Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (in liq)

[1998] FCA 14

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - Corporations Law, s 564 - application by liquidator - certain unsecured creditors provided monies to the liquidator for the purpose of his recovering funds in the liquidation - successful recovery of funds by liquidator - whether funding creditors should receive priority in the winding up - issue of special claims of employees.

Corporations Law, ss 556 (1)(dd), 556(1)(e), 564(a)
Companies Act 1961 (WA), s292(10)

Re Kyra Nominees Pty Ltd(in liq) (1987) 11 ACLR 767
Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610
Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84
Re Allquip (WA) Pty Ltd (in liq) (Carr J, 26 November 1997, unreported)

POWER DEMOLITIONS PTY LTD v
TOSICH CONSTRUCTION PTY LIMITED (IN LIQUIDATION)
NG  3453 of 1994

BRANSON J
SYDNEY
21 JANUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG3453  of   1994

BETWEEN:	POWER DEMOLITIONS PTY LTD Applicant
AND:	TOSICH CONSTRUCTION PTY LIMITED Respondent
JUDGE(S):		BRANSON J
DATE OF ORDER:		21 JANUARY 1998
WHERE MADE:		SYDNEY

THE COURT ORDERS THAT:

1. The applicant is to bring in short minutes of order consistent with these reasons.

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	NG3453 of 1994

BETWEEN:	POWER DEMOLITIONS PTY LTD Applicant
AND:	TOSICH CONSTRUCTION PTY LIMITED Respondent

JUDGE(S):	BRANSON J
DATE:	21 JANUARY 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

This is an application by the liquidator of Tosich Construction Pty Ltd (In Liquidation) (“the Company”) for an order under s 564 of the Corporations Law.

Section 564 of the Corporations Law provides as follows:

“Where in any winding up:

(a)property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of moneys or the giving of indemnity by creditors;  or

(b)expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.”

The orders sought in this case relevantly are as follows:

“2.that all monies recovered by the Applicant in proceedings G3510 of 1996 after payment of the costs and expenses of the winding up including the costs of this Application be distributed amongst creditors who provided funds in the winding up.

3.        that the costs of this Application be an expense in the winding up.”

Notice of this application was given to the unsecured creditors of the Company.   A number of former employees of the Company attended the hearing and expressed opposition to the making of the orders sought, on the basis that the unpaid entitlements of the former employees of the Company should be a first call on funds in the hands of the liquidator after payment of the costs and expenses of the liquidation.   One former employee forwarded a letter expressing the same view to the office of the liquidator.

Certain of the creditors who provided funds in the liquidation (“the funding creditors”) appeared to support the application made by the liquidator.

BACKGROUND FACTS

The liquidator was appointed provisional liquidator of the Company by an order of this Court dated 8 September 1994.  He was subsequently appointed official liquidator on 7 October 1994.

A report as to affairs, prepared by the receivers and managers of the Company appointed by the National Australia Bank Limited (“NAB”), dated 8 September 1994, indicated that there were no assets of the Company available to the liquidator.   The claims as detailed in schedules to the report were as follows:

Claim of employee entitlements  $    292,364.50
           Other unsecured creditors  $ 5,192,395.54
   ___________
           Total  $  5,484.760.04  

The claims of employee entitlements included a claim by NAB pursuant to s 560 of the Corporations Law for approximately $163,000 for monies advanced to pay wages and employees’ leave entitlements.

The liquidator’s investigations caused him to form the view that, as a result of transactions that occurred in March and April 1994, NAB obtained payments from the Company that were unfair preferences. He considered that it would be necessary to examine certain persons under ss 596A and 596B of the Corporations Law to obtain evidence to commence legal proceedings against NAB. He called a meeting of creditors for 17 January 1995. By a report to creditors dated 21 December 1994, provided to them with the notice of the meeting called for 17 January 1995, the liquidator advised creditors of his opinion that certain persons concerned with the Company should be examined and he sought funding from creditors to allow this to happen. His report drew attention to the terms of s 564 of the Corporations Law.

Following the meeting held on 17 January 1995, the liquidator received from creditors a total amount of $8,000.  Examinations were conducted in late November 1985.

By letter dated 23 February 1996, the liquidator advised creditors that he had received legal advice that “there is a good prospect of success should I commence an action against the National Australia Bank.”   He again sought funding from creditors.  His letter included the following paragraph:

“The Court [sic] have consistently given “funding creditors” a greater dividend than ordinary unsecured creditors from the proceeds of a successful case.  In a recent case, a funding creditor received 100 cents in the dollar of the proceeds, as a result of a successful Court action, a summary of this case is available at your request.”

The liquidator thereafter received $17,000 from unsecured creditors, and proceedings against NAB were instituted.

During the course of the litigation with NAB, the liquidator found it necessary to obtain further funding.  This funding was made available by FAI General Insurance Company Limited (“FAI”) pursuant to an insurance funding proposal approved by the Committee of Inspection established by the unsecured creditors, and subsequently approved by Lindgren J of this Court.

The proceedings against NAB were settled on 1 August 1997.  By a deed of settlement of that date, NAB agreed to pay a significant sum to the liquidator and further agreed not to prove as a creditor of the Company in its liquidation.

In April 1996, the liquidator instituted proceedings in this Court against one Melanie Tosich (“Ms Tosich”).   The proceedings were unsuccessful at first instance and on appeal to the Full Court.  The liquidator accepts a liability to pay approximately $52,000 in costs in respect of these legal proceedings.

The fund that is estimated to be now available to the liquidator, and which would be affected by the order sought by the liquidator, is approximately $169,000.

CONSIDERATION

The first issue which arises is that of whether the circumstances of this case fall within the terms of para (a) of s 564 of the Corporations Law.   The term “indemnity” as a legal term is ordinarily understood to mean an enforceable agreement to keep another person secure against loss or liability or to compensate for loss suffered or expenses incurred (Re Kyra Nominees Pty Ltd(in liq) (1987) 11 ACLR 767 at 772). In Kyra Nominees, Franklyn J of the Supreme Court of Western Australia held that creditors who had provided funds to a liquidator to enable him to proceed with litigation could not be said to have indemnified the liquidator against the costs of such litigation within the meaning of s 292(10) of the Companies Act 1961 (WA). No relevant distinction can be drawn for present purposes between the wording of s 292(10) of the Companies Act 1961 (WA) and s 564 of the Corporations Law.   His Honour considered, however, that such creditors had paid money which had protected or preserved an asset in the liquidation, namely the chose in action to recover moneys to which the company was entitled.

In my view, it may be doubted whether the expression “an indemnity for costs” appearing in s 564 of the Corporations Law is intended to be understood in the strict manner adopted by Franklyn J in Kyra Nominees.    It may be noted that the first meaning listed in The Macquarie Dictionary for “indemnity” is simply “protection or security, as by insurance, against damage or loss”. The provision of funds by unsecured creditors to the liquidator did provide the liquidator with a measure of protection in respect of the costs of the litigation instituted by him. However, it is not necessary for me to adopt a concluded view in this regard. If the facts of the case do not fall within the first of the circumstances envisaged by para (a) of s 564 of the Corporations Law, as I am inclined to think that they do, it would follow from the reasoning adopted by Franklyn J in Kyra Nominees that they will fall within the second.

The authorities recognise that the purpose behind s 564 of the Corporations Law, and its predecessor provisions, is to give the courts “a broad and general discretion  and one that is to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies” (see per Hayne J in Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612; also Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84; and Re Allquip (WA) Pty Ltd (in liq) (Carr J, 26 November 1997, unreported)).

In this case, no funds which were moneys of the Company in the hands of the liquidator were apparently used to meet the costs of the litigation against NAB.  However, the contributing creditors did not fund, or undertake to fund, the whole of the costs of that litigation.  In the events which happened, the greater part of such funding came from the FAI funding proposal.

Importantly, it is clear that, but for the amount recovered from NAB following the compromise of the proceedings against it, there would have been nothing available for distribution to the unsecured creditors of the Company.

The total amount put at risk by the contributing creditors was $25,000.   This represents only a small, although in the circumstances of the case, a vital part of the total funding of the litigation against NAB.   The individual contributions of the contributing creditors, whilst significant, were not large.

In my view, a fair result in this case, which recognises the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies, whilst also taking account of the special claims of employees of companies recognised by s 556(1)(e) of the Corporations Law, will be reflected by an order that each of the contributing creditors receive a distribution in an amount equivalent to three times its contribution (ie an aggregate amount of approximately $75,000) and that the whole of the amount remaining be paid in accordance with the priorities established by the Corporations Law. The costs of the applicant are to be expenses of the liquidator properly incurred within the meaning of s 556(1)(dd) of the Corporations Law.

The applicant is to bring in short minutes of order to reflect the above conclusion.

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

Associate:

Dated:             

Counsel for the Liquidator:	J K Chippindall
Solicitor for the Liquidator:	Ross Koffel Solicitors
Mr J Johnson and Mr J Pacchiarotta appeared for certain of the funding creditors.
Date of Hearing:	21 November 1997
Date of Judgment:	21 January 1998