Order.  There will be liberty to speak to the Minutes.