O.D. Transport (Australia) Pty Ltd (in liq) v O.D. Transport Pty Ltd

[1997] FCA 1412

FEDERAL COURT OF AUSTRALIA

CORPORATIONS

- cross-claim in company’s action- whether leave to proceed under
s 500 (2) of the Corporations Law is required - circumstances in which leave should be granted

PRACTICE AND PROCEDURE - whether consent orders made under O 35 r 10 can constitute leave to proceed under s 500(2) of the Corporations Law

Corporations Law s 500(2)
Federal Court Rules O 35 r 10

Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503 discussed
Re A J Benjamin Ltd (in liq) (1969) 90 WN (Pt. 1) (NSW) 107 discussed
Ogilvie-Grant & Anor v East (1983) 7 ACLR 669 discussed
Thomson v Mulgoa Irrigation Co Ltd (1893) 4 BC (NSW) 33 mentioned
Vagrand Pty Ltd (in liq) v Fielding (1993) 113 ALR 128 applied
Re David Lloyd & Co [1877] 6 ChD 339 mentioned
J J Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (in liq) & Anor (1986) 11 ACLR 224 applied

O.D. TRANSPORT (AUSTRALIA) PTY LTD (IN LIQ) & ORS v O.D. TRANSPORT PTY LTD & ORS
VG 3145 of 1997

FINKELSTEIN J
MELBOURNE
10 DECEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 3145 of 1997

BETWEEN:  O.D. TRANSPORT (AUSTRALIA) PTY LTD (IN LIQ) & ORS

Applicants

AND:             O.D. TRANSPORT PTY LTD & ORS

Respondents

JUDGE:	FINKELSTEIN J
DATE OF ORDER:	10 DECEMBER 1997
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

The application for leave to commence or proceed with a cross-claim against the first
           applicant is dismissed.

Note: Settlement and entry of orders is dealt with in order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 3145 of 1997

BETWEEN:	O.D. TRANSPORT (AUSTRALIA) PTY LTD (IN LIQ) & ORS Applicants
AND:	O.D. TRANSPORT PTY LTD & ORS Respondents

JUDGE:	FINKELSTEIN J
DATE:	10 DECEMBER 1997
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

HIS HONOUR: This is an oral application by the first respondent pursuant to s 500(2) of the Corporations Law for leave to commence or proceed with a civil proceeding by cross-claim against the first applicant. By that subsection no civil proceeding can be commenced against a company that has voluntarily been wound up without leave of the Court.

The first applicant is a company which was wound up voluntarily on 15 October 1992.  The second and third applicants are the joint and several liquidators of the first applicant.  On 21 May 1997 the applicants commenced a proceeding in the Federal Court against the first respondent and others.  In their statement of claim the applicants assert a number of causes of action against the first respondent.  For present purposes it is sufficient if I summarise them.  It will not be necessary for me to deal with the causes of action which have been pleaded against the other respondents. 

The first cause of action concerns a franchise agreement made on 5 September 1990 by which the first respondent granted to the first applicant a franchise to conduct a road haulage and transport business.  The first applicant says that pursuant to that franchise agreement the first applicant agreed to pay by way of royalty an amount equal to eight per cent of the gross receipts of the business and an amount equal to five per cent of the leasing or hiring charges payable by the first respondent to the lessors or owners of certain equipment that is referred to in the franchise agreement.  Then it is alleged that during the period between 5 September 1990 and 15 October 1992 the first applicant made payments on account of royalties which exceeded the amount properly payable under the franchise agreement by an amount of $295,524.03.  The first applicant seeks to recover that sum as money had and received by the first respondent to the use of the first applicant.

As an alternative claim the second and third applicants allege that the first applicant acquired the haulage and transport business from the first respondent at a time when the two companies were related companies within the meaning of s 50 of the Corporations Law. Those applicants say that the cash consideration which was paid for the business exceeded the value of the business by an amount of $295,524.03 and the second and third applicants seek to recover the excessive consideration under s 567(1) of the Corporations Law.

Finally it is alleged that the payments totalling $295,524.03 made by the first applicant to the first respondent are settlements within the meaning of s 120 of the Bankruptcy Act 1966 (Cth), which is made applicable to the winding up of insolvent companies by s 565 of the Corporations Law, and are void as against the second and third applicants as the liquidators of the first applicant and are recoverable by them.

When the originating application was issued by the applicants it made provision for a directions hearing: see O 4 r 7 of the Federal Court Rules. The purpose of a directions hearing is for the Court to make such orders as are thought proper for the future conduct of a proceeding. It is not uncommon for parties to agree on what orders should be made. By O 35 r 10 the solicitors for the parties may file a written consent to the making of orders and this procedure is commonly employed to avoid the costs of an appearance at a directions hearing. In this case the parties filed a written consent seeking orders for the filing and service of pleadings and the making of discovery. One of the proposed orders was that “the respondents file and serve their defence and any cross-claim on or before 6 September 1997.” In accordance with the rules the Registrar brought the matter before me and I directed the Registrar to draw up, sign and seal the orders that were sought. When I gave that direction I overlooked the need for an order under s 500(2) of the Corporations Law in the event that the cross-claim referred to in the written consent was to be brought against the first applicant.

Presumably in reliance on the order that I have mentioned, the first respondent filed a cross-claim against the first applicant.  The cross-claim alleges that by a mistake common to the contracting parties the franchise agreement did not reflect the oral agreement for the payment of royalties that had been reached prior to the execution of the franchise agreement.  The first respondent asks for relief by way of rectification of the franchise agreement so that it accords with the oral agreement that it alleges had been made.  If this relief is granted the royalties payable under the franchise agreement will be more than the first applicant asserts are payable and will, I assume, defeat the claim based on the alleged overpayment.

The first question that arises in these circumstances is whether it is necessary for the first respondent to obtain leave to proceed by way of cross-claim against the first applicant.  At one time it was thought that s 231 of the Companies Act 1948(UK), which is to the same effect as s 500(2) of the Corporations Law, did not apply to a counterclaim in an action brought by a company in liquidation: see Buckley on The Companies Acts (13th ed 1957) at 500. Mersey Steel & Iron Co v Naylor Benzon & Co [1884] 9 App Cas 434 was cited as authority. However, in Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503 it was explained that Mersey Steel did not establish that proposition.  On the contrary, the Court of Appeal held that it was necessary to obtain leave to counterclaim against a company in liquidation except in the case of a counterclaim that was brought to establish a set-off for the purpose of reducing or extinguishing the company’s claim. 

Next I turn to the question whether the first respondent must obtain an order under s 500(2) when there is in force an order requiring it to bring any cross-claim by a specified date. Here again the answer is clear: such an order must be obtained. In the first place an order made under s 500(2) cannot be made by the consent of the parties to the proceeding. The interests of the creditors of the insolvent company are involved and the Court is obliged to take those interests into account in deciding whether to make any order under the subsection and, if such an order is to be made, on what terms it should be made. In the second place the submission pursuant to O 35 r 10 of a written consent to orders should not be taken as an application under s 500(2) of the Corporations Law unless the proposed orders specifically advert to the fact that such an order is sought or the Court is informed of that fact in some other way. Finally, if the order that has been made can be construed as the grant of leave under s 500(2) I would recall the order. I did not intend it to operate as an order under s 500(2). The order is interlocutory in nature and it can be recalled in an appropriate case. I have no doubt that this would be such a case.

Having reached the conclusion that the first respondent must obtain leave to bring its cross-claim the final question is whether that leave should now be granted.

The legislative policy behind s 500(2) has been considered in a number of cases. In Re A J Benjamin Ltd (in liq) (1969) 90 WN (Pt. 1) (NSW) 107 Street J thought that it reflected the view that the affairs of an insolvent company should be controlled by a liquidator and that independent actions against the company should not be encouraged because it was for the liquidator to satisfy the rights of creditors.  In Ogilvie-Grant & Anor v East (1983) 7 ACLR 669 McPherson J, writing for the Full Court of the Supreme Court of Queensland, discussed the matter in a passage which I regard as sufficiently important to set out in full. His Honour said at 672-3:

“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.

This explanation [for s 500 and its predecessors] has been accepted in a number of Canadian cases and appears also to have been adopted by Street J in Re A J Benjamin Ltd.  It is consistent with this that there should be no automatic prohibition upon proceedings against the company in members’ voluntary winding-up, where the company is solvent and therefore less likely to be the target of numerous actions. 

...

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 a consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances 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 s 230(3) [of the Corporations Law] 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. This is really all that is meant in this context by expressions such as ‘convenience’ and ‘balance of convenience’ that appear in judgments on the matter. 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.” (citations omitted)

Here the focus of attention is on the competing procedures that are available to establish a money claim against a company in liquidation.  Generally the court will require an applicant to proceed by way of proof of debt unless the applicant can show good reason why curial action is the preferable course.  But the matters to be taken into account in an application under
s 500(2) are not confined to determining what is the appropriate procedure to pursue a claim. Another purpose of s 500(2) is to ensure that a company in liquidation is not to be harassed and its assets wasted by unnecessary litigation: see Thomson v Mulgoa Irrigation Co Ltd (1893) 4 BC (NSW) 33. Hence, on an application for leave to proceed it has usually been necessary to show that there is some foundation for the proposed claim against the company in liquidation. See generally Vagrand Pty Ltd (in liq) v Fielding (1993) 113 ALR 128 where the Full Court of the Federal Court discussed the need to establish some good basis for a claim before leave to proceed would be granted. The Full Court rejected the contention that a prima facie case needs to be established because that would place too onerous a burden on an applicant and may have the effect of shutting out a good claim. The Full Court held that the test to be applied was akin to that used in considering whether an interlocutory injunction should be granted namely whether there was “a serious question to be tried”: see Vagrand at 134.

But there is no hard and fast rule and it is possible to imagine circumstances where it would not be appropriate to impose an obligation on an applicant to show that there is “a serious question to be tried” in the sense explained by Vagrand. One circumstance is where the applicant does not have the choice between proceeding by way of action or proof of debt. For example take the case of a person who wishes to recover his own property from the company in liquidation as might be the case with a mortgagee. Section 500(2) is not to be used to thwart such a claim: see Re David Lloyd & Co (1877) 6 ChD 339. Where a mortgagee wishes to enforce his security by taking action to recover mortgaged property it would usually be sufficient for the mortgagee to establish the existence of the mortgage and no more in order to obtain leave to proceed against the company.

The present case is another example of one where the claim can only be resolved by a court.  But that fact does not mean that the suit for rectification should not be the subject of some investigation to determine whether it is appropriate that leave should be granted to bring it.  A case in point is J J Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (in liq) & Anor (1986) 11 ACLR 224. There the applicant sought leave to proceed against a company in liquidation to rectify a deed of charge that had been granted by the company. Rowland J did grant that leave but only after having satisfied himself that the applicant had a case that was capable of serious argument. My reading of his Honour’s reasons leads me to conclude that if there had been no evidence before the court indicating that the applicant had some prospect of success in its claim for rectification the order would not have been made.

Here the position is different.  The first respondent has not put forward any material to establish that its claim has merit.  It may be a very good claim or it may be quite hopeless.  I am not in a position to say one way or the other.  It would be wrong for me to grant leave to proceed in these circumstances.  Before leave will be granted the first respondent must show that its proposed cross-claim has some merit and will not result in the first applicant incurring unnecessary expenditure which it may not be able to recover. 

In the result I will dismiss the application but without prejudice to the first respondent’s right to make a further application on proper material.  No order for costs will be made on the application.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein

Associate:
Dated:  10 December 1997
Solicitor for the applicant:     Coltmans Price Brent
Solicitor for the respondent:   Irlicht & Broberg

Date of Hearing:  31 October 1997
Date of Judgment:                 10 December 1997