Polyaire P/L v K-AIRE P/L (No 3)

[2006] SASC 147

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

POLYAIRE P/L v K-AIRE P/L & ORS (No 3)

[2006] SASC 147

Reasons for Decision of The Honourable Justice Bleby

19 May 2006

CORPORATIONS - VOLUNTARY ADMINISTRATION - PROTECTION OF COMPANY PROPERTY DURING ADMINISTRATION - STAY OF PROCEEDINGS

Application for leave to continue proceedings against second and ninth defendants in administration - Defendants found liable for infringement of registered design - Plaintiff yet to elect to claim damages or an account of profits - Corporations Law, s 440D - Principles of moratorium on legal proceedings during administration - Consideration of circumstances where application under s 440D granted - Balance of convenience - No real prejudice to plaintiff if unable to proceed against second and ninth defendants - Application dismissed.

Corporations Act 2001 (Cth) s 439A, s 440D, referred to.
Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203; Cope v Home [2002] NSWSC 777, applied.
Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (Administrator Appointed) (1997) 25 ACSR 757, discussed.

POLYAIRE P/L v K-AIRE P/L & ORS (No 3)
[2006] SASC 147

1. BLEBY J:             After a series of appeals from a Judge of this Court to the Full Court of the Federal Court and ultimately to the High Court, the plaintiff has succeeded in an action against nine defendants for infringement of a registered design.  Orders have been made restraining the defendants from taking certain action by way of infringement, together with a number of consequential orders.  The orders have only concerned the defendants’ liability for infringement.  The Court has adjourned to a date to be fixed further consideration of the plaintiff’s entitlement to damages from or an account of profits by the defendants in respect of their respective involvement in the manufacture, sale or offer for sale of the infringing articles.

2. The plaintiff has not yet elected either to claim damages or an account of profits.  In September 2005 the trial Judge made orders for the filing by the defendants of affidavits and for the giving of discovery in aid of the plaintiff’s decision whether to elect to claim damages or an account of profits.  Affidavits were filed, but the plaintiff now alleges that they are inadequate and complains that the order of the trial Judge has not been complied with.

3. In the meantime, on 23 February 2006, the directors of the second and ninth defendants appointed administrators to those companies pursuant to Part 5.3A of the Corporations Act. The administrators have continued the business of the companies with a view to attempting to sell the business as a going concern, and have investigated other possible alternatives for restructuring. They have formed the opinion that the companies are insolvent. Present indications are that it is likely that the companies will be wound up, although it is possible that Deeds of Company Arrangement may be proposed. The administrators have obtained an extension of time until 14 June 2006 in which to hold a second meeting of creditors in accordance with the requirements of s 439A of the Corporations Act.

4. In order to resolve the alleged non‑compliance by the defendants with the trial Judge’s order, the plaintiff has filed an application, which is yet to be heard by the trial Judge, for declaratory relief as to the effect of the previous orders, or alternatively that the orders be corrected to reflect what the plaintiff says was properly intended.  At the same time, the plaintiff has filed an application for leave to proceed against the second and ninth defendants.  It is that application which is now before me.  The granting of leave is opposed by the administrators.

5. In Foxcraft v The Ink Group Pty Ltd[1] Young J contrasted an application for leave to proceed against a company in administration with that of a company in liquidation.  He said:[2]

   A company in administration is seeking to continue to trade and is, in accordance with s 435A, seeking to maximise the chance of it remaining in business.  A company in liquidation is one where the liquidator is seeking not to trade but to realise the company’s assets as soon as possible for the best price, in order to be able to distribute the net available funds to the creditors and in some circumstances, the members.

   The provisions of Pt 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 s 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 s 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.

   [1] (1994) 15 ACSR 203.

   [2] Ibid at 204.

6. The approach of Young J in that case has been followed in many subsequent cases.  One of the rare circumstances in which leave was given was in Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (Administrator Appointed)[3], where Carr J, in respect of ongoing conduct, granted leave to proceed against a company in administration for the purpose of seeking an injunction to prevent a breach of the Patents Act 1990 (Cth). Carr J[4] contrasted that situation with the situation of a creditor, whether secured or unsecured, seeking to advance its position in relation to a debt existing at the time when the administration commenced. 

   [3] (1997) 25 ACSR 757.

   [4] Ibid at 760.

7. In refusing leave to proceed in respect of a claim to property held by a company under administration, Barrett J said, in Cope v Home:[5]

   In the end, I think it comes down to the question whether the statutory moratorium, particularly the aspect of it in s440D precluding resort to legal proceedings, is intended to relegate rights of a proprietary kind in such a way that an administrator may proceed without interference from persons assisting them. The answer, as I see it, is generally in the affirmative. By precluding proceedings against the company or in relation to its property, the legislation aims to ensure that the company is freed during administration from the effects of claims upon its property that can be asserted through legal action.

   …

   For the reasons I have stated, the balance of convenience in the end must, I think, be regarded as favouring the freedom of the administrators to deal with the company's property without interference by the present claim initiated in respect to the company's property without leave under s440D. In saying this, I am not to be taken as suggesting that it would be a proper exercise of the administrators' powers to effect a sale by the company which frustrated such rights as the plaintiffs may have under the agreement of 22 November 2001. That is not an issue that arises upon this application. I merely say that, in light of the statutory scheme, it is not appropriate that the administrators be subjected to restraint by injunction.

   [5] [2002] NSWSC 777 at [24], [26].

8. In this case the plaintiff argues that the second and ninth defendants should be bound by any order made as a result of the pending application or declaratory relief.  It argues that if, as a result of the declarations sought and any further affidavits filed the plaintiff elects to claim an account of profits from the second and ninth defendants, it is arguable that the proceeds will be held by the companies as constructive trustees of the plaintiff, in which case the plaintiff has an interest in preserving the assets of the companies, and that any costs incurred by the administrators will only, in all likelihood, diminish the pool of assets available to the plaintiff.

9. On the other hand, if the plaintiff were to elect to proceed for damages only against the defendants, the plaintiff concedes that a court would be unlikely to grant leave to proceed.

10. Even if it could be shown that the plaintiff was entitled to an equitable interest in the assets of the two defendants beyond that of an unsecured creditor, it is doubtful, on the authorities to which I have referred, that leave to proceed would be granted.  That is not to say that the position might not be different if the companies were in liquidation.  However, at this stage, the plaintiff cannot even assert a proprietary right against the assets of the defendant.  At best that will not arise until it makes its election, and even then its foreshadowed claimed entitlement is not assured.

11. To grant leave to proceed might allow the plaintiff to advance its election whether to claim damages or an account of profits, but for so long as the companies remain under administration, promotion of whatever the plaintiff’s claim may be would normally be stayed without leave to proceed under Part 5.3A of the Corporations Act.  If leave were granted, not only would the plaintiff possibly accrue an advantage over other creditors, but the administrators would necessarily be deflected from their primary task of preserving the companies’ assets and helping to resolve the future course to be taken in the interest of all creditors.

12. The effect of not granting leave to proceed is that the second and ninth defendants cannot be required to answer the claims for declaratory relief now being sought.  The plaintiff’s application can and will proceed against the other defendants.  If the plaintiff succeeds, those defendants may be required to file further affidavits and give additional discovery.  By the time that application is resolved, the future position of the second and ninth defendants is likely to be clearer.  Any application then made for leave to proceed will depend upon different circumstances then prevailing.  If by then the plaintiff has obtained against the other defendants the declaratory orders that it seeks in relation to the judgment already obtained, or if as against those defendants there has been a clarifying order in respect of that judgment and if the action is then to proceed against the second and ninth defendants also, there might be some difficulty in persuading a court that those orders should have no application to the second and ninth defendants.  However, that is a matter for the future.

13. If the administrators or, if it be the case, a liquidator, should take action inconsistent with what the plaintiff asserts are its proprietary rights in respect of certain assets of the companies, then they will no doubt seek injunctive or declaratory relief in the administration.  That is a matter for consideration if it ever arises.

14. At this stage I am not satisfied that there is any real prejudice to the plaintiff by not being able to proceed against the second and ninth defendants or that if there is, that it outweighs the inconvenience to the administrators by deflecting their attention from the immediate problems which they have to resolve.  Accordingly, the plaintiff’s application for leave to proceed against the second and ninth defendants is dismissed.