Re Southern Cross Airlines Holdings Ltd (in liq)

[1998] QSC 97

IN THE SUPREME COURT OF QUEENSLAND	No. 193 of 1993
Brisbane
Before Mr Justice Ambrose

[In the matter of the Corporations Law & Southern Cross

Airlines Holdings Ltd]

IN THE MATTER OF THE CORPORATIONS LAW

AND

IN THE MATTER OF SOUTHERN CROSS AIRLINES HOLDINGS LTD. (IN

LIQ.) (A.C.N. 006 982 387)

REASONS FOR JUDGMENT - B.W. AMBROSE J.

Judgment delivered 20 May 1998

CATCHWORDS:

LIQUIDATOR'S FUDICIARY DUTY - contributories - creditors - notification - shareholders' personal cause of action - directions pursuant to s. 479(3) of the Corporations Law

In Re Gertzenstein Ltd [1977] 1 Ch. 115

In Re Sir John Moore Goldmining Company [1879] 12 Ch.D. 325

Re Contract Corp.; Gooch's case (1871) 7 Ch. App. 207

Tymray Pty Ltd (Admin. Apptd) v Mercantile Mutual Life

Insurance Co. (1994) 13 ACSR 104

GPI Leisusre Corporation Ltd (In Liquidation) (1994) 53 FCR

365

Bennett v Minister of Community Welfare (1992) 176 CLR 408

Nocton v Ashburton (Lord) (1914) AC 932
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465

McMaster v Byrne [1952] 1 All ER 1362

Counsel:	Mr L.F. Kelly for the applicant liquidator Mr J.D. McKenna for the respondent directors
Mr P. McMurdo S.C. for the
respondent Arthur Andersen
Solicitors:	Allen Allen & Hemsley for the applicant liquidator Corrs Chambers Westgarth for the respondent directors Minter Ellison for the respondent Arthur Andersen
Hearing Date:	14 May 1997
IN THE SUPREME COURT OF QUEENSLAND	No. 193 of 1993
Brisbane
Before Mr Justice Ambrose

[In the matter of the Corporations Law & Southern Cross

Airlines Holdings Ltd.]

IN THE MATTER OF THE CORPORATIONS LAW

AND

IN THE MATTER OF SOUTHERN CROSS AIRLINES HOLDINGS LTD. (IN

LIQ.) (A.C.N. 006 982 387)

REASONS FOR JUDGMENT - B.W. AMBROSE J.

Judgment delivered 20 May 1998

This is an application by the liquidator of Southern Cross Airlines Holdings Ltd (in Liquidation) (“the company”) for directions pursuant to s.479(3) of the Corporations Law.

The liquidator was appointed as provisional liquidator of the company on 11 March 1993. Subsequently he was appointed liquidator on 27 April 1993.

Since 4 March 1993, the liquidator, his legal advisers and others have been investigating the affairs of the company and he has concluded that the realization of company assets will not be sufficient to satisfy the claims of its creditors; nor will there be sufficient funds available to make any payment to shareholders of the company.

Extensive investigations have been conducted involving the examination of records, interviewing witnesses and liaising with officers of the Australian Securities Commission who have also carried out extensive investigations. Examinations have been conducted of officers of the company and of various other persons connected with its promotion and initial management.

On 18 September 1995 the company commenced proceedings against its former auditors. Those proceedings were transferred to the Federal Court on 9 September 1996. Since that time former directors have been added as defendants.

By a report to shareholders of 16 June 1993, the liquidator advised that it was unlikely that there would be any return to shareholders because the liabilities of the company exceeded the value of its assets by about $16M.

By memorandum to shareholders dated 20 May 1994 the liquidator advised of the investigative work that had been completed and of the issue of proceedings in the Federal Court of Australia seeking to recover approximately $11M. In the course of that memorandum he advised:—

“Further investigations are continuing to enable me to determine whether legal actions should be taken against other professional organizations involved with the prospectus and public float of shares of the company and the audit of the company's financial accounts for year ended 30 June 1992. In addition I will also be considering whether shareholders have any claims arising out of the prospectus and public float of shares of the company which I will report to you upon the conclusion of my investigations.”

By report to the creditors dated 18 May 1994 the liquidator advised that at that stage the major outstanding matters to be concluded in the investigation and administration of the liquidation included -

“5. Further consideration of events surrounding the promotion, formation, management and administration of the company and all parties related thereto to form a view as to the recovery of moneys for the benefit of creditors.”

The opinion was expressed that at least part of the loss was attributable to illegal transactions carried out by a former officer of the company.

As a consequence of the protracted investigations and consideration of evidence unearthed by the liquidator and his legal advisers, they concluded that the shareholders of the company may have an arguable case that the defendants already sued by the company may be liable for the losses suffered by the shareholders.

In fact the liquidator has been advised that he is under a duty to notify shareholders that “they have a potential claim”. He has been advised that there may be a limitation period within which shareholders may take proceedings and that it may expire on 16 July 1998 and that subject to any direction of this Court the liquidator should notify shareholders in sufficient time prior to that date to enable them if they so desire to take proceedings against the persons against whom the company has already taken proceedings.

There are approximately 8,300 shareholders of the company. The cost of notifying each of the shareholders by post is estimated to be between $6,000 and $7,000. This is less than the cost of advertising in major Australian newspapers. The liquidator has advised the solicitors acting for potential defendants to an action by shareholders of his proposal to seek these directions.

All the defendants to the company's action who the liquidator desires to inform shareholders may also be liable to them personally have appeared upon this directions hearing and strenuously opposed the liquidator giving the proposed notification. Stated shortly, they contend that -

(1) The position occupied by the liquidator does not impose upon him a duty to so inform shareholders (even though they be contributories) of rights which are merely personal to them and in no way dependent upon the rights of the company against the persons sued; and

(2) That in effect giving notice would amount to defaming the officers of the company and the auditors. It is contended that to some extent at least the reason for the liquidator coming to the conclusion which is reached is in all likelihood based upon what emerged in examinations which in effect are privileged and it would be unfair for shareholders to be advised of a potential claim when the persons already sued by the company in liquidation have had difficulty in obtaining copies of evidence adduced upon examination.

For the prospective defendants to any shareholders action it is contended that if a direction of the kind sought by the liquidator is given it may give him “protection” against proceedings for defamation bought by the current defendants to the company's action and this is a matter which should dissuade me from giving the direction. In effect if the liquidator takes it upon himself to give notices of the sort he has been advised to give he should run the risk of being sued for defamation. He might then perhaps rely upon defences of qualified excuse etc. Of course if the notices are not given shortly - a month or so before the expiration of the limitation period - it may be difficult for shareholders to pursue whatever rights they may have but of which at the present time they may be unaware. Understandably the liquidator is loath to embark upon a course which may result in his defending defamation proceedings relying upon qualified privilege etc.

I suspect that more than one insurer may have an interest in the outcome of this application.

It is clear on the cases that a liquidator is under a fiduciary duty to the company, its contributories and its creditors. In this respect I refer to McPherson - Law of Company Liquidation 3rd Ed. at 214 In Re Gertzenstein Ltd [1937] 1 Ch. 115 at 116 per Bennett J and In Re Sir John Moore Goldmining Company [1879] 12 Ch. D. 325. Re Contract Corp Gooch's case (1871) 7 Ch. App. 207 at 211 requires a liquidator to act honestly and impartially between the various person to whom is owed a fiduciary duty.

I will assume therefore on the cases that a fiduciary relationship exists between liquidator and shareholders as indeed it does between him and some of the defendants in pending actions in the Federal Court, some of whom are also contributories.

I will assume that some at least of those shareholders may not have adverted to the possibility that facts have emerged in the administration of the winding up conducted by the liquidator which may arguably give those shareholders a right to recover from officers of the company and its auditors the serious losses they suffered as a result of the company failure.

The real question then is whether in those circumstances the extent of the fiduciary duty owed by the liquidator to the shareholders is such as to place him under a duty to make them aware of the facts he believes to exist as the result of his administration, to give them the opportunity of deciding whether or not to seek legal advice to recover damage which they will suffer as a consequence of subscribing for their shares.

The winding up has proceeded over the last four years or so and having regard to the observations made in the report and memorandum to shareholders to which I have already referred it seems to me likely that many shareholders receiving that information would not have taken steps on their own initiative to inquire about facts relevant to their rights to recover their losses but indeed may have decided to wait for a report from the liquidator of the sort he intimated he was contemplating making back in May 1994.

Counsel informed me that they have discovered no authority which touches directly on this matter. Authorities to which reference was made were Gooch's case, Tymray Pty Ltd (Admin. Apptd) v Mercantile Mutual Life Insurance Co (1994) 13 ACSR 104 and particularly at 109-110 and GPI Leisure Corporation Ltd (In Liquidation) (1994) 53 FCR 365.

On the assumption that the liquidator does owe a fiduciary duty to contributories, it seems to me some assistance may be obtained from Bennett v Minister of Community Welfare (1992) 176 CLR 408. In that case the High Court considered the obligation on a person responsible for the proper control of a young man in a custodial institution to obtain independent legal advice for him on his rights of action when he suffered an injury in that institution arguably as a result of negligence of the persons in control of it.

In the joint judgment of Mason CJ, Deane and Toohey JJ at 411 it was observed:—

“In the Courts below the duty of care appears to have been equated to, even derived from, a fiduciary duty owed by the director to the appellant arising out of his statutory office as guardian. That fiduciary duty was a positive duty to obtain independent legal advice with respect to the possible existence of a cause of action on the part of the appellant arising out of the circumstances in which he sustained an amputation of four fingers on his left hand.”

At p. 412 their Honours continued:—

“In the cirumstances which we have outlined the Director after the appellant's injury became subject to a duty of care owed to the appellant to avoid his suffering loss and damage from the possibility that he might not exercise an entitlement to bring an action for damages in respect of his injury and that the action might become statute-barred. The common law duty of care arose independently of the fiduciary duty which in no way displaced qualified or derogated from the common law duty. The Director breached that common law duty by failing to obtain independent legal advice.

At p. 413 they continued:—

“The Director's duty was to obtain legal advice from a competent legal practitioner based on adequate and accurate instructions -- it was common ground that the appellant would have made a claim and commenced an action for damages against the Minister once he was legally able to do so had he been made aware of his rights.”

At p. 414 they continued:—

“-- the appellant's cause of action would not have become statute-barred but for the director's breach of duty. Had the Director performed his duty and procured the advice that advice would have changed the course of events namely the inaction on the part of the appellant which led to the loss and prompted instead a decision by him which would have both preserved and enforced his cause of action thereby deflecting the loss which occurred.”

In a concurring judgment Gaudron J observed at p. 423:—

The duty may be likened to the duty to warn or the duty to instruct a person who might otherwise be at risk of injury. The immediate effect of the duty is to provide that person with information which he can use to protect himself. So too Mr Bennett would have been provided with information if the Director had discharged his duty in this case. And consistent with that duty it must be taken that the information would have enabled him to bring proceedings within the time fixed by the Statute of Limitations.

Ultimately it was the lack of information which put Mr Bennett in the position whereby he has lost his right to bring action to recover damages with respect to his 1973 injuries. That lack of information was clearly referable in the first instance to the Director's breach of duty.”

I refer also to the observations of McHugh J at p. 427 where he observed:—

“Nevertheless it is not open to doubt that in addition to the fiduciary duty which the Director owed to the appellant the circumstances of the guardianship and the injury to the appellant while under the care and control of the Director gave rise to a common law duty on the part of the latter to take reasonable care to ensure that the appellant did not suffer economic loss by not being advised of his rights in respect of that injury.”

It is clear on the cases that a person under a fiduciary duty will often be required to take steps to protect the person to whom that duty is owed, against damage and to be more careful in giving advice etc. than would be the situation if he did not owe such a duty. In this respect I refer merely to Nocton v Ashburton (Lord) (1914) AC 932 and particularly per Viscount Haldane at 952; and Lord Dunedin at 964 where his Lordship observed inter alia:—

“And then there are the duties which arise from a relationship without the intervention of contract in the ordinary sense of the term such as the duties of a trustee to his cestui que trust or of a guardian to his ward. It is in this latter class of case that equity has been peculiarly dominant not I take it from any scientific distinction between the classes of duty existing and the breaches thereof but simply because in certain cases where common justice demanded a remedy the common law had none forthcoming--

But from the other point of view he may have put himself in a fiduciary position and that fiduciary position imposes on him the duty of making a full and not misleading disclosure of facts known to him when advising his client--”

This authority was reaffirmed in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465.

I refer only to the observations of Lord Morris of Borth-y-Gest at 502-3:—

“My Lords I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes quite irrespective of contract to apply that skill for the assistance of another person who relies upon such skill a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or skill or upon his ability to make careful inquiry a person takes it upon himself to give information or advice to or allow his information or advice to be passed on to another who as he knows or should know will place reliance upon it then a duty of care will arise.”

I find it difficult to distinguish in principle between the obligation on a person under a fiduciary duty to take care in giving advice upon which somebody obviously intends to rely and the obligation upon such a person to give advice to persons he knows may avoid damage if they are given that advice in time to institute proceedings against others whose actions and conduct have been examined and found wanting by the person under that fiduciary obligation to the persons needing that advice.

Spencer Bower in Actionable Non-Disclosure (1915) paragraph 315 at p. 273 observed:—

“The general rule or principle (stated summarily) is that where a fiduciary relation exists between two persons the person in whom confidence is reposed in virtue of that relation owes to the person who has reposed it a duty (which begins with the creation of the relationship and continues until its dissolution) to place at his disposal all the knowledge acquired and possessed by himself in the course and by virtue of such relationship which has a bearing on any transaction either between the parties themselves or between either of them and a third person with reference to any matter which is the subject of the confidence.”

This approach was adopted by the Privy Council in McMaster v Byrne [1952] 1 All ER 1362 at 1368G-H. That was a case where a solicitor was held to be under a fiduciary duty to a former client to advise him of all facts of which he was aware concerning negotiations under way to acquire shares which his former client had for sale and over which he agreed to give his former solicitor an option to purchase at the same price as he had formerly given another person an option to purchase. Upon the evidence apparently the former client was aware of negotiations and had been informed of possible offers but had not been informed by his former solicitor of the current facts within his knowledge at the date he took the option.

The liquidator in this case as officer of the Court has conducted extensive and expensive inquiries over a period of years. He has discovered facts which have persuaded him to institute proceedings against all the respondents to this application in the Federal Court and in my view his relationship with the shareholders of the company in liquidation imposes upon him a duty to inform them of the fact that based on the information at his disposal concerning the actions of persons connected with the promotion and establishment of the company and indeed with the auditing of company accounts they ought seek legal advice as to whether they should also take action against the same persons to recover the damages they have suffered as a consequence of the company failure. He should give them notice not designed to express any view as to the likely outcome upon determination of the issues presently before the Federal Court. Undoubtedly, interested shareholders would take advice on requirements for the successful pursuit of an action for recovery of pure economic loss such as relationship, proximity, membership of an ascertainable class etc.

The liquidator has provided a form of notice which he seeks direction to give to the various shareholders in the following terms -

“TAKE NOTICE THAT:

1.     The liquidator of the company has completed extensive investigations into the affairs of the company including the $50M public float leading to the allotment of 100 million shares on 17 July 1992. Having completed those investigations the liquidator has formed the view based on legal advice that some shareholders may have a claim against the company's former directors and other third parties involved in the promotion and formation of the company. The claim if successfully prosecuted may result in the recovery by shareholders of either:—

(a)	Where the shareholder was an original subscriber in the float who still holds the shares allotted to him or her, the subscription price of each share (50 cents per share); or
(b)	Where the shareholder was an original subscriber in the float who subsequently sold the shares allotted to him or her for an amount less than the subscription price, the difference between the subscription price and the sale price of each share;

2.    The limitation period for issuing proceedings in respect of the potential claim may expire on 16 July 1998 after which time the claim may become statute- barred.

Should any shareholder require further information in respect of the potential claim you should contact the liquidator's solicitors--

It is recommended that shareholders seek their own legal advice in respect of any potential claim before instituting any proceedings.

Richard Anthony Barber

Official Liquidator
NOTE This notice has been issued in compliance with the
direction in the Supreme Court of Queensland made May
1998.”

I conclude upon the material that it is strongly arguable that the liquidator is under a duty to advise forthwith shareholders of the company of the possibility that they have a personal cause of action against the respondents; if he fails to do so he may arguably be liable to at least some of those shareholders should they fail to consider and receive legal advice upon instituting proceedings prior to 16 July 1998.

In any event even in the absence of any specific provision in the Corporations Law imposing a statutory obligation upon him to give a notice of the kind proposed, I take the view that the giving of such a notice would be a step properly taken by the liquidator in the administration of the company insolvency with a view to enabling shareholders as far as possible to avoid loss as a consequence of their receiving no dividend in respect of the shares they hold.

Pursuant to s.479(3) I authorise and direct the liquidator to notify shareholders of the company of the potential claims by posting a notice in the terms attached and marked “A” to each shareholder by prepaid post to the shareholder's address last known to the liquidator no later than 29 May 1998.

ANNEXURE “A”

IN THE SUPREME COURT OF QUEENSLAND No. 193 of 1993

IN THE MATTER of the Corporations Law

and

IN THE MATTER of SOUTHERN CROSS AIRLINES HOLDINGS LIMITED
(IN LIQUIDATION) (ACN 006 982 387)
NOTICE TO SHAREHOLDERS OF SOUTHERN CROSS AIRLINES HOLDINGS
LIMITED (IN LIQUIDATION)

TAKE NOTICE THAT:

1.   The liquidator of the company has completed extensive investigations into the affairs of the company including the $50 million public float leading to the allotment of 100,000,000 shares on 17 July 1992. having completed those investigations, the liquidator has formed the view, based on legal advice, that some shareholders may have a claim against the company's former directors and other third parties involved in the promotion and formation of the company. The claim, if successfully prosecuted, may result in the recovery by shareholders of either:

(a)	where the shareholder was an original subscriber in the float who still holds the shares allotted to him or her, the subscription price of each share (50 cents per share); or
(b)	where the shareholder was an original subscriber in the float who subsequently sold the shares allotted to him or her for an amount less than the subscription price, the difference between the subscription price and the sale price of each share.

2.   The limitation period for issuing proceedings in respect of the potential claim may expire on 16 July 1998 after which time the claim may become statute barred.

Should any shareholder require further information in respect of the potential claim, you should contact the liquidator's solicitors, Allen Allen & Hemsley (Contact: Peter Smith (Phone [phone])).

It is recommended that shareholders seek their own legal advice in respect of any potential claim before instituting any proceedings.

Richard Anthony Barber

Official Liquidator

NOTE: This notice has been issued in compliance with the direction of the Supreme Court of Queensland made 20 May 1998

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