Lyford, In the Matter of Plastics Technology Engineering Pty Ltd; (In Liquidation) ACN 061 419 403

[2005] FCA 1922

FEDERAL COURT OF AUSTRALIA

Lyford, In the Matter of Plastics Technology Engineering Pty Ltd
(In Liquidation) ACN 061 419 403 [2005] FCA 1922

CORPORATIONS – company in liquidation – application for order pursuant to s 564 of the Corporations Act 2001 (Cth) – security for costs and litigation funding provided by creditors – advantage over other creditors in consideration for risk assumed by them – notice to creditors of application – no opposition – order made pursuant to s 564 of the Corporations Act

Corporations Act 2001 (Cth) s 564

IN THE MATTER OF PLASTICS TECHNOLOGY ENGINEERING PTY LTD (IN LIQUIDATION) ACN 061 419 403
MAURICE HODGSON LYFORD
WAD 363 OF 2005

FRENCH J
23 DECEMBER 2005
PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD363 OF 2005

In the matter of Plastics Technology Engineering
Pty Ltd (In Liquidation) ACN 061 419 403

MAURICE HODGSON LYFORD PLAINTIFF
JUDGE:	FRENCH J
DATE OF ORDER:	23 DECEMBER 2005
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1.After payment of the plaintiff’s fees and costs the following payments be made from the assets of the company, which assets were recovered in litigation in priority to other creditors:

(i)        $99,000 to Mr Hugh Prior; and

(ii)       $17,000 to Vinidex Pty Ltd.

2.The costs of this application be the plaintiff’s costs in the liquidation of Plastics Technology Engineering Pty Ltd (In Liquidation).

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD363 OF 2005

In the Matter of Plastics Technology Engineering
Pty Ltd (In Liquidation) ACN 061 419 403

MAURICE HODGSON LYFORD PLAINTIFF
JUDGE:	FRENCH J
DATE:	23 DECEMBER 2005
PLACE:	PERTH

REASONS FOR JUDGMENT

1. Plastics Technology Engineering Pty Ltd (In Liquidation) (Plastics Technology) carried on business as a contractor supplying and installing plastic piping in mining related construction projects.  On 16 December 1998 Mr MH Lyford was appointed as liquidator of the company, pursuant to a winding up order made in the Supreme Court of Western Australia.  At the time of the winding up order it appeared that the company’s major asset was a claim against Stork ICM Australia Pty Ltd (Stork).  Plastics Technology claimed to be owed $3,045,276.12 by Stork pursuant to a contract.  Stork denied liability.  The liquidator investigated the claim against Stork, a process which he said took a considerable amount of time.  He engaged consultants to provide technical advice about the claim.  In mid 2001 the liquidator instituted an arbitration of the disputed claim, pursuant to the terms of the contract under which it arose.  The amount claimed by the liquidator, in the arbitration, was $2,870,000 plus interest and costs.

2. The arbitrator made an order at the first directions hearing that each party provide $56,000 by way of security for his costs.  One of the company’s creditors, Mr Hugh Prior, who claimed to be owed $680,723.33, offered to provide the requisite $56,000 on the basis that he would obtain a premium return from assuming that risk in support of the litigation.  A meeting of the Committee of Inspection held on 21 June 2001 passed a resolution in the following terms:

   ‘THAT the liquidator be empowered to pay a premium to Hugh Prior on the funds totalling $56,000 being advanced by Hugh Prior to meet the costs of the arbitration (being the Arbitrator’s best estimate of his total costs for the arbitration), such premium being calculated at the rate of 50% of the actual costs finally paid to the arbitrator and the payment of such premium to be subject of Court approval, pursuant to Section 564 of the Corporations Law.’

3. Mr Prior provided $56,000, which was lodged as security for the cost of the arbitration.  The liquidator unsuccessfully sought litigation funding for the arbitration from a commercial funder and also from the National Australia Bank (NAB), which is a secured creditor of Plastics Technology.  Neither was prepared to fund the claim, although the NAB said that it would be receptive to allowing priority to a creditor who was prepared to fund it.  On 31 October 2001 the Supreme Court ordered that Plastics Technology provide security for Stork’s costs in the arbitration in the sum of $101,233 and stayed the arbitration until that security was provided. 

4. The liquidator called a meeting of creditors on 5 April 2002.  As he put it, ‘They expressed little interest in funding the claim and referred the matter to a Committee of Inspection.’ The terms of their resolution was thus: 

   ‘THAT this meeting empowers the Committee of Inspection to accept any reasonable compromise or offer in relation to the Stork arbitration.’ 

5. On 10 April 2002 Kinley & Associates Pty Ltd offered to buy the claim for $30,000 cash, or provide the requisite security on the basis of a reward in an amount equal to the security plus a percentage of the gross value of any settlement.  On 2 May 2002 Mr Prior provided an offer in writing, in which he said that he was willing to provide a bank guarantee for the amount of the security required by the Supreme Court based upon a guaranteed priority payment of 100 per cent return on the total of that sum, plus the $56,000 that he had already expended.  On that basis he sought a priority payment, including return of capital of $314,466, in the case of a win.  Another creditor, Vinidex Tubemakers Pty Ltd (Vinidex), offered to also provide an amount towards the requisite security.  On 17 May 2002 the Committee of Inspection passed the following resolution: 

   ‘THAT the Committee recommends, in relation to the offer of litigation funding in the amount of $67,488.66 in the form of a Bank Guarantee by Hugh R. Prior (“Prior”) that Prior be advantaged over creditors for the full amount of the indemnity provided, and in relation to the offer of litigation funding in the amount $33,744.34 by Vinidex Tubemakers Pty Ltd (“Vinidex”) that Vinidex be advantaged over other creditors for the full amount of the indemnity provided, and that such advantage is given to both parties in recognition of the risks assumed by them, subject of course to their recognition that a final order will have to be made by the Court pursuant to and in compliance with Section 564 of the Corporations Act.’

6. Both guarantees, as offered, were provided by Mr Prior and by Vinidex.  In the event cash deposits were required and were ultimately provided by those creditors.  Mr Prior advanced $67,488.66 and Vinidex, $33,744.33.  The arbitration was settled in late 2004.  Stork agreed to pay the liquidator $210,000 and out of that sum the liquidator made the following payments:

   1.Fees owed to Jackson McDonald of $20,405.50 for legal services provided in relation to the Supreme Court proceedings;

   2.Fees of $27,338.70 to Kott Gunning, in relation to legal fees incurred with respect to the arbitration;

   3.Fees of $27,100 paid to Morris Kinley Consultants, who provided support to Kott Gunning and Jackson McDonald.

7. The outstanding costs in relation to the liquidation in general are $35,000 and the liquidator estimates that the costs of the present application could be up to $15,000 if the application is opposed.  I expect, of course, that they will be nothing like that as the application is not opposed.  As at 14 June 2005, the liquidator held $173,209.32.  The company has no other assets.  The security provided by Mr Prior and by Vinidex, has been returned.  Mr Prior also expended $2,000 in the provision of and the subsequent cancellation of the bank guarantee.  He paid the further costs of $17,500 relating to the arbitration, at the request of the liquidator, for which he has yet to be reimbursed.

8. The liquidator now applies for an order under s 564 of the Corporations Act 2001 (Cth) (the Act) in the following terms:

   ‘1.1after payment of the plaintiff’s fees and costs, the following payments be made from the assets of the company, which assets were recovered in litigation, in priority to other creditors:

   1.1.1    $99,000 to Mr Hugh Prior; and

   1.1.2    $17,000 to Vinidex Pty Ltd.

   2.The cost of this application be the plaintiff’s costs in the liquidation of Plastics Technology Engineering Pty Ltd (in liq).’

9. The amount to be paid to the two creditors, on this application, is calculated on the following basis.  First, as to Mr Prior, there is a return of $17,500, which was the amount contributed by him, at the liquidator’s request, towards the costs of the arbitration.  Secondly, there is a return to him of $9,898.06 outstanding from the amount of $56,000, which he had originally provided to meet the costs of the arbitration.  That $56,000 was not fully recovered.  In addition, there is the reimbursement for the sum of $2,000, the costs associated with the provision and cancellation of the bank guarantee.  This is rounded off to a figure of $29,000.  The balance of $70,000 represents under 50 per cent of the amount put at risk by Mr Prior, that amount being $66,000 provided by way of security for Stork’s costs, $56,000 provided by way of security for the arbitrator’s costs and $29,000 outlaid by way of costs of the arbitration and the cancellation of the bank guarantee.  In the case of Vinidex, the amount which it put at risk was over $33,000 and the $17,000 represents a 50 per cent return on that assumption of risk. 

10. Section 564 of the Act, under which this application is made, provides:

    ‘Where in any winding up:

    (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

    (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered;

    the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.’

11. Notice of the application was given to creditors in a circular sent out on 9 December 2005 by the liquidator, which attached a copy of the originating process and the first return date. Unfortunately, the circular misstated the jurisdiction in which the application was being brought. It said that the application was being made in the Supreme Court. The originating process, which was attached, made clear it was in the Federal Court. Having regard to the fact that the Committee of Inspection contemplated a s 564 application and that there have evidently been no queries in relation to this application, apart from inquiries made by Vinidex, as to the allocation of the funds, which have been responded to in a letter from the solicitors for the liquidator, I am prepared to proceed on the basis that adequate notice has been given to anybody who would like to have an interest in opposing the application.

12. Having regard to the prior resolutions of the Committee of Inspection and the unwillingness of other creditors to support the litigation and the extent of the risk assumed by Mr Prior and Vinidex, I do consider it just that an order be made in terms sought in the application. So I will order, pursuant to s 564 of the Act:

    1.After payment of the plaintiff’s fees and costs the following payments be made from the assets of the company, which assets were recovered in litigation in priority to other creditors:

    (i)        $99,000 to Mr Hugh Prior; and

    (ii)       $17,000 to Vinidex Pty Ltd.

    2.The costs of this application be the plaintiff’s costs in the liquidation of Plastics Technology Engineering Pty Ltd (In Liquidation).

I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Associate:

Dated:             23 January 2006

Counsel for the Plaintiff:	Mr J Giles
Solicitor for the Plaintiff:	Solomon Brothers
Date of Hearing:	23 December 2005
Date of Judgment:	23 December 2005