Nauru Phosphate Royalties Trust v Business Australia Capital Mortgage Pty Ltd
[2004] FCA 1782
•12 AUGUST 2004
FEDERAL COURT OF AUSTRALIA
Nauru Phosphate Royalties Trust v Business Australia Capital Mortgage Pty Ltd [2004] FCA 1782
NAURU PHOSPHATE ROYALTIES TRUST & ORS v BUSINESS AUSTRALIA CAPITAL MORTGAGE PTY LIMITED & ORS
N1159 OF 2004
EMMETT J
12 AUGUST 2004
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N1159 OF 2004
BETWEEN:
NAURU PHOSPHATE ROYALTIES TRUST
FIRST APPLICANT
REPUBLIC OF NAURU FINANCE CORPORATION
SECOND APPLICANT
RANDWICK NOMINEES PTY LIMITED
THIRD APPLICANT
CENTRAL PACIFIC (DOWNTOWNER) PTY LIMITED
FOURTH APPLICANT
SPENCER INVESTMENTS PTY LIMITED
FIFTH APPLICANT
RONSI BUSINESS PTY LIMITED
SIXTH APPLICANT
RONSI HOLDINGS PTY LIMITED
SEVENTH APPLICANTAND:
BUSINESS AUSTRALIA CAPITAL MORTGAGE PTY LIMITED
FIRST RESPONDENT
BUSINESS AUSTRALIA CAPITAL FINANCE PTY LIMITED
SECOND RESPONDENT
HLBC PTY LIMITED
THIRD RESPONDENT
IAN DAVID ROGUT (AKA IAN DAVID LAZAR)
FOURTH RESPONDENTJUDGE:
EMMETT J
DATE OF ORDER:
12 AUGUST 2004
WHERE MADE:
SYDNEY
THE COURT ORDERS:
1.The challenge to the retainer of the legal representatives of the first and the third to seventh applicants 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
N1159 OF 2004
BETWEEN:
NAURU PHOSPHATE ROYALTIES TRUST
FIRST APPLICANT
REPUBLIC OF NAURU FINANCE CORPORATION
SECOND APPLICANT
RANDWICK NOMINEES PTY LIMITED
THIRD APPLICANT
CENTRAL PACIFIC (DOWNTOWNER) PTY LIMITED
FOURTH APPLICANT
SPENCER INVESTMENTS PTY LIMITED
FIFTH APPLICANT
RONSI BUSINESS PTY LIMITED
SIXTH APPLICANT
RONSI HOLDINGS PTY LIMITED
SEVENTH APPLICANTAND:
BUSINESS AUSTRALIA CAPITAL MORTGAGE PTY LIMITED
FIRST RESPONDENT
BUSINESS AUSTRALIA CAPITAL FINANCE PTY LIMITED
SECOND RESPONDENT
HLBC PTY LIMITED
THIRD RESPONDENT
IAN DAVID ROGUT (AKA IAN DAVID LAZAR)
FOURTH RESPONDENTJUDGE:
EMMETT J
DATE:
12 AUGUST 2004
PLACE:
SYDNEY
REASONS FOR JUDGMENT
The applicants have commenced a proceeding in this Court, claiming relief against the respondents under the Trade Practices Act 1974 (Cth). The proceeding was commenced in the name of the applicants after the appointment of receivers and managers (‘the Receivers’) in respect of the first and the third to seventh applicants (‘the Relevant Applicants’). Instructions for the commencement of the proceeding were given on behalf of the Relevant Applicants by their directors and not by the Receivers. Indeed, other legal representatives have appeared on behalf of the Relevant Applicants in circumstances to which I shall refer shortly.
Three of the respondents have been served and have appeared. Those respondents (‘the Respondents’) have challenged the retainer of those appearing for the Relevant Applicants, on the instructions of their directors. They assert that the proceeding has not been properly instituted on behalf of any of the Relevant Applicants because it was instituted on instructions given by the directors who, they say, no longer have authority to give such instructions on behalf of the Relevant Applicants, following the appointment of the Receivers.
Clearly, it is in the interests of a defendant or respondent in a proceeding commenced on the instructions of directors of a company, where receivers and managers have been appointed to assets of the company that include the relevant chose in action, to know that the proceeding has been commenced properly in the name of the company. Otherwise, even if the proceeding was successfully defended, there could be the spectre of a second proceeding, brought on the basis that the first proceeding did not bind the company, since it was commenced without its authority. Clearly enough, therefore, the Respondents have standing to challenge the retainer of those legal practitioners who have purported to commence this proceeding in the name of the Relevant Applicants.
The Relevant Applicants own parcels of real estate in respect of which they have granted mortgages to GE Capital Security Agent Pty Ltd (‘the Security Agent’), to secure advances made to them by General Electric Capital Corporation (‘GE’). In addition, each of the Relevant Applicants has granted a charge to the Security Agent as security for the same advances. The charges are expressed to be fixed or floating in respect of various assets. In the case of certain of the Relevant Applicants, however, the charge does not relate to all of the assets of that applicant. Nevertheless, for present purposes, it will be assumed that each charge extends to the chose in action comprising the cause of action that the Relevant Applicant seeks to enforce in this proceeding.
The Respondents claim to be creditors of the Relevant Applicants. They also claim the benefit of securities, alleged to have been granted to them by the Relevant Applicants, in respect of the properties that are the subject of the securities in favour of the Security Agent. In the proceeding, in addition to claims for damages, the applicants seek ancillary relief relating to the securities relied on by the Respondents.
Notwithstanding that receivership and management may well exclusively dominate a company’s affairs in its dealings and relations with the outside world, it does not permeate the company’s internal domestic structure. That structure continues to exist, notwithstanding that the directors no longer have authority to exercise their ordinary business management functions. While a valid receivership and management will ordinarily supersede, it will not destroy, the company’s internal organs through which it conducts its affairs – Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1970) 92 WN 199 at 209, Deangrove Pty Ltd v Commonwealth Bank of Australia [2001] FCA 173 at [29]-[42] and Ernst & Young v Tynski Pty Ltd [2003] FCAFC 233.
Under the charges granted by the Relevant Applicants to the Security Agent, power to institute legal proceedings in the name of the Relevant Applicants is conferred on receivers and managers appointed pursuant to the charges. Nevertheless, it is clear that the directors of the Relevant Applicants retained a residual power to sue in the name of those applicants, at least where the proceeding was against the Receivers or against the Security Agent, to challenge the appointment of the Receivers or the validity of the charges. There has been no challenge by any of the Relevant Applicants to the validity of the securities granted to the Security Agent or to the appointment of the Receivers. That residual power, therefore, has no relevance in the present context.
However, there is a further residual power vested in directors of a company, notwithstanding the appointment of receivers and managers to the company, to institute a proceeding in the name of the company in some circumstances. The precise extent of the circumstances in not without considerable doubt (see O’Donovan, Company Receivers and Administrators at par [8.90] – [8.130] Meagher, Gummow & Lehane, Equity Doctrines and Remedies, pars [28-240] to [28-260], Picarda, The Law Relating to Receivers, Managers and Administrators, 3 ed pp 104-108, Lightman & Moss, The Law of Receivers and Administrators of Companies, 3 ed at pars [2-023] to [2-026] and Blanchard and Gedye, The Law of Company Receiverships in Australia and New Zealand, 2 ed, par [10.02]). Clearly, grave difficulty could arise if two different sets of people, being the directors, on the one hand, and receivers and managers on the other hand, who may have widely differing views and interests, each have power to bring proceedings on the same cause of action. Accordingly, where receivers and managers purport to commence a proceeding on a particular cause of action, it is clear that that excludes any power on the part of the directors to give instructions to do the same. Doubt arises, however, where receivers and managers do nothing.
The solicitors and counsel purporting to appear on behalf of the Relevant Applicants have received no instructions from the Receivers. On the other hand, the Receivers instructed other legal practitioners to appear in this proceeding on behalf of the Relevant Applicants for limited purposes. A notice of motion filed on 4 August 2004, purportedly on behalf of the Relevant Applicants, claimed orders that the proceeding be stayed until the following conditions were met:
- Security in respect of any order for costs that may be made against the applicants, or any of them, be provided by the applicants in such amount and such manner as the Court sees fit.
- The solicitors on the record as having commenced the proceeding in the name of the Relevant Applicants undertake to the Court that they will not, without the leave of the Court, seek to recover from those applicants or any of them or from the Receivers any amounts in relation to any costs or disbursements incurred in relation to the proceeding.
The notice of motion was filed on behalf of the Relevant Applicants by solicitors instructed by the Receivers.
Thus, it was clear at that stage that the Receivers actively opposed the prosecution of the proceeding in the names of the Relevant Applicants. At that stage, therefore, it was clear that, in the light of the conflict between the directors, on the one hand, and the Receivers, on the other hand, concerning the prosecution of the relevant causes of action, the authority of the Receivers must prevail. In the absence of anything further, the proceeding would have to be stayed or dismissed.
However, after preliminary directions in relation to the notice of motion filed on the instructions of the Receivers, the Court was asked to make orders by consent of the Relevant Applicants, their directors and the Receivers, without any objection from the Respondents. Orders were to the following effect:
(1)Any order for costs in the proceeding against any of the applicants is to be an order for costs against all such applicants and may be recovered jointly and severally against each of them.
(2)The Court noted the agreement between the applicants, their directors and the Receivers that:
(a)upon the Receivers receiving proceeds of the realisations of the assets of the Relevant Applicants to which none of the Security Agent, GE or the Receivers make any claim, the Receivers will, out of those proceeds, pay into Court the sum of $500,000 to abide any order of the Court in relation to the costs of the parties in the proceeding;
(b)upon redemption or transfer or assignment of the securities granted to the Security Agent and GE, the Receivers will be entitled to require payment from the Relevant Applicants of the sum of $500,000 over and above all money otherwise secured and the Receivers will pay into Court the sum of $500,000 to abide any order of the Court in relation to the costs of the parties in the proceeding.
(3)The Court noted the undertaking given by the solicitors on the record, being those instructed by the directors, that they would not seek to recover from the Receivers or from the Security Agent or from GE any amount in relation to any costs or disbursements incurred or rendered by them in relation to the proceeding.
(4)The motion filed on 4 August 2004 on the instructions of the Receivers be dismissed with no order as to costs.
When those orders were made, senior counsel appearing for the Relevant Applicants on the instructions of the Receivers, expressly stated that, while the Receivers did not wish to participate further in relation to the proceeding, they did not expressly consent to the further prosecution of the proceeding in the name of the Relevant Applicants on instructions from the directors. Whatever that means, it was apparent that, from that time, there was no longer any conflict between the directors of the Relevant Applicants and the Receivers as to the further prosecution of the proceeding in the name of the Relevant Applicants.
It is tolerably clear that, where a cause of action subsists on the part of a company in respect of which receivers and managers have been appointed, the benefit of success in that cause of action might be lost by effluxion of time and the receivers and managers decline to give instructions on behalf of the company to prosecute the cause of action, the directors have a residual power to do so, so long as the position of the secured creditor and the receivers and managers is not prejudiced by that conduct.
One possible prejudice would be the consequences of an order for costs. For that reason, it would normally be incumbent upon directors to proffer security, to the satisfaction of the receivers and managers, for any detriment that might flow from the making of an order for costs against the company, or the incurring by the company of a liability to its own legal advisers for costs. Alternatively, if the receivers and managers are satisfied that, by reason of arrangements that are in place between them and the directors, that possible prejudice has been eliminated, the residual authority of the directors would be enlivened (see – Newhart Developments Ltd v Cooperative Commercial Bank Ltd [1978] QB 814 at 818-819, Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53 at 63).
The Relevant Applicants, through the legal advisers instructed by their directors, assert that there is considerable urgency in this proceeding. Part of the ancillary relief sought in the proceeding is the discharge of securities relied on by the Respondents. That is said to be necessary in order to redeem the securities pursuant to which the Receivers were appointed. Pending that discharge and redemption, the Receivers are embarking on the exercise of powers of sale in respect of the assets of the Relevant Applicants. Unless the proceeding is prosecuted with considerable diligence and expedition, the Relevant Applicants may be irreparably and irretrievably damaged by that exercise of powers of sale.
The Receivers are clearly aware of the commencement of the proceeding and the intention of the directors to prosecute it. Nevertheless, they do not wish to take any steps at this stage to prevent that course. Having regard to the fact that the Receivers first sought orders that the proceeding be stayed, and then consented to the orders that I have described, I consider that the residual authority of the directors has been enlivened, at least for the time being. That authority, however, could be terminated at any time by the Receivers.
I consider that the challenge to the retainer of those appearing for the Relevant Applicants must fail. I therefore propose to give directions for the further conduct of the proceeding.
I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 9 June 2005
Counsel for the Applicants: Mr G. Segal Solicitor for the Applicants: Levitt Robinson Counsel for the First, Second and Third Respondents: Mr P. Biscoe Solicitor for the Respondents: Aitken McLachlan Thorpe Date of Hearing: 12 August 2004 Date of Judgment: 12 August 2004
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