Lumsden, Leon Alfred v Long, George Walter
[1998] FCA 1304
•16 OCTOBER 1998
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - winding up - preferences - receiver failing to make payments to priority creditors - liquidator recovering funds from receiver - receiver's appointment terminated - whether receiver remains under obligation to priority creditors - whether liquidator assumed obligation upon recovery of company assets
Corporations Law ss 421, 433, 556
Sipad Holdings DDPO -v- Popovic (1996) 14 ACLC 307, applied
Re Pearl Maintenance Services Ltd [1995] 1 BCLC 449, applied
Perrins -v- State Bank of Victoria [1991] 1 VR 749, applied
Inland Revenue Commissioners -v- Goldblatt [1972] 2 ALL ER 202, discussed
Stein v Saywell (1969) 121 CLR 529, cited
James v Commonwealth Bank of Australia (1992) 37 FCR 445, cited
Sheahan v Carrier Air Conditioning Pty Ltd (1997) 147 ALR 1, discussed
Chief Commissioner of Stamp Duties v Buckle (1998) 151 ALR 1, cited
LEON ALFRED LUMSDEN -v- GEORGE WALTER LONG
VG 3163 of 1998
MURPHY JR
MELBOURNE
16 OCTOBER 1998
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 3163 of 1998
BETWEEN:
LEON LUMSDEN
APPLICANTAND
GEORGE WALTER LONG
RESPONDENTJUDICIAL
REGISTRAR:
MURPHY JR DATE OF ORDER:
16 OCTOBER 1998
WHERE MADE:
MELBOURNE
ORDER
The Court orders and declares that the applicant is liable to pay the priority claims listed in paragraph 5 of the application dated 6 May 1998 out of the property of the company.
The application is otherwise dismissed.
The applicant pay the respondent's costs of the proceeding to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 3163 of 1998
BETWEEN
LEON LUMSDEN
APPLICANTAND
GEORGE WALTER LONG
RESPONDENT
JUDICIAL REGISTRAR:
MURPHY JR
DATE:
16 OCTOBER 1998
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
In these proceedings the liquidator of Fine Edge Kitchen Cabinets Pty Ltd (In Liquidation) (ACN 050 029 608) ("the company") seeks declaratory and other relief against the respondent, the former receiver and manager of the company. In particular the applicant seeks declarations that the respondent is liable to a number of priority creditors of the company. The applicant's case is that the respondent, although now no longer the receiver of the company, remains personally liable under the Corporations Law for certain priority debts. The evidence in the proceeding consisted of an extensive affidavit from the applicant and a shorter one from the respondent. Neither deponent was cross-examined.
Resolution of the proceedings requires consideration of the provisions of ss 433 and 556 of the Corporations Law and construction of a deed of settlement between the parties in earlier proceedings in the Court.
Background.
On 1st March 1996 the respondent was appointed receiver and manager of the company. His appointment was purportedly pursuant to a mortgage debenture between the company and its directors, Michael Terlato and Irma Terlato, dated 30th June 1994, which created a floating charge which was registered with the Australian Securities Commission. On 26th May 1996 the applicant, pursuant to an order of the Supreme Court of Victoria, was appointed liquidator of the company. The applicant investigated the affairs of the company and prepared a summary of receipts and payments. He formed the view that there was no power under the debenture for the directors to appoint the respondent as receiver and manager of the company. The applicant and the company then issued proceedings in the Court against the respondent and the directors (No. VG 3477/96) ("the earlier proceedings"). In the earlier proceedings the applicants alleged that the directors did not advance moneys pursuant to the debenture, and did not have power to appoint the respondent as receiver and manager. Further, the applicants alleged that the respondent entered into possession or control of the company property invalidly, and trespassed on the property. It was also alleged that the respondent failed in his duty to obtain full market value for the assets of the company. The respondents to the earlier proceedings joined the solicitor who drew the debenture to the action, and various cross-claims ensued.
The earlier proceedings were settled pursuant to a Deed of Settlement, which was executed on 21 April 1997 ("the Deed"). The Deed involved payments by the respondent, by the solicitor who drew the debenture, and by the directors. The payments were made with a denial of liability.
Paragraph 4 of the Deed provides that:
"The Applicants agree to accept the Long Payment [from the respondent], the Elhosni Payment [from the solicitor] and the Terlato Payment [from the directors] in full and final settlement and satisfaction of their claims, costs, expenses and interest in relation to and arising out of, or in respect of the matters alleged in the proceeding, but insofar as the Applicants' release and discharge of Long is concerned, limited to his alleged trespass to and conversion of the assets and undertaking of Fine Edge and any sale by him of the assets and undertaking of Fine Edge for an amount less than the market value or the best price that was reasonably obtainable, with an acknowledgment by the Applicants that these payments are made with an express denial of liability."
At para 10 the Deed provides for mutual releases by the parties, but the release to the respondent was qualified as follows :
"10.The parties hereby release and forever discharge each other and each and all of their agents, predecessors, successors and assigns, if any, from all actions, causes of action, suits, demands, expenses, costs, liability and entitlement to damages, contribution or any other claim for relief whatsoever which they now have or may have against each other in respect of any matter directly or indirectly arising out of or related to or in connection with any of the acts, facts, matters or circumstances pleaded in the proceedings, the Long Cross-Claims, the Terlato Cross-Claims, and the Elhosni Cross-Claims or the subject matter thereof and any matter incidental thereto:
(a)But insofar as the Applicants release and discharge of Long is concerned, limited to his alleged trespass to and conversion of the assets and undertaking of Fine Edge and any sale by him of the assets and undertaking of Fine Edge for an amount less than the market value or the best price that was reasonably obtainable;"
Paragraphs 5, 6 and 7 of the Deed provide:
"TERMINATION OF RECEIVERSHIP
5. Long shall resign as receiver/manager of Fine Edge on the settlement date.
6.Subject to the Terlatos' right to prove and claim in the winding up of Fine Edge as unsecured creditors they hereby release and forever discharge Fine Edge as at the date of settlement from the alleged liability to the Terlatos arising from the Charge.
7.On the settlement date Long shall deliver to Lumsden all books, records and assets of the company including, without limiting the foregoing, any company funds in his possession."
On 30th April 1997 Ryan J, by consent, struck out the earlier proceedings and the cross-claims.
The priority claims.
In April 1997 the applicant wrote to individuals who, in the Directors' Report of Affairs dated 26 May 1996, were listed as having an employee claim. A number of employees returned forms 536 "Formal Proof of Debt or Claim on behalf of Employees". It was common ground that there were bona fide claims by previous employees totalling $26,580.99, of which $24,756.99 remains outstanding, having not been paid by either the respondent as receiver and manager, or the applicant as liquidator. The essence of these proceedings is that the respondent asserts that the applicant is responsible for payment of those claims under s 556 of the Corporations Law. On the other hand the applicant asserts that the liability rests squarely on the respondent under s 433 of the Corporations Law.
Section 433 of the Corporations Law provides:
"....
(2) This section applies where:
(a)a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a floating charge, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a floating charge; and
(b)at the date of the appointment or of the taking of possession or assumption of control (in this section called the "relevant date"):
(i)the company or registered body has not commenced to be wound up voluntarily; and
(ii)the company or registered body has not been ordered to be wound up by the Court.
(3)In the case of a company, the receiver or other person taking possession or assuming control of property of the company shall pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures:
........ .
(c)subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560."
Section 556 provides:
"(1)Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
.....
(e)subject to subsection (1A) - next, wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date;
(f)next, amounts due in respect of injury compensation, being compensation the liability for which arose before the relevant date;
(g) subject to subsection (1B) - next, all amounts due:
(i) on or before the relevant date; and
(ii) because of an industrial instrument; and
(iii) to, or in respect of, employees of the company, and
(iv) in respect of leave of absence;
(h)subject to subsection (1C) - next, retrenchment payments payable to employees of the company."
It was common ground that the employee claims come within paragraphs 556(1)(e), (g) or (h).
Counsel for the respondent submits that the applicant is in funds and in a position under s 556 of the Corporations Law to pay the employees' claims. Further, he submits that as the receivership of the respondent has terminated, any liability which the respondent may have had, has ceased. He denies that s 433 of the Corporations Law imposes any personal obligation on the respondent to pay the employee claims. He also submits that given the provisions of the Deed, which involved the respondent passing all assets to the applicant, as well as making a payment to him, it would be unfair to now impose the employee claims on the respondent. Finally, he asserts that the applicant has no standing to make the claim on behalf of the former employees.
Resolution of the competing claims requires a consideration of the provisions of ss 433 and 556 of the Corporations Law. It was conceded by counsel for the respondent that the applicant had taken "possession or assum(ed) control of company property" as a receiver under sub-s 433(2). The case thus turns on sub-s 433(3). Counsel for the applicant asserted that sub-s 433(3) imposes a personal and continuing obligation on the receiver which in the present circumstances has not been discharged. He further submits that the obligation remains unaffected by the respondent's resignation under the Deed, and the obligations imposed on the applicant under s 556 of the Corporations Law.
The liability of a receiver or controller under sub-s 433(3) of the Corporations Law.
Support for a personal obligation on the receiver to make payments to priority claimants is provided in a number of authorities. In Sipad Holdings DDPO -v- Popovic (1996) 14 ACLC 307, Lehane J, after referring to some authorities, at 311 said:
"It seems to me clear, however, that what all those cases stand for is the proposition, now clearly established, that section 433 and its equivalents operate not merely to confer a priority for certain claims but also to impose a personal liability on a receiver to pay those claims where the receiver pays away property which has come into his control without either discharging the claims concerned or making proper provision for them."
In Re Pearl Maintenance Services Ltd [1995] 1 BCLC 449, Carnwath J, when discussing an equivalent provision in the United Kingdom, at 457 said:
"The cases show that s40 creates a positive duty (not merely a restriction) in favour of the preferential creditors, and that it is a duty enforceable by action in tort for damages [citations omitted]. Thus it is a duty which creates statutory private rights, enforceable as such by the preferential creditors. This being so, it would be very odd if those rights disappeared, merely because the debenture holder (who in the context of these statutory rights is a third party) had been paid off........ ..
Thus, although the receiver starts as the appointee of the debenture-holder, the statute imposes upon him a duty to the preferential holders which is capable of having a separate life of its own. It does not cease merely because the debenture-holder is satisfied. The receiver remains under a duty to meet the claims of the preferential creditors, so far as can be done out of floating charge assets."
In Perrins v State Bank of Victoria [1991] 1 VR 749, Gobbo J considered a number of authorities on the predecessor to s 433 and held at 759 that its words "are such as to compel compliance by the agent in possession even though there is also now a winding up order and I am unable to accept the view that (s 556) should supplant the obligation prescribed by (s 433)". He went on:
"I am therefore of the opinion that the agent in possession must pay preferred creditors under s 331 of the Code [s 433] out of the collected assets whether collected before or after the winding up order. Any preferred debts remaining unpaid are to be paid by the liquidator according to the provisions of s 446 of the Code [s 556]."
The respondent was under a personal obligation.
Counsel for the applicant submitted that the provisions of s 433 and these authorities support a continuing obligation on the respondent to pay the employee claims as priority creditors. These authorities on the construction of s 433 support the conclusion that the respondent, who, it was common ground, was a receiver or a "person taking possession or assuming control of property of the company" within the terms of sub-s 433(2), came under a personal duty to pay the priority creditors out of the property coming into his hands. That duty remained despite the appointment of the applicant as liquidator. His coming into possession of the company property, in the words of Carnworth J in Re Pearl (above), "create(ed) a positive duty (not merely a restriction)" in favour of the priority creditors.
Does the personal obligation survive the Deed and resignation?
The respondent had a personal obligation by reason of sub-s 433(3), but is that the end of the matter? The applicant seeks a declaration that the respondent is liable to the priority creditors. The respondent replies that his receivership is over, and he has returned all the property he held to the company in the earlier proceedings. The company and the liquidator took the earlier proceedings against the respondent as receiver and manager, and the directors. In the statement of claim in those proceedings it was alleged that the respondent had trespassed on the assets and been in breach of his duty to obtain the best price for the company property. The earlier proceedings sought to unwind an invalid receivership and to require those that benefited under it, the directors and the respondent, to disgorge the company funds that had wrongly come into their possession or control. Where does this leave the statutory obligation of the respondent to the priority creditors under sub-s 433(3)? Does the liability to the priority creditors go with the fund that has been returned in the earlier proceedings? What effect, if any, do the sums of money recovered by the company and the liquidator in the earlier proceeding have on any liability of the receiver to pay the priority creditors pursuant to sub-s 433(3)?
The scheme of these provisions of the Corporations Law is, as indicated by Barwick CJ in Stein v Saywell (1969) 121 CLR 529 at 545, when discussing earlier equivalent provisions, complementary. Section 433 operates to provide a preference for certain debts as against a debenture holder, while s 556 provides an equivalent preference for those debts as against unsecured creditors in a liquidation. The complementary treatment of the priority debts is relevant in considering whether the personal obligation of a receiver should remain in this case.
Some assistance regarding the nature of a continuing obligation to priority creditors can be gained from Inland Revenue Commissioners -v- Goldblatt [1972] 2 All ER 202. There the debenture-holder appointed a receiver and manager who took possession of the assets and collected money due to the company. The receiver was removed. There was a provision in the revocation agreement which provided that in return for the receiver delivering all the articles and money held by him, he would be indemnified by the debenture-holder against all liabilities incurred while in office. The company then agreed with the debenture-holder to deliver to the debenture-holder all the assets. The receiver, as directed, delivered up the assets to the debenture-holder. The receiver did not pay the priority creditors who then took proceedings against the receiver, as well as the debenture-holder. The priority creditors alleged a breach of statutory duty by the receiver. The receiver was held liable to the priority creditors. In addition the debenture-holder, who had obtained the assets of the company from the receiver with notice of the claims of the priority creditors, was also held liable on the footing of a constructive trusteeship.
In this case the applicant and the company have, in the earlier proceedings, recovered funds from the receiver, as well as from the directors. The applicant must be taken to know of the claims by the priority creditors, and the receiver's breach of his duty to pay them. The claims are listed in the Directors' Report of Affairs. On this basis, while the facts are very different, the applicant is in the equivalent position of the debenture-holder in Goldblatt. The applicant and the company in the earlier proceedings have obtained the resignation of the receiver, had the debenture-holders (the directors) withdraw their claims, and recovered funds from those two parties as well as from the solicitor who drew the debenture. In these circumstances the company property, which originally gave rise to the personal obligation on the receiver, has been recovered and the receivership effectively unwound. If the scheme of ss 433 and 556 of the Corporations Law is to be respected, then, applying the reasoning in Goldblatt, there is a good argument that while the respondent is under a personal obligation, the applicant is holding the assets on a constructive trust for the unpaid priority creditors.
A different way to approach the matter is to consider whether the receiver at any time was a fiduciary for the priority creditors. Counsel for the applicant strongly resisted any suggestion that a receiver could be said to be in any fiduciary position regarding property that comes into his or her hands. He submitted that a receiver is an agent whose primary duty is owed to the debenture-holders: James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 452 per Gummow J. While this may be correct it is clear from authorities such as Goldblatt and Sheahan v Carrier Air Conditioning Pty Ltd (1997) 147 ALR 1 that in respect of property coming into his or her hands a receiver may have obligations analogous to those of a trustee. In Sheahan, at 13, Dawson, Gaudron and Gummow JJ referred to the provisions of s 421 of the Corporations Law, which provides for receivers to establish separate accounts, and said:
"The relationship between the bank with which the receiver maintained the account and the receiver was essentially that of debtor and creditor, the account being in credit; such a debt constituted a chose in action, the title to which was vested in the receiver. The statutory requirement of segregation, duly observed by the receiver, may well have been indicative of the existence of a trust binding the receiver as holder of the legal title to that chose in action and as to dealings with the account. The obligations of the receiver with respect to the treatment of the moneys represented by the credit in the bank account were spelled out by cl 22 of the debenture." (Footnotes omitted)
In a footnote the judges noted that "s433 of the Corporations Law creates a statutory priority, in respect of payment of certain debts, over claims under the security". At 14, when discussing the s 421 account, the judges noted that in the event that the bank, in that case as security holder, had realised the security, then "in the absence of an express trust stipulation in the security itself, the bank would have been obliged to account [to the person entitled to the mortgaged property] as a constructive trustee for any surplus". (Footnotes omitted)
Sheahan was concerned with the question of whether certain payments made by a receiver to creditors of the company could be recovered as preferences. Dawson, Gaudron and Gummow JJ considered the position where a receiver had made payments out of a s 421 account towards payment of outstanding indebtedness of the company to a third party, being a payment made under the terms of the debenture. At 14-15 the learned judges said:
"If the receiver decided to apply the account towards payment of an outstanding indebtedness of [the company] to a third party, there would be payment of an outgoing which the receiver had thought fit to pay within the meaning of cl 22(a) of the debenture. In that provision the term "outgoing" is apt at least to include a payment or expenditure which in the opinion of the receiver ought to be made in order to facilitate achievement of the ends for which he or she was appointed by the secured creditor.
The established pattern of English authority indicates that, at least as a "general rule", if a payment were so made by the receiver to a creditor of [the company] and accepted by the creditor in satisfaction of the debt of [the company], nevertheless the payment would not discharge the liability of [the company] to the creditor, unless made as agent for and on behalf of [the company] and with the prior authority of or subsequent ratification by [the company]. The different treatment of contractual privity in many jurisdictions in the United States would lead to a different result, namely discharge of [the company]. In any event, it was the view of Willes J and of Fletcher Moulton LJ and Farwell LJ that the creditor could not later maintain an action for the debt. This was because a subsequent action by the creditor against the debtor would be classified as an abuse of the process of the court. In the event of a liquidation of [the company], a proof by such a creditor might properly be rejected. Accordingly, in the circumstances of the present case, even if the acts of the receiver in tendering amounts for payment of the debts of [the company] to [the third parties] are not to be classified as activities as agent of [the company], the practical effect of the working out of the legal relations between the parties, including the subsequently appointed liquidator of [the company], would produce a result equivalent to a discharge of [the company]." (Footnotes omitted)
While these comments refer to a payment made out of property in the hands of a receiver, in my opinion they are equally apposite to the question of the "statutory priority" over property in favour of priority creditors under sub-s 433(3). While the obligation is on the receiver, the priority debts are due by the company, and it will benefit by any discharge of them.
The obligation of the receiver, and the corresponding "statutory priority" of the priority creditors under sub-s 433(3), must also be considered in the light of the right of indemnity of a receiver from company assets. The receiver is in a position analogous to a trustee in respect of property. On the principles endorsed in Chief Commissioner of Stamp Duties v Buckle (1998) 151 ALR 1 at 13-14, the receiver then is entitled to "exoneration or reimbursement" out of company property for any liabilities properly incurred. If those liabilities include those under sub-s 433(3), then the funds recovered by the applicant and the company in the earlier proceedings are impressed with that obligation.
In Goldblatt it was the statutory priority which attached to the property garnered by the receiver that Goff J, applying equitable principles, held also bound to a subsequent recipient of the funds. Goff J held, at [1972] 2 All ER 202, 208, that if the successor to the receiver "knew of the claim [by the priority creditors] then, in my judgment, he is liable to the [priority creditors] as constructive trustee." Counsel for the applicant submitted that there was no basis under the Corporations Law to hold that the receiver was a trustee and thus there was no basis to recognise any right of indemnity from the liquidator. He conceded that if the receiver was a trustee then equity would recognise a continuing indemnity as discussed in Buckle's case (above).
The authorities just considered lead me to the conclusion that the statutory priority is analogous to a trust obligation and the company assets recovered in the earlier proceedings are impressed with the same obligation which was imposed on the receiver. Here I am satisfied that in working out the proper legal relations between the parties the applicant, having had the respondent resign as receiver and disgorge company assets, cannot now leave the respondent in a position where he has no company funds to meet the statutory priority imposed by sub-s 433(3). As Gobbo J noted in Perrins (above):
"[A]ny preferred debts remaining unpaid [by a receiver] are to be paid by the liquidator according to the provisions of s 446 of the Code [s 556]."
The effect of the Deed.
Counsel for the applicant submitted that the Deed did not release the respondent from his liability under s 433. He submitted that if the parties wished to resolve the question of a complete indemnity for the respondent from the applicant then additional monies would have been paid and the terms of the release would have been wider. He submitted that because s 433 creates a statutory obligation, a release may not have been appropriate but that an indemnity should have been obtained to protect the receiver.
In my opinion the Deed is silent on the s 433 obligation of the respondent. It is silent on the equitable principles that I have found apply here. The parties did not address these issues in the Deed or in the earlier proceedings, and thus it does not assist the applicant here.
Relief.
The equitable principles discussed in Goldblatt (above) and Sheahan (above) are relevant to the relief that should apply in this proceeding. The statutory duty is owed by the respondent to the priority creditors. They are not parties to this proceeding. Should they take proceedings against the respondent he has no company funds available to meet their demands. He has repaid monies to the applicant and the company. I have earlier concluded that those monies are impressed with a trust in favour of those priority creditors. In these circumstances, the appropriate order is a declaration that the applicant is liable to pay the priority creditors listed in the application out of the property of the company.
ORDER
The Court orders and declares that the applicant is liable to pay the priority claims listed in paragraph 5 of the application dated 6 May 1998 out of the property of the company.
The application is otherwise dismissed.
The applicant pay the respondent's costs of the proceeding to be taxed in default of agreement.
I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of Judicial Registrar Murphy
Associate: KAREN HALSE
Dated: 16 October 1998
Counsel for the Applicant: MR P SOLOMON Solicitor for the Applicant: DUNHILL MADDEN BUTLER Counsel for the Respondent: MR I BOWDITCH Solicitor for the Respondent: RUSSO PELLICANO CARLEI Date of Hearing: 17TH SEPTEMBER 1998 Further Submissions: 8TH OCTOBER 1998 Date of Judgment: 16TH OCTOBER 1998
1
8
1