Re Newage Metals P/L

[1996] QSC 265

IN THE SUPREME COURT
OF QUEENSLAND

No.768  of 1994

Brisbane

Before the Hon. Justice Mackenzie

[Re Newage Metals P/L]

IN THE MATTER of the Corporations Law  

and

IN THE MATTER of NEWAGE METALS PTY LTD
  (ACN 010 853 031) (in liquidation)
  (Receivers and Managers appointed)

JUDGMENT - MACKENZIE J.

Judgment delivered 20 December,  1996

CATCHWORDS:  CORPORATIONS LAW - s471B - Plaintiff seeks to enforce rights as a secured creditor based upon a claim of subrogation of rights under a registered charge on the company's assets - potential disadvantage to unsecured creditors due to delay in asserting these rights - many questions of fact and law are currently unresolved - whether leave to proceed nunc pro tunc should be granted under s 471B Corporations Law.

Counsel:Mr D Andrews for the plaintiffs.

Mr J Sheahan for the defendants.

Solicitors:Barker Gosling for the plaintiffs.   

Russel and Co for the defendants.

Hearing date:  27 November 1996                   

JUDGMENT - MACKENZIE J.

Judgment Delivered 20 December, 1996

This is an application by Maxwell Wreford Chandler, who claims to be entitled to exercise rights as if a secured creditor of Newage Metals Pty Ltd (Newage Metals) and Ivor Worrell and Rajendra Khatri, who claim to be receivers and managers of Newage Metals for leave to be given nunc pro tunc to commence and continue proceedings in a Supreme Court action 9142 of 1996 against Newage Metals or alternatively that they be given leave to commence proceedings by way of a Supreme Court action claiming identical relief to that sought in action 9142 of 1996. 
          An order winding up Newage Metals was made on 6 January 1995.  Leaving aside Mr Chandler it had at least 22 unsecured creditors to a total value of more than $330,000.  According to Mr Bender, the liquidator's assistant, the winding up has reached a stage where within a short time its mining tenements and equipment will be ready for sale.  There was no suggestion at the time of hearing that any creditor apart from Mr Chandler had a dispute which might prevent the sale of the assets.  The liquidator does not oppose an order that leave be given to commence proceedings provided the proposed plaintiffs provide security for costs in the sum of $73,500 and give an undertaking to pay costs of the proposed first and second defendants on an indemnity basis if the action fails.  The proposed second defendant is the liquidator.  The liquidator has on hand only about $9,500 in cash and is not aware of any easily realisable debts owing to Newage Metals or any other significant assets which may be called in to finance the litigation. 
          Newage Metals was part of a group comprising 4 companies.  All are now in liquidation.  Newage Corporation NL was the holding company for the group.  It held shares in the other companies.  Mr Chandler, amongst others, held shares in Newage Corporation.  Newage Industries Pty Ltd was to mine and sell dolomite, the exploitation of a deposit of which was the principal business of the group.  Newage Metals held the mining tenements and mining equipment.  Moreton Finance Pty Ltd was a finance company the purpose of which was to raise funds for the venture. 
          In July 1993, at which time Mr Chandler was a substantial creditor of Moreton Finance, Moreton Finance obtained a mortgage over Newage Metals' mining tenements and a charge both of which were duly registered.  According to Mr Chandler in March 1994 he was told that Moreton Finance needed to borrow $105,000 and shortly after, that sum was borrowed from one Sylvia Joan Meadows.  Mr Chandler and two directors, Curtain and Hollands, executed guarantees as did Newage Metals and Newage Corporation.  Moreton Finance gave a charge in favour of Ms Meadows and Newage Metals also gave fixed and floating charges in favour of Ms Meadows.  On 23 June 1994, Mr Chandler claims that he was told by Mr Curtain and Mr Moyle who was a finance broker acting on behalf of Ms Meadows that $135,250 owing pursuant to the loan by Morton Finance had been demanded and that Ms Meadows intended to go into possession and sell the assets if payment was not made.  Mr Chandler says that because he had outlayed more than $1M in shares and loans in the Newage Group he decided to pay that sum to Ms Meadows.  He mortgaged his home as security for a loan from a finance company.  On 24 June 1994 he wrote a cheque for the sum demanded to be deposited in the trust account of Ms Meadows' solicitor. 
          Later, in December 1994, Mr Moyle and Mr Hollands approached him again and told him that an outstanding broker's fee had to be paid.  Because he had already paid the amount previously demanded he refused to pay it.  An incident which may correspond to this is deposed to it the affidavit of Robert Owen Fox who was also a director of companies in the Newage Group.  He deposed that in December 1994 he was told by Mr Hollands and Mr Moyle that Moreton Finance had defaulted in repaying a loan to Ms Meadows and that Mr Chandler as one of the guarantors had repaid the loan.  However because the repayment was one day late a further $10,000 interest was outstanding and that Ms Meadows would foreclose if it was not paid.  He was also told that $5,000 was owing to Steadvale Pty Ltd which he believed was associated with Mr Moyle.  He felt he was being put under pressure and, being concerned that the assets of the group might be lost, he sought assistance from Mr Hefford, another investor in the Newage Group to pay the $15,000 which was paid on 19 December 1994 to Ms Meadows solicitor's trust account in full satisfaction of all moneys owing to her and Steadvale Pty Ltd.  When that was done Mr Fox obtained the following documents:-

(a)the original loan agreement dated 24 March 1994 between Moreton Finance as borrower and Meadows as lender;

(b)the original guarantee and indemnity dated 24 March 1994 from Chandler as guarantor to Meadows;

(c)the original guarantee and indemnity dated 24 March 1994 from Newage Metals as guarantor to Meadows;

(d)the original guarantee and indemnity dated 24 March 1994 from Newage Corporation as guarantor to Meadows;

(e)the original guarantee and indemnity dated 24 March 1994 from Hollands as guarantor to Meadows;

(f)the original guarantee and indemnity dated 24 March 1994 from Curtain as guarantor to Meadows;

(g)the debenture charge dated 24 March 1994 granted by Newage Metals to Meadows;

(h)the debenture charge dated 24 March 1994 granted by Moreton Finance to Meadows;

(i)the original report and valuation by Peter Brett; and

(j)two executed Form 312 releases of charge with respect to the two charges held by Ms Meadows over Newage Metals and Moreton Finance.

All the documents referred to except those referred to in (i) and (j) above were subsequently forwarded to Mr Chandler.  Mr Fox deposes that he did not at anytime request Mr Meadows to release the debenture charges granted to her by Moreton Finance or Newage Metals and, indeed, he believed the agreement was that those charges were to be assigned to him to be held by him for the benefit of Mr Chandler in respect of the moneys he paid to Ms Meadows in June 1994 in satisfaction of the loan then due by Moreton Finance to Ms Meadows and also in respect of the moneys paid by him and Mr Hefford in December 1994.  
          Mr Chandler's claim depends on the proposition that he is entitled to the benefit of the securities by subrogation.  Reliance was placed on s.4(1) of the Mercantile Act 1867 for the proposition that, being a surety for the debt of Newage Metals to Ms Meadows  he was entitled to have assigned to him the securities held by the creditor whether the "security shall or shall not be deemed at law to have been satisfied by payment of the debt".  The right to appoint receivers, upon the exercise of which the claim of Mr Worrell and Mr Khatri depends relies on the correctness of that proposition and the powers in the securities.  To the extent that the charge granted by Newage Metals to Ms Meadows is the security involved there were five guarantors including Mr Chandler.  Section 4(3) of the Mercantile Act provides that no co-surety shall be entitled to recover from any other co-surety more than a just proportion as to which, as between the parties, the other co-surety is entitled.  Apart from these issues to which I shall return later Mr Sheahan for the respondents raised a number of other issues.  One was that the grant of leave will seriously disrupt the orderly winding up of Newage Metals.  In re Gordon Grant & Grant Pty Ltd (1982) 1 ACLC 196 Master Lee in dealing with a predecessor of s.471B set out a number of propositions. The applicant in that case was a prospective plaintiff in an action for a work related injury. The reality therefore was that if he was successful the statutory insurer would meet the company's liability. That is not the case here. Nonetheless the principles set out by Master Lee provide guidance. For example the claim in the proceedings in respect of which leave is sought here is one which must proceed to judgment. It cannot be adequately dealt with by way of proof of debt. There is in one sense a prejudice to creditors in that their entitlements in the liquidation will be diminished if Mr Chandler's claim succeeds. However that will be because he will be in a preferred category of creditors if he succeeds, not because it will involve enlarging the number of creditors in the same class.
          Master Lee said that mere delay in seeking leave will not prevent the Court granting leave to proceed.  He said that leave should not be withheld as a punitive measure.  There was undoubtedly delay in the present case.  Notwithstanding the payment by Mr Chandler as guarantor in June 1994 he did nothing to enforce the securities upon which he relies until 29 August 1996 under the charges from Newage Metals to Moreton Finance and from Moreton Finance to Ms Meadows and until 28 October 1996 in respect of the charge from Newage Metals to Ms Meadows.  By the time of the first action to appoint receivers the liquidation had been underway for almost 20 months.  The only explanation which was given was that he did not have the benefit of legal advice at the time of the payment and was unaware that sureties who discharge liabilities can obtain assignments of securities held by a creditor.  Because of the unsophisticated way in which the transaction with respect to payment appears to have proceeded that explanation may have some substance in fact.  However Mr Chandler cannot be held entirely blameless for his failure to seek appropriate advice.  Subject to that there is some explanation for the delay.  Nonetheless it was submitted by Mr Sheahan that delay was a relevant factor in this case because Newage Metals continued to trade after Mr Chandler's rights accrued and a number of creditors extended further credit after that time.  It was submitted that their position has suffered as a result of Mr Chandler failing to promptly enforce his rights by appointing a receiver. 
          Turning to another submission by Mr Sheahan, it is desirable to be cautious about expressing provisional views about the merits, especially in relation to factual issues in an application of this kind but one of the submissions about the difficulties associated with the plaintiff's claims calls for some comment.  It was submitted that the Forms 312 bear the date 23 June 1996 whereas payment into Ms Meadows solicitor's trust account did not occur until 28 June 1994.  Mr Chandler's evidence is that he wrote the cheque on 24 June 1996 after demands were made on him verbally on 23 June 1994.  Further according to Mr Fox penalty interest was demanded of him on the basis that payment had been one day late.  This subsequent demand was not made until December 1994.  It was made both upon Mr Chandler and on Mr Fox.  In all the circumstances one would have to be suspicious about the bona fides of the demand and more importantly, as Ms Meadows had apparently executed releases about six months before, questions about her capacity to exercise powers under the charges in December 1994 are certainly not dispelled by what Mr Sheahan described as the "curious deed" of 19 December 1994 which specifically refers to a debt of $24,000 owed by Newage Metals to Steadvale and contains a confidentiality clause.  The purpose of making those comments is to bring into focus a submission that there are difficulties about Mr Chandler's claim because more than one person may be a claimant to assignment of the charges.  In the context of the facts I would not be prepared to accept that as fatal to Mr Chandler's claim proceeding if everything else was in favour of it. 
          Another matter raised by Mr Sheahan as a difficulty was the absence of an express assignment of the charges.  He submitted that s.4 of the Mercantile Act did not of itself assign the securities.  He relied on Batchelor v. Lawrence (1861) 9 CB (NS) 543, 556 in this regard. However it is not clear to me that the case is an unequivocal statement of the need for express assignment and there is in any event more recent authority to the contrary (e.g. in re M'Myn; Lightbown v. M'Myn (1886) 33 Ch. D 575; McColl's Wholesale Pty Ltd v. State Bank of New South Wales (1984) 3 NSWLR 365). In the latter case Powell J. said that a similar New South Wales statutory provision operated as an implied assignment of securities. If Mr Sheahan wishes to pursue a distinction between simple cases and complex cases in regard to the operation of the Act or to submit that these transactions fall into a category where express assignment is necessary, that is a matter for argument at the trial in view of the lack of authoritative support for the proposition on the material before me.
          He also submitted that it was likely that each of the two charges upon which Mr Chandler relied is void or voidable.  He submitted that the transactions appeared to be uncommercial and committed when the company was insolvent.  Further in respect of the charge created by Newage Metals in favour of Moreton Finance it was submitted that the liquidator had not been able to confirm that moneys were in fact owed by Newage Metals to Moreton Finance apart from a relatively small sum.  It is not possible to resolve these issues in these proceedings as in my view they will depend on findings of fact on evidence which will probably be more extensive than is before me. 
The various considerations bearing on the question whether leave should be given under s.471B have been discussed above. Mr Chandler asserts the right to appoint receivers and has acted in pursuance of that assertion. The correctness or otherwise of his assertion cannot be resolved authoritatively in these proceedings. There are substantial factual issues which are not capable of resolution on the material before me which will have a bearing on the outcome. There is in my view a sufficiently arguable case to militate against refusing leave on the basis that the case must fail. It is obvious that there has been delay. There is an explanation but the delay is to a significant degree of Mr Chandler's own making because he did not seek appropriate advice. However he has now purported to exercise the power to appoint receivers and the question of validity of the appointments cannot be ignored. It is not a case where that issue will simply go away if leave is refused in these proceedings. (See S.A. Asset Management Corp. v. Sheahan (1995) 13 ACLC 1138, 1143-4). Factors relevant to the interests of other creditors have been discussed above. While those matters must be taken into account they are not in my view critical in the final equation in the circumstances of this case. Subject to what I am about to say about security for costs or other section for the liquidator I am of the view that leave should be given.
          The action in respect of which leave is sought names Mr Chandler as the first plaintiff and the receivers as second plaintiffs.  It names Newage Metals as first defendant, the liquidator of Newage Metals as the second defendant and Moreton Finance as the third defendant.  I have previously referred to the safeguards sought by the liquidator in respect of the first and second defendant's costs.  It is deposed that at present the liquidator believes he has a duty in the interests of unsecured creditors to defend the proceedings while remaining receptive to any further information Mr Chandler or anyone else may have.  Reference is made in the material to correspondence entered into with a view to clarifying the question of the possibility of Mr Chandler obtaining relief from the setting aside of the charges under s.588FG and some of the issues discussed earlier in these reasons. 
          An order for leave to proceed can be subjected to conditions.  I am satisfied there are questions in these proceedings which as the matter stands justify the liquidator's stance that it is his duty to resist the relief sought in the action.  This is not and is not intended to be an expression of any view about possible outcomes.  It is merely a recognition of the fact that the matter is not necessarily straightforward.  It has previously been mentioned that the liquidator has only about $9,500 in cash available.  It is apprehended that without provision being made for the liquidator's costs he will be unable to defend the proceedings. 
          Mr Sheahan sought an order similar to that made in J.J. Lennard Properties Pty Ltd v. Lennard (WA) Pty Ltd (1987) 5ACLC 565 in which the applicant was ordered to give an undertaking to pay the defendant's costs of the application and the proposed action irrespective of the result of the action. That was a case where discretionary considerations played a much greater part that seems likely in the present case. Once the facts are established in the present case and any disputed propositions of law are resolved the application of principles of law rather than exercises of discretion will resolve the matter. Given the estimate by the respondent's solicitor of the costs of a trial, payment of those costs and his own cost would represent a Pyrrhic victory to Mr Chandler even if he was successful. It may be that the estimate of costs is, as the applicant's solicitor suggests, unduly pessimistic.
          In my view the case is one which lends itself to management measures designed to confine costs and at the end of the day the critical factual issues are relatively confined.  In deciding whether and what order to made in respect of leave to proceed I have had regard to the fact that the imposition of conditions is discretionary and while it is not necessary to do so in view of that I have had regard to the usual principles applicable to applications for security for costs.  I recognise that the first plaintiff is a natural person but have come to the conclusion that in the event of the liquidator being successful there should be sufficient assurance that he will get his costs.  In view of the apparent ability on the part of Mr Chandler to raise moneys to perform certain requirements of the lease I do not get the impression from the material that the imposition of a condition that security be provided would stifle his action.  However I am not prepared to give uncapped resources to the liquidator which the kind of order in Lennard would provide, to resist the claim.  I also have regard to the fact that the liquidator has the possibility at his disposal of seeking assistance from unsecured creditors to resist the claim if their wish coincides with his justifiable perception of his duty. 
          I propose to make an order which imposes a condition similar to an ordinary security for costs provision.  I give leave to Maxwell Wreford Chandler and Ivor Worrell and Rajendra Khatri, nunc pro tunc, to commence and continue proceedings being Supreme Court action No. 9142 of 1996 against Newage Metals Pty Ltd (ACN 010 853 031) (in liquidation) (Receivers and Managers appointed) on condition that within 28 days of this order the first plaintiff Maxwell Wreford Chandler provide security for costs of the first and second defendants in a form approved by the Registrar in the sum of $25,000.  I order that the costs of the application be costs in the cause.