LAKEMIST Holdings Pty Ltd v Retravision (WA) Ltd - [2001] WASC 279

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: LAKEMIST HOLDINGS PTY LTD -v- RETRAVISION (WA) LTD [2001] WASC 279

CORAM: MASTER BREDMEYER

HEARD: 3 OCTOBER 2001

DELIVERED : 8 OCTOBER 2001

FILE NO/S: COR 323 of 2001

BETWEEN: LAKEMIST HOLDINGS PTY LTD (ACN 069 215 201)
Plaintiff
AND
RETRAVISION (WA) LTD (ACN 008 685 158)
Defendant

Catchwords:

Corporations Law - Ability of directors to bring an action in name of company where receiver and manager has been appointed - Requirement of indemnity from directors - Appropriate security also required for the indemnity

Legislation:

Nil

Result:

Application allowed

Category: B

Representation:

Counsel:

Plaintiff: Mr S Penglis
Defendant: Mr J C Vaughan

Solicitors:

Plaintiff: Freehills
Defendant: Deacons

Case(s) referred to in judgment(s):

Deangrove Pty Ltd (Receivers and Managers Appointed) & Anor v Commonwealth Bank of Australia (2001) 37 ACSR 465
Newhart Developments Ltd v Co‑operative Commercial Bank Ltd [1978] 1 QB 814
Tranchita v Retravision (WA) Pty Ltd [2001] WASCA 265

Case(s) also cited:

Charmae Investments Pty Limited & Ors v Australia and New Zealand Banking Group Limited & Ors (1991) ATPR 41-063
NEC Information Systems Australia Pty Ltd v Lockhart, unreported; SCt of NSW - Commercial Division (Brownie AJ); No 50240 of 1990; 8 June 1990
Phillips Oysters Pty Limited v National Australia Bank Limited, unreported; Federal Court of Australia (Lockhart J); G3035 of 1992; 13 November 1992

MASTER BREDMEYER: This is an application by the defendant that the originating process be set aside, or, alternatively, be stayed until:
"1.The Receiver and Manager of the Plaintiff declines to pursue the proceedings against the plaintiff; and
2.the directors of the Plaintiff, Roger James Harper and Marice Mignon Harper:
(a)agree to indemnify the Plaintiff in respect of:
(i)legal costs and expenses incurred on behalf of or in the name of the plaintiff for the conduct of the proceedings; and
(ii)any order for costs which may be made against the plaintiff in the proceedings (such indemnity being for the benefit of the Plaintiff and the Defendant); and
(iii)provide security for the indemnity (such security to be to the satisfaction of the Defendant, or, failing agreement by the Defendant, as directed by the Court)."
The substantive application is the plaintiff's application by originating process against the defendant for oppression under s 233 of the Corporations Law. The plaintiff is a shareholder of the defendant. The originating process outlines the oppression as follows:
"The conduct of the Defendant in facilitating and approving the opening of a Retravision 'superstore' in O'Connor approximately 6 km from the Retravision store in Southlakes owned and operated by the Plaintiff (Southlakes Retravision), without any prior consultation with the Plaintiff and knowing the effect the same would have on Southlakes Retravision store [run by the plaintiff]."
The application claims damages and interest and costs.
The background facts are that the plaintiff ran a Retravision store at Southlakes in the Lakes Shopping Centre. It was a franchise operation. The franchisor was Retravision (WA) Ltd, the defendant. As stated, the plaintiff owns a few shares in the defendant. The plaintiff also runs a Retravision store at Broome. The Southlakes store was opened by the plaintiff in May 1995. All goods stocked there have to be purchased through the defendant. When the plaintiff first applied to the defendant to open a Retravision store in the Lakes Shopping Centre, objections were invited from nearby Retravision stores. Those objections were heard at a board of directors' meeting of the defendant and were overruled. The Southlake store ran into financial difficulties and the defendant appointed a receiver and manager to the plaintiff company on 10 July 2001. The receiver and manager closed the Southlake store and has sold, or is in the process of selling, all the stock. He was unable to find a buyer for the store. The receiver and manager is currently running the Broome store which is also on the market for sale.
In May 2001 the defendant advised the plaintiff that approval had been granted to a Mr John Grant for a Retravision franchise in O'Connor, which is situated approximately six kilometres from Southlakes Retravision. The plaintiff says that this new store is a Retravision superstore. It is significantly larger than the other stores and the defendant is the head lessee, which is not the same with any other Retravision store. The Retravision superstore opened in O'Connor on 2 July 2001. The plaintiff and other nearby Retravision store owners were not given an opportunity to object to the opening of the Retravision superstore. The plaintiff says that the creation of the Retravision superstore in such close proximity to Southlakes would:
" ... necessarily have, and has in fact had, a significant adverse effect on the viability, profitability and future prospects of Southlakes Retravision."
The defendant claims that the plaintiff owes it a lot of money for goods supplied to the plaintiff's store and on 7 September 2001, in CIV 2369 of 2001, sued the plaintiff's directors, Mr and Mrs Harper and a Mr and Mrs Williams, under personal guarantees supplied by them in the sum of $907,242.38.
To return to the defendant's interlocutory application, I accept the law on this topic as set out by Sackville J of the Federal Court in Deangrove Pty Ltd (Receivers and Managers Appointed) & Anor v Commonwealth Bank of Australia (2001) 37 ACSR 465. At par 30, he said:
"The general principle, at least so far as the usual form of debenture or charge is concerned, is that the appointment of receivers does not entirely displace the powers and authorities of the directors."
At par 32 he quoted, with approval from Shaw LJ, with whom Stephenson LJ agreed, in Newhart Developments Ltd v Co‑operative Commercial Bank Ltd [1978] 1 QB 814 at 819:
"One has got to see what the function of the receiver is. It is not, of course, to wind up the company. It is perhaps interesting to note in passing that when a liquidator is appointed, certainly in a winding up by the court, the powers of the directors immediately cease by statutory provision. There is no such provision in relation to the appointment of a receiver, whose duty it is to protect the interests of the mortgagee or debenture holders as the case may be. Insofar as it is requisite and necessary for him, in the course of his dealing with the assets of the company, bringing them in and realising them, and so on, to bring actions as well, he is empowered to do so by the debenture trust deed in the name of the company. That makes it possible for him to institute such proceedings without exposing himself to the risk of liability for costs if those proceedings should fail. But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name of the company. It does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge."
He further quoted from Shaw LJ, in the same case, at 821:
"But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the rights or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board ... from seeking to enforce the claim, however ill‑founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders."
Later, at par 40, Sackville J said:
"In my view, the authorities clearly support the proposition that, where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder, qua debenture holder, are not prejudiced ... . The entitlement of the directors reflects the fact that, as Street J observed in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 92 WN (NSW) at 210, it borders on the absurd to contemplate that a receiver would institute proceedings in the name of the company challenging the very debenture to which he or she owes office. It is almost as absurd to contemplate the receiver instituting proceedings against the debenture holder or chargee claiming damages for misleading and deceptive conduct or breach of duty. In any event, an action conducted by the receiver against his or her appointor is likely to encounter a variety of practical difficulties ... ."
In Deangrove, above, the Commonwealth Bank was a substantial creditor and had appointed a receiver and manager. Mr Jeans was the company's only shareholder and a director. He instructed Deangrove to bring an action against the Commonwealth Bank, trying to set aside its security documents on the basis that they had been entered into as a result of misleading and deceptive conduct by the bank.
Sackville J at pars 46 and 47 stated:
"As Mr Speakman pointed out, orders have been made in some cases restraining directors of companies in receivership from conducting proceedings in the name of the company without first indemnifying the company and providing security for that indemnity: Charmae Investments Pty Ltd v ANZ Bank (1991) ATPR 41‑063 at 52,003 ‑ 4; NEC Information Systems Australia Pty Ltd v Lockhart, unreported; SCt (NSW) Brownie AJ; 50240/90; 8 June 1990. In Phillips Oysters v National Australia Bank Limited, unreported; Federal Court of Australia; 13 November 1992 Lockhart J dismissed the proceedings because the corporation was 'hopelessly insolvent' and neither director had any assets to meet an indemnity against costs.
In my view the governing principle is that those giving instructions on behalf of Deangrove, in order to continue the proceedings, must demonstrate that 'nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders': Newhart Developments, at 821. Had there been evidence that Mr Jeans has sufficient resources to satisfy an indemnity, it might not be necessary for any security to be provided in support of the indemnity. But no such evidence has been adduced. Nor is there evidence as to Deangrove's financial position. In these circumstances, it seems to me that Mr Jeans should provide appropriate security to support his indemnity to Deangrove if the company is to pursue its claim against CBA."
In this case I do not consider that the receiver and manager's consent for the plaintiff to bring this action against the defendant need be obtained. To apply for that consent seems a waste of time. The receiver and manager is most unlikely to consent to the company bringing an action against the defendant who appointed him. However, on the authority of Deangrove I consider that the directors must provide an indemnity with appropriate security before being allowed to proceed with their action in the name of the company against the secured creditor. This is because the governing principle is that the secured creditor is in a privileged position and nothing done in the course of proceedings which the plaintiffs institute in the name of the company should threaten the interests of that secured creditor.
Applying that principle to the facts of this case, the directors Mr and Mrs Harper have signed a suitably worded indemnity making them personally liable for any costs order which may be obtained by the defendant against the plaintiff. They have also disclosed, in affidavit form, a summary of their assets and liabilities. It is clear from this statement that many of their assets are already secured to the defendant. Those securities were obtained prior to the commencement of this action to secure the defendant for the credit which it supplied to the defendant for the goods which it supplied to the plaintiff's stores. The secured assets include a first mortgage over the Harpers' property at 45 Brookton Highway, Roleystone, which is valued at $300,000. The Harpers owned a house at 7 Hamersley Street, Cottesloe, which was mortgaged, firstly, to that National Australia Bank and, secondly, to the defendant. They recently sold that property for $1.55 million. After payment out of the selling expenses, plus the first mortgage, $113,731.08 was paid to the defendant in part payment of the plaintiff's debt to the defendant. The defendant has sold the bulk of the stock from the plaintiff's Southlakes store and this has reduced the debt by $85,000. At present $835,328.05 is owed to the defendant. Further sale of stock from the Southlakes store may reduce this by another $20,000. In addition, the receiver and manager is currently running the Broome store. It is said to be breaking even. He has it on the market for sale. I was not told of the value of the stock held by the store or what it might fetch on sale.
I note that the plaintiff's case, at this early stage of its formulation, appears to be weak. Its main point is that the opening of the Retravision superstore at O'Connor, six kilometres from its store, was oppressive and unfairly prejudicial and discriminatory against the plaintiff, particularly when no opportunity was made for prior objections. The prospective adverse effect of the new superstore on the business of the plaintiff's store, is certainly arguable, but it can hardly be said that the advent of the superstore destroyed the plaintiff's business. The plaintiff's business was going bad long before then. The receiver and manager was appointed on 10 July 2001, whereas the Retravision superstore opened in O'Connor on 2 July 2001. The plaintiff's business was in financial difficulties before then. For example, at par 14 of Mr Harper's affidavit of 10 September 2001 he relates how in April or May 2000 the trading figures were very low and remedial action had to be taken.
The other comment I make, which is not in the papers before me but I assume is common ground, is that there was a Retravision store at O'Connor, between 1989 and 1999. It was not a superstore. It recorded net losses in the financial years 1998 and 1999. From May 1999 the company running the store was under administration. It owed $2.28 million to the defendant as at September 1999. I learn that from Tranchita v Retravision (WA) Pty Ltd [2001] WASCA 265.
I consider, as previously stated, on the authority of Deangrove that the directors are required to indemnify the defendant with appropriate security for the defendant's costs of this action if the defendant successfully defends the claim.
I consider that the indemnity offered, in its wording, is satisfactory. But I consider that the security offered is not adequate and appropriate to give an indemnity to the defendants. The Roleystone property, mortgaged to the defendant, is worth $300,000. That is more than swallowed up by the plaintiff's debt to the defendant for goods supplied. The existence of that mortgage gives no comfort to the defendant for the legal costs which it may be awarded in this action. I do not consider that the legal costs in this action are likely to be high. The oppression alleged is limited to the single issue of the opening of the O'Connor superstore. I consider there would be no need for discovery. There would only be a need for a further affidavit from the defendant on the merits and possibly a replying affidavit from the plaintiff. The matter could then go off to a special appointment. The matter is within the jurisdiction of a Master. If this action is confined in that way, and bearing in mind that the present interlocutory application also adds to the costs, I consider an appropriate estimate of costs is around $7,000. I would order the plaintiff's directors, Mr and Mrs Harper, to pay into court $7,000 or provide a bank guarantee as security for the defendant's costs. I will require that to be paid into court within 21 days. Until such payment in is made, the action will be stayed.
I will order that costs of this application be reserved. They may be agreed or argued on another occasion.