MGT Samorr Knitting Mills v Rocklea Spinning Mills (No. 2)

[2003] VSC 366

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

(Formerly Federal Court Proceeding No. VG 3073 of 1999)

No. 6556 of 1999

IN THE MATTER OF THE CORPORATIONS LAW OF VICTORIA

and

IN THE MATTER OF MGT SAMORR KNITTING MILLS PTY LTD
(IN LIQUIDATION) (ACN 004 907 868)

TIM JONAS (AS LIQUIDATOR OF MGT SAMORR KNITTING MILLS PTY LTD) (IN LIQUIDATION) (ACN 004 907 868)	Plaintiff
v
ROCKLEA SPINNING MILLS PTY LTD (ACN 000 070 824)	Defendant

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JUDGE:	Byrne J
WHERE HELD:	Melbourne
DATE OF HEARING:	12 September 2003
DATE OF JUDGMENT:	1 October 2003
CASE MAY BE CITED AS:	MGT Samorr Knitting Mills v Rocklea Spinning Mills (No. 2)
MEDIUM NEUTRAL CITATION:	[2003] VSC 366

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Companies - winding up – unfair preference – interest on judgment – “good cause shown” – delay in commencement of proceeding – delays in interlocutory stages of proceeding – whether full penalty interest rate applicable.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R.S. Randall	Madgwicks
For the Defendant	Mr Garry Bigmore, QC	John Matthies & Co

HIS HONOUR:

1. On 1 August 2003, I published my reasons[1] for concluding that two payments totalling $76,648.82 made by the defendant, Rocklea Spinning Mills Pty Ltd (“Rocklea”), were voidable pursuant to s. 588FA of the Corporations Law as insolvent transactions of the company, MGT Samorr Knitting Mills Pty Ltd (in liquidation). The parties are unable to agree as to the interest which I should order on this sum pursuant to s. 58 of the Supreme Court Act 1986.

   [1][2003] VSC 277.

1. The section is in the following terms:

“(1)If in a proceeding a debt or sum certain is recovered, the Court must on application, unless good cause is shown to the contrary, allow interest to the creditor on the debt or sum at a rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 or, in respect of any bill of exchange or promissory note, at 2% per annum more than that rate from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain) or, if payable otherwise, then from the time when demand of payment was made.

(2)Sub-section (1) does not authorise the computation of interest on any bill of exchange or promissory note at a higher rate than the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 if there has been no defence pleaded.

(3)A debt or sum payable or a date or time is to be taken to be certain if it has become certain.”

1. The liquidator seeks interest calculated at the penalty interest rates calculated from 27 September 1997 to the date of judgment.  The commencement date is approximately the date of the expiry of the liquidator’s demand for payment made on 3 September 1997.  This interest is calculated at $56,094.44.

1. On behalf of Rocklea, three contentions were advanced against this award of interest.

·     Interest should not be allowed for the period from the demand to the date of the commencement of the litigation or for the whole of that period.

·     Interest should not be allowed for two periods in the interlocutory stages of the proceeding where delays were caused by the default of the liquidator or his legal advisers.

·     Interest should not run at the maximum penalty interest rate.

1. It was accepted before me that s. 58 provides that the liquidator is entitled to interest for the whole period from 27 September 1997 to the date of judgment unless good cause be shown to the contrary and that, in any event, I had a discretion as to the rates of interest provided that these did not exceed the penalty interest rates prescribed from time to time[2].

   [2]Clarke v Foodland Stores Pty Ltd [1993] 2 VR 382.

Pre Litigation Period

1. The relevant chronology is the following:

31 January 1997	First voidable payment.
25 May 1997	Second voidable payment.
18 July 1997	Administrator appointed.
13 August 1997	Liquidator appointed by resolution of creditors.
3 September 1997	Liquidators demand on Rocklea.
5 March 1999	Liquidator commences this proceeding in the Federal Court to recover preferential payment.
19 August 1999	The proceeding is continued in this Court following the decision of the High Court in Re Wakim.

1. Of these dates, the critical period is the 17 months from the date of expiry of the demand on 27 September 1997 and the date of commencement of the proceeding on 5 March 1999.

1. As to this kind of delay, the Full Court in Clarke v Foodland Stores Pty Ltd[3] said this:

“Nothing put by counsel served to persuade us that delay on the part of a plaintiff, subsequent to the date from which interest might be allowed under s. 58, is always irrelevant in allowing interest under that section. If, as we have said, interest is to be awarded, not to punish the defendant, but to compensate the plaintiff for being deprived of his money and the discretion arising out of the words ‘unless good cause is shown to the contrary’ is to be seen as existing in order to relieve against injustice to the defendant, the question will be whether the plaintiff’s delay, such as it is in a given case, is seen as working such injustice, were the plaintiff to be allowed interest for the whole of the period available under s. 58. On that issue, each case must turn upon its own facts and circumstances.”

[3][1993] 2 VR 382 at 400.

1. And a little later[4]: 

“It is not irrelevant that this is a claim by the liquidator to recover a preference.  In such a case, it is true that the defendant has had the use of the money in issue pending judgment, and that is a factor that must not be overlooked;  it is at the heart of allowing interest.  But his claim to the money is different from that of the ordinary debtor.  Ordinarily, the defendant to a claim by a liquidator to recover a preference has simply received a payment due to him from the company now in liquidation and the payment of the payer.  That was so here, and in this case Foodland could rely, too, upon the debenture unless and until it was set aside at the instance of the liquidator.  The defendant may have had the money in the meantime, but it was the defendant’s own and to keep, subject only to the liquidator taking appropriate action.”

[4][1993] 2 VR 382 at 401.

1. A further consideration, also highlighted by their Honours, is the fact that the maximum rate of interest permitted under s. 58 may include an element of penalty, as indeed the description “penalty interest rate” suggests. This penalty might, in the appropriate case, act as a discouragement of tardiness on the part of the defendants[5] so that they delay settlement of or adjudication upon the claim[6].  This said, it is well established that the principal purpose of the penalty interest provision is to compensate the plaintiff, in this case the liquidator, or perhaps the company and its creditors, for being kept out of their money.

   [5][1993] 2 VR 382 at 397.

   [6]Ruby v Marsh (1975) 132 CLR 642 at 632-3, per Barwick CJ.

1. The decision of the Court of Appeal in Clarke v Foodland Stores, however, shows that the liquidator, unlike a creditor, has, prior to the adjudication of the preference claim, no right to the money which is the equivalent of the impugned payment. His is a statutory right to recover this payment only where liquidation has supervened and the transaction has been avoided by the court. In this sense, his entitlement is more akin to the expectancy of a personal injuries plaintiff who seeks to recover damages from a tortfeasor. In such a case, until the claim is adjudicated upon and execution levied, the defendant is free to use its own money as it pleases. Even so, such a plaintiff will ordinarily recover interest at penalty interest rates calculated from the date of commencement of the proceeding. Notwithstanding this similarity, it was accepted before me that, subject to good cause, interest is payable upon a recovered preference claim from the date of the expiry of the demand. The rationale for this must be that the recipient of a payment from a company which is subsequently wound-up must seriously address the liquidator’s demand. If the payee does not accede to the demand, it runs the risk of an order for interest under s. 58. Absent some such incentive, the payee is at no risk other than that of the costs of unsuccessfully resisting the liquidator’s claim. In this regard, it will be observed that the preference which is sought to be recovered is characterised by Parliament as an “unfair” preference. It is not surprising, then, that the law should offer such payee every encouragement to undo this unfairness and to act pursuant to s. 588FI to put the company and its creditors in the position they would have enjoyed had the payment not been made.

1. It is for the defendant to demonstrate good cause in terms of s. 58. Mere unexplained delay between the demand and the commencement of proceedings will often not satisfy this requirement[7].  No alteration of position or, indeed, any disadvantage or prejudice has been shown to have been suffered by Rocklea in this case by reason of the lapse of time in commencing the litigation.  I was simply referred to the period of 17 months from the demand.  The use of the expressions “delay” or “undue delay” in the cases appear to connote some criticism of the liquidator.  While the period of 17 months is long, it has not been demonstrated that the liquidator has been guilty of delay or undue delay.  It is notorious that in insolvency cases a liquidator has often to face severe difficulties in preparing a preference claim.  Often the books of account of a company are in disarray, the former directors unhelpful, the staff dispersed and the financial position of the company such that there are insufficient funds to commence and pursue litigation against a determined recipient of the suggested preferential payment, at least without some assistance from creditors.  Add to this the fact that these claims need to be supported at an early stage by affidavit material, the preparation of which requires time and cost.  It is, therefore, not surprising to find that even an assiduous liquidator is not able to follow an unsatisfied demand with a prompt proceeding in the court.  In the present case, it was said, and I accept, that some part of the period presently under consideration was occupied in raising funds for the claim.

   [7]David Leahey (Aust) Pty Ltd v McPhersons Ltd (Supreme Court (Vic), Tadgell J, 7 September 1989), reported Civil Procedure - Victoria [1600 008].

1. In the circumstances of this case, then, I find no good cause shown with respect to the pre-litigation delay. 

Delays in Interlocutory Stages

1. This case took an extraordinarily long time to come to trial.  It was commenced in the Federal Court on 5 March 1999 and found its way into this Court in August of that year.  The trial commenced on 24 June 2003 so that the interlocutory process occupied some four years and three months. 

1. Two periods of delay were here relied upon:  the eight month period from 27 August 2000 to 23 April 2001 following the vacation of the trial date by Mandie J on 11 August 2000;  and the two-month period from 24 April 2003 to 23 June 2003 following the further vacation of the trial date by the Listing Master on 3 April 2003.  In each case, it was put, the lost time was due to the default of the liquidator.

The Period in 2000 – 2001

1. According to the affidavit of Philip Eric Fox sworn 10 August 2000, this matter was, on 7 April 2000, fixed for trial to commence on 21 August 2000.  On 8 August 2000, the liquidator produced approximately 200 pages of document dealing with the issue of the solvency of the company.  It was accepted on his behalf that these documents should have been discovered earlier and they were relied upon at trial by one or other or both parties.  It was said on behalf of Rocklea that this late delivery prejudiced the preparation by its consultant of a report as to solvency, so that the trial date had to be vacated and was refixed to commence on 23 April 2001.  It was argued on behalf of the liquidator that during this eight month period Rocklea, too, made discovery of further documents and sought unsuccessfully to amend its pleading.  Accordingly, it was said that not all of the period was wasted from Rocklea’s point of view.  I accept that the trial date in August 2000 was lost due to the default of the liquidator or those for whom he is responsible.  I am satisfied, too, that the court should show its disapproval of his default by denying to the liquidator interest during the period lost as a consequence.  I fix this period in the circumstances as the six month period from 21 August 2000 to 21 February 2001. 

The Period in 2003

1. The allegation of Rocklea is that it shows good cause in respect of this period from 24 April 2003 to 23 June 2003 because the trial date was again abandoned, this time for the non-availability of a witness for the liquidator.  It seems that this witness had somehow overlooked his commitment to the trial and had arranged an overseas holiday. 

1. Counsel for the liquidator submitted that the non-availability of witnesses is an ordinary hazard of litigation and that his client should not be disadvantaged for this.  With some hesitation, I agree that interest should run during this period.  In the ordinary course, a party whose failure to ensure that witnesses are available will bear the costs to the consequent adjournment.  What is here sought is that that party should also bear the cost of deferring the recovery of sums to which it will be found to be entitled while the defendant has the use of that money.  To my mind, the conduct of the liquidator is not sufficiently reprehensible to warrant this conclusion. 

Conclusion

1. I conclude from this that the liquidator should have interest pursuant to s. 58 for the period from 27 September 1997 to 21 August 2000 and from 21 February 2001 to the date of judgment.

The Interest Rate

1. It was put on behalf of Rocklea that I have a discretion as to the rate of interest, provided that it does not exceed the penalty interest rates.  I agree.

1. Then, it was said, I should not award interest at the full penalty interest rate because this contains a penalty component.  It was put that this is because of the liquidator’s delays and because the liquidator made claims for the repayment for sums which were not found to be unfair preferences.  I have already made a sufficient allowance for the liquidator’s reprehensible delays.  I will not reduce the rate for the claims that failed because no interest is payable on those sums.  Had Rocklea repaid the sums which I have found to have been unfair preferences it would have been successful as to the balance of the liquidator’s claim and would have recovered its costs in full.  This it did not do.  Nor will I reduce the rate to reflect the actual benefit which Rocklea earned from its retention of the sums unfairly received by it or to reflect the actual loss of the liquidator or the company for having been deprived of these sums.  There is no evidence of these matters.  In any event, I accept that the policy behind the rates fixed under the statute is to provide a disincentive to recipients of potentially unfair preferences for refusing a demand that it refund them. 

Costs of the August 2000 Adjournment

1. In his order of 11 August 2000, Mandie J reserved the costs of the opposed application to vacate the trial date.  For reasons which I have expressed, I consider that the non-compliance by the liquidator of its discovery obligations was the cause of this adjournment.  I consider that Rocklea should have these costs. 

Rocklea also seeks these Costs. 

1. Rocklea also seeks the costs of a mediation which took place on 29 March 2000.  I decline to make such an order.  These costs are not reserved.  In any event, I am unable to conclude that the mediation would have been successful had the discovery been complete or that the mediation was wasted by reason of the non-production of the documents which the plaintiff produced on 6 August 2000.

Orders

1. I therefore propose:

(a)that there be judgment for the plaintiff in the sum of $76,648.82 together with interest pursuant to s. 58 of the Supreme Court Act 1986 calculated on the penalty interest rates from time to time in force for the periods from 27 September 1997 to 21 August 2000 and from 21 February 2001 to the date of judgment; and

(b)that the costs reserved by the order of Mandie J on 11 August 2000 be paid by the plaintiff.

1. I propose no further orders as to costs at this stage as I understand that further submissions may be made on this matter.

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