Matthews v The Tap Inn P/L - [2015] SADC 20

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Application)
MATTHEWS v THE TAP INN P/L
[2015] SADC 20
Reasons for Rulings of His Honour Judge Slattery
11 February 2015
PROCEDURE - MISCELLANEOUS PROCEDURAL MATTERS - OTHER MATTERS
Application by the plaintiff for the court to appoint a mediator under section 32 of the District Court Act 1991 (SA).
Held: the application of the plaintiff is refused.
District Court Act 1991 (SA) s 32; District Court (Civil) Rules 2006 (SA) r 113(1), 220; Corporations Act 2001 (Cth) ss 588FA, 588FB, 58 FC, 588FE, 588FF, referred to.
Hopcroft & Anor v Olsen & Ors [1998] SASC 7009; Cawthorne v Olsen & Ors [2005] SASC 34; Edwards & Anor v Olsen & Ors; Murphy v Stevens & Anor [2000] SASC 438, discussed.

MATTHEWS v THE TAP INN P/L
[2015] SADC 20

The trial date of this matter is set for 16 March 2015. By application of the plaintiff dated 3 February 2015 and heard on 10 February 2015, the plaintiff seeks an order that this matter be referred to a mediation, that Mr Phillip McNamara QC be appointed the mediator and for other orders. The plaintiff brings his application under section 32 District Court Act 1991 (SA)[1] and rules 220 and 113(1)[2] of the District Court (Civil) Rules 2006.[3]
[1] 32—Mediation and conciliation
[2]113—General duty of parties
(1)The parties to a proceeding, and their lawyers, have a duty to the Court to assist in the orderly progress of the action from its commencement until it has been finally dealt with by the Court.
Note—
The powers to enforce compliance, or to penalise non-compliance, with this rule, and indeed the rules generally, conferred by rules 12 and 13 should be noted.
[3]220—Mediation
The plaintiff is the liquidator of Pub Tap Investments Pty Ltd (in liquidation) (‘the company’). On 16 June 2010 the company was placed into administration. On 16 July 2010 the company was placed into liquidation and the plaintiff was appointed as the liquidator. The company was the operator of a hotel in Adelaide called the Tap Inn. The defendant was formerly the owner of the business and was the vendor of the business to the company. The defendant provided vendor finance to the company and took a second charge over the company assets. A financier held the first charge.
The plaintiff makes his claims against the defendant under Part 5.7B of the Corporations Act 2001 (Cth) (‘CA’). The plaintiff pleads sections 588FA(1) (unfair preferences), FB(1) and FB(2) (uncommercial transactions), FC (insolvent transactions), FE (voidable transactions) and FF(1) of the CA. For the purposes of these proceedings, the effective date of winding up is 16 June 2010, being the date that the plaintiff was appointed as the administrator of the company.
The plaintiff pleads that between 30 June 2008 and 27 April 2010, the company paid to the defendant a total of $374,772.22. Under section 588FF(1)[4] CA, if a liquidator is able to satisfy a court that a transaction of a company is voidable because of the application of section 588FE(1) CA, [5]the court may make a number of orders including for payment of money on a number of bases and for transfer of property. The plaintiff asserts that the payments made are uncommercial transactions for section 588FB CA, and insolvent transactions for section 588FE(3) CA.
[4] Courts may make orders about voidable transactions
[5] Voidable transactions
(1) If a company is being wound up:
(a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and
(b) a transaction of the company may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors' Bonuses) Act 2003 .
The plaintiff pleads in the alternative that particular payments in the sum of $76,678.46 being payments made from 24 December 2009 were received by the defendant as an unsecured creditor of the company. The plaintiff pleads that as an unsecured creditor, the defendant received from the company more than the defendant would have received if the debts owed to the defendant were treated pari passu with other unsecured creditors of that company. The payment of these amounts is alleged to be preferential.
The facts of the matter as I am able to ascertain them from the pleadings are that the defendant sold its hotel business to the company and extended vendor finance in an amount of $1,100,000. The repayment of this loan was governed by a loan agreement and an allotment deed. The allotment deed reflected a trust arrangement under which redeemable preference units were created and allotted to the defendant.
The redemption rights attaching to those redeemable preference units were postponed to a formal redemption date being the anniversary of a transaction completion date and then on the anniversary of such date until payment was made in full. The company paid monthly amounts prior to and after the redemption dates which the plaintiff alleges are accelerated payments; the plaintiff contends that no reasonable person would have made such accelerated payments having regard to the objectively identifiable state of insolvency of the company. The plaintiff contends that for this reason and others, any payments so made were in respect of an uncommercial transaction and an insolvent transaction and are voidable. This was because these payments were made and received outside of any obligation under the deed and no reasonable person in the company’s position would have made such payments. Such person would only have made payments on the annual dates as the deed provided. Also, the trustee under the deed had a right to seek to defer the payments. Objectively assessed, the trustee could have and would have sought to defer the payments because of the state of penury of the company.
The defendant admits receipt of the payments as well as other payments. It says that the payments were made to redeem the preference units and as dividends (upon the same units) and for interest. The defendant pleads that each sum was paid under an identifiable obligation under the deed and that the payments connected to the redeemable preference units gave a commercial benefit to the company because the interest payable under that deed was calculated on a decreasing sum based upon these payments. The defendant will argue the doctrine of ultimate effect.
I refer to the issue of the payment of the sum of $76,678.46 and also paragraph 6.1 of the defence, relating to the amounts paid by the company to the plaintiff as reflected in paragraph 13.14-13.18 inclusive of the statement of claim. The defendant pleads that these were payments of secured debts for the purposes of section 588FA(2) CA under a charge given by the company to the defendant on 27 November 2007. That date preceded the first pleaded date of payment of an amount by the company to the defendant (30 June 2008: viz paragraph 13.1 of the statement of claim) by some 7 months and 3 days. The charge in favour of the defendant secured all moneys owed by the company to the defendant in respect of the loan agreement and the allotment deed and was a fixed charge on all of the assets of the company. And so, the defendant pleads that any payments made under it could not be preferential (as it was not being paid as an unsecured creditor).
In his first and second reply, the plaintiff pleads for the first time that the debt is unsecured because for section 588FA(2) CA the security held by the defendant was of no value at the time of the winding up of the company. He alleges that the amount of the payments made to the defendant by the company in the sum of $76,678.46 exceeded the value of the secured assets and that there was a security shortfall adverse to the defendant. The plaintiff pleads that as a result, the defendant was an unsecured creditor at the date of liquidation of the company.
Other matters are pleaded by the plaintiff in the second reply, but I shall focus on paragraph one for present purposes. That pleading in its current form is difficult to comprehend and the plaintiff is to bring in a third reply to correct some omissions in that paragraph. The parties’ positions at the argument before me were that the plea related to the alternative claim in respect of the sum of $76,678.46. That position needs to be clarified in the fresh pleading. This is only one of the matters that requires attention.
Doing the best I can, it appears that in respect of the alternative claim, the plaintiff’s principal focus is upon the operation of section 588FA(2) CA. Section 588FA(1) and (2) reads as follows:
Unfair Preferences
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
(2) [where debt unsecured] for the purposes of sub-section (1) a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.
Several questions arise on the parties’ submissions. One is the date at which the assessment of value is to be made. The plaintiff contends that the relevant date of assessment is the date of the winding up (the ‘effective date’) and that the defendant was unsecured as at the date of liquidation because the priority chargee did not have its debts satisfied from the company’s assets. The defendant appears to contend for the date as being the date of the grant of the security. Another issue for resolution is the date of assessment of the value of the assets secured under the defendants charge. Is it the effective date of winding up, the date of the grant of the registered charge or some other and, if so, what date. The defendant contends that there is a panoply of possibilities. A further question is the method of valuation. The differences between the parties on this and other issues in the case are pronounced.
The plaintiff seeks an order of the court under District Court Act 1991 (SA) section 32 / District Court (Civil) Rules 2006 (SA) rule 202 for a compulsory mediation. The defendant resists this application. It contends that it has allegedly already lost over $1,000,000 on this deal as a vendor financier and it wants adjudication on this claim of the liquidator which, if successful, will compound its loss.
Mr Douglas for the plaintiff relies upon the decision of Perry J in Hopcroft & Anor v Olsen & Ors [1998] SASC 7009 at [35] and [36] in support of the plaintiff’s application. Those paragraphs read as follows:
Be that as it may, it does not appear to me that precedent is of much assistance in determining the present application. Every case involves different circumstances. What might be an appropriate procedure in one case, may clearly be inappropriate in another.
I am not much moved by the argument that the parties are a long way apart - so far apart, Mr Bell suggests, that the difference between them could not be bridged. That is a familiar cry in the context of many cases which subsequently are successfully mediated.
Courts have on a number of occasions made orders for a compulsory mediation over the objections of a party. In my opinion, that is part and parcel of the exercise of an unfettered discretion. The differences between the parties to litigation may be great but, in the end, these differences are usually only matters of comparison rather than a guide post for or against the exercise of discretion. Parties are and remain in litigation because of their differences.
Mr Douglas for the plaintiff focused his submissions on three main matters. The first, that the costs of a truncated mediation with Mr McNamara QC acting as mediator must be compared to or at least considered in light of the fact that the argument under section 588FA(2) has not been extensively canvassed in Australia and an appeal by the loser at first instance in this court is likely. Although this is a consideration, it is something that must have been in the mind of the plaintiff when he commenced the proceedings and properly considered, does no more than emphasise the differences between the parties’ positions.
Mr Douglas’ second point was, at one level, similar to his first. The argument to be had at trial on the issue begets what may become highly technical arguments based upon the parties own assessments of the real issues in the action. The proposition put was that the parties would be assisted by a robust discussion with the mediator and to receive his views on their respective commercial positions. Mr McNamara QC would not express any particular view about the merits in his impartial position in a mediation. I proceed on that basis and I must presume that having reached this stage, the parties have taken all the advice that they need to take on what they perceive to be the relevant issues. This must include a robust examination of the merits of each of the parties’ commercial and legal positions.
Thirdly, Mr Douglas pointed to the general philosophy underpinning the District Court (Civil) Rules 2006 (SA) which require the exercise of good faith by all parties (rule 113(1)). The approach of the liquidator, with his special powers and responsibilities, has been consistent with that approach.
Mr Douglas agreed with the position that I then put to him: that on this application the question for the court was whether, on the whole of the issues joined in the action, upon a proper understanding of the parties positions and interests at this preliminary stage and irrespective of the parties stated desires, it is appropriate to order a mediation.
In response, Mr Riggall’s first contention was that the test to be applied was that some exceptional circumstances needed to be identified before a court would make an order. He relied upon the decision of Perry J in Cawthorne v Olsen [2005] SASC 34. That case was another in a very long line of what are described as the fisheries cases, a number of which were decided by Perry J: see for example Edwards & Anor v Olsen & Others; Murphy v Stevens & Anor [2000] SASC 438; Hopcroft & Anor v Olsen & Ors [1998] 201 LSJS 54. This was a similar case. Other cases of a similar style had been run and lost and there had been appeals that failed. Mr Cawthorne was a fisherman in the group who were affected by a change to the rights attaching to their fishing licences. Perry J had dealt with similar claims and in some of those earlier claims, his Honour had made orders for mediation and under the equivalent of the District Court Act 1991 (SA) section 32. At paragraph [10]-[15] of his Honour’s judgement, his Honour said as follows:
In the first place, my decision in Edwards and Murphy, which was upheld in the Full Court, should serve to illuminate much of the ground which the court is likely to have to cover, in dealing with most of the issues now in contention.
That is not to say that I have in any respect formed a view as to whether the outcome of this case should be similar. All I am indicating is that the issues in the other litigation gave rise to similar arguments, and the manner in which the court approached those arguments in Edwards and Murphy will have a bearing upon the approach to be taken in this case. I stress, though, that it should not be thought for one moment, that it should follow from those comments, that the outcome of this case should be the same.
In the second place, I ordered a settlement conference which took place recently before Master Withers, when presumably the parties not only put their best offers, but made their position clear on the crucial issues.
Third, while I ordered a mediation against the wishes of the parties in the abalone case of Hopcroft,^2. that was before the decision had been handed down in Edwards and Murphy. Indeed, it was before the trial of the Edwards and Murphy case. Mediation in Hopcroft did not resolve the matter, although it settled much later after the Edwards and Murphy claim had been handed down.
If the parties do not fully understand their respective positions and the strengths and weaknesses of their claim and defence in these proceedings at this stage, I feel that they never will.
They are, I am told, a long way apart. Although Master Withers thought the mediation had a reasonable prospect of resolving the matter, my extended experience of the abalone cases and my understanding of this case suggests to me that if it is going to settle, it will do so between now and the trial, without the assistance of a mediation.
This authority does not stand for any proposition of a requirement for exceptional circumstances as contended for by Mr Riggall. A significant matter in that case was that the application was heard and granted by Perry J in 1998 but the trial of the action was due to commence in 2000. Time was not an issue. In my opinion this case is different.
Mr Riggall submitted that the parties have narrowed the issues as best as they can. I would presume this to be the case but he also says that his client wants an adjudication on all issues, especially the section 588FA(2) CA issue.
One curious aspect of this matter is that the plaintiff did not raise the section 588FA(2) CA plea until his reply. I would have expected such an important plea to have been raised in the statement of claim. This means that there has been and will continue to be movement in the pleadings. The issue was raised later than might otherwise have been the case and opens a new train of inquiry for both parties. In the absence of anything to the contrary, I will assume that the plaintiff has assessed and then prepared his case on the question of the value of the security. He will bear the onus of proof of this matter in his own case. It is not a matter that could ever be considered to be rebuttal in nature. Thus even though the plaintiff pleads this issue in reply, it will form part of his case in chief.
There are a number of issues that are unresolved as I read the pleadings. Those include the other payments referred to by the defendant in his defence. Despite that, the parties appear to fully understand their respective positions. By now, each must be aware of the strengths and weaknesses of their claims. Each of them acknowledge the importance of the resolution of the section 588FA(2) CA issue and I presume each of them must understand where their differences lie. One matter that concerns me is that not having sought permission to file a rejoinder, the defendant has not pleaded positively to the plaintiff’s case that the value (of the charged assets (subject to the priority charge)) is assessed at the date of winding up. I understand the defendant would put a case that the appropriate date is the date of the grant of the security. I consider that it would be helpful to have that position pleaded in a rejoinder.
Applying the whole of the issues test formulated by me and having regard to the identified matters put to me, I do not think that it is appropriate to make an order under District Court Act 1991 (SA) section 32 / District Court (Civil) Rules 2006 (SA) rule 220. In my opinion, there are two principal bases for the exercise of my discretion in that way. The first is that the unresolved section 588FA(2) CA issue is at least potentially very pervasive of this claim. It is unlikely that a mediation ordered by the court will be productive in light of the differences between the parties about the meaning of this provision and the defendants determination to have it litigated. This is not a matter of merely identifying a ‘difference’ between the parties: the question of the application of the sub-section is fundamental to the resolution of this action. The second is that the trial date is imminent and the parties quite thoroughly understand the case of the other. Both must have given consideration to all of the issues and weighed the balance of risks. Both must be presumed to know and to comprehend the nature and the strengths and weaknesses of their own and the other party’s cases. The parties are represented by experienced solicitors and counsel and it remains open for them to commence or to continue any negotiations in this action.

The formal order is that the plaintiff’s application is refused.

(1) Subject to and in accordance with the rules, the Court constituted of a Judge or Master
(whether or not sitting with assessors) may, with or without the consent of the parties,
or the Registrar may, with the consent of the parties, appoint a mediator and refer an
action or any issues arising in an action for mediation by the mediator.

(1)A Judge or Master may appoint a mediator in an action and refer the action or a particular issue arising in the action for mediation.

(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
   (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
   (b) an order directing a person to transfer to the company property that the company has transferred under the transaction;
   (c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
              (d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:
  (i) money that the company has paid under the transaction;
  (ii) proceeds of property that the company has transferred under the transaction;
              (e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
               (f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned--an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
              (g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
              (h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;
               (i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;
               (j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.