Meehan v Stockmans Australian Café (Holdings) Pty Ltd

[1996] FCA 926

CATCHWORDS

Corporations Law - application under s 444E(3) for leave to proceed with a proceeding against a company under a deed of company arrangement - whether principles applicable to the consideration of a winding‑up by the Court under 471B applicable - application of principles - whether leave should be granted given the possible strength and size of claim, the fact that there are disputed legal and factual issues and the fact that there are proceedings on foot against a related respondent in a situation where there is a lack of complexity of issues, the costs of trial would be deleterious for creditors in general and there is a right under s 1321(ca) to appeal to the Court from a decision of the administrator made under Pt 5.3A.

Corporations Law, s 444E(3), s 439A(4), s 553(1), s 444A(4)(i), s 444E(i), s 471B, s 435A, s 55A(2)(6), s 554A(8), s 554A(3), s 1321(ca), s 553C(1)

Trade Practices Act 1974, s 52

Foxcraft v The Inc Group Pty Ltd (1994) 15 ACSR 203)
Ogilvie‑Grant v East (1983) 1 ACLC 742 at 744
Vagrand Pty Ltd v Fielding (193) 41 FCR 550
Re A J Benjamin Ltd and the Companies Act (1969) 90 WN (Pt 1) (NSW) 107)
Capita Financial Group Ltd v Rothwells Ltd (1960) 7 ACLC 634)
Sandtara Pty Ltd v Abigroup Pty Ltd (1995) 13 ACLC 283
Re Stuart Bros Pty Ltd (1995) 16 ACSR 451

WILLIAM JOSEPH MEEHAN and NANCY THERESE MEEHAN v STOCKMANS AUSTRALIAN CAFE (HOLDINGS) PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) & ANOR
No. NG 592 of 1994

CORAM:Lehane J

PLACE:Sydney

DATE:24 October 1996

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY  )
GENERAL DIVISION  )            No. NG 592 of 1994

BETWEEN:WILLIAM JOSEPH MEEHAN and

NANCY THERESE MEEHAN

Applicants

AND:STOCKMANS AUSTRALIAN CAFE (HOLDINGS) PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

First Respondent

PAUL McVERRY

Second Respondent

CORAM:Lehane J

PLACE:Sydney

DATE:24 October 1996

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. The applicants' motion be dismissed.

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

IN THE FEDERAL COURT OF AUSTRALIA  )
NEW SOUTH WALES DISTRICT REGISTRY  )
GENERAL DIVISION  )            No. NG 592 of 1994

BETWEEN:WILLIAM JOSEPH MEEHAN and

NANCY THERESE MEEHAN

Applicants

AND:STOCKMANS AUSTRALIAN CAFE (HOLDINGS) PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

First Respondent

PAUL McVERRY

Second Respondent

CORAM:Lehane J

PLACE:Sydney

DATE:24 October 1996

REASONS FOR JUDGMENT

LEHANE J: This is a motion by which the applicants seek, under s 444E(3) of the Corporations Law (the Law), leave to proceed against the first respondent.

The proceedings were commenced by an application filed on 5 September 1994. The applicant seeks declarations that the first respondent has engaged in conduct prohibited by s 52 of the Trade Practices Act 1974 and that the second respondent aided and abetted the first respondent in that conduct; declarations are also sought against the first respondent that it has breached certain warranties and a duty of care in relation to certain representations which the first respondent is alleged to have made. Finally (and obviously most significantly) damages are sought.

From the applicants' further amended statement of claim, filed on 15 December 1994, it appears that their claims are based on written and oral representations said to have been made, on the faith of which, it is alleged, the applicants executed a franchise agreement and a site licence agreement with the first respondent and various other transactions with other parties.  It is said that the representations were false; that so far as they were representations with respect to future matters the first respondent had no reasonable grounds for making them; and that their making therefore amounted to conduct, in trade or commerce, that was misleading or deceptive or was likely to mislead or deceive.  The applicants claim that they suffered loss as a result of entering into the various transactions induced, as they claim, by the misleading or deceptive conduct; particulars of the loss are given: the amount claimed is approximately $655,000.  Allegations are also made founding the claimed liability for breach of (presumably contractual) warranties and in tort: the factual basis of those claims is substantially the same as that which is said to give rise to liability on the part of the first respondent under the Trade Practices Act.

The respondents have filed a defence and cross‑claim.  Both liability and the amount of damages are in dispute.  The cross‑claim is by the first respondent and is for amounts which are claimed to have fallen due, but not to have been paid, under the agreements between the first respondent and the applicants.  The amount claimed, disregarding interest accrued since 31 December 1994, is $88,505.91.

The proceedings are ready for trial and have been set down for hearing over five days beginning on Monday, 28 October 1996.

In the meantime, however, the first respondent has encountered financial difficulties. On 9 July 1996 an administrator of the first respondent was appointed under Part 5.3A of the Law. The evidence of the administrator, which is not contradicted, is that he caused a meeting of the creditors of the first respondent to be held on 5 August 1996 and that, before that meeting, he sent to all creditors, including the applicants, a report relating to his administration of the first respondent including a statement of his opinion as required by s 439A(4) of the Law. The creditors represented at the meeting resolved that the first respondent should enter into a deed of company arrangement. The deed was executed the following day, 6 August 1996.

The deed defines a "creditor" by reference to a definition of "claim" which is in terms substantially the same as those of s 553(1) of the Law. The day specified in the deed under paragraph 444A(4)(i) of the Law is, as is customary, the date when the administrator was appointed, 9 July 1996. Clearly the claims of the applicants on which these proceedings are based arose before that date; the applicants concede, rightly in my view, that they are creditors bound by the deed (s 444E(1)) and that consequently they may not proceed with these proceedings against the first respondent except with the leave of the Court (s 444E(3)). Hence the present motion.

So far as Counsel and I have been able to discover, there is no reported authority as to the principles to be applied on an application for leave under subs 444E(3). Counsel proceeded on the basis that the principles applicable are those which the Court applies when considering a similar application in a winding‑up by the Court, under s 471B. No
doubt deeds of company arrangement may take many forms, and different considerations  may apply in other cases, but in this case (and I shall return to the general effect of the present deed) I think the basis on which counsel proceeded was right.  Particularly I do not think that the very strict approach which may be apt where an administrator has been appointed under Division 2 of Part 5.3A, having regard to the interim character of such an appointment (Foxcraft v The Inc Group Pty Ltd (1994) 15 ACSR 203), is appropriate here.

In general terms, the deed is one which is intended to have the effect (see s 435A) of maximising the chances of the first respondent continuing in existence. It provides for a compromise of existing claims against the first respondent: in broad terms, and subject to provisions dealing specially with the claims of secured creditors, certain claims of employees and certain creditors whose claims are guaranteed by directors, creditors may lodge proofs of their claims which the administrator is to deal with substantially in accordance with the procedure which a liquidator is required to follow under Part 5.6 of the Law. Thus, for example, the administrator is required to make an estimate of the value of a debt or claim which does not bear a certain value (the alternative, open to a liquidator under para 554A(2)(b), of referring the question to the Court may not be available to the administrator) and the amount of the debt or claim that is admissible to proof (see s 554A(8)) is the value as estimated. Although the right of appeal available in liquidation under subs 554A(3) may not be available against the administrator, there is a right of appeal, no doubt identical for all practical purposes, under para 1321(ca) of the Law. Where (as here, given the cross‑claim) there have been mutual credits, mutual
debts or other mutual dealings between the first respondent and a person wanting to have a debt or claim admitted against it, an account is to be taken of what is due by each to the other, the amounts are to be offset and only the balance is admissible to proof or, if in favour of the first respondent, payable to it (see subs 553C(1)). Thus the procedure under the deed for the lodgement and admission of proofs of claims is capable of operating in relation to the claims of the applicants against the first respondent; for that purpose the cross‑claim would be taken into account; and there is a right of appeal to the Court from a decision of the administrator as to the admission, or otherwise, of the applicants' claims.

The deed then provides that distributions will be paid to those creditors whose claims have been admitted out of certain funds available to the administrator and that once all practicable distributions have been made claims admissible under the deed are to be released.  It is, of course, contemplated that creditors will receive less than the full amount of their claims: on the material before me it seems likely that they will receive substantially less than the full amount.  There is before me an affidavit of the first respondent's solicitor estimating that the first respondent's costs of a five day trial are likely to amount to about $57,000.  That evidence was challenged only to the extent that it was suggested that the employment of senior counsel might not be appropriate; and, subject perhaps to that, it certainly does not by any means seem inherently improbable.  There is also unchallenged evidence of the administrator to the effect that a hearing would involve the incurring of additional costs by him and his firm and that, owing in part to difficulty in collecting moneys owing to the first respondent, the administrator does not
have available at present funds sufficient to pay the costs of the hearing.  His evidence is also - and it is unchallenged - that there is no insurer obliged to indemnify the first respondent in respect of the applicants' claims.

I should mention also that there is provision in the deed for the execution by creditors whose claims are guaranteed by directors of a specified form of deed of forbearance; unless that is done within 60 days of the Commencing Date (the date of execution of the deed) the deed is to terminate; likewise, there is provision for the assignment of certain leases, and it is provided that unless those assignments are consented to and are accepted within 60 days of the Commencing Date the deed is to terminate.  In each case the administrator is given power to extend the time.  The administrator has given evidence, which again is not challenged, that he has extended the time in each case by 60 days and that, although those matters have not yet been completed, his expectation is that they will be, in each case within the extended time.  In any event, neither party suggested that anything turned on those provisions for termination and I do not think anything does turn on them: the evidence before me strongly suggests that if the deed were to be terminated prematurely the liquidation of the second respondent would be an almost inevitable consequence.

In Ogilvie‑Grant v East (1983) 1 ACLC 742 at 744 McPherson J, with whom Wanstall CJ and Sheahan J agreed, said:

The precise purpose and function of provisions similar to [a predecessor of s 471B] have seldom been explained.  From time to time the suggestion has
been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably amongst all creditors so that none of them will gain an advantage over others ... .  But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor.  A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time‑consuming, as well in some cases as unnecessary. ...

As a matter of history, a winding up by the Court was and remains today an administration conducted by the Court ... .  Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the brining of proceedings, whether at common law or otherwise, during the course of that administration.  What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a Judge, who determines that appeal de novo primarily on affidavit material ... .  There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action.  If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstance that on appeal it is possible under modern rules of procedure for the Judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so.

The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a Judge, is therefore reduced largely to one of choosing between alternative forms of procedure.  The effect of [the section] is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. ... It, of course follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed.

His Honour's judgment was quoted at length, and with approval, by the Full Court of this Court in Vagrand Pty Ltd v Fielding (1993) 41 FCR 550. As his Honour said, the factors affecting an exercise of the discretion to give or refuse leave to proceed cannot be stated exhaustively. Others have been identified, additional to those mentioned by McPherson J; for example, the fact that a company in liquidation is indemnified by insurance against a claim on which leave to proceed is sought is a factor strongly favouring the grant of leave (Re A J Benjamin Ltd and the Companies Act (1969) 90 WN (Pt 1) (NSW) 107); leave is likely also to be granted where it is clear that the liquidator will reject the claim so that, if the claimant wishes to press it, an appeal to the Court is inevitable (Capita Financial Group Ltd v Rothwells Ltd (1960) 7 ACLC 634).

Counsel for the applicants persuasively argued that a number of factors identified in the authorities as favouring the grant of leave are present in this case.  Thus, perhaps most obviously, the trial of the proceedings is imminent.  At the time when the administrator was appointed the case was already ready for trial and had been set down for hearing.  Thus a great deal had been done, and substantial costs incurred, which if leave were not granted would be wasted.  The claims made by the applicants were, it was said, substantial and serious and the legal and factual issues involved in the case complex: there were substantial disputed questions of fact and issues as to both liability and quantum of loss.  It was said that the proceedings would establish the precise amount for which the applicants are entitled to prove under the deed of company arrangement, that they have an interest in establishing a right of set‑off against the cross‑claim and that, there being claims against the second respondent as well as those against the first respondent, it was
just and convenient that the claims against both respondents should be dealt with together (that being impossible, of course, in these proceedings but not under the alternative procedure: see Sandtara Pty Ltd v Abigroup Pty Ltd (1995) 13 ACLC 283). It might also be said that this does not appear to be a case in which a grant of leave to the applicants is likely to unleash an "avalanche of litigation": see Capita at 638, although the evidence is that there are two cases similar to this on foot (though at a less advanced stage than this) in this Court.

Senior counsel for the first respondent conceded that the Court might be affirmatively satisfied that the applicants' claims has a solid foundation and gives rise to a serious dispute: see Vagrand at 556.  He contended, however, that there was no good reason why the ordinary procedure - that provided by the deed - should be displaced.  He contended that this was not a case where the applicants cannot obtain under the deed the substantial relief which they seek in these proceedings: the claim is one for damages and that is a claim the value of which the administrator can and must estimate; the evidence of the administrator is that he has already admitted, for voting purposes, particulars of claims lodged by two parties who have commenced proceedings in this Court on similar grounds to those relied on by the applicants.  Neither, says the first respondent, is there any particular legal or factual complexity about the applicants' claims; far from being made upon a basis which is "both factually and legally extremely complex" (Re Stuart Bros Pty Ltd (1995) 16 ACSR 451) they are claims of a kind which is commonly encountered having no particularly unusual features: the administrator has given evidence of the way in which he would evaluate them under the deed. Equally, the first respondent argues,
this is not a case where it is clear a proof would be rejected so that an appeal would inevitably follow: the evidence of the administrator is to the contrary.  It may be true that substantial expenditure has been incurred in preparing the case for hearing, but the material prepared will be available for use in an appeal if required: if, of course, the applicants were to accept an estimate made by the administrator, then no appeal would be necessary and no additional cost would be incurred.

The starting point must be, I think, that claims for unliquidated damages under the Trade Practices Act, for breach of contract and for tort are admissible to proof.  The general rule in relation to such claims is, as with other provable claims, that proceedings on them may not be instituted or continued except with the leave of the Court.  A common characteristic of claims of that kind is that there will be disputed questions of fact, there may be some disputed issues of law and there will be questions relating to the assessment of damages.  The mere fact that such a claim possesses those common characteristics cannot, I think, mean that it will fall within an exception to the general rule, so that leave to proceed will be given.  The claims in this case have the common characteristics to which I have referred; but I accept the submission of the respondent that they do not have those characteristics to any exceptional extent.  The claim, in the context of the total claims against the first respondent and its available assets, is certainly a large one, but I do not think that that, though no doubt a factor to be taken into account, necessarily means that leave to proceed should be granted.  The administrator's report to creditors, in which he recommended execution of the deed of company arrangement, is in evidence: it is an annexure to an affidavit of the administrator which was read before me.  Attached to

the report is a schedule indicating likely recoveries and distributions in a winding‑up of the first respondent and under the then proposed deed.  Obviously the figures, to a large extent, are estimates and there will no doubt be differences between them and what ultimately turns out to be reality.  They indicate, however, sufficiently I think for present purposes, a likely order of magnitude.  The amount available to unsecured creditors under the deed is estimated to be $204,730; the amount estimated on an optimistic basis to be available for distribution to unsecured creditors in a liquidation is $109,620; it is estimated on a pessimistic basis that there would be a deficiency in a liquidation of the first respondent.  In that context I have great difficulty in seeing that it is appropriate to expose the relatively modest sum likely to be available to substantial depletion by the cost of a five day trial: and that cost is likely to be substantial whether or not every item taken into account in the estimate of the administrator's solicitor (for example the matter referred to by counsel for the applicants, the employment of senior counsel) is in the circumstances appropriate.

Two other aspects of the matter require discussion.  One is the cross‑claim.  My view is that the existence of the cross‑claim should not affect the conclusion to which I would otherwise come.  The administrator is obliged to deal with it, if the applicants lodge a proof of their claims, by way of offset against the applicants' claims.  If the applicants are dissatisfied with the decision of the administrator, they may appeal against it to the Court.

The other matter is the claim against the second respondent under the Trade Practices Act.  It is true that that claim, if it is pursued, is likely to require litigation of substantially the issues which would be litigated against the first respondent, in relation to the claim against it under that Act, if leave to proceed against it were granted.  There is no doubt that the applicants will suffer inconvenience, and no doubt additional expense, if they are required to pursue separately, by different procedures, their claims against the two respondents.  In my view, however, the fact that, in a case such as the present, an applicant choses to claim against a director or officer of a company for aiding and abetting conduct in respect of which a claim is made against the company should not of itself require that leave be given to proceed against the company if it is wound up or executes a deed of company arrangement.  Whatever prejudice the applicants in this case suffer by being deprived of the opportunity to proceed concurrently against both respondents seems to me, in the circumstances as I have described them, clearly to be outweighed by the prejudice likely to be suffered by creditors generally if the trial of the action against the first respondent were to proceed.  The applicants relied, in this context on Sandtara, but that was a rather different case from this: there leave was sought to proceed against a principal debtor in liquidation in order to establish a foundation for recovery against a substantial guarantor whose liability was, of course, strictly derivative or secondary.  Such a case gives rise to considerations which do not arise here.

For those reasons I dismiss the applicants' motion.  I will hear counsel on the question of costs and as to any other matter which may need to be determined in relation to the further conduct of the proceedings.

I certify that this and the preceding 12 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane.

Associate:

Dated:  24 October 1996

Heard:  21 October 1996

Place:  Sydney

Decision:  24 October 1996

Appearances: Mr J B Conomy of counsel instructed by Ferrys Law Firm appeared for the applicants.

Mr A J Meagher SC instructed by Russell and Company appeared for the respondent.