RH Woodward and Co Pty Ltd v M and T Meat Supply (Aust) Pty Ltd
[2011] VSC 322
•15 February 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
LIST E
S CI 2010 2894
| RH WOODWARD AND CO PTY LTD (ACN080 256 397) | |
| - and - | |
| FREWSTAL WHOLESALE PTY LTD (ACN 075 922 511) | Plaintiffs |
| v | |
| GREGORY STUART ANDREWS in his capacity as the Deed Administrator of M & T Meat Supply (Aust) Pty Ltd (subject to a deed of company arrangement) | |
| - and - | |
| M & T MEAT SUPPLY (AUST) PTY LTD (subject to a deed of company arrangement) ACN076 299 879) | Defendants |
---
JUDGE: | Gardiner AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 December 2010 | |
DATE OF RULING: | 15 February 2011 | |
CASE MAY BE CITED AS: | RH Woodward and Co Pty Ltd & Anor v M & T Meat Supply (Aust) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 322 | |
---
CORPORATIONS ― application pursuant to s 600A of Corporations Act 2001(Cth) ― costs ― plaintiffs sought leave to discontinue application ― r 25.05 and r 63.15 of the Supreme Court (General Civil Procedure) Rules ― plaintiff ordered to pay defendant’s costs by reason that discontinuance amounted to a surrender in the litigation.
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr E. Woodward SC | Hunts Lawyers as agents for Kells the Lawyers |
| For the First Defendant | Mr M. McKillop | Mills Oakley Lawyers |
| For the Second Defendant | Mr R. Broberg | Irlicht and Broberg |
HIS HONOUR:
On 27 May 2010, the plaintiffs commenced this proceeding seeking orders that a resolution passed by related creditors at the second meeting of creditors of the second defendant (“the company”) on 23 March 2010 to have the company execute a deed of company arrangement be set aside under s 600A of the Corporations Act2001. The plaintiffs also sought orders that the company be placed in liquidation and that Mr Andrews, the firstnamed defendant, be appointed liquidator.
The plaintiffs now seek leave to discontinue the application. In such circumstances, r 25.05 of the Rules provides that liability for costs shall be determined in accordance with r 63.15 of the Rules. Rule 63.15 provides:
Unless the Court otherwise orders, a party who discontinues or withdraws part of a proceeding, counterclaim or claim by third party notice shall pay the costs of the party to whom the discontinuance or withdrawal relates to the time of the discontinuance or withdrawal (emphasis added).
The plaintiffs seek an ‘otherwise order’ in respect of costs. The defendants seek an order that the plaintiffs pay their costs on an indemnity basis.
On 17 February 2010, Mr Andrews was appointed as administrator by the directors of the company. On 23 March 2010, at the second meeting of creditors, it was resolved that the company execute a deed of company arrangement. The resolution was passed by a majority of creditors in value and number after a poll of votes was taken.
Nine creditors voted in favour of the resolution, with debts totalling $1,026,258.96. Two of those creditors were unrelated to the company or its directors and they voted by way of general proxies given to one of the directors of the company, Mr Warchulski. Five creditors, including the plaintiffs, voted against the resolution with debts totalling $730,314.72. The resolution that the company enter into a deed of company arrangement was passed by reason that a majority of the related party creditors voted in favour of the resolution.
On 14 April 2010, the company, its directors and Mr Andrews executed a deed of company arrangement.
On 1 April 2010, the plaintiffs’ solicitors wrote to Mr Andrews as deed administrator foreshadowing that an application would be made on behalf of the plaintiffs pursuant to s 600A of the Corporations Act. The plaintiffs’ solicitors did not disclose the grounds for the application.
On 28 April 2010, the plaintiffs’ solicitors wrote to the deed administrator stating that goods with the company’s logo still on the packaging had been sold by a related creditor of the company, South Pacific Meat Export Pty Ltd (“South Pacific”). The plaintiffs’ solicitors requested that Mr Andrews investigate the issue.
Some two weeks later, on 14 May 2010, Mr Andrews responded advising that the goods were stock that was purchased from the company by South Pacific and there was an invoice which disclosed that South Pacific had been charged for the goods.
On 27 May 2010, the plaintiffs’ application was served on Mr Andrews. The originating process was supported by an affidavit of Mr Robert Frew, a director of the second plaintiff. That affidavit, for the most part, was directed to establishing the formal matters required under s 600A(1)(a) and (b). The only mention of the matters required to be established by s 600A(1)(c) was the expression of a belief without factual substantiation that the unsecured trade creditors of the company would be in a better position if the company was placed into liquidation.
On 18 June 2010, the application came before Efthim AsJ. Mr Andrews was ordered to make certain documents available for inspection by the plaintiffs. Because of the absence of Mr Andrews and other staff from his office, the provision of those documents was delayed. The proceeding was listed for hearing on 3 August 2010.
On 20 July 2010, the plaintiffs obtained the issue of ten subpoenas directed to various parties involved in the company’s affairs, including its directors. The plaintiffs stated that, because the company was not taking an active role in the proceedings, that the plaintiffs were forced to issue subpoenas to obtain the documents required to advance the plaintiffs’ case.
On 3 August 2010, I gave leave to the parties to uplift and copy the documents produced pursuant to the subpoenas, gave directions for the filing of further affidavit material and adjourned the proceeding for hearing on 19 October 2010.
Some time before the date set down for hearing, it became evident that the matter was not ready to proceed and on 13 October 2010, I made further directions by consent vacating the hearing date and setting the matter down for hearing on 13 December 2010.
In her affidavit sworn 29 October 2010, Gabrielle Polczynski, of the plaintiffs’ solicitors, raised certain issues in regard to the administration generally. This affidavit was responded to by two affidavits filed on behalf of the defendants, being a further affidavit of Angela Kennedy sworn 17 November 2010 and an affidavit of Bob Warchulski sworn 22 November 2010.
The plaintiffs, after reviewing those two affidavits, considered that the concerns that they had were, for the most part, answered. Ms Kennedy, who is an accountant employed at Mr Andrews’ office, provided details in respect of loan accounts, the voting at the meeting at which the deed of company arrangement was passed and information in respect to potential voidable transaction and insolvent trading proceedings. Mr Warchulski deposed to the details of loan accounts in respect of which the plaintiffs had raised questions.
In her affidavit of 10 December 2010, Joanne Hardwick, a partner in the firm of Mills Oakley Lawyers, the solicitors for Mr Andrews, chronicled the progress of the matter prior to the filing of the originating process until 6 December 2010. Ms Hardwick exhibits the significant correspondence passing between her office and the office of the solicitors for the plaintiffs.
Ms Hardwick exhibits a letter from the plaintiffs’ solicitors of 1 December 2010 which was expressed to be without prejudice but indicated the letter would be produced to the Court on the question of costs. The plaintiffs indicated their willingness to consent to orders dismissing their application on the basis of each of the defendants agreeing to bear their own costs. On 3 December 2010, Ms Hardwick wrote back to the plaintiffs’ solicitors rejecting the offer contained in the letter of 1 December. She observed:
We told you in pre-litigation correspondence that your clients’ concerns were unfounded. Despite this correspondence your clients issued their application. As a consequence, our client was required to go to the trouble of preparing extensive affidavit material and incurred significant legal costs in the process. The numerous subpoenas and affidavit material did not demonstrate grounds for the application and your clients now wish to discontinue with no costs consequence.
Ms Hardwick indicated that Mr Andrews was prepared to agree to orders dismissing the proceeding on the basis that the plaintiffs pay his costs fixed in the sum of $10,000.
On 6 December 2010, the plaintiffs wrote to the defendants and to my associate foreshadowing the present application.
Ms Hardwick’s evidence, which is supported by contemporaneous written communications, reveals that Mr Andrews and his legal advisers have conducted themselves professionally and appropriately when dealing with the plaintiffs’ requests for information and co‑operation.
Both the plaintiffs and each legal representative of the defendants referred me to the statement of McHugh J in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin[1] where he stated:
If it appears that both parties have acted reasonably in commencing and defending proceedings and the conduct of the parties continues to be reasonable until the litigation will settle or as further prosecution became futile, the proper exercise of the cost discretion will usually mean that the Court will make no order as to costs of the proceeding.
[1](1997) 186 CLR 622 at 625.
Mr Woodward SC, who appeared on behalf of the plaintiffs, referring to a decision of Ringwood Plus Pty Ltd v Commissioner of State Revenue,[2] stated that it is now generally accepted that a distinction needs to be drawn between cases in which one party, after litigating for some time, effectively surrenders to the other, to cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs.
[2][2004] VSC 494 per Hollingworth J at [13] – [23].
Mr Woodward says that this case is an example of the latter type and is not a surrender on the part of his clients. Mr Woodward, while accepting that his clients bear the onus of satisfying the Court that it should “otherwise order”, emphasised that the Court’s discretion is unconstrained and each case will depend on its own circumstances. In submitting that his clients did not act unreasonably in commencing the proceeding, he drew attention to several features of the proceeding. These were as follows:
(a)the total realisations on liquidation and under the DOCA were identical;
(b)the differences between the likely return to creditors on liquidation and under the DOCA were marginal (21.7 cents against 30.6 cents);
(c)at the time of voting, the investigations into the possible voidable transactions and insolvent trading were preliminary and incomplete;
(d)the DOCA was approved solely on the votes of related creditors, none of whom were making any direct financial contribution to the DOCA and one of whom stood to receive distributions under the DOCA for a substantial proportion of his claim;
(e)a creditor had observed questionable trading in the stock of the company post appointment;
(f) the plaintiffs’ concerns about the circumstances leading to the approval of the DOCA were real and substantial.
In addition, Mr Woodward emphasised the following matters:
(a)The process server attempting to serve the director of the company, Mr Magdziarz with a subpoena detailing in his affidavit of attempted service exchanges which were not consistent with a person having nothing to hide.
(b)Investigations subsequent to the commencement of the proceeding revealed other matters which raised significant concerns about the legitimacy of the debts claimed by related creditors and therefore the voting at the second meeting of creditors.
(c)Ms Kennedy’s second affidavit outlines in detail further investigations and enquiries which support the validity of those concerns.
(d)The Court can infer that those further investigations detailed by Ms Kennedy unearth documents and information that was not previously available to Mr Andrews.
(e)Ms Kennedy’s further affidavit also deposes that her further investigations into unfair preferences were still preliminary in nature.
(f)The matters referred to by Ms Kennedy in her further affidavit in respect of the possible insolvent trading claims were debatable.
Mr Woodward contends that Mr Andrews in resisting the proceeding has been both active and partisan to an extent that was not appropriate in the circumstances. I observe however that Mr Andrews’ conduct was not criticised by the plaintiffs in their affidavits and indeed the originating process seeks a further order that he be appointed as liquidator.
In response, Mr McKillop on behalf of Mr Andrews states that this case is a surrender by the plaintiffs. He submitted that this is a case of the plaintiffs seeking to discontinue because they doubt they can prove their claim. He stated that from the initiation of the proceeding his client refuted the allegations made in the application and stated that if an application was pressed an order for costs would be sought on an indemnity basis. In particular, it was communicated to the plaintiffs’ solicitors that the supporting affidavit material provided no support for the claim that the resolution to pass the deed was contrary to the interests of creditors as a whole or to any class of them and did not depose to any relevant prejudice or reasonably likelihood of prejudice to the creditors. Mr McKillop also drew attention to Ms Hardwick’s letter of 2 June 2010 where she indicated to the plaintiffs that the rate of return of the deed was 41% higher than the estimated rate of return under liquidation.
Mr McKillop submitted, and as stated above I agree, that Mr Andrews co‑operated at all times with the plaintiffs’ enquiries. The concern expressed in Ms Polczynski’s affidavit of 29 October 2010 regarding the loan account of the director of the company was not raised in the original material. As I have observed, Ms Kennedy’s further affidavit assuaged the plaintiffs’ concerns in this regard.
Mr McKillop emphasised the following features of the plaintiffs’ conduct to support his contention that the plaintiffs acted unreasonably:
(a)The plaintiffs now seek to discontinue the proceeding having failed to make out any grounds to support their claim on their own admission.
(b)While the case law indicates that the law should not consider how the proceeding would have been determined on the merits, the Court is entitled to consider the grounds relied on by the plaintiffs to determine if their conduct was reasonable.
(c)The Court is entitled to review the material to determine whether the case is one of surrender and Mr McKillop indicates that it was.
(d)The plaintiffs commenced this proceeding to set aside the deed without grounds of any real merit.
(e)Mills Oakley Lawyers’ letter of 2 June 2010 observed this and warned if the application was continued the first plaintiff would seek indemnity costs.
(f)The affidavit material filed in support of the originating process confirmed the application was without merit as then constituted – as I have said the only mention of the matters required to be established by s 600(1)(c) was not developed beyond mere assertion.
(g)The plaintiffs, despite offers from the solicitors for Mr Andrews did not ask Mr Andrews to provide further documents.
Mr McKillop says that it is in the interests of the creditors of the company as a whole that the deed fund be recompensed by an award of costs, observing that Mr Andrews’ remuneration as deed administrator will not be recoverable. He submitted that by refusing to accept a reasonable Calderbank offer regarding costs, the plaintiffs cannot be said to have had acted commercially regarding their consideration of the cost question.
In my view, the plaintiffs should be made to pay the costs of the defendants of the proceeding. I consider that the plaintiffs have surrendered to the defendants in the litigation. The proceeding when commenced contained nothing more than formulaic and generic assertion in the form of mere recitation of the third element of the matters required to be demonstrated to succeed under s 600A(1), that is, that the resolution that the company execute a DOCA was contrary to the interests of creditors as a whole or has prejudiced or was reasonably likely to prejudice the interests of creditors who voted against the proposed resolution. It appears that the plaintiffs hoped to pull themselves up by their bootstraps after the commencement of the proceeding but were unable to do so. It could not be said that Mr Andrews was unco‑operative in regard to the provision of information and documentation or improperly obstructed the plaintiffs in any way. As to the factors pointed to by Mr Woodward that the plaintiffs did not act unreasonably, I observe as follows:
(a)There was a significant difference in the likely return to creditors under the DOCA (calculated by Mr McKillop to be 41% higher than the estimated return under liquidation).
(b)As to the investigations into possible voidable transactions, this feature is almost always present in the scenario where the creditors resolve that a company enter into a DOCA. Typically, the time periods fixed under the Act for convening meetings of creditors do not permit comprehensive investigations into voidable transactions or insolvent trading to take place.
(c)Mr Woodward observes that the DOCA was approved solely on the votes of related creditors, none of whom were making any direct financial contribution to the DOCA and one of whom stood to receive distributions under the DOCA. Of course, in order to commence a proceeding under s 600A it must be shown under s 600A(1)(b) that the vote was passed by votes of related creditors.
(b)As to the questionable dealings involving a related creditor selling goods packaged with the company’s logo, the evidence is that this matter was quite quickly shown to be without substance by Mr Andrews when it was raised.
One can perhaps sympathise with creditors in the position of the plaintiffs where related creditors’ votes have resulted in liquidation being avoided and a DOCA being entered into. Section 600A of the Act requires something more to impeach the DOCA, that is, that the resolution to pass the deed is contrary to the interests of creditors of the company or has prejudiced the interests of creditors who voted against the resolution. Despite their best efforts, the plaintiffs have been unable to make out this ground. When they commenced the proceeding without a proper foundation, they took a risk in that regard. That risk involved an exposure for the other parties’ costs in circumstances where the plaintiffs have had to surrender because of their inability to establish a vital element of the requirements of section 600A. As a result of the plaintiffs’ actions, the general body of creditors, of whom ironically the plaintiffs make up a large part, have had the funds available to them depleted by the plaintiffs’ commencement of these proceedings for which they should be recompensed.
The plaintiffs’ approaches to Mr Andrews’ solicitors in early December are in my view a quest to make a virtue out of a necessity as it was then evident that they could not establish the matters required to succeed. The plaintiffs should have more thoroughly investigated the matter before commencing the proceeding.
The plaintiffs should not have prematurely embarked on this proceeding. Mr Andrews invited them to withdraw but those approaches were rebuffed. The plaintiffs’ rejection of the Calderbank offer made by Mr Andrews was unreasonable and they should pay his costs of the proceeding on an indemnity basis, including the costs of this application in respect of costs. Unless Mr Broberg can point to the existence of a Calderbank offer by his clients, I will order that the plaintiffs pay his clients’ costs on a party/party basis.
---
0
1
0