Mead Corporation v Carbonless Papers (Australia) Pty Ltd - [2002] WASC 268

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: MEAD CORPORATION -v- CARBONLESS PAPERS (AUSTRALIA) PTY LTD & ORS [2002] WASC 268

CORAM: HASLUCK J

HEARD: 13 NOVEMBER 2002

DELIVERED : 15 NOVEMBER 2002

FILE NO/S: CIV 1606 of 1996

BETWEEN: MEAD CORPORATION
Plaintiff
AND
CARBONLESS PAPERS (AUSTRALIA) PTY LTD (ACN 053 402 038)
First Defendant
THOMAS LESTER EVERETT
ROBIN ASCOTT
Second Defendants

Catchwords:

Practice and procedure - Adjournment - Application for adjournment shortly before trial - Company under voluntary administration - Application for leave to proceed - Matters to be considered in granting leave - Corporations Law s 440D and s 440J - Turns on own facts

Legislation:

Corporations Law, s 440D, s 440J, s 435A, s 437C, s 477(2)(c) Pt 5.3A

Rules of the Supreme Court, O 34 r 4, O 34 r 2

Result:

Application for leave to proceed refused
Application for adjournment allowed

Category: B

Representation:

Counsel:

Plaintiff:     Ms N Johnson QC & Mr C S Gough
First Defendant             :     Mr D M Stone
Second Defendants       :     Mr D M Stone
Administrators              :     Mr J C Vaughan

Solicitors:

Plaintiff:     Minter Ellison
First Defendant             :     Williams & Hughes
Second Defendants       :     Williams & Hughes
Administrators              :     Deacons

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

BBC Hardware Ltd v GT Homes Pty Ltd (1997) 2 QR 123
Foxcroft v The Ink Group Pty Ltd (1994) 12 ACLC 1063
Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 237
Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 258
Patrick Stevedores v MUA (1998) 195 CLR 1
Port of Melbourne Pty Ltd v Anshun Pty Ltd (1981) 147 CLR 589
Re Movitor Pty Ltd (In Liq) (1996) 64 FCR 380
Rodgers v Radly [2000] VSC 570
Slater v Global Finance Group Pty Ltd (1999) 30 ACSR 519
Thackray v Hardcastle, unreported; SCt of WA; Library No 980669; 17 November 1998
Uvanna Pty Ltd v Tsang Chi Ming & Ors (1997) 15 ACLC 443
Wallabah Pty Ltd v Navillo Pty Ltd & Anor (1997) 23 ACSR 444

Case(s) also cited:

Hall Chadwick Corporation Finance (WA) Pty Ltd v Axiom Properties Ltd [2002] WASC 179
Kazar v Duus & Ors (1998) 29 ACSR 321
Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd BC 9706556
Re Behan; Ex parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725
Spacorp Australia Pty Ltd (Administrator Appointed) v Fitzgerald BC 200101007
Vital Finance Corporation Pty Ltd v Abor & Ors (1994) 12 ACLC 973
Wren v Mahony (1972) 126 CLR 212

HASLUCK J: This is an application by the defendants for the adjournment of a trial which is due to commence in a few days' time on Monday, 18 November 2002. Administrators have recently been appointed to the defendant company, Carbonless Papers (Australia) Pty Ltd, ("CPA"), with the result that issues arise under the Corporations Law as to whether the plaintiff requires leave to proceed against the defendants and, if so, whether leave should be granted. These issues have a bearing upon the application for an adjournment.

Background

The nature of the controversy between the parties and the procedural history of the matter is described at some length in two recent rulings made by myself concerning interlocutory matters being Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 237 ("the use of discovered documents ruling") which was handed down on 16 October 2002 and Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 258 ("the leave to amend counterclaim ruling") which was handed down on 7 November 2002.
In order to understand the matters now in issue concerning the defendants' application for an adjournment, it becomes necessary to repeat some of the matters referred to in the earlier judgments.
Mead is a company incorporated in the United States of America. For many years it has been the exclusive manufacturer and distributor of a range of chemical carbonless coating materials. It also provides technical and other supporting services to facilitate their application and usage.
It seems that over 10 years ago Mr Ascott on behalf of companies associated with him including CPA entered into various agreements with Mead for the supply of certain products. Information made available to him by Mead was to be held in confidence. As a consequence of the negotiations, CPA eventually acquired a coater for the manufacture of carbonless paper in Western Australia using Mead's system and materials.
It is now a matter of acute controversy between the parties as to whether the coater was sufficient for the intended purpose and as to whether Mead can be held responsible for certain representations which are said to have caused CPA loss and damage.
In 1996 Mead commenced legal proceedings in the District Court of Western Australia to recover the sum of $109,998.56(US) which was said to be due in respect of coating materials delivered to CPA.
The matter was moved into the Supreme Court and consolidated with other proceedings when it became apparent that CPA intended to advance a counterclaim for damages referable to Mead's alleged involvement in the supply of the coater. The matter principally in controversy is now reflected in the defendants' counterclaim.
As I noted in my previous judgments, the parties attended to discovery but, for one reason or another, it seems that discovery was provided by the defendants in a piecemeal way.
In or about the months of July and August 2001 the legal advisers to Mead came across certain documents suggesting that CPA may arguably have been involved in providing information and chemicals confidential to Mead to other manufacturers. Some of the documents bearing upon this issue are said to have come to light as a consequence of the late discovery of documents by CPA in the present proceedings.
The action had been listed for trial in August 2001. The principal witness for Mead travelled to this State in anticipation that the trial would proceed. The trial was eventually adjourned upon the application of the defendants owing to the unavailability of counsel. This was not due to any default on the part of the defendants or their advisers. Nonetheless, the application for an adjournment was accompanied by vigorous debate concerning the costs of the adjournment and late discovery of documents.
In the course of the leave to amend counterclaim ruling, I observed that, as a consequence of these events, both parties and their legal advisers were on notice as from September 2001 that procedural issues and directions relating to the action would be dealt with rigorously with a view to averting any subsequent adjournment of the trial.
I went on to describe at some length the various formal and informal exchanges that took place between the parties from September 2001 to early November 2002 concerning the Mead's wish to commence proceedings in Ohio against CPA. Mead complained of an alleged breach of the confidentiality arrangements and sought to use certain documents discovered in the Perth proceedings. In the end, as appears from the use of discovered documents ruling, Mead was allowed leave to make use of the documents.
Mead commenced proceedings in Ohio on 23 October 2002 as previously foreshadowed. CPA did not persist with an application for an anti‑suit injunction to restrain the Ohio proceedings. However, it did seek leave to amend its counterclaim in the Perth proceedings with a view to obtaining an anti‑suit injunction. Leave to amend its defence and counterclaim in that regard was refused.
While these events were taking place, the Perth proceedings were listed for trial. It has been known to both parties, since June 2002, that the Perth proceedings would proceed to trial for 15 days commencing Monday, 18 November 2002.
In accordance with the usual procedures concerning a reasonably complex piece of civil litigation of this kind, orders were made in advance of the appointed trial date for witness statements to be exchanged (including the reports of experts) and for trial documents to be assembled in the prescribed manner. It seems that both parties arranged for witnesses to attend at the trial and arrangements were also made for certain evidence to be given by video.

Pleadings

The plaintiff pleads in par 6 of the statement of claim in the Perth proceedings that the plaintiff sold and delivered goods to CPA upon the basis that the second defendants, Thomas Lester Everett and Robin Ascott, agreed to guarantee payment. The plaintiff pleads in par 7 that it supplied and delivered materials on or about the dates and for the prices particularised in that paragraph. It is said that CPA and the second defendants have refused or neglected to pay the amount due.
It appears from par 9 of the statement of defence and counterclaim that as to par 7 of the claim CPA admits that the plaintiff sold and delivered certain chemical coating materials to CPA on or about the dates and for the prices set forth (par 9.1); CPA otherwise denies the allegations of fact contained therein (par 9.2); the second defendants deny par 7 of the statement of claim.
It is said further at par 11 of the defence and counterclaim that "the defendant" (I take this to be a reference to CPA) will set off against any sums found to be due by it to the plaintiff the value of the claims hereinafter set out. One finds pleaded in the following paragraphs the various facts and matters which are said to constitute the defendants' counterclaim. Reference is made to representations concerning the coater and its alleged deficiencies.
The counterclaim contains a plea that in reliance on the representations complained of the defendants set up business premises and commenced the manufacture of carbonless paper using the coater.
It is said that net losses sustained to cessation of trading on 30 June 1996 included net losses of between $1,144,000 and $1,505,000. It is said that the defendants lost the opportunity to make profits from a business that would have earned net profits of $3,700,000 over a period to 30 June 1998. Paragraph 39 of the counterclaim contains a claim for loss in similar terms in respect of certain breaches for which Mead is said to be liable in damages.
It emerges, then, as I have already indicated, that the size of the counterclaim being advanced by CPA far outweighs the claim being pressed by the plaintiff. Further, although the counterclaim is referable to a course of dealing between the parties, it concerns a series of discrete allegations that are not directly related to the plaintiff's claim for goods sold and delivered.
When one draws together these features of the pleadings, there is a prospect, on the defendants' case, that if CPA is at liberty to set off against any sums found to be due by it to the plaintiff the value of damages recovered pursuant to its counterclaim, and to recover the balance then CPA will be left with a substantial amount in hand. On one view of the matter, this prospective right of recovery under the counterclaim could be regarded as a form of property.
It is against this background that I turn to the recent events that have prompted the defendants' application for an adjournment of the trial and the related application by the plaintiff under the Corporations Law for leave to proceed.

The Applications

The defendants' application for an adjournment is reflected in a chamber summons dated 12 November 2002 in which the defendants seek orders that the trial of the counterclaim be adjourned and the trial of the action against the second defendants be adjourned.
One notices immediately that the application does not specifically refer to the trial of the action against CPA. As I understand it, that is because the Mead claim against CPA in the Perth proceedings is thought to have been automatically stayed by s 440D of the Corporations Law. I will come to that provision in a moment.
The defendants' application is supported by the affidavits of Michael Townsend sworn 12 November 2002; that of Hermien Bouman sworn 13 November 2002 and that of Robin Ascott sworn 13 November 2002.
Mead sought initially to rely upon a chamber summons in the Perth proceedings (CIV 1606 of 1996) whereby leave was sought to continue with the Perth proceedings. However, upon reflection, the plaintiff by its legal advisers concluded that an originating process was required. The relevant document dated 13 November 2002 was before me at the hearing pursuant to an undertaking by counsel to file the same. No objection was taken to my dealing with the matter upon this basis and the application for leave to proceed in terms of the originating process dated 13 November 2002 was treated as a live issue.
The plaintiff's originating process speaks of the application being made under s 440D and s 440J of the Corporations Law. On the facts stated in the supporting affidavit, the plaintiff claims:
"1.An order for leave to proceed in CIV 1606 of 1996 as against Carbonless Papers (Australia) Pty Ltd;
2.An order for leave to proceed in CIV 1606 of 1996 as against Thomas Lester Everett and Robin Ascott."
The plaintiff's application for leave was supported by the affidavits of Craig Stewart Gough sworn 12 and 13 November 2002.
For the sake of completeness, I must also mention that the recently appointed administrators of CPA were represented at the hearing by counsel. He relied upon the affidavit of Gary John Trevor sworn 12 November 2002 and made submissions to the Court which were generally supportive of the position being contended for by counsel for the defendants.

The Townsend Affidavit

The affidavit of Mr Townsend is to this effect. He is a director of CPA with Mr Everett and Mr Ascott. The papers concerning the Ohio proceedings were delivered to CPA on 28 October 2002 and disclosed a total claim against CPA in respect of the alleged breach of confidentiality arrangements in the sum of $26,558,100(AUD) at the current exchange rate.
CPA does not have the capacity to meet a judgment debt in the amount being claimed. CPA had previously obtained advice from American lawyers as to the content of Ohio law at a cost in the order of $35,410.80(AUD). Mr Townsend and Mr Ascott were of the view that CPA could not afford to defend the Ohio proceedings.
Mr Townsend went on to say that CPA ceased to trade in 1996 and now has a net asset deficiency of in the order of $1,140,000. With the support of its directors, CPA nonetheless remained able to pay its debts as they fell due. CPA's directors had arranged to borrow funds from Toongabbie Pty Ltd, a shareholder of CPA (and a company related to Mr Townsend) of which about $180,000 was available to meet the costs of the trial listed to start on 18 November 2002. He said further that if Mead recovered a judgment in Ohio for $26,558,100 as a consequence of the Ohio proceedings not being defended then CPA is insolvent. The refusal of the CPA application for leave to amend the counterclaim with a view to obtaining an anti‑suit injunction foreclosed any prospect that CPA could avoid incurring the substantial costs of defending the Ohio proceedings.
Mr Townsend says at par 13 of his affidavit that on refusal of the application to amend the counterclaim, CPA became unable to pay all its debts as they fell due. This is because CPA and its directors did not and do not have the capacity to meet the sort of judgment which is likely to be entered, by default, against it in the Ohio proceedings. In discussions on 8 November 2002, Mr Ascott, Mr Everett and Mr Townsend agreed that CPA must not, in such circumstances, incur any further liabilities and that it was appropriate for CPA to enter into a form of insolvency administration.
It was against this background that late on 8 November 2002 CPA's board resolved to place CPA into voluntary administration.
Mr Townsend says further that it is evident from reading CPA's financial statements that the company's only contingent assets are its counterclaim in the Perth proceedings, and a claim against BASF (Australia) Ltd. In his view, the institution of the Ohio proceedings serves no commercial purpose because CPA does not have the capacity to satisfy a judgment.
Mr Townsend described the steps taken by CPA in conjunction with its legal advisers to be ready for trial. His understanding is that CPA was and would on 18 November 2002 have been ready for trial. Until 8 November 2002 CPA's directors were prepared to fund the proceeding by borrowing from Toongabbie Pty Ltd. He says that from the time when CPA was refused leave to amend its counterclaim and a voluntary administrator was appointed the following position pertains, namely, the company's solicitors advised that s 440D of the Corporations Act probably imposes a temporary stay of the Ohio proceedings; it is not clear whether Mead will seek leave to proceed in Ohio and if they do, whether that leave will be granted. There is a substantial question as to whether or not any judgment awarded in the Perth proceedings on the counterclaim can be enforced in Ohio because Mead has articulated a larger claim in Ohio which it may claim to set off against CPA's judgment.
Mr Townsend concludes by saying that in the above circumstances, all of which have arisen from the institution of the Ohio proceedings, CPA's prosecution of the counterclaim may (and may not) prove a pointless exercise. Whether or not this is so, depends upon events yet to happen and upon Ohio legal advice. At this stage, however, he regards it as folly to agree to commit the resources necessary to fund a three week trial if there is any sensible prospect that a judgment obtained at the end of it may not be enforceable against Mead. Neither he nor any of the other CPA directors intend to fund CPA in the trial if it proceeds on 18 November 2002. For all of these reasons, he asks that CPA's counterclaim be adjourned.

The Trevor Affidavit

Mr Trevor affirms in his affidavit that he is an official liquidator and has 25 years experience of insolvency administration. His affidavit is sworn in opposition to the grant of leave to Mead to pursue its case against CPA and in support of CPA's application for the adjournment of its counterclaim. He confirms that he was appointed an administrator of CPA late on Friday, 8 November 2002. Prior to his appointment, he had no knowledge of CPA, its directors or of its dispute with Mead. He confirms that CPA's latest financial statements disclose a net deficiency of $1,140,000.
Mr Trevor refers to his meeting with the directors of CPA late on Friday, 8 November 2002 in which the position concerning the Ohio proceedings was presented to him. He was told that as a consequence of the likelihood that Mead would obtain a default judgment in Ohio which neither CPA nor its directors had the capacity to satisfy, the directors had formed the view, that first, CPA was insolvent (or certainly was likely to become insolvent) and, second, because CPA was insolvent, it was appropriate to (and they considered it their duty to) place CPA under voluntary administration.
Mr Trevor goes on to say that CPA has approximately $3,000 in a bank account. It does not have the funds to either defend the claim brought by Mead or to prosecute its counterclaim. Mr Trevor is not willing to incur personal liabilities for the legal costs of a three week trial or the fees and costs properly payable to experts and other witnesses for that trial. He is unable in the time available to him, prior to 18 November 2002, to make any assessment of the merit of Mead's claim against CPA or CPA's counterclaim or as to whether CPA will be able to enforce a judgment in Ohio. He cannot make any assessment as to whether in due course he will be able to obtain funding for CPA to prosecute the counterclaim in the Perth proceedings.
However, Mr Trevor goes on to say that the right of action represented by the counterclaim is a potentially valuable asset that should be preserved for the benefit of CPA's creditors. In the main those creditors are the directors. The creditors do, however, include at least one third party with a claim against CPA, namely, BASF in an amount of $155,000.

Mr Trevor says that to his knowledge there is no person who is presently willing to fund either the defence of Mead's claim against CPA or CPA's counterclaim against Mead. He considers it improbable that external litigation funding could be secured in the time available. He has instructed CPA's solicitors to cancel the attendance of all witnesses and has instructed them not to perform any further work in relation to the proceedings until he can make an assessment.

Other Affidavits

Mr Ascott says in his affidavit sworn 13 November 2002 that Mr Townsend's affidavit represents a fair and accurate summary of the material facts and considerations that led to CPA being placed under voluntary administration. He says further that he relied on CPA's lawyers to conduct his defence to the Mead claim. His principal line of defence was that CPA was not, in all the circumstances, indebted to Mead and that, as a consequence, he had no personal liability on any guarantee. He does not have the financial capacity to conduct his own defence which, for practicable purposes, involves a three week trial before the Court.
The first affidavit of Mr Gough describes various events leading up to and associated with the appointment of the administrators. Various financial statements of CPA are exhibited to his affidavit. A further exhibit is the transcript of a hearing in which Mr Ascott was cross‑examined as to the financial position of the company. The exchanges in question show that CPA ceased trading in September 1996 although the company remained in existence. The assets of the company had generally been disposed of although it still held certain chemicals and some paper stocks.
Mr Gough's second affidavit sworn 13 November 2002 refers to financial accounts for CPA for the year ended 30 June 2000 which indicate that the only asset of CPA at that time was $10,314 in a bank account. The total liabilities of CPA were current loans owing to the following persons in the following amounts, namely W & G Barton $52,044; Rebb Nominees Pty Ltd $65,446; Creditors $9,436; Toongabbie Pty Ltd $759,822. A company search exhibited to the affidavit reveals that the directors of the Rebb company are Mr and Mrs Ascott.
Mr Gough's affidavit goes on to describe the procedural history of the Perth proceedings including reference to preparations for trial. He says that the parties to the Perth proceedings were notified of the listing of the trial for hearing on Monday, 18 November 2002 by letter from the Civil Listings Co‑Ordinator dated 21 June 2002.
Mr Gough refers to matters substantiating his belief that there is a substantial risk that if the trial is adjourned Mead may suffer substantial prejudice in the form of being unable to procure witnesses to attend trial. More particularly, he says that Brian Gray, Gary Gardner and John Brabender are no longer employees of Mead; John Brabender will not come to Australia on this occasion for the purposes of giving evidence. I understand this to be a reference to inconvenience caused to Mr Brabender as a consequence of the previous adjournment.
Mr Gough says further that it has been very difficult to persuade Brian Gray and Gary Gardner to come to Australia for the purpose of giving evidence. It is unlikely that they can be persuaded to come to Australia to give evidence if the trial was adjourned again. Due to a restructuring at Mead it is possible that if the trial is adjourned Frank Breeden and Len Sabortini may no longer be employees of Mead by that time and there may then be difficulties in having those gentlemen attend the trial.
Mr Gough confirms that Brian Gray, Gary Gardner, John Brabender and Len Sabortini are primary witnesses for the plaintiff. He considers Brian Gray to be the most relevant witness for the purpose of the trial.
I note in passing that counsel for the defendants took issue with some of these assertions. I took account of his observation that the plaintiff had been informed that Gardner could give evidence by video and that as no witness statement for Breeden had been delivered it was questionable whether his evidence could be received in any event.

Legislation

It will now be useful to look at certain statutory provisions and decided cases bearing upon the question of leave to proceed. The principal statutory provisions fall within Pt 5.3A of the Corporations Law. It will be useful to form an appreciation of the objectives underlying that part of the legislation.
In Patrick Stevedores v MUA (1998) 195 CLR 1 Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ of the High Court said at 37 that voluntary administration under Pt 5.3A is intended to be a temporary measure. There are times within which steps in the administration must be taken. Thus, there are times set within which meetings of creditors must be convened. Next, the fate of a company in voluntary administration is in the hands of its creditors in the sense that it is that group which decides whether the company will execute a deed of company arrangement or the administration will end, or the company will be wound up. In the end, it must always be remembered that the company that is subject to voluntary administration is one that the board has resolved is insolvent or is likely to become insolvent at some future time.
Gaudron J drew attention to the object of Pt 5.3A as it is expressed in s 435A of the Corporations Law, that is to say, to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
The administrator is obliged to investigate the business property, affairs and financial circumstances of the company and form an opinion as to whether it is in the best interests of the creditors to execute a deed of company arrangement, or for the administration to end, or for the company to be wound up. He or she must convene a further meeting of creditors to decide those matters within the time allowed by the legislation.
Put shortly, it seems that the scheme of this Part of the Corporations Law as it applies to the period of administration is that of creating a moratorium period for a company which is or is likely to become insolvent. During the moratorium period creditors are afforded the opportunity in meeting to decide the company's future and claimants against the company or its property are held at bay.
It is in this context that one turns to s 440D which provides that during the administration of a company, "a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with" except with the leave of the court and in accordance with such terms (if any) as the court imposes.
Section 440J(1) provides that during the administration of a company (a) a guarantee of a liability of the company cannot be enforced as against a director of the company who is a natural person and (b) without limiting par (a), a proceeding in relation to such a guarantee cannot be begun against such a director, except with the leave of the court and in accordance with such terms (if any) as the court imposes.

Precedents

In Foxcroft v The Ink Group Pty Ltd (1994) 12 ACLC 1063 a dismissed employee took proceedings against the company for reinstatement or for damages and was obliged to apply for leave under s 440D when the company went into administration. Leave to commence proceedings was refused on the basis that there was no real purpose in permitting proceedings to continue as the employee's case was best dealt with in the comparatively near future when a decision was taken as to whether the administration would cease or lead to a winding up.
In the course of his judgment Young J said this at 1065:
"The provisions of Part 5.3A, as exemplified in sections such as 437C, 437F, 440C and 440D, provide that there shall be a complete freeze of proceedings against the company during the administration so that the administrator can have time to assess the situation, and the company's creditors have an opportunity to work out the net position and adopt an attitude under section 439C which will be in their common interest. To allow one creditor or potential creditor to proceed would not only take the administrator's attention from what he needs to do under the division in a relatively short period of time, but it would also involve costs in running the legal action on behalf of the administrator, as well as perhaps giving the claimant some advantage over the other creditors or potential creditors.
Accordingly, it seems to me that an application under section 440D will rarely be granted. It may be that where the company is insured against the liability the subject of the proceedings, the administrator will ordinarily consent or the court will give conditional leave, but outside this field it is hard to see situations where it would be proper to grant leave, though doubtless there are such situations."
In Slater v Global Finance Group Pty Ltd (1999) 30 ACSR 519 leave was refused. Wheeler J said this at 522:
"A review of the law in relation to s 440D of the Corporations Law was undertaken by Carr J in Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (admin apptd) (1997) 25 ACSR 757. His Honour noted the reluctance generally displayed towards the grant of leave. The cases to which his Honour referred established two broad themes, they being first that it is inappropriate to grant leave so that a creditor may seek to advance his own individual interest in respect of some disputed matter; the existence of s 447B assists in protection of those interests to the appropriate extent. The other theme is the undesirability of an administrator being distracted from his or her statutory duties and obliged unnecessarily to incur legal costs. Neither of those principles is strictly applicable here."
In Wallabah Pty Ltd v Navillo Pty Ltd & Anor (1997) 23 ACSR 444 Wallabah was granted a charge over the property of Navillo which carried on business as a licensed restaurant. Galuppo was a director of Navillo and was said to have guaranteed Navillo's liability. Exercising its powers under the charge, Wallabah had appointed administrators to Navillo. Wallabah then sought leave pursuant to s 440D and s 440J respectively to obtain judgment against Navillo and Galuppo. Leave was refused.
Olney J said that the factors relevant to the exercise of the Court's discretion in that case were as follows:
"(a)the case was not one where a director/guarantor had attempted to forestall action or obtain a moratorium by having an administrator appointed;
(b)Wallabah was the major creditor and only secured creditor, and itself had triggered the application of CL ss 440D and 440J;
(c)the grantor/director disputed the validity of the guarantee a fact known to Wallabah before the administrators were appointed;
(d)Navillo was no longer trading;
(e)the administrator was actively seeking to sell Navillo's major asset;
(f)Navillo had limited funds with which to contest any action brought against it;
(g)Wallabah had not demonstrated that it might suffer any disadvantage were leave refused."
In BBC Hardware Ltd v GT Homes Pty Ltd (1997) 2 QR 123 leave to proceed pursuant to s 440D was granted in circumstances where the plaintiff's entitlement was essentially unchallenged and the position in relation to administration would be clarified by the recognition and quantification of the rights of a secured creditor. Thomas J made these observations at 125:
"It seems reasonable to infer that the defendants were stalling and that their financial situation, and no doubt other factors, have induced them to seek the appointment of an administrator. However, the question is whether that circumstance should be allowed to frustrate the position of the plaintiff which, as I see it, was on the brink of an entitlement to obtain judgment. If this were simply the case of an unsecured creditor about to obtain judgment, the position would be entirely different. However, it seems to me that the essential claim of the plaintiff is as a secured creditor, namely, as an equitable chargee, and that it has taken certain steps towards the realisation of particular properties. This action is a vehicle for that realisation."
Thomas J went on to say at 126 that the criteria upon which a court will grant leave have not been authoritatively spelt out. It seemed to him that very different considerations applied depending upon whether the plaintiff was a secured or unsecured creditor. It would be uncommon for leave to be granted in respect of an unsecured creditor. That is because such leave would tend to interfere with the orderly disposition and control of unsecured creditors, all of whom are expected to prove in the one administration. Conversely, when the applicant is a secured creditor, the rights of the applicant generally stand outside those that have to be administered with respect to the unsecured creditors.
However, he went on to say at 127 that he did not think that the object of s 437C to s 440D is always to ensure a complete freeze during an administration in order to work out the net position although that may be a useful generalisation.

The Present Case

I must now return to the circumstances of the present case. At the hearing before me counsel for the plaintiff foreshadowed a challenge to the validity of the administrators' appointment. She conceded that in the short time available she had not been able to assemble sufficient evidentiary materials bearing upon this point and was therefore not in a position to press the challenge. However, she felt obliged to describe the nature of her client's reservation of position in general terms and, having regard to the materials presently available, to place on record that the validity of the appointment was not accepted.
In essence, the plaintiff's stance was that CPA had ceased trading in September 1996. Notwithstanding a lack of any assets and a substantial deficit, for the past six years the directors of CPA had clearly treated the company as being solvent as it sought to recover substantial damages against Mead pursuant to its counterclaim in the Perth proceedings. It had no active third party creditors and had been aware for over 12 months that Mead intended to claim damages against it for breach of the confidentiality arrangements. Mr Townsend's contention that CPA became insolvent when it was refused leave to amend its counterclaim was specious. What had prompted the appointment of administrators was not a bona fide need or desire for a moratorium of the kind allowed for by Pt 5.3A of the Corporations Law, but simply a decision by Mr Townsend and Toongabbie to cease funding the action. This was essentially a tactical response to the commencement of the Ohio proceedings with a view to securing a stay of the Perth proceedings and an indefinite adjournment of all claims against the company.
Counsel for the plaintiff said further that Mead could not be criticised for commencing the Ohio proceedings shortly before the trial of the Perth action. The alleged breach of the confidentiality arrangements had only come to light in comparatively recent times as a consequence of inadequate discovery by the defendants. The Ohio claim had been foreshadowed for over 12 months but could not be commenced until the use of discovered documents ruling was obtained. The plaintiff could be criticised, and might possibly be prejudiced, if it failed to advance all claims prior to the commencement of the Perth trial: see Port of Melbourne Pty Ltd v Anshun Pty Ltd (1981) 147 CLR 589.
Counsel for CPA disputed this view of the matter. He submitted that, for all the reasons set out in the Townsend affidavit, the commencement of the Ohio proceedings and the refusal of leave to amend the counterclaim had suddenly brought home to the directors of CPA that the company was or was likely to become insolvent. The only responsible course was for administrators to be appointed so that an assessment of the company's position could be made. He submitted further that the commencement of the Ohio proceedings could be regarded as oppressive conduct. It was designed to convince the defendants to abandon or settle their counterclaim in the Perth proceedings because, ultimately, the damages they recovered, if any, would be extinguished by a judgment for Mead in the Ohio proceedings.

Various Factors

I have already noted that counsel for Mead accepted that she was not presently in a position to press her challenge to the validity or propriety of the appointment. When I entered into debate with her about that aspect of the matter with a view to clarifying the implications of her stance, with great reluctance, but understandably, she was obliged to accept that in these circumstances I was left with no option on the materials before me, including especially the affidavit of Mr Trevor, to proceed from the premise that a regular appointment had been made. That being so, the Court had to give due weight to the objects reflected in s 435A of the Corporations Law and the notion that the administrators should be allowed time to assess the company's situation.
Counsel for Mead contended, however, having regarded to the decided cases, that in weighing up the question of whether leave should be granted, and whether an adjournment should be allowed, it was open to me to take account of those factors in the situation which suggested that the appointment of administrators was simply a tactical response to the commencement of the Ohio proceedings.
I pause here to say that there was no suggestion by any party before me that the administrators had acted otherwise than in good faith and with complete professional propriety. The plaintiff's challenge was directed entirely to the reasoning and recent conduct of the directors of CPA. Having regard to Mr Trevor's affidavit, I accept that he is an experienced liquidator, that he was approached and appointed in the manner described in his affidavit and that he has not yet had an opportunity to make his own assessment of the company's affairs and the strength of its legal position.

Leave to Proceed

This brings me to the question of whether leave to proceed is required. It is apparent from the plaintiff's originating process dated 13 November 2002 that the plaintiff accepts that s 440D of the Corporations Law operates as a stay in respect of Mead's claim against CPA in the Perth proceedings. Mead accepted that leave was required pursuant to s 440D to proceed against CPA and pursuant to s 440J to enforce the claims against Mr Everett and Mr Ascott (the second defendants) as guarantors.
Mead did not accept that CPA's counterclaim in the Perth proceedings was stayed or that leave was required for that matter to be disposed of. If, however, leave was required, upon the basis that the matter stayed was the whole of the Perth proceedings (CIV 1606 of 1996), then the application for leave to proceed in CIV 1606 of 1996 encompassed that issue and leave should be granted.
I pause here to say that the question of whether the appointment of administrators operates as a stay of the Ohio proceedings was not an issue before me and no part of my reasoning or ruling should be assumed to apply to that matter.
Counsel for Mead submitted that s 440D is limited to a stay of a proceeding in court against a company. The stay did not apply to CPA's counterclaim. Such an interpretation was consistent with the language of the statutory provision and the underlying policy, for the aim was to immunise the subject company against claims during a moratorium period, not to impede recovery action by a company in administration. I was not referred to any decided cases bearing directly upon the matter in issue.

Counsel for CPA said that the stay operated not only in respect of a proceeding against the company but in respect of a proceeding "in relation to any of its property". In effect, this was a reference to any proceeding which could affect the financial standing or property of the company. Moreover, because CPA's defence contains a set off as part of its defence to the plaintiff's claim the effect of s 440D is also to stay the counterclaim. In addition, the counterclaim should be regarded as a proceeding "in relation to the property" of CPA because the counterclaim is in the nature of a chose in action which could be assigned to a third party for value and therefore should be regarded as property of the company. He supported his line of argument by reference to s 477(2)(c) of the Corporations Law and Re Movitor Pty Ltd (In Liq) (1996) 64 FCR 380.
Counsel for CPA referred also to Rodgers v Radly [2000] VSC 570 at par 21. In that case Warren J of the Supreme Court of Victoria held that an oppression proceeding brought against the company in question was stayed unless leave to continue was granted. He had this to say at par 20 and par 21 of the judgment:
"[20]Ultimately, the correct approach in my view is to construe s 440D(1) of the Law as intended to stay proceedings 'against the company' or 'in relation to any of its property' pending the completion of the winding up. The purpose of the section is to prevent the creation of preferences and interference in the disposition of the property of the subject company prior to the completion of the administration.
[21]The purpose of the section is to enable the administrators also to continue with their task without the distraction of the consideration and management of litigation. In the present matter, whilst on one view it may be argued that the oppression proceeding is concerned with the position of a director of a company and the shareholding entitlement of that director and as such is not concerned with the 'property' of the company subject to administration in my view that misconceives the underlying purpose of the oppression proceedings. The purpose of those proceedings is to rearrange the affairs of Capital General so as to reinstate Rodgers as a director and reinstate or adjust the shareholding in the company. These matters of themselves broadly speaking go to the property of the company."
Counsel for Mead sought to answer these contentions by reference to the reasoning of Wilcox J in Uvanna Pty Ltd v Tsang Chi Ming & Ors (1997) 15 ACLC 443. In that case, his Honour held that an appeal against an award of damages was not a proceeding against a company within the meaning of s 440D of the Corporations Law. His Honour said that the appeal was rather a proceeding instituted by the company for its own benefit, in the hope of ridding itself of judgments entered against it.
His Honour went on to say this at 444:
"Nor do I think it is a proceeding 'in relation to any of its property'. It might perhaps be said, in a loose sense, that an appeal involving the question whether certain people are entitled to recover damages against a property affects the company's property; but I do not think that is a correct understanding of the application of subsection (1). I think the relevant words were intended to refer to litigation over a property owned by the company - an item of property in relation to which it can prove title. As Mr Basten pointed out, this is consistent with the way in which the phrase 'property of the company' is used in the two immediately preceding sections. It is not difficult to think of cases to which s 440D(1) might apply, if interpreted in this way: for example, injunctive proceedings and actions for specific performance. I do not think the words are apt to include a mere claim for damages, where the award of damages does not effect a charge against particular property. Accordingly, I think the application is misconceived, to the extent that it is based upon s 440D(1)."
I note in passing that in that case Wilcox J addressed a further question as to whether it was appropriate, as a matter of discretion, for the appeal to proceed before a determination by the administrator of the company's financial position and a decision by creditors as to the course to be taken. His Honour noted that in some cases it will be convenient for a pending appeal to be adjourned until completion of such steps, such as where an application for an adjournment is made at an early stage of the appeal process and especially where the appeal will be protracted and expensive, and the opposite party will not be prejudiced by the delay. However, he was of the view that none of those situations existed in the present case in respect of a one day appeal to be heard in a few days time. Accordingly, he was of the view that the application for an adjournment should be refused.

The Scope of s 440D

Having reviewed these authorities, I am of the view that s 440D must be interpreted broadly and in the circumstances of the present case extends to the CPA counterclaim so as to operate as a stay of the same. In my view, the provision must be related to the objects of the Corporations Law which require that there be an orderly assessment of the company's position. Further, in the absence of clear language, I am not persuaded that the provision was intended to confer special procedural advantages on a party to litigation which would be the case if a company in administration was able to press a counterclaim against a third party while sheltering behind the temporary immunity afforded to it by a stay of the third party's claim pursuant to s 440D.
It follows from this analysis that, in my view, the reference in s 440D to leave being required in respect of a "proceeding" should be regarded as a reference to the various matters embraced by the proceeding in question, including the counterclaim. Further, and in any event, I consider that in the circumstances of the present case, for the reasons relied upon by CPA, the defence and related counterclaim should be regarded as a proceeding in relation to the property of the company. It follows that Mead is required to obtain leave in respect of the various facets of the Perth litigation before the trial can be proceeded with. The question of whether leave should be granted is bound up with the defendants' application for an adjournment. Accordingly, I will now turn to these matters.

Adjournment

Order 34 rule 4 of the Rules of the Supreme Court provides that the Judge may, if he thinks it expedient in the interests of justice, adjourn a trial for such time, and to such place, and upon such terms, if any, as he thinks fit. Order 34 rule 2 provides that if, when a trial is called on, one party does not appear, the Judge may proceed with the trial of the action or of any counterclaim in the absence of that party.
The decided cases confirm that by O 34 r 4 and in its inherent jurisdiction the Court may grant or refuse an adjournment of proceedings. The discretion will be exercised in the light of the principles and objects of case flow management. The proper administration of justice requires trials to be heard as soon as reasonably possible, and every effort should be made to ensure that all matters listed for trial are heard on the scheduled dates. Adjournments will not be readily granted. The Judge concerned will be required to weigh the potential prejudice to the party seeking the adjournment should the adjournment be refused, against the potential prejudice to the other party or parties should the adjournment be granted. In considering the question of injustice, the Judge will expect the parties to use their best efforts and to take all reasonable steps to ensure that they will be ready for trial: Seaman Civil Procedure par 34.4.1; Thackray v Hardcastle, unreported; SCt of WA; Library No 980669; 17 November 1998.
Counsel for the defendants in the present case, somewhat dramatically, asserted that "there will be no trial on Monday". It was not entirely clear to me whether this was to be regarded as a submission weighing in favour of a refusal of leave and the grant of an adjournment, or simply as a matter of information that the defendants would not be offering any evidence at trial and would probably not turn up. The suggestion seemed to be that in these circumstances it would be unfair, if leave to proceed were allowed, for the plaintiff to prove its case in the absence of the defendants and to obtain judgment. In other words, he seemed to be suggesting that the defendants determination not to participate, of itself, could be regarded as a reason why leave to proceed should be refused and the trial adjourned.
Let me say immediately that in regard to civil litigation of this kind, and in the context of a trial that was adjourned on a previous occasion, such a plea carries little weight in the circumstances of the present case. It is clear from the evidentiary materials that the defendants had found a way to finance the litigation and saw commercial advantages in pressing their counterclaim to a conclusion. It is not said that the funding source has suddenly evaporated or, that if an adjournment were granted, funds from some other source would soon become available. Against this background, but for the appointment of administrators, the defendants would have great difficulty in persuading me that an adjournment should be granted.
The litigation has been in motion for a considerable period of time. The parties have been moving towards an appointed trial date for many months at considerable expense to themselves and no evidentiary or pleading issue has suddenly arisen which is said to have taken the defendants by surprise. The defendants acknowledge that they were ready to proceed. Having regard to the principles I mentioned earlier, it would clearly be unjust to deny Mead an opportunity to take advantage of the listed trial date, especially in regard to a case where there has been extensive preparation on both sides.
In this case, it is not a sufficient basis for an adjournment that several days before the trial date one party simply asserts that it has decided not to participate. Likewise, it is not to the point that some proceedings have been commenced elsewhere which cause one party to reconsider the commercial advantages and/or disadvantages of the litigation. To my mind, a view to the contrary would have the effect of vesting in a recalcitrant party the power to control the progress of the litigation to suit itself and without regard to the rules of the Court.
It emerges, then, that the critical question is whether the appointment of administrators has had such a profound effect in the circumstances of the present case that the trial cannot be proceeded with. Mead has sought to characterise the appointment of administrators as simply a tactical step. However, as I noted earlier, I must proceed from the premise that the appointment is regular, and has brought into play related provisions of Pt 5.3A of the Corporations Law. An important feature of those provisions is that the Perth proceedings are stayed and, prima facie, the administrators, and through them the creditors, are in a position to exercise control over the company's affairs and its future.
The defendants submit that in these circumstances leave should be refused and the trial adjourned so the administrators can evaluate the position. It is said that the plaintiff suffers no real prejudice because the plaintiff's claim is against an insolvent company and is essentially worthless. Adjournment of the counterclaim prevents Mead being liable to CPA in that regard. It is said further that although the plaintiff could arguably proceed against the second defendants as guarantors if leave were granted, it would be unjust to allow that matter to proceed if CPA, as the principal defender, does not play an active part at the trial.
It is apparent from the decided cases that in the usual case leave to proceed is not generally allowed to an unsecured creditor. This ensures that an unsecured creditor does not obtain an advantage and, in any event, it allows the administrator to evaluate the prospects of the company. However, the plaintiff says that this is not the usual case. CPA ceased trading seven years ago and has no external creditors (other than the contested claim of BASF). There is therefore little to be evaluated by the administrators. The relevant statutory provisions allow for leave to be granted and this is one of the unusual cases where it should be granted.
Counsel for the plaintiff submitted that in the context of a trial that was adjourned on a previous occasion, Mead should be afforded an opportunity to bring the litigation to an end. This will prevent its claim being contested in the event of the company going into liquidation. Further, if the trial is adjourned, it will be left open to CPA to revive the counterclaim in the Perth proceedings at some future date, and in circumstances which are likely to be inconvenient and prejudicial to Mead owing to the unavailability of its principal witnesses.
Mead says further as to any adjournment of the trial that it cannot be adequately compensated by orders as to costs and other matters, for CPA is insolvent and, in any event, is in administration. Quite clearly, it will not resume business.

Conclusion

Let me move to a conclusion. I am left with a very strong impression that in recent weeks, since the institution of the Ohio proceedings, the directors of CPA have acted principally with a view to taking advantage of the voluntary administration provisions of the Corporations Law in order to secure a procedural advantage in the Perth proceedings, that is to say, to postpone the trial of the action. If the issues in the Perth proceedings were comparatively straightforward, and the amounts in issue modest, I would be sorely tempted to grant leave to proceed and to refuse the adjournment. The reasoning in a number of the previously decided cases contemplates that if the case be one in which an appointment has been made with a view to forestalling action or obtaining a breathing space, then extraneous considerations of that kind can be brought to account in determining whether leave should be granted. I refer to the reasoning of McPherson J in BBC Hardware (supra), that of Wilcox J Uvanna (supra) and that of Olney J in Wallabah (supra).
In circumstances of such a kind, it could be said that the grant of leave was consistent with the policy of the legislation. The statutory provisions allow for leave, and in circumstances where the subject company had ceased trading, and had virtually no external creditors, there would be little for the administrator to evaluate. It could not be said that the interest of the creditors and members of the company was being overlooked. Before moving to the point of decision in such a case, I would feel obliged to make an appraisal of the strength of the opposing claim.
However, the present case is of an entirely different order. First, as I have noted, I cannot make a ruling by reference to an impression. Upon the basis of the evidentiary materials before me, I have to accept that the appointment is regular, in which case I must give due weight to the objects of Pt 5.3A in determining whether leave to proceed should be granted. Prima facie, administrators must be allowed an opportunity to assess the company's situation. I accept that in the circumstances of the present case the administrators have not had that opportunity. If leave is granted and the adjournment refused, the defendants will not appear at the trial. Mead Corporation is likely to obtain judgment by default in respect of its claim and a dismissal of the counterclaim.
This brings me to the second major consideration. The issues reflected in the pleadings to the Perth proceedings are complex. It is virtually impossible to evaluate the strength of the opposing cases in the absence of expert evidence and the testimony of witnesses. On the defendants' side, the consequence of refusing the adjournment would be that a very sizeable counterclaim would be disposed of in a summary form and the second defendants would be exposed to personal liability upon the principal claim without being heard.
Further, the administrators, as the persons charged with the responsibility of evaluating the company's affairs, would have been precluded from playing any effective role in determining what should be done with the company's claim for damages. The claim in question can be characterised as a chose in action and can arguably be regarded as property under the control of the administrators. It would seem to be contrary to the intention of the legislation that the administrators be precluded from performing their proper role by a decision made pursuant to s 440D in regard to which they have not had sufficient time to advance an argument. Put shortly, it is the size and complexity of the counterclaim which weighs against a decision being made that will inevitably bring the litigation to an end in a summary manner.
I must, of course, weigh up these factors against the actual and potential prejudice to Mead. I have mentioned a number of relevant factors in that regard. Principally, however, one notes that if the adjournment is allowed the plaintiff's claim will remain on foot, albeit stayed for the time being. Mead will undoubtedly incur substantial costs if the trial be adjourned. The reality is that though an order for costs be made in its favour, it will probably not be able to enforce such an order. On the other hand, it will probably be left in much the same position if the trial proceeds. In that event, it seems likely to obtain a judgment, and an order for costs, but doubts exist as to whether it will be able to enforce the same against an insolvent company under administration. It does, however, have prospects of obtaining judgment against the second defendants. In addition, it will probably have the satisfaction of obtaining a judgment for dismissal of the counterclaim, and thus be assured that the counterclaim will not be revived at some future date when Mead's witnesses are no longer available or as effective in their testimony.
I am conscious, on my view of the way in which matters have developed in recent weeks, that Mead will be put to expense and inconvenience if the adjournment is granted. Nonetheless, the scales are not entirely tipped in its favour when one reviews the period between the fixing of the trial date in June 2002 and the position now in mid‑November. The application for an adjournment was undoubtedly brought about as a direct consequence of the Ohio proceedings having been commenced on the eve of trial. It is probably true to say that those proceedings could have been commenced earlier. That would have allowed for a clearer position to emerge as to the implications of those proceedings.
In the final analysis, I consider that the cost and potential prejudice to Mead is outweighed by the injustice that seems likely to occur if judgment is entered in respect of the claim and counterclaim in the Perth proceedings without a defended hearing. It is generally recognised that case management principles should not override the essential requirements of justice in the circumstances of a particular case. I am conscious also, as was put to me in argument, that a judgment by default at trial in the absence of an adjournment might not lead to finality, for it would be open to a liquidator to look behind the judgment.
For these reasons, I consider it is not appropriate as matters stand to give leave to proceed. The proposed basis for leave is to allow the trial to proceed on Monday next. It follows from what I have said that I am persuaded that the application for an adjournment of the counterclaim should be allowed. It follows also from earlier discussion that, in my view, the leave applied for should be regarded as applicable to the entirety of the matters in issue in CIV 1606 of 1996, both claim and counterclaim.

Accordingly, if the trial as a whole is to be adjourned, then leave to proceed should not be granted in the present circumstances. I emphasise that this ruling as to leave is conditioned by the special circumstances whereby leave was sought as a matter of urgency to proceed with a forthcoming trial. In changed circumstances, it might, at some later time, become appropriate that leave to proceed be granted.
In summary, then, the application for leave to proceed will be refused. The application for an adjournment of the trial will be allowed. I will hear from the parties as to the form of the orders to be made but my provisional view is that the trial should be adjourned sine die to the intent that the matter will be returned to the call over list in due course.