The Duke Group Ltd (in Liquidation) v Angus Claymore Pilmer

[1993] SASC 3991

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA MULLIGHAN J

CWDS
Companies - application for leave to issue third party proceedings against company in liquidation - proposed proceedings in part for unliquidated damages - prima facie case established - proof of debt procedure inappropriate in view of complexity of proposed proceedings - proposed action futile - existence of relevant insurance cover not established - application refused.
Capita Financial Group Ltd. v. Rothwells Ltd. (No.2) (1989) 7 ACLC 634, Fieldinq and Anor v Vaarand P/L (In Liq) and Anor (1992) 9 ACSR 505, Zempilas and Ors v JN Taylor Holdinqs Ltd (In Prov Liq) and Ors (No. 4) (1991) 9 ACLC
297, Battiston v Maiella Construction Co P/L (1967) VR 349, Re Islinqton Metal and Platinq Works Ltd (1983) 3 All ER 218, Re Sydney Formworks P/L (In Liq)
(1965) NSWR 646 referred to; and In Re Newman Ex Parte Brooke (1876) 3 Ch.494, Re Autolook P/L; O'Brien v Bills (1984) 2 ACLC 30 and In Re Southern Cross Coaches Ltd (1932) 49 WN(NSW) 230 followed.
Companies (South Australia) Code s.37l(2). Re Berkeley Securities (Property) Ltd (1980) 3 All ER 513, not followed.

HRNG ADELAIDE, 10 March, 1 and 7 April 1993 #DATE 11:6:1993
Counsel for plaintiff:            Mr T Gray QC
  with Mr S J Lipman
Solicitors for plaintiff:         Fisher Jeffries
Counsel for defendants:         Mr J Mansfield QC
  with Mr S T Lane
Solicitors for defendants:        Ross and Mccarthy
Counsel for third party Western: Mr D F Wicks
  with Mr M G Evans
Solicitors for third party:     Thomsons

ORDER
Application refused.

JUDGE1 MULLIGHAN J The defendants seek an order that they be at liberty to issue third party proceedings against Western United Limited (In Liquidation) ("Western United"). 2. The plaintiff, formerly Kia Ora Gold Corporation NL ("Kia Ora"), has sued the defendants, who at all relevant times were practising accountants, for damages alleging breach of contract and negligence in the preparation of an alleged valuation of Western United said to have been provided to Kia Ora and a report for the purposes of Rule 3J(3) of the listing rules of the Australian Stock Exchange Limited. It is unnecessary for present purposes to mention the various allegations in the Statement of Claim and the issues raised by the Defence. It is sufficient to say that the defendants deny that they have been in breach of any duty which they owed to Kia Ora or anyone else, but, if they were, they assert that others were in breach of a duty to them. They have issued third party proceedings against persons who were directors and shareholders of both Kia Ora and Western United, claiming indemnity or contribution from each of them on grounds which have no bearing upon this application. 3. The defendants assert, inter alia, that a member of senior management of Western United, acting for and on behalf of Western United, provided information to them which was inaccurate and unreliable and was negligent in so doing. They relied upon this information in providing the report for the purposes of Rule 3J(3) and the allegations of negligence which they make involve complex legal, factual and accounting considerations and are based upon factual circumstances which are intertwined with factual circumstances upon which the plaintiff's causes of action against the defendants are based. 4. They claim damages against Western United and the proposed third party proceeding is to be the vehicle for pursuing that claim. This claim is in tort and is based upon alleged negligent misstatements made by senior management of Western United to the defendant and a member of staff undertaking the work for the plaintiff, upon which they relied. If leave is granted and the defendants are successful in their proceedings against Western United, they will seek to have the damages which they recover applied to pay, or partly pay, any damages which they have to pay to the plaintiff. They are willing to give an undertaking that if leave is granted they will not proceed to enforce any judgment which they may obtain without the leave of the court. 5. Western United was ordered to be wound up by this Court on 25th July 1989 and the process is continuing. Consequently, the defendants require leave to issue the third party proceedings: s.371(2) of the Companies (South Australia) Code which applies as the winding up commenced before the coming into operation of the Corporations Law, see s.601 of the Corporations Law. 6. The first matter to be considered is whether the defendants have a prima facie case against Western United as the resources of a company in liquidation should not be wasted in defending baseless claims: Capita Financial Group Ltd. v. Rothwells Ltd. (No.2) (1989) 7 ACLC 634 per Rogers CJ at p 636, Fielding and Anor. v. Vagrand Pty. Ltd. (In Liq.) and Anor. (1992) 9 ACSR 505 per Morling J at p 508 and Zempilas and Ors. v. JN Taylor Holdings Ltd. (in prov liq) and Ors. (No.4) (1991) 9 ACLC 297 per Debelle J. Mr. Wicks contended that there was no evidence to establish this requirement. Strictly speaking that is correct because none of the defendants has deposed to the factual basis upon which their case against Western United would be based. However, it is plain from the material upon the court file that the defendants did receive information from senior management of Western United. In the proposed third party notice, they allege that such information was incorrect. Having regard to all of the information before the court at this stage, a basis for the proposed claim can be seen. It is very likely that there will be a genuine dispute between the defendants and Western United as to the elements of the tort of negligent misstatement, or some of them. Strictly speaking, whether or not that is so will only be known should Western United respond to the proposed third party notice. However, it may be expected that the alleged cause of action and its factual base will be disputed. If not, a prime facie case will be established. If so, a genuine dispute will be apparent. In either event the requirement of a prima facie case has been established. 7. The effect and purpose of s.371(2) was discussed in Ogilvie-Grant and Anor. v. East (1983) 7 ACLR 669. The Full Court of the Supreme Court of Queensland held that the requirement of leave under the section is primarily concerned with the orderly winding up of a company in that it is designed to avoid a multiplicity of actions which would be both expensive and time-consuming, as well as in some cases unnecessary: per McPherson J at p 672. He went on to point out that what is substituted for litigation in the ordinary form is the procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit evidence. He referred to In re Kentwood Constructions Ltd.
(1960) 1 WLR 646. As to the circumstances in which a claimant should be given leave to depart from this procedure and institute proceedings, he said, at pp 672-673:-
    "It, of course, follows that it is quite impossible to state in an
    exhaustive manner all the circumstances in which leave to proceed
    may be appropriate, but in the past they have been said to include
    factors such as the amount and seriousness of the claim, the
    degree of complexity of the legal and factual issues involved, and
    the stage to which the proceedings, if already commenced, may have
    progressed. The third party proceeding proposed in the present
    case has, superficially at least, some claim to be regarded as
    sufficiently special to attract an exercise of the court's
    discretion under s.230(3) to grant leave to proceed. A principal
    object of the third party procedure is to ensure, in the words of
    Rules of the Supreme Court O 17 r 1(c), that 'any question or
    issue relating to or connected with the original subject-matter of
    the action should be determined not only as between the plaintiff
    and the defendant but also as between either or both of them and a
    person not already a party to the action'. Clearly enough, the
    underlying purpose is to avoid the costs of two or more
    independent actions, as well as to exclude the possibility of
    separate conflicting decisions on the same matter. Viewed in this
    light, the appellants' application to join the company in the
proceedings brought against them may seem not unmeritorious". 8. In Battiston v. Maiella Construction Co. Pty. Ltd. (1967) VR 349 McInerney J took the view that there were two matters of importance, namely that the claim was for unliquidated damages in tort and, if in dispute, could only be determined by a judgment of the court. Leaving all other considerations aside, the proof of debt and the hearing of an appeal de novo procedure would be totally inappropriate to resolve the defendants' claim against Western United. 9. There is another reason which suggests that leave should be granted. Western United is a creditor of the plaintiff. The debt owing is $533,000. Should the plaintiff succeed in its action against the defendants, the damages paid by them may benefit Western United, at least to the extent of that debt being paid but, should this leave be refused, Western United will be protected from liability to the defendants. Mr. Mansfield QC contended that there may be other ways in which Western United could benefit substantially if the plaintiff is successful in its action against the defendants, but I accept the argument of Mr. Wicks QC that, as it is a subsidiary of the plaintiff, any other benefit is unlikely. 10. However, there are reasons for refusing this application. Leave should not be granted if the proposed action would be futile. S.438(2) provides that in the winding up of an insolvent company, the rules applicable with regard to debts provable in the winding up will be the rules applicable under the Bankruptcy Act 1966 (Cth.). S.82(2) of that Act provides that "demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy". This exclusion is absolute except where the company is insured against the liability to a third party and an amount is received by the company from the insurer with respect to that liability in which case that amount must be paid to the third party after deducting appropriate expenses: s.447(1) of the Code. The English equivalent of s.82(3) was considered by the Court of Appeal in In re Newman Ex Parte Brooke (1876) 3 Ch 494. There the court was concerned with a claim for damages for personal injuries for a tort. A verdict was obtained before liquidation of the defendant company. It was held that there could be no proof, in bankruptcy, for damages in an action of tort until judgment had been signed and unless judgment had been signed such damages were not included when judgment was signed after the bankruptcy. This approach accords with the long established and basic principle of liquidation that the liquidation and distribution are to be treated as notionally simultaneous and the date of liquidation is the date on which all claims are to be established and valued: In re Humber Ironworks and Shipbuilding Co. (1869) LR 4 Ch App 643, Re Dynamics Corporation of America (1976) 2 All ER 669 and Re Lines Bros Ltd.
(1982) 2 All ER 183. The same approach has been taken in Australia. In In Re Southern Cross Coaches Limited (1932) 49 WN(NSW) 230 Harvey J held that no claim for damages in tort could be proved for in the liquidation of a company, unless it had been prosecuted to judgment before the resolution for the liquidation was proved: see also Re Autolook Pty. Ltd.; O'Brien v. Bills
(1984) 2 ACLC 30 per Needham J at p 33. 11. A contrary view was taken by Vinelott J in Re Berkeley Securities (Property) Ltd. (1980) 3 All ER 513. He expressed the view that there is no exclusion of a claim for damages for tort which has not been liquidated at the commencement of the winding up but there is an exclusion from proof of a claim of that nature which has not been liquidated by judgment at the time when the claim comes in to prove. 12. That view was not shared by Harman J in Re Islington Metal and Plating Works Ltd (1983) 3 All ER 218. He referred to Vinelott J's view as "undoubtedly surprising" and concluded, at p 222, that admission to proof must be determined at the commencement of the winding up. Morling J in Fielding and Anor. v. Vagrand Pty. Ltd. (In Liq.) and Anor. (supra) expressed the view that there was much to be said for the approach taken by Vinelott J in Re Berkeley Securities (Property) Ltd. (supra) and he noted the anomalies that can arise from excluding unliquidated claims in tort but including unliquidated claims in contract. However, he went on to say that he should follow the Australian cases, a conclusion with which I respectfully agree. It follows that unless there is insurance covering, wholly or in part, the defendants' claim against Western United, their proposed action would be futile. 13. I now turn to the question of insurance. Western United had a professional indemnity insurance policy prior to 11th June 1989. Despite investigations the liquidator has not been able to ascertain if any such insurance existed after that date. The events which are the subject of the claim by the plaintiff against the defendants and the claim which the defendants wish to make against Western United occurred before that date. However, the information received by the liquidator is that the insurance policy was of a "claims made" nature, which means that a claim had to be made during the currency of the policy. The liquidator has also been informed by a former director of Western United that he believes that no notice of the claims made in the proposed third party notice has been given. The liquidator did not renew the policy following his appointment as liquidator. He continues to make enquiries as to what insurance cover had been arranged by Western United and copies of all policies have been requested. However, as matters stand at present, the evidence does not disclose that Western United had any relevant insurance cover. 14. Mr. Mansfield QC contends that if there is a prospect of relevant insurance cover being in existence, that is sufficient for present purposes. It is unnecessary to decide whether the proposed claim, if successful, would be covered by insurance. In many cases it would not be possible to do so. Mr. Mansfield sought support for his contention from the decision of McLelland J in Re Sydney Formworks Pty. Ltd. (In Liq.) (1965) NSWR 646. There, McLelland noted that there was nothing before him to show that the company was insured against the liability which was the subject of the claim, but that there may have been insurance and consequently the claimant should have the opportunity of obtaining the benefits of the legislative provision which was then in force and is the equivalent of s.447(1) if those benefits proved available to him: p 651. He went on to say that the winding up could be protected by an undertaking of the type which the defendants are prepared to give. I do not think this decision is authority for Mr. Mansfield's contention. In Re Sydney Formworks Pty. Ltd. (In Liq.) the claimant's proposed action was for damages for personal injuries against the company which was his employer. It was highly likely that the company was insured as the claimant had received workers' compensation payments from an insurer. Whilst McLelland J had to acknowledge that the evidence before him did not establish that the company was insured, he was obliged to accept that it may have been insured. It is, perhaps, reasonable to conclude that he thought that the existence of insurance was highly likely in view of the company's obligations under the Workers' Compensation legislation and the fact that employers commonly insured against the type of claim which was being considered. Here, the evidence establishes that it is unlikely that there is any insurance cover. In my view the defendants need the benefit of s.447(1) if leave is to be granted and they must establish that their proposed claim is covered by insurance. They are unable to do so. They cannot even establish that there is a reasonable possibility that the proposed claim is covered. 15. Lastly, I mention the argument of Mr. Mansfield that as Western United may not be truly insolvent and may benefit from the action brought by the plaintiff against the defendants, they should be permitted to proceed with their claim on the basis of giving the undertaking, so that in due course, when the application is made to enforce their judgment, the true position as to all relevant matters will be known, including whether Western United will benefit from any judgment obtained by the plaintiff. The evidence does not provide a basis for apprehending that Western United is likely to benefit from such a judgment beyond the present debt being paid. The evidence establishes that Western United is insolvent and is likely to remain so even if the debt is paid. 16. In my view there is no basis for the granting of leave and the application is refused. I would have granted leave if the defendant's proposed claim was covered by insurance. If the defendants so wish I shall merely make no order on their application and adjourn it sine die, so that if it is established that an insurance cover exists, the application can again be pursued.