Re S&D International Pty Ltd (in liq) (No 7)
[2012] VSC 551
•15 November 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
No. 7807 of 2008
IN THE MATTER OF S & D INTERNATIONAL PTY LTD
(IN LIQUIDATION) (ACN 075 030 447)
| GEOFFREY NIELS HANDBERG (IN HIS CAPACITY AS LIQUIDATOR OF S & D INTERNATIONAL PTY LTD (IN LIQUIDATION) (ACN 075 030 447) | First Plaintiff |
| S & D INTERNATIONAL PTY LTD (IN LIQUIDATION) (ACN 075 030 447) | Second Plaintiff |
| v | |
| MIG PROPERTY SERVICES PTY LTD (ACN 006 657 174) & ORS | Defendant |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 19 September and 10 October 2012 | |
DATE OF JUDGMENT: | 15 November 2012 | |
CASE MAY BE CITED AS: | Re S&D International Pty Ltd (in liquidation) (No 7) | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 551 | |
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CORPORATIONS – Creditors’ voluntary winding up – Application under s 511 for directions that the liquidator would be justified in entering into terms of settlement with the defendant – Whether conduct of liquidator enlivened Court’s jurisdiction to give a direction – Purposes of direction under s 511 – Application under s 477(2A) for Court approval of the compromise of a debt due by the defendant to the plaintiff under the terms of settlement – Application under s 477(2B) for Court approval of the liquidator entering into the terms of settlement under which the defendant was not obliged to perform obligations of payment for more than 3 months after the agreement was made – ss 477(2A), 477(2B), 479(3) and s 511 of the Corporations Act 2001.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | M J Galvin | Mills Oakley |
| For the Defendants | P Tree SC with D Triaca | Mason Black Lawyers |
TABLE OF CONTENTS
Introduction............................................................................................................................... 2
The history of the proceedings.................................................................................................... 2
Settlement agreement.................................................................................................................. 9
Interests of the creditors.............................................................................................................. 9
Concerns about future claims................................................................................................... 10
Other litigation involving Mr Malhotra and S&D................................................................... 13
Update on the state of the liquidation........................................................................................ 14
Previous application by Mr Handberg on a settlement in this proceeding............................... 14
Approving a compromise and giving directions....................................................................... 17
Should the compromise of the debt be approved?...................................................................... 17
Brief history of Court approval of compromises of debt............................................................. 20
Should Court approval be given under s 477(2B)?.................................................................. 23
Should a directions be given under s 511?............................................................................... 24
Conclusion as to directions....................................................................................................... 26
Orders....................................................................................................................................... 26
HIS HONOUR:
Introduction
The liquidator of S&D International Pty Ltd (S&D), Mr Handberg, has entered into a deed of compromise with MIG Property Services Pty Ltd (MIG) resolving all outstanding issues in this proceeding between them, including the appeal made by MIG against the orders I made against it in favour of the liquidator in this proceeding whereby MIG was ordered to account to S&D for proceeds from the sale of properties of S&D over which MIG held a first mortgage.
It is a condition of the compromise that the liquidator seeks directions that he would be justified in entering into the settlement. The liquidator seeks such a direction. The settlement also involves the compromise of a judgment debt in excess of $100,000 and involves the payment of moneys some 120 days after the execution of the agreement. Accordingly, as required by ss 477(2A) and (2B) of the Corporations Act 2001 (the Act), the liquidator seeks the Courts approval of the compromise of the debt and the entry into of an agreement that may not be performed within three months of it was entered into.
Thus the issues for consideration are:
(a) is the power to give the directions sought enlivened?
(b) if so, is the liquidator justified in entering into the deed of settlement?
(b) should the Court approve the compromise of the debt?
(c) should the Court approve the liquidator entering into the terms of settlement where obligations under the agreement may not be performed within three months of it being entered into?
The history of the proceedings
The proceedings have a long history and involve several judgments during their passage through the Court. In Re S&D International Pty Ltd[1] I set out the background to the dispute and the issues to be resolved. For convenience, I will repeat and update those issues.
[1][2009] VSC 225.
Each of the plaintiffs and the defendants to the proceeding in Re S&D International Pty Ltd (the principal proceeding) claimed an interest over assets held on trust for the S&D International Unit Trust. The Trust assets included a property at 580 Barkly Street, Footscray which has now been sold by the first mortgagee, MIG (the first defendant), and another property at 45 Boronia Drive, Hillside which was in the possession of the receiver, Mr Vartelas, the second defendant, who was appointed by the registered first mortgagee and mortgage debenture holder MIG and has now been sold by the liquidator.
Previously, the trustee of the unit trust, S&D (the second plaintiff), carried on an Indian wholesale grocery business at the Footscray property known as Bharat Traders International. The business was initially established as a partnership in 1991 by Dinesh Malhotra, the third defendant, his brother Vinod Malhotra, and Markandey Tiwari. In 1992, Markandey Tiwari divorced his wife Sheela Tiwari who then married Dinesh Malhotra. Also in 1992, Markandey and Vinod left the partnership and Dinesh Malhotra was registered as sole proprietor of the business name.
The business was thereafter built up and conducted by Sheela Tiwari and Dinesh Malhotra. In 1996, the unit trust was established and S&D appointed the trustee. S&D took over the wholesale grocery business and acquired the Footscray property in 1996. Subsequently, in 2000, S&D as trustee purchased the Hillside property. S&D mortgaged these properties to the Commonwealth Bank of Australia (CBA) along with a mortgage debenture over the assets and undertaking of S&D. These securities have been transferred by CBA and are now held by MIG.
The two units in the unit trust were held by Sheela Tiwari. Dinesh Malhotra resigned as a director in 1999; although he claimed that at all times he was the beneficial owner of half the units in the trust and half the shares in the trust held by Sheela Tiwari. In April 2002, for reasons it is not necessary to canvass, Dinesh Malhotra was locked out of the Footscray property by Sheela Tiwari, where they also resided. He soon thereafter lodged a caveat over both properties claiming to have an estate in fee simple in each property.
After Dinesh was excluded from the Footscray property, Sheela Tiwari and her son Pradeep Tiwari caused S&D to grant an unregistered mortgage to the ANZ Bank over the Footscray property and a registered mortgage debenture over the assets and undertaking of S&D in exchange for a business loan and a home loan which were used by Sheela Tiwari to buy a home at Point Cook. The ANZ Bank lodged a caveat giving notice of its unregistered second mortgage over the Footscray property.
In August 2002, Dinesh Malhotra instituted legal proceedings in the Supreme Court of Victoria to establish his half interest in the properties and the business. Thus began a long series of court cases which have led to the current proceedings. Sufficient to say, Dinesh Malhotra succeeded in his initial proceedings in establishing that he was beneficially entitled to a half interest in the unit trust and its assets.
Sheela Tiwari retained the firm of Velos and Davis to act for her and S&D in the proceedings instituted by Dinesh. She also caused S&D to give an equitable charge over the Footscray property and the Hillside property to secure legal fees incurred on her behalf and S&D’s behalf in the Supreme Court proceedings. Mr Bill Velos of the firm of Velos and Davis is the fourth defendant. On 6 August 2007, Mr Velos and his partner Peter Davis obtained judgment against Sheela Tiwari for $190,708.52 plus costs in respect of fees and charges incurred in acting for her and S&D in the Supreme Court proceedings. This debt has not been paid and Mr Velos and Peter Davis claim to be entitled to the moneys in Court as a matter of priority by virtue of the equitable charges.
Sheela Tiwari appealed the Supreme Court decision under which Dinesh Malhotra succeeded in establishing that he was beneficially entitled to a half interest in the unit trust and its assets. While the matter was pending in the Court of Appeal, Sheela Tiwari and Dinesh Malhotra agreed to appoint an administrator to run the business until their dispute could be resolved. They appointed Stirling Horne and Peter Vince, the sixth and seventh defendants, as administrators. Despite the business being previously profitable Dinesh Malhotra alleges that Messrs Horne and Vince, with the connivance of Sheela Tiwari and her son Pradeep Tiwari, recommended that the trustee (S&D) be wound up. At that stage, S&D owed CBA approximately $240,000 as a secured creditor. In June 2005, the creditors of S&D resolved to wind up the company and appointed Messrs Horne and Vince as liquidators.
Dinesh Malhotra then instituted further proceedings in the Supreme Court to terminate the winding up and to remove Messrs Horne and Vince as liquidators. At first instance, he failed to have the winding up terminated and Messrs Horne and Vince removed as liquidators. He successfully appealed the decision of the Court not to remove Messrs Horne and Vince. In June 2007, Mr Handberg, the first plaintiff, was appointed as the liquidator of S&D in their stead. In November 2004, Messrs Horne and Vince lodged a caveat against the properties, notifying their claim to a lien over the assets for their unpaid fees and expenses.
Previously, Messrs Horne and Vince had sought to have Dinesh Malhotra’s caveats removed. In July 2006, the Supreme Court refused their application.
As mentioned above, the CBA held securities over S & D and the properties and at about the time S & D was placed in administration, the CBA called up its loan owed by S & D. In June 2005, Dinesh Malhotra was able to arrange for the CBA to be paid out by Colonel Naresh Malhotra, who took over the securities but assigned them to MIG on 11 September 2006.
On 25 October 2006, Mr Vartelas was appointed receiver and manager of the assets and undertaking of S&D under the mortgage debenture held by MIG. In August 2007, Mr Vartelas was appointed the agent of MIG and entered into possession of the two properties. At that time, the principal debt secured by the mortgages was $242,540.38.
On or about 19 September 2007, MIG (through its agent Mr Vartelas) sold the Footscray property at public auction for the total sum of $1,360,000 to Tiwari Enterprises Pty Ltd (a company associated with Sheela Tiwari). Settlement of the sale occurred on 18 October 2007. On 19 October 2007, the estate agents accounted to MIG for the deposit. At settlement, withdrawals were provided for the Dinesh Malhotra caveat, the ANZ Bank caveat and the Horne and Vince caveat. Mr Dinesh Malhotra agreed with MIG to provide his withdrawal on the basis that MIG would pay the surplus (if any) into Court. MIG did not pay the surplus into Court, nor had it done so by the time this proceeding commenced. At or after settlement, MIG did not account to the mortgagor or the subsequent interest holders for the moneys it was retaining in satisfaction of its secured debt. It did not treat its mortgage and other securities as satisfied in full. On the contrary, it retained the proceeds of sale and failed to calculate what it was owed.
In September 2008, on the application of the liquidator of S&D, MIG and Mr Vartelas were ordered to pay the balance of the moneys which they still retained from the sale of the Footscray property and the receivership of S&D into Court.
The proceedings in this matter initially sought to settle the entitlement of several parties to the moneys paid into Court, their entitlement to the Hillside property, and other issues related to the conduct of MIG as mortgagee and Mr Vartelas as agent for the mortgagee and receiver of S&D.
There were two proceedings before the Court. In the main proceeding, the plaintiffs were Mr Handberg, the current liquidator of S&D, and S&D itself. The liquidator sought an order that he has first priority to the funds in Court on the basis he has a lien over them arising out of his efforts to preserve them from misuse by MIG and Mr Vartelas. He also sought orders resolving the entitlements of the other defendants. The liquidator and S&D also sought orders against MIG and Mr Vartelas challenging their conduct as mortgagee and as agent in possession and as receiver and manager of S&D respectively.
MIG and Mr Vartelas denied any improper conduct as mortgagee, as agent in possession or as receiver of S&D, and claimed that MIG and Mr Vartelas were entitled to the moneys in Court to meet its mortgage. MIG and Mr Vartelas also claimed that the surplus, after being delivered back to MIG and Mr Vartelas , if any, should be dealt with according to the Court’s directions.
Dinesh Malhotra claimed that he was entitled to a half interest in the moneys in Court as he was held to be the beneficial owner of a half interest in the Footscray property in the Supreme Court proceedings.
The fourth defendant was Mr Bill Velos. As mentioned above, his firm Velos and Davis acted for Sheela Tiwari and S&D in the proceedings taken by Dinesh Malhotra to establish his half interest in the trust and the trust assets. To secure their legal fees, S&D (then under the control of Sheela Tiwari and her son Pradeep Tiwari) gave equitable charges in favour of Velos and Davis over both properties. Mr Velos was owed some $198,000 in fees. He had a judgment debt for the sum. He claimed that he had priority next after MIG to the moneys in Court.
As mentioned above, the fifth defendant was Pradeep Tiwari, the son of Sheela Tiwari. In July of 2008, the ANZ Bank assigned its unregistered second mortgage and mortgage debenture it held over the assets and the undertaking of S&D to Pradeep Tiwari. Mr Tiwari claimed that he had priority next after MIG to the moneys in Court.
As mentioned above, the sixth and seventh defendants were Messrs Horne and Vince. In November 2004, they lodged caveats over the Footscray and Hillside properties claiming an equitable interest as lien holders for their costs. They claimed that they were entitled to their costs in priority to any claim that the liquidator may have to his costs.
The second proceeding was commenced in May 2008 by Pradeep Tiwari against MIG and Mr Vartelas, seeking a declaration that, by operation of s 77(3) of the Transfer of Land Act 1958, the defendants were bound to pay to the ANZ Bank such moneys as were payable for moneys owing under or in respect of the second ranking ANZ mortgage from the sale of the Footscray property.[2] He also sought an order that the defendants pay out the ANZ mortgage. Pradeep Tiwari was a guarantor of the ANZ Bank loan to S&D that was used to buy the house for his mother. Soon after commencing the proceeding, Pradeep Tiwari paid out the ANZ Bank and took an assignment of its securities. Pradeep Tiwari claimed he was entitled to the moneys in Court next after MIG.
[2]Plaintiff, ‘Writ of summons’, Tiwari v MIG Property Services Pty Ltd, S CI 6325/2008, 23 May 2008.
On 9 June 2009, the Court delivered judgment in the principal proceeding. Insofar as MIG is concerned, in substance the Court held that MIG as mortgagee of the Footscray property ought to have accounted to S&D for the balance of the proceeds from the sale after the satisfaction of the moneys owed to it. The Court also ruled on some specific items of expenditure that MIG sought to recover under the mortgage.
On 19 June 2009, the Court ordered that there should be an inquiry into the amount and sums that should have been included in the account of MIG in its capacity as controller in possession of the property of S&D and should have rendered to the liquidator on settlement of the sale of the Footscray property.
Subsequently on 3 July 2009, MIG appealed the orders that were made against it in the principal proceeding.
On 5 October 2009, the Court made orders pursuant to an agreement between the plaintiffs and MIG that MIG pay to the liquidator $164,944 with interest of $35,139.52 in satisfaction of the order of 19 June 2009, on the basis that the settlement would not prejudice MIG’s appeal to the Court of Appeal. Under the order, the agreed sums were to be paid by the liquidator into Court to be held with the other moneys paid into Court from the sale of the Footscray property. MIG failed to make the agreed payments to the liquidator.
On 23 November 2011, following MIG’s failure to pay the plaintiffs the amounts ordered to be paid to the liquidator by the Court’s order of 5 October 2009, the plaintiffs commenced winding up proceedings against MIG.
On 29 February 2012, Efthim AsJ made orders that MIG be wound up in insolvency and appointed a liquidator to MIG in the winding up proceeding.
On 23 March 2012, I set aside the orders made by Efthim AsJ on 29 February 2012 and ordered that the application to wind up MIG be adjourned pending the hearing and determination of the appeal to the Court of Appeal by MIG against the orders of 19 June 2009 in the principal proceeding.
Settlement agreement
On 11 July 2012, MIG, S&D and the liquidator attended a mediation in the appeal proceedings. During the course of the mediation MIG, S&D, and Mr Handberg agreed to settle the principal proceeding, the appeal proceedings and the winding up proceeding, subject to Mr Handberg obtaining orders pursuant to s 511, on the terms and conditions set out in the deed of settlement.
The deed of settlement provides that the rights and obligations set out in the deed are strictly conditional upon the liquidator obtaining directions from the Court pursuant to s 511 of the Act that he is justified or is otherwise acting reasonably in settling the proceedings on the terms set out in the deed.
Interests of the creditors
The liquidator says that the amounts owing to creditors of S&D total $1,818,474.98. The liquidator says that he believes that the deed of settlement is in the best interests of the creditors of S&D. He says that belief is formed on the basis that:
(a) There are, as with all litigation, inherent risks regarding the defence of the appeal proceedings.
(b) The costs associated with prosecuting the appeal proceedings from now until the outcome of the hearing will be substantial. He says that he is informed by his legal representatives and verily believe that those costs are likely to be between $25,000 and $35,000.
(c) The outcome of successfully defending the appeal proceedings will lead to the further costs associated with winding up MIG. The liquidator says that having conducted public examinations of MIG’s sole director and made extensive enquiries into MIG’s financial affairs, he believes that there is a real risk that no funds will be recovered from the winding up of MIG and subsequent action.
I was informed by counsel for Mr Handberg that MIG has no assets, and believe this to be the case. Mr Lindberg was informed by Mr Mond (the sole director of MIG) that the moneys recovered from the mortgage have been expatriated to Israel and have been used to build a home for Mr and Mrs Mond in Israel.
For reasons that I discuss below, Mr Handberg has also given evidence that, if he settles with MIG he is concerned he will be challenged by other parties and creditors (particularly Mr Malhotra), unless he has the Court’s direction that he is justified in doing so.
Concerns about future claims
Mr Handberg says that he is concerned that the deed of settlement is likely to be the subject of future claims against him by other parties and/or creditors. He says that this concern is based on the litigious nature of the parties involved with the principal proceeding and throughout the protracted liquidation of S&D generally. He says that it is primarily for this reason that he insisted upon approval pursuant to s 511 being a condition precedent of the deed of settlement.
Mr Handberg says that in or around September 2008, following Dinesh Malhotra’s application to remove Horne & Vince as liquidators of S&D (referred to above), Mr Malhotra issued a Supreme Court proceeding (the Dinesh proceeding)[3] against Messrs Horne and Vince alleging breaches of various duties in the course of their role as administrators and liquidators. Mr Handberg was the third defendant in the Dinesh proceeding, although initially no claim was made against him. On or around 31 October 2011, Mr Malhotra filed an amended statement of claim in the Dinesh proceeding.
[3]Malhotra v Vince, S CI 4624/2008 (ultimately, dismissed without trial by consent).
On or around 30 November 2011, by their further amended defence, Messrs Horne and Vince amended their defence to the Dinesh proceeding by pleading that they denied the allegations of loss and damage made by Mr Malhotra on the basis that, inter alia, Mr Handberg was a ‘concurrent wrongdoer’ within the meaning of Part IVAA of the Wrongs Act 1958 (Vic).
On or around 16 April 2012, Messrs Horne and Vince and Mr Malhotra entered terms of settlement in order to compromise the Dinesh proceeding as between one another, under which Messrs Horne and Vince agreed to pay Mr Malhotra $220,000.
On 18 April 2012, at a directions hearing before this Court, Mr Malhotra sought orders for the filing and service of an application for leave to file a further amended statement of claim in the Dinesh proceeding. The Court ordered that he do so on or before 17 May 2012.
On 18 May 2012, Mr Handberg’s solicitors, Mills Oakley Lawyers, wrote to Mr Malhotra’s solicitors, RRR Lawyers, noting that no application had been filed by Mr Malhotra to amend his claim and that Mr Handberg therefore assumed he did not intend to amend his claim.
On 22 May 2012, RRR Lawyers wrote to Mills Oakley Lawyers stating that they required various information in order to prepare and file Mr Malhotra’s application to amend his claim in the Dinesh proceeding.
On 25 May 2012, Mills Oakley Lawyers filed and served a summons in the Dinesh proceeding seeking orders that the proceeding be dismissed and that Mr Malhotra pay Mr Handberg’s costs.
On 28 May 2012, Mr Malhotra telephoned Mills Oakley Lawyers and spoke with Ariel Borland. Mr Handberg says that he was informed by Ms Borland and verily believes that Mr Malhotra referred to the summons that had been filed on Mr Handberg’s behalf and that Mr Malhotra wished for the Dinesh proceeding to be dismissed with no order as to costs.
On 28 May 2012, Mills Oakley Lawyers sent Mr Malhotra an email referring to his telephone conversation with Ms Borland and attaching a deed poll of acknowledgment, which provided for the release and discharge of Mr Handberg from all claims Mr Malhotra has or may have in respect of the subject matter of the Dinesh proceedings. Mr Handberg says that he requested that Mr Malhotra execute the deed poll in order for Mr Handberg to agree to orders dismissing the Dinesh proceeding with no orders as to costs.
On 29 May 2012, RRR Lawyers telephoned Mills Oakley Lawyers and spoke with Timothy Dowling. Mr Handberg says that he is informed by Mr Dowling and verily believes that Mr Malhotra attended this telephone conversation and that RRR Lawyers informed Mr Dowling that:
(a) Mr Malhotra was concerned about the release contained in the proposed deed poll;
(b) no claims had been made against Mr Handberg in the Dinesh proceeding thus far and that was primarily because the loss and damage had not “crystallised”;
(c) Mr Malhotra was concerned about the costs of keeping the Dinesh proceeding on foot; and
(d) despite the possibility of being estopped from bringing any future claims against Mr Handberg, he would be prepared to dismiss the Dinesh proceeding and issue fresh proceedings if he decided to sue Mr Handberg subsequently.
On 30 May 2012, Mr Handberg says that he and Mr Malhotra agreed to orders dismissing the Dinesh proceeding with no order as to costs. Mr Handberg says that Mr Malhotra did not execute the deed poll, and that Mr Handberg believes that Mr Malhotra’s refusal to do so was on the basis that he intends to consider making claims against Mr Handberg at a later date in respect of his role as liquidator of S&D.
Other litigation involving Mr Malhotra and S&D
The liquidator refers to a string of other cases that have arisen out of Mr Malhotra falling out with Mrs Tiwari over S&D and their other financial dealings. It is sufficient merely to list them:
(a) Malhotra v Tiwari [2005] VSC 25 (Balmford J), concerning Mr Malhotra’s claims against Mrs Tiwari with respect to the Indian grocery business and land;
(b) Malhotra v Tiwari [2005] VSC 260 (Cummins J), concerning the extension of Mareva protection sought by Mr Malhotra;
(c) Malhotra v Tiwari [2005] VSC 496 (Mandie J), concerning Mr Malhotra’s allegations of misconduct by Mr Handberg’s predecessors, Messrs Horne and Vince;
(d) S&D v Malhotra [2006] VSC 280 (Gillard J), relating to a dispute between S&D and Mr Malhotra as to the validity of a caveat lodged by Mr Malhotra on the title to S&D’s land at Footscray and Hillside;
(e) Malhotra v Tiwari [2007] VSCA 101 (Court of Appeal: Chernov, Nettle and Redlich JJA), being an appeal by Mr Malhotra from the judgment of Mandie J (which resulted in the removal of Messrs Horne and Vince as liquidators and, eventually, their replacement by Mr Handberg);
(f) Handberg v MIG Property Services [2009] VSC 225 (Robson J), in which I dealt with the liquidator’s claims against MIG and its agent, Mr Vartelas, with respect to the proceeds of sale of the Footscray property;
(g) Re S&D International Pty Ltd; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 595 (Robson J), in which I dealt with various disparate and competing claims to the surplus proceeds of sale of the Footscray property;
(h) Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 (Warren CJ), in which the Chief Justice approved a compromise of the liquidator’s claims against Mr Vartelas (including an appeal by Mr Vartelas from the orders against him); and
(i) MIG Property Services Pty Ltd v Handberg [2012] VSC 122 (Robson J), in which I allowed an appeal by MIG from an order of Efthim AsJ winding up MIG in insolvency.
The sheer number of these proceeding add weight to the liquidator’s concerns that his action in settling with MIG may attract further litigation.
Update on the state of the liquidation
Mr Handberg has provided an update of the liquidation of S&D. He says that the creditors of S&D are yet to be paid. Mr Handberg says that a significant obstacle to the progression of that process has been the conclusion of the appeal proceedings. He says that there are presently funds in Court in which a number of parties have competing interests and which he believes may encourage criticism of his decision to settle with MIG.
As at 21 June 2012, Mr Handberg says that he had received a total of $585,550.88 and had made payments of $539,343.79 throughout the liquidation of S&D. As at 5 October 2012, Mr Handberg says that the total unpaid fees of the liquidation were $357,832.47 (excluding GST).
Mr Handberg says that he is informed by Mills Oakley Lawyers and believes that the total unpaid legal costs in respect of the liquidation of S&D are approximately $732,503.20.
Previous application by Mr Handberg on a settlement in this proceeding
In the principal proceedings, subsequent to the Court’s orders of 19 June 2009, Mr Handberg agreed with Mr Vertelas (the receiver of S&D’s property appointed by MIG) to consent orders under which Mr Vertelas would pay the liquidator $125,000 in full and final settlement of claims against him. Mr Vartelas had also appealed against the orders of 19 June 2009.
The liquidator applied for directions under s 511 of the Corporations Act 2001 that he would be justified in compromising with Mr Vartelas the outstanding issues in the principal proceedings. The application for the order for directions was decided by Warren CJ in Handberg v MIG.[4] The Chief Justice reviewed the relevant authorities dealing with giving a direction under s 511 that the liquidator would be justified in compromising litigation,[5] and concluded that when considering an application for directions Courts are “restrained from the compromise of litigation pursuant to s 511, and that such approval will not be given absent a degree of personal risk attached to a particular liquidator that could negatively affect the winding up process.”[6]
[4](2010) 79 ACSR 373.
[5]Especially Re Bauhaus Pyrmont Pty Ltd (in liq) (2007) 64 ACSR 646.
[6]Handberg v MIG (2010) 79 ACSR 373, [19] (and then going on to quote Re Addstone Pty Ltd (1997) 25 ACSR 357, [65]).
The Chief Justice cited with approval Re Ansett Australia No 3,[7] where Goldberg J held that the Court should not give directions on a decision by the liquidator that merely involved the implementation of a business or commercial decision that raised no legal issues or was not the subject of attack. His Honour said:[8]
This review of the authorities satisfies me that the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease. There must be an issue calling for the exercise of legal judgment.
[7](2002) 115 FCR 409.
[8]Re Ansett Australia No 3 (2002) 115 FCR 409, [65].
In the matter before her, the Chief Justice was satisfied that Mr Handberg had made out the grounds necessary to attract an order giving the directions. Her Honour found that that Mr Handberg was justifiably concerned that his decision to settle might be challenged by Mr Malhotra in view of the history of the litigation.
What the Chief Justice said is apposite to the present case:[9]
To turn first to the position of the plaintiffs, it is clear to me that they are engaged in a piece of multi-stage litigation involving a large number of acrimonious and competing claims. It is also pertinent that the first plaintiff is the second liquidator engaged to wind-up the company and that the actions of the original administrators of the company, Messrs Horne and Vince, were successfully challenged in a previous set of proceedings by the third defendant. They are now the sixth and seventh defendants in this matter. Two observations may be made. First, the sensitivity of the first plaintiff to further disputes arising out of each step taken to resolve the claims in issue appears well founded in light of the history of the matter. Secondly, his decision to settle with the second defendant appears to be a prudent step towards untangling this litigation, resolving the disputes out of which it arises, and progressing to his administrative duties. Only the first stage of what is expected to be a multi-stage litigation process has been completed. The conclusion of that stage has already generated two appeals. The capacity for ongoing cycles of litigation and the cost component consequent upon them appears to be a not unlikely result of the winding up of the second plaintiff. Thirdly, the first plaintiff has made it plain that his continued ability to litigate on behalf of the creditors of the second plaintiff is contingent upon receiving a settlement sum from the second defendant pursuant to the settlement deed. The execution of that deed is itself conditional upon the direction sought from this court. In truth, it is the liquidator who has included the condition in the settlement deed which has now been brought before the court, so this is, in effect a secondary consideration. He would be at liberty to enter the deed and receive the funds without the orders he seeks. However, insofar as the willingness of the liquidator to settle the claim in the circumstances pertaining to the winding up is an important precondition to receipt of these funds, it is, in circumstances of unusual personal risk, relevant to the decision before me.
Finally, I am satisfied, on the basis that the first plaintiff has not informed the court of any matter that should be known, that he has made full and fair disclosure of all relevant matters when making this application.
[9]Handberg v MIG (2010) 79 ACSR 373, [20]-[21].
Approving a compromise and giving directions
The liquidation of S&D is a voluntary creditors’ winding up. Under s 511 in Part 5.5 Division 4 of the Act (dealing with voluntary winding up generally), a liquidator may apply to the Court to exercise all or any of the powers that the Court might exercise if the company were being would up by the Court. The Court, if satisfied, that the exercise of the power will be “just and beneficial,” may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application that it thinks just.[10]
[10]Corporations Act 2001, s 511(2).
One such power that the Court might exercise if the company were being wound up by the Court is the power under s 479(3) for a liquidator to apply to the Court for directions in relation to any particular matter arising under the winding up. The right of a liquidator in a voluntary liquidator to avail him or herself of this power was examined by Warren CJ in Handberg v MIG,[11] where her Honour reviewed the history and purpose of s 511. The Chief Justice concluded that the only qualification is “one of purpose, it must be “just and beneficial”, not one of scope.” Her Honour said that “as such, it cannot be characterised as more or less limited that the powers the court is able to exercise with respect to a liquidator in a compulsory winding up.”[12]
[11](2010) 79 ACSR 373.
[12]Ibid, [12].
Should the compromise of the debt be approved?
Under s 506(1A), ss 477(2A) and (2B) (dealing respectively with the compromise of a “debt” and with agreements that may be performed after three months) apply to the liquidator of a voluntary winding up.
Relevantly, s 477(2A) provides that except with the approval of the Court a liquidator of a company must not compromise “a debt” to the company if the amount claimed by the company is more than $100,000 (the prescribed amount).
The key question is therefore: are the claims sought to be compromised properly characterised as “a debt” within the meaning of s 477(2A)?
In Re Luxtrend Pty Ltd (in liq),[13] Moynihan J examined the meaning of the term “debt” for the purposes of s 477(2A):[14]
[13][1997] 2 Qd R 86 (Luxtrend).
[14]Luxtrend [1997] 2 Qd R 86, 87-88.
The power contained in s 477(1)(d) of the Law is sufficiently widely expressed to encompass settlement of a preference claim. The question which then arises is whether such claim is a debt in terms of sub-s (2A).
Generally speaking, a debt is a chose in action founding an action for debt; Ogdens Ltd v Weinberg (1906) 95 LT 567 (HC). The characteristic of a debt is that it is a sum of money which is immediately payable or which, by reason of a present obligation, will become payable in the future: Webb v Stenton (1883) 11 QBD 518 at 526; Re ANZ Savings Bank [1972] VR 690 at 692. In the latter case it was held there was no debt because there was no present obligation to pay; for that to arise required the performance of a condition precedent – presentation of a passbook and a completed withdrawal slip. It may be doubted that a preference payment constitutes a debt in the sense referred to in this case.
A preference action is characteristically an action for monies had and received; Enterprise Sheet Metal Pty Ltd (in liquidation) v Queensland Steel and Sheet Pty Ltd [1995] 1 Qd R 511 at 512 and 513. An action for moneys had and received was traditionally brought on an indebitatus count rather than in debt – cf Holmes v Hall (1705) 6 Mod Rep 161; 87 ER 918; Moses v Macferlan (1760) 2 Burr 1005; 97 ER 676.
A payment said to constitute a preference is, at the time at which it is made, a valid discharge or the debt. Whether a liquidator is entitled to avoid a payment as a preference is subsequently determined by the court.
The considerations being those adverted to, I am of the view that a preference payment is not a debt in the sense I have been discussing.
The question then is whether ”debt“ has any wider or different meaning in the context of the Law when it is used in s 477(2A). In the context of s 556 of the Code (now s 592 of the Law) the New South Wales Court of Appeal has held that ”debt” included an undertaking to pay a sum of money at a future time even though the undertaking was conditional and the amount uncertain. It thus covered obligations under a guarantee – Hawkins v Bank of China (1992) 26 NSWLR 562, 570-572, 576-578 (CA); cf Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150, 153 (FC). This was explained in Re Beckwith (1993) 43 FCR 256, 271 as being limited to a conditional but unavoidable obligation to pay a sum of money (as on a guarantee).
In Hawkins it was said to the effect that ”debt” must be construed wherever it appears in the Corporations Law “in a practical and commonsense fashion, consistent with the context and with the statutory purpose”. Even so, it was difficult to conclude that an amount recovered in the preference action is a conditional but unavoidable obligation in the sense used in Hawkins.
The relief sought against MIG in the principal proceeding included orders and declarations under ss 423(1)(a), 424, 425, 434(1)(b), 434B(1), 434B(5) and 1321 of the Act.[15] Relevantly, the Court ordered:
(a)under s 423(1), that there be an inquiry into the amounts and sums that should have been included in the account that MIG, in its capacity as controller in possession of the property of S&D, should have rendered to the First Plaintiff on the settlement of the sale of the Footscray property on 19 October 2007;[16]
(b)under s 434(1)(b), that by 8 July 2009, the First Defendant render to the Plaintiffs proper accounts of, and vouch, his receipts and payments in his capacity as controller in possession of the property of the Second Plaintiff;[17]
(c)(by consent) pursuant to the order for an enquiry under s 423(1), MIG pay to S&D the sum of $164,994 together with interest in the sum of $35,139.52 (to 17 September 2009);[18]
(d)that MIG pay the plaintiffs’ costs of the proceeding as between them.[19]
[15] Handberg v MIG Property Services [2009] VSC 225, [200].
[16]Orders of Robson J (19 June 2009) in Re S&D International Pty Ltd (rec & mgr appt) (in liq), S CI 7807/2008, (these Orders are Ex GNH-2 in the present proceeding), [8].
[17] Ibid, [13].
[18]Consent Orders (5 October 2009), (these Orders are Annex B to the affidavit of David Mond, 4 September 2012, in the present proceeding), [1].
[19]Orders (14 February 2010) in Re S&D International Pty Ltd (rec & mgr appt) (in liq), S CI 7807/2008, [21].
The liquidator contends that it is the last two obligations which are sought to be compromised. He says that the latter, being an order for costs (which remain untaxed and unquantified), is not a debt in the relevant sense. The order for the payment of a total of $200,133.52 is, however, a judgment debt. The amount is a certain sum and is presently due and payable by MIG to S&D. A compromise affecting it must, therefore, by approved by the Court or creditors.
Section 447(2B) is also enlivened as the obligations of a party to the agreement will not be discharged by performance for more than three months after the agreement is entered into. Under the compromise, MIG is to pay the liquidator $200,000: $20,000 within 7 days of the execution date. and $180,000 120 days after the execution date. The execution date is the date at which the deed is exchanged between the parties.
Brief history of Court approval of compromises of debt
In Luxtrend,[20] Moynihan J referred to the history of the requirement that certain compromises by liquidators be approved by the Court, by the committee or by resolution of creditors, noting that under previous Corporations Law the liquidator’s power of compromise generally was subject to a requirement of the approval of creditors or of the court, subject to an exception in the case of a debt of not more than a certain monetary limit. That position is the converse of the situation with liquidators of today.
[20][1997] 2 Qd R 86, 87.
It was s 73 of the Corporate Law Reform Act 1992 (Cth) that amended s 477 of the Corporations Law by omitting the general requirement of approval. This was a result of recommendations made by the Harmer Report that the powers of a liquidator generally be exercisable without the need for approval of creditors or the court, subject to exceptions in the cases of the power to compromise debts above a prescribed amount, and the power to enter long-term commitments.[21]
[21]Australian Law Reform Commission Report 45: General Insolvency Inquiry (1988), [610] (and see generally [608]-[610]).
The expansion of the liquidator’s power to act without approval was recommended on the basis of the competence and qualifications of persons who act in the capacity of liquidator. The general requirement of approval was omitted from s-s (1) and insertion of a requirement of approval in new s-s (2A) subject to a prescribed amount.
The history of the evolution of s 477(2A) was considered in detail by Lindgren J in Re Elderslie Finance Corporation Limited.[22] Justice Lindgren opined that the opening words of s 477(1) – that “subject to this section, a liquidator of a company may“ – have the effect of making the power to compromise in paragraph (d) of that subsection subject to sub-ss (2A) and (2B). Thus, his Honour said that if (2A) or (2B) were enlivened, then without the Court’s approval the compromise would lie outside the power of the liquidator.[23]
[22](2007) 160 FCR 423 (Elderslie).
[23]Elderslie (2007) 160 FCR 423, [26] (referring to Re HIH [2004] NSWSC 5 (HIH),[12] (Barrett J)).
In Elderslie, Lindgren J noted that “it is in the interests of creditors that the liquidator compromise a claim early and without the expensive factual and legal investigation that resolution of the debt/non-debt question may demand”.[24]
[24](2007) 160 FCR 423, [27].
In several cases, where the liquidator required the Court’s approval of a compromise under s 477(2A) or (2B), the liquidator has also sought and obtained directions under s 479(3) that he was justified in entering into the compromise.[25]
[25]HIH; Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 (Gate Gourmet); Foyster v Foyster Holdings Pty Ltd (in liq) [2003] NSWSC 925; Re United Medical Protection (2003) 46 ACSR 98; QBE Workers Compensation (NSW) Ltd (2006) 56 ACSR 687 (QBE); Elderslie, [33]-[34]. See also discussion in Re Tietyens Investments (1999) 31 ACSR 1 (Weinberg J).
The function of the Court under s 477(2A) was described by Giles J in Re Spedley Securities Pty Ltd,[26] where his Honour said that the Court would not withhold approval unless there was shown to be “some lack of good faith, some error of law or principle or substantial grounds for doubting the prudence of the liquidator's conduct.” It is appropriate to cite the passage of his Honour’s judgment in full:[27]
In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.
[26](1992) 9 ACSR 83 (Spedley Securities), 86.
[27]Spedley Securities (1992) 9 ACSR 83, 85-86.
In HIH, Barrett J said that although s 477(2A) and (2B) deal with different powers, “both are concerned to ensure that the court exercises some oversight of the liquidator’s actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown.”[28] Justice Barrett cited with approval Giles J in Spedley Securities, and confirmed that the Court is not concerned with the commercial desirability of the transaction.
[28]HIH [2004] NSWSC 5, [15].
As mentioned in Spedley Securities, where the Court’s approval of the compromise of a legal claim is sought, a liquidator will usually be expected to obtain legal advice supporting the compromise from an appropriate practitioner. This approach was summarised in McPherson’s The Law of Company Liquidation,[29] which was cited with approval by Einstein J in Gate Gourmet.[30] Mr Handberg has not deposed to any such advice. Nevertheless, his reasons for compromising are essentially commercially based. If he succeeds on the appeal, he is not confident of recovering any amount of the judgment debt for the reasons I have canvassed. The only assets available to pay the liquidator’s costs and expenses of the liquidation are the claims against MIG, the costs orders against the other defendants, and the funds in Court, and these assets are not sufficient to meet the liquidator’s remuneration and expenses, much less future remuneration and expenses.
[29](4 ed, 1998), 344.
[30]Gate Gourmet (2005) 23 ACLC 834, [9].
Accordingly, in the peculiar circumstances of this case, I am prepared to forgo the usual evidence of appropriate legal advice on the merits of the compromise.
I am satisfied that liquidator has entered into the compromise in good faith. I find that in doing so he has not made some error in law or principle. I do not doubt the prudence of the liquidator’s conduct in settling the judgment debt on the basis that he does and in view of the matter.
I will grant approval under s 477(2A) of the compromise of the debt due by MIG under the order of 5 October 2009.
Should Court approval be given under s 477(2B)?
The agreement in the present case was entered into on 18 July 2012. It was made conditional on an application for a direction under s 511. It required approval under s 477(2A). A portion of the settlement sum was not payable until 120 days after execution of the agreement. This is only one month beyond the statutory three month period where Court approval is required.
In Re United Medical Protections Ltd,[31] Austin J said that the considerations arising under both s 477(2A) and (2B) were “much the same.” In HIH, Barrett J agreed with that proposition but added that s 477(2B) “focuses particular attention on the need to ensure that contractual provisions as to timing do not cut across the general expectation that winding up will proceed in as expeditious a fashion as circumstances allow”.[32]
[31](2003) 46 ACSR 98, [6].
[32]HIH [2004] NSWSC 5, [15] (authorities omitted).
In my opinion, the delay in this case will not adversely affect the expeditious winding up of S&D; otherwise, I repeat my conclusions in approving the compromise of the debt due by MIG to the liquidator.
I will grant approval under s 477(2B) of the liquidator entering into the settlement agreement on S&D’s behalf with MIG under which obligations of MIG may not be discharged be performance more than three months after the agreement was entered into on 18 July 2012.
Should a directions be given under s 511?
As mentioned above, in many instances the Court has also provided a direction that a liquidator is justified in compromising a debt even where Court approval of the compromise is required.
In Re G B Nathan & Co Pty Ltd (in liq),[33] McClelland J considered the history and purpose of the power of the Court to provide directions to a liquidator and its relationship to the power of the Court to give similar directions to trustees. Justice McClelland concluded that the power was limited in two fundamental ways. First, that the power may only be exercised to give directions as to how the liquidator should exercise his statutory functions as such. Secondly, that the power does not enable the Court to determine any rights or liabilities arising from the company’s transactions before the liquidation. In other words, the power may not be used to determine any rights or liabilities between creditors or contributories and the company or such rights as between themselves.
[33](1991) 24 NSWLR 674 (G B Nathan).
In addition to providing a means by which the liquidator may obtain advice as to the proper course he or she should take in the liquidation, by obtaining a direction the liquidator is protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company if he or she has made full and fair disclosure to the Court of all material facts flowing from pursuing the conduct found to be justified.
In G B Nathan, McClelland J said:[34]
The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.
Modern Australian authority confirms the view that s 479(3) “does not enable the court to make binding orders in the nature of judgments” and that the function of a liquidator's application for directions “is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation.”
[34]G B Nathan (1991) 24 NSWLR 674, 679-680 (citations omitted).
G B Nathan was cited with approval by Fitzgerald P (with whom McPherson JA agreed) in Coats v Southern Cross Airlines Holdings Ltd (in liq).[35] Southern Cross concerned the appropriateness of the liquidator seeking directions as to a matter that fell outside his duties as a liquidator in the winding up. In the course of his reasons, Fitzgerald P accepted that the primary purpose of the Court’s directions was to protect the liquidator from allegations that he or she has acted improperly or unreasonably or has caused actionable loss.[36]
[35][2000] 1 Qd R 84 (Southern Cross).
[36]Southern Cross [2000] 1 Qd R 84, 93.
In St Petka Inc v Petra,[37] the High Court considered advise given to a trustee by the Court under the Trustee Act 1925 (NSW). The Court said that where a trustee seeks advice about incurring costs and expenses of prosecuting or defending litigation, (that as well as the trustee obtaining personal protection) the advice also serves the important purpose of protecting the interests of the trust.[38] Similarly, in a liquidation protecting the interest of creditors is also an important purpose of the liquidator seeking advice.
[37](2008) 237 CLR 66.
[38]Ibid, [71]-[72].
Conclusion as to directions
In this case, I am satisfied that the decision is more than a commercial decision that lies within the discretion of the liquidator. Putting aside the fact that the liquidator does not have power to enter into the agreement without the Court’s approval under s 477(2A) and (2B), as discussed above, the history of the litigation establishes that the liquidator is putting himself at a material risk of suit by compromising the debt owed by MIG.
I am satisfied that the directions sought by the liquidator are in the best interests of the winding up of S&D. I am satisfied that it is proper to give the directions sought by the liquidator.
Orders
I propose to make the following orders:
1 Mr Handberg and S&D have leave to amend their interlocutory process dated 14 September 2012, as sought on 10 October 2012.
2 Pursuant to s 511 of the Corporations Act 2001, the Court directs that Mr Handberg as the liquidator of S&D is justified in compromising:
(a) the unresolved matters in Supreme Court of Victoria proceeding number 7807 of 2008 (the principal proceeding) as between the plaintiffs and MIG in the principal proceeding;
(b) the matters raised in the proceeding commenced in the Court of Appeal, Supreme Court of Victoria proceedings number 3800 of 2009 and 0029 of 2011 (the appeal proceedings) between the appellant and the first and second respondents in the appeal proceeding; and
(c) the matters raised in the Supreme Court of Victoria proceeding number 2011 6361 and Court of Appeal proceeding A PCI 2012 0053 (the winding up proceeding).
on the terms and conditions set out in the deed of settlement dated 18 July 2012 and comprised in exhibit “GNH-1” to the affidavit of Geoffrey Niels Handberg sworn on 12 September 2012 (the settlement agreement).
3 Pursuant to s 477(2A) of the Corporations Act 2001 the Court approves the compromise of the debt owed by MIG to Mr Handberg as liquidator of S&D under the order of 5 October 2009 made in the principal proceeding affected by the settlement agreement.
4 Pursuant to s 477(2B) of the Act, the Court approves the liquidator entering into the settlement agreement on S&D’s behalf with MIG where obligations of MIG may not be discharged by performance more than 3 months after the agreement was entered into on 18 July 2012.
5 That the costs of and incidental of this application be the liquidator’s costs in the winding up.
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