Read v Bowesco Pty Ltd - [2013] WASC 240

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: READ -v- BOWESCO PTY LTD [2013] WASC 240

CORAM: MASTER SANDERSON

HEARD: 27 MAY 2013

DELIVERED : 27 MAY 2013

PUBLISHED : 21 JUNE 2013

FILE NO/S: COR 61 of 2013

MATTER :WESTPOINT MANAGEMENT LTD (ACN 074 148 431) (in liq) (Receivers & Managers Appointed)

BETWEEN: SIMON ANDREW READ in his capacity as liquidator of WESTPOINT MANAGEMENT LTD (ACN 074 148 431) (in liq) (Receivers & Managers Appointed)
First Plaintiff
WESTPOINT MANAGEMENT LTD (ACN 074 148 431) (in liq) (Receivers & Managers Appointed) in its capacity as the responsible entity of THE WESTPOINT INCOME FUND and as trustee of THE WESTPOINT INCOME FUND
Second Plaintiff
AND
BOWESCO PTY LTD (ACN 008 915 357)
Defendant

Catchwords:

Corporations law - Application by liquidator for directions to defend action - Turns on own facts

Legislation:

Nil

Result:

Directions given

Category: B

Representation:

Counsel:

First Plaintiff                :     Mr J C Vaughan
Second Plaintiff            :     Mr J C Vaughan
Defendant:     Mr A Metaxas

Solicitors:

First Plaintiff                :     Clayton Utz
Second Plaintiff            :     Clayton Utz
Defendant:     Metaxas & Hager

Case(s) referred to in judgment(s):

Bowesco Pty Ltd v Read [2012] WASC 340
Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373
Mentha v GE Capital Ltd (1997) 154 ALR 565
MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 158 FLR 121
Re Rewards Projects Ltd (in liq); Ex Parte Rewards Projects Ltd (in liq) [2011] WASC 339

MASTER SANDERSON: The plaintiffs seek directions as to whether funds allegedly held on trust may properly and justifiably be applied in defending proceedings in which the defendant, Bowesco Pty Ltd, seeks to establish a putative trust. To put this application in context it is necessary to outline some background facts. These facts are taken from the first plaintiff's affidavit sworn 8 April 2013.
The second plaintiff is being wound up by the court. The first plaintiff is the liquidator appointed by the court for the purposes of the winding up. The second plaintiff is the responsible entity of the Westpoint Income Fund. In that capacity it is a trustee: s 601FC(2) of the Corporations Act 2001 (Cth). The defendant Bowesco Pty Ltd asserts certain funds are held by the first plaintiff as liquidator of the second plaintiff on trust for it to the extent of its claims.
Bowesco Pty Ltd has issued proceedings against the first plaintiff in this court. I dealt with a summary judgment application by Mr Read in those proceedings. I dismissed the application. In the course of doing so I outlined the background facts: see Bowesco Pty Ltd v Read [2012] WASC 340.
In substance, Bowesco Pty Ltd invokes the doctrine of subrogation to bring a claim against funds derived from assets of a debtor to it and the second plaintiff. Bowesco Pty Ltd says that those funds are in the custody of the first plaintiff and he holds the funds on trust to meet Bowesco Pty Ltd subrogated claims. The alleged subrogated claims are said to total just over $2,500,000.
The funds held by the second plaintiff as responsible entity of the Westpoint Income Fund total just over $1,900,000 as at January 2013. The second plaintiff has assets in its own right. As at 25 February 2013 these totalled just over $67,000. However, the second plaintiff has liabilities in its own right exceeding $800,000. So the defence of the Bowesco Pty Ltd claim is for the benefit of investors in the second plaintiff not the creditors of the second plaintiff.
The first plaintiff's solicitors have informed him that their estimate of legal costs to defend the claim of Bowesco Pty Ltd is some $83,000. (This figure seems remarkable given what it anticipated is a two day trial with a largely agreed statement of facts and the prospect of no more than two witnesses. Neither of the two very experienced counsel who appeared at the hearing called into question the estimate.) The plaintiffs propose to pay the future reasonable legal costs to defend Bowesco Pty Ltd's claim from the funds held by the second plaintiff as responsible entity of the Westpoint Income Fund. By this application, the plaintiffs seek directions they would be acting properly and justifiably in doing so.
The circumstance when directions are available to an external administrator has now been considered by various courts on numerous occasions and can be succinctly stated. There was no dispute between counsel in this case as to those principles. However, it is worth restating these principles again. What follows is taken directly from an admirable summary provided by counsel for the plaintiffs in his written submissions:
11.A liquidator in a winding up by the court may apply to the court for directions in relation to any particular matter arising under the winding up: s 473(3) Corporations Act 2001 (Cth).
12.There is an analogous power under s 92 of the Trustees Act 1962 (WA) to give directions to a trustee 'concerning any property subject to a trust' or 'respecting the exercise of any power or discretion vested' in him or her as trustee.
It would appear the principles applying under both acts are the same.
13.Subject to the liquidator / trustee making full and fair disclosure of the material facts, the effect of such an order is to protect the liquidator / trustee from claims that he or she has acted unreasonably, inappropriately or in breach of duty, i.e. it sanctions a proposed course of conduct: Re GB Nathan & Co Pty (In Liq) (1991) 24 NSWLR 674 at 679‑680; Re Anglican Insurance Ltd [2008] NSWSC 41 [38]‑[39]; Handberg v MIG Property Services Pty Ltd[2010] VSC 336; (2010) 79 ACSR 373 [7]. See also s 95 of the Trustees Act 1962 (WA).
14.However, the power to give directions is not unfettered. As Goldberg J explained in Re Ansett Australia Limited (No 3) [2002] FCA 90; (2002) 115 FCR 409 [65]:
'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, that decision. It may be a legal issue of substance or procedure, it may be an issue of power, proprietary or reasonableness, but some issue of this nature is required to be raised.'
There must be 'an issue calling for the exercise of legal judgment' as Goldberg J goes on to say. In this case the direction sought is in terms that the first plaintiff may 'properly and justifiably' take certain action. Accordingly, there is an issue of proprietary or reasonableness. Directions are available and appropriate on that basis: Re Rewards Projects Ltd (in liq); Ex Parte Rewards Projects Ltd (in liq) [2011] WASC 339 [22].
A direction that an external administrator may 'properly and justifiably' carry out a proposed course of conduct is used to signify that it is appropriate that he or she should do so. It is a form of direction in common use. See by way of example Mentha v GE Capital Ltd (1997) 154 ALR 565, 571 ‑ 572. It is implicit in such an order the court is approving the proposed conduct.
In this case, in addition to all of the above, the facts raised for consideration the appropriate action that a trustee ought to take when faced with competing claims that will exhaust the trust fund. There is a legal issue of substance. Moreover, it is a legal issue on which a degree of personal risk may attach to the plaintiffs and their legal advisors. That makes this case one in which directions are available and appropriate: Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373.
All of the above sets out the jurisdictional basis upon which directions can be made. There remains the question as to whether in this particular case the directions ought be made. It was the position of Bowesco Pty Ltd who was joined as a party interested the directions ought not be made. It is appropriate to set out the competing arguments.
The main aim argument of the plaintiffs was, if directions were not given, the plaintiffs would not have the funds to defend the claim by Bowesco Pty Ltd and that claim would necessarily succeed. That, it was said, ran counter to the interests of justice. Effectively Bowesco Pty Ltd by simply asserting a trust claim would very likely succeed irrespective of the merits of that claim.
In developing that argument counsel made a number of further submissions. First, he submitted there was a significant prospect of resisting Bowesco Pty Ltd's claim and it would therefore be appropriate to give the directions sought. I accept that submission. As mentioned above, I heard the summary judgment application. Bowesco Pty Ltd was not able to point to any precedent supporting its position. To adopt counsel's terminology, the claim is 'novel'. I accepted Bowesco Pty Ltd's argument they may be able to develop the law of equity to cover the position they advanced. But I did so without much enthusiasm. There is a real prospect that the first plaintiff will succeed in its defence of the Bowesco action.
Second, it was submitted that the plaintiffs should be placed in a position where they are able to exercise their discretion and judgment to protect the trust property in the litigation without exposing themselves and their legal advisors to the risk of automatic liability in equity should the defence be unsuccessful. Again, I accept that submission. The first plaintiff is in the position of liquidator/trustee. He is obliged to do what he thinks is the right thing and his legal advisors have told him defending the Bowesco action is proper and appropriate. He should not be exposed to personal liability if he follows such a course.
Third, it was submitted that directions sought would facilitate the administration of justice by providing protection to the second plaintiff as trustee and the first plaintiff as liquidator within the scope of the specific directions sought. Again, that submission is soundly based but with one qualification. Even if Bowesco Pty Ltd's claim were to proceed on an undefended basis, it would still be necessary to establish its claim to the satisfaction of the court. There is no suggestion if either of the plaintiffs did not appear at trial of the Bowesco action there would be some form of default judgment. But, there is no doubt the chances of successfully defending Bowesco Pty Ltd's claim will be significantly improved if the plaintiffs are represented.
It is not unusual in applications such as this for parties in the position of the plaintiffs to file an opinion of counsel as to the likely prospects in any litigation. Counsel for the plaintiffs submitted it was not necessary in this case. I agree. The nature of the issues between the parties was fully developed on the summary judgment application. While leave to defend was given, it was a case where the application just failed and where it is clear Bowesco Pty Ltd faces significant problems. A further opinion by counsel could not usefully advance the position.
On the face of it then, the reasons for making directions are compelling. It is now a question of considering the arguments advanced by Bowesco Pty Ltd.
Counsel made two main points. First, he referred to the terms of s 92(2) of the Trustees Act 1962 (WA). That section is in the following terms:
Every application made under this section shall be served upon, and the hearing thereof may be attended by, all persons interested in the application or such of them as the Court thinks expedient.
It was counsel's submission that as the application had not been served on the unit holders of the second plaintiff those persons had not been given the opportunity to be heard and no order could be made. In response to that submission counsel for the plaintiffs contended that the proper interpretation of s 92(2) was the application need be served upon only those unit holders which the court thought it expedient to serve.
The wording of s 92(2) is not entirely happy. It can be read in two ways. On Bowesco Pty Ltd's interpretation the application has to be served on all persons interested in it and then the court has the right to determine which of them should be heard. But the obligation to serve is a necessary prerequisite to any hearing. Counsel for the plaintiffs submitted properly considered the section required service on only those persons who the court thought it expedient to serve.
On balance I favour the interpretation proposed by the plaintiffs. This case provides a classic illustration of why mandatory service on all of the unit holders would be pointless. They could not possibly add anything to the submissions put on behalf of the plaintiffs. Bowesco Pty Ltd is claiming all of the funds held by the plaintiffs. The chances of those funds being lost to the unit holders is increased if Bowesco Pty Ltd's action is not defended. It is inconceivable the unit holders would simply deny the plaintiffs the right to defend the action and therefore forego payments they might otherwise receive. Their interests coincide with the interests of the plaintiffs. The interpretation of the subsection which favours flexibility by the court is in my view to be preferred.
Support for this position can be drawn from the decision of Austin J in MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 158 FLR 121. His Honour was there dealing with s 63 of the Trustees Act 1925 (NSW). That section is not the direct equivalent of our section. It was also a case where no notice had been provided to unit holders. This was raised as an impediment to the giving of judicial advice. His Honour said:
In my view there are occasions when judicial advice is an appropriate procedure even though the advice affects the rights of persons who are not represented at the hearing of the application or their enjoyment. For example, the court may give judicial advice to a trustee who contemplates litigation as a plaintiff or defendant, even though the other party to the litigation is not before the court. Where the trustee is in doubt as to the extent of its dispositive power such as a power of sale, it is open to the court to give judicial advice even though not all of the potential objects of the power, or even any of them, are represented. In many cases the crucial issue for the court will be whether that giving of advice might operate unfairly as regards a person not before it. That, in turn, requires an assessment of whether the court might fail to take into account some relevant submission in the absence of representation of the affected person. But these matters fall within the ambit of the court's discretion, and the absence of representation of an affected party is not a jurisdictional bar (19).
The second point raised by counsel had to do with the scheme constitution for the Westpoint Income Fund. Clause 17 of the constitution is headed 'Responsible Entities Indemnity for Costs, Liabilities and Expenses'. For present purposes cl 17.1 is relevant. It is in the following terms.
Subject to clause 17.2 below, in addition to any other right of indemnity which the Responsible Entity may have under this Deed or at law, the Responsible Entity shall be indemnified and shall be entitled to be reimbursed out of, or have paid from, the Fund for:
(a)all Costs and liabilities incurred by the Responsible Entity in the performance of its duties or the exercise of its powers, the course of its office or in relation to the administration or management of the Trust; and
(b)all Costs and liabilities necessarily incurred by the Responsible Entity in relation to its acting as Responsible Entity of the Trust; and
(c)without limitation to clause (a) and (b) above, the amounts specified in Schedule 2.
The Responsible Entity may defer reimbursement of any or all of such expenses for such period as the Responsible Entity may determine.
It was counsel's submission that clause provided an indemnity to the responsible entity but not to the liquidator of the responsible entity. Therefore it was not appropriate to make the orders sought.
In my view there are two answers to that submission. First, in the proceedings Bowesco Pty Ltd has brought it alleges the first plaintiff is a trustee of the funds for it - that is Bowesco Pty Ltd. Bowesco Pty Ltd cannot approbate and reprobate. If it alleges the first plaintiff is a trustee then the first plaintiff can obtain directions under s 92.
Perhaps the more important question is whether provision such as cl 17.1 could in any circumstances limit the power of the court to give directions to a liquidator. That point was not fully argued and a detailed analysis should perhaps be left for another day. But, my view is cl 17 does not by its terms, limit the power of the court to give direction and in all probability it is not open to the parties to somehow agree to such a limitation.
One further point was mentioned during argument and should be addressed. On 30 June 2006 Master Newnes made certain orders in relation to the provisional liquidators and liquidators of the second plaintiff. These orders had to do with costs. Order 7 of those orders was in the following terms:
The provisional liquidators and the liquidators of Westpoint Management may deduct their reasonable remuneration (to be determined in accordance with sub‑sections 473(2) and 473(3) of the Corporations Act 2001 respectively), expenses (of a type described in paragraph 556(1)(a) of the Act), and other costs and expenses incurred by them undertaking work in respect of, or in connection with, the administration of the Westpoint Income Fund, may be deducted and paid by the liquidators of Westpoint Management from the assets of that managed investment scheme.
It was submitted on behalf of the defendant in the light of that order no further order was necessary. With respect, it seems to me the position of the plaintiffs, with respect to the Bowesco Pty Ltd litigation, would not be entirely clear if the plaintiffs were left solely to rely on that order. The position should be clarified. For that reason, in my view, it is appropriate to make orders as sought by the plaintiffs.
Turning then to the form of the orders, it seems to be some attempt should be made to ensure the costs incurred by the plaintiffs' solicitors are reasonable. For that reason, I imposed two conditions on the orders sought by the plaintiffs. First, I required the plaintiffs obtain from an independent cost consultant an opinion as to whether the costs agreement was reasonable. A copy of that opinion was to be provided to the court. Second, I required all accounts rendered by the plaintiffs' solicitors be submitted for taxation. Thus ensuring the costs rendered complied with the costs agreement.
Counsel for the plaintiffs submitted both of these restraints were unnecessary. He submitted the use of the word 'reasonable' in relation to the costs incurred was sufficient. There is some force in that argument. However, to my mind transparency is all important. If Bowesco Pty Ltd is unsuccessful in its claim against the plaintiffs and a costs order is made against it, there may be a challenge to the bill subsequently rendered. This avoids that possibility. In other words it ensures unit holder funds will not be further dissipated by an argument with respect to costs. The unit holders who have not been served can be assured the costs occasioned in defending the action are limited to what is reasonable in the circumstances.
On behalf of the defendant it was said they should be provided with a copy of the costs agreement. There are two problems with that submission. First, it would be tantamount to directing the plaintiffs to waive legal professional privilege and that is not appropriate. Second, even if a copy of the costs agreement were provided it is doubtful any point could be made with respect to its reasonableness or otherwise by the defendant. It is not privy to that agreement and there is no reason why it should have a say in what the relationship should be between the plaintiffs and their solicitors.

The final point related to costs. In my view it is proper Bowesco Pty Ltd should have its costs of appearing on the application paid out of the assets held on behalf of unit holders. There were two reasons why I reached that conclusion. First, Bowesco Pty Ltd did appear and present counter arguments against the giving of advice. Those arguments may not have succeeded but the fact they were made ensured proper process was followed and the rights of the unit holders were protected. In effect, Bowesco Pty Ltd was acting as a de facto advocate for unit holder's rights. That suggest Bowesco Pty Ltd should have its costs.
Second, Bowesco Pty Ltd was joined as a defendant to the proceedings. That was proper and appropriate. Once they were joined it was also proper and appropriate Bowesco Pty Ltd should appear at the hearing and present its argument. There being no action on the part of Bowesco Pty Ltd to disqualify it from having its costs it is appropriate a costs order be made.
Because of the slightly unusual nature of this application and the even more unusual nature of the orders eventually made I will set those orders out in full:
UPON the application of the plaintiffs by originating process dated 10 April 2013 and upon hearing Mr J C Vaughan of counsel for the plaintiffs and Mr A Metaxas of counsel for the defendant IT IS ORDERED THAT:
1.It is directed pursuant to section 92 of the Trustees Act 1962 (WA) that in circumstances where:
(a)the Second Plaintiff, by the First Plaintiff, holds some $1,935,992 (Trust Property) as at 29 January 2013 (being the remaining balance of amounts repaid to the Second Plaintiff by Lanepoint Enterprises Pty Ltd ACN 110 693 251 together with interest thereon) on trusts;
(b)the First Plaintiff, on behalf of the Second Plaintiff, has received a demand from Bowesco Pty Ltd ACN 008 915 357 (Bowesco) to the effect that the First Plaintiff holds the Trust Property as trustee for Bowesco to the extent of Bowesco's claims (which claims exceed the amount of the Trust Property); and
(c)the First Plaintiff is engaged in legal proceedings with Bowesco, namely action CIV 2092 of 2012 in the Supreme Court of Western Australia (Action), for a determination of Bowesco's claims;
the Second Plaintiff would be acting properly and justifiably in applying property:
(d)which is part of the Trust Property subject to such (if any) entitlements Bowesco has, or might be held by the court to have, arising from its allegations set out in its writ dated 25 June 2012;
(e)and which might, if Bowesco's allegations are upheld, be part of property the subject of a trust in favour of Bowesco,
in the payment of the First Plaintiff's reasonable costs (including fees and disbursements charged by legal practitioners) in the defence of the Action. However:
(1)before payment of any legal costs in this manner the Plaintiffs must first obtain advice from an independent legal costs consultant to the effect that the terms of the costs agreement pursuant to which the costs are rendered are fair and reasonable (such opinion to be provided to the court); and
(2)at the conclusion of the Action the Plaintiffs must cause any legal costs paid in this manner to be taxed.
2.It is directed pursuant to section 479(3) of the Corporations Act 2001 (Cth) that the First Plaintiff would be acting properly and justifiably in causing the Second Plaintiff to act in accordance with the direction in paragraph 1 above.
3.The parties' costs of this application be taxed and paid out of the Trust Property.