Vagrand Pty Ltd (in Liq) v Fielding

[1993] FCA 179

Re: VAGRAND PTY LIMITED (IN LIQUIDATION)
And: JOHN ARTHUR FIELDING; JOHN FIELDING CPA MANAGEMENT SERVICES PTY LIMITED;
RICHARD NEVIN MOFFITT; GRAHAM KENNETH STREET; WARWICK JOHN LEWARNE; JOHN
WILLIAM WARREN and OTHERS
No. NG0003 of 1993
FED No. 179
Number of pages - 16
Corporations
(1993) 10 ACSR 373, (1993) 113 ALR 128
(1993) 41 FCR 550

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox(1), Burchett(1) and Beazley(1) JJ

CATCHWORDS

Corporations - Application for leave to commence proceedings against a company in liquidation - Leave limited to application for order under s.87 of Trade Practices Act - Whether s.87 relief may be granted after commencement of winding up - Standard of evidence required in order to justify grant of leave - Whether prima facie case must be shown - Costs.

Companies Code (NSW), s.371(2).

Trade Practices Act 1974, s.87.

HEARING

SYDNEY, 16 March 1993

#DATE 5:4:1993

Counsel for the Appellant: Bernard Coles QC

Solicitors for the Appellant: Baker and McKenzie

Counsel for the First Respondent: N Cotman

Solicitors for the First Respondent: Stephen Blanks

Counsel for the Second and Third
Respondents: D Davies

Solicitors for the Second and
Third Respondents: Phillips Fox

ORDER

The Court orders that:

1. The appeal be dismissed.

2. The appellant pay the costs of all the respondents.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

WILCOX, BURCHETT and BEAZLEY JJ This is an appeal against a decision of a Judge of the Court (Morling J) giving leave to the first and second respondents, John Arthur Fielding and John Fielding CPA Management Services Pty Limited, to proceed with an action they had commenced against Vagrand Pty Limited, the present appellant. Leave was granted only in relation to the applicants' claim for relief under s.87 of the Trade Practices Act 1974, not their claim for damages . Leave was necessary because Vagrand is in liquidation. The decision of Morling J is now reported: see Fielding v. Vagrand Pty Limited (1992) 111 ALR 368.

1. The winding up order was made under the Companies (NSW) Code, before the commencement of the Corporations Law. Accordingly, s.371(2) of the Code applied to the application: see s.601 of the Corporations Law. Section 371(2) provides:
   

"371(2) Where an order has been made for the winding up of a company, or a provisional liquidator has been appointed in respect of a company, no action or other civil proceeding may be commenced or proceeded with against the company except -

(a) by leave of the Court; and

(b) in accordance with such terms as the Court imposes."

1. The second respondents in the action are the members of a firm of accountants, Thompson Douglass and Co. They did not participate in the argument before Morling J. They were not initially made parties to the appeal. But when the appeal to this Court was called for hearing, Mr D Davies of counsel appeared on behalf of these respondents and sought that they be joined as respondents to the appeal and permitted to put submissions in opposition to those of counsel for the appellant. Mr Davies contended that his clients had a real interest in the appeal; if it succeeded, there would be no possibility of the applicants' losses being eliminated or reduced by a s.87 order. Mr Davies argued that it was in the interests of his clients that the applicants' losses be reduced as much as possible; his clients might eventually be held liable for them. We accepted these submissions and granted leave. But we indicated that this order would not necessarily entitle Mr Davies' clients to an order for costs if the appeal failed.

2. The case arises out of a take-over by the Westmex group of companies of an entity known as Australian Petroleum Fund ("Auspet"). In their amended Statement of Claim the applicants allege that, on 30 June 1989, the first applicant held 198,400 Auspet units. They were divided into two categories, explorer units (56,400 held), and capital units (142,000 held). On that day, it is said, Vagrand (a member of the Westmex group) made an offer to all Auspet unit holders. The offer was to procure the allotment to unit holders of shares in Westmex Limited in return for the transfer of their Auspet units to Vagrand, in the proportions of one Westmex share for each five capital units or four explorer units. Vagrand supplied information to all offerees, including information about the financial affairs of the Westmex group. It is said that this information was false. The applicants claim that the first applicant relied on the false information in deciding to accept Vagrand's offer. The applicants also say that, on 6 August 1989, the second applicant purchased from a third party 2,000 Auspet explorer units and 1,000 capital units. It is apparently claimed that the decision to purchase was influenced by the information supplied by Vagrand. It is not alleged that the second applicant accepted Vagrand's offer in relation to these units. But it is claimed that, on 12 October 1989, Vagrand issued a notice that the capital units had been compulsorily acquired. There is also a claim that, acting on the faith of the representations, the first applicant acquired additional Westmex shares. The Westmex shares acquired through these various transactions are said now to be worthless and, as to all of them, it is alleged that the applicants retained the shares by reason of their reliance upon the representations. The applicants claim that the second respondents, Thompson Douglass and Co, were involved in the supply of the false information.

3. The decision of Morling J was an interlocutory one, but the appeal has been brought by leave. Counsel for the appellant, Mr B Coles QC, submitted to us that the decision of Morling J was wrong in principle because it failed to give effect to a fundamental rule. He described this rule by saying that, upon the liquidation of a company, its assets are available only for the purposes stipulated by the Companies Code (payment of expenses of the liquidation, debts etc); and for no other purpose. It follows, he said, that no s.87 order may be made against those assets; the s.87 claim must fail.

4. Mr Coles' submission is critical to this case and of general importance. But we think it is wrong. It overstates the true position. It is true that, upon a winding up of a company, the appointed liquidator comes under an obligation to take control of the company's assets and realise them for the benefit of the creditors, after payment of all proper outgoings. But the liquidator takes the assets subject to such liabilities as then attach to them. If a particular asset is subject to a mortgage, the liquidator takes the asset subject to the mortgage. If an asset is held by the company in trust for somebody else, the liquidator is bound by the trust. In the same way, as Morling J pointed out, as a consequence of taking control of an asset, a liquidator may be faced with litigation. At 374 his Honour said:
   

"... none of the cases to which I have referred preclude the granting of leave to an applicant who seeks a remedy other than a money judgment. Thus leave to proceed has been given to a plaintiff who seeks an order of specific performance (Thames Plate Glass Co v. Land and Sea Telegraph Construction Co (1871) LR 6 Ch App 643), or an injunction (see Wyley v. Exhall Coal Mining Co Ltd (1864) 33 Beav 538), or rescission of a contract (Re Pacaya Rubber and Produce Co Ltd (1913) 1 Ch 218).

1. The point, of course, is that the assets come to the liquidator with their history and inherent characteristics. Although the liquidator takes the assets on behalf of the creditors, third parties retain any rights which enure to them as a result of that history or those characteristics.

2. The last of the three cases mentioned by Morling J is particularly interesting in the present context. Pacaya Rubber involved proceedings to set aside an agreement compromising pending litigation. The plaintiff claimed that the compromise was procured by fraud. The company went into liquidation after the compromise. Neville J granted leave to institute an action against the company seeking an order cancelling the compromise agreement. The Court of Appeal affirmed his order. At 223-224 Buckley LJ said:
   

"That order was right, for the cancellation of the agreement which the plaintiffs sought could not have been obtained in the winding up proceedings, but only in the action".

The present situation is similar. Mr Fielding and John Fielding Management cannot obtain from the liquidator the relief they seek under s.87. They can achieve this relief only by a successful application to this Court.

1. We do not suggest that, in a case where the desired relief is otherwise unavailable, an applicant is automatically entitled to leave under s.371(2) of the Companies Code, or its equivalents. The question of leave is always a matter of discretion. But the circumstance that relief is not otherwise available to an applicant must always be a significant factor in favour of leave.

2. The second matter raised by Mr Coles, in his challenge to the order of Morling J, is the standard applied by his Honour in considering the merits of the case demonstrated by the applicants for leave. After referring to a number of authorities on the point, Morling J said at 371:
   

"In summary, in the exercise of its discretion under s.371(2) the court should only grant leave to proceed where it is satisfied that a real dispute exists between the parties and that in light of all the circumstances it is more convenient (or otherwise appropriate) to allow the matter to proceed to judgment."

1. Mr Coles submits that the test, "real dispute", imposes too small a burden upon an applicant for leave. The true position, he says, is that an applicant must demonstrate a prima facie case; that is, the applicant must provide evidence of each element of its claim.

2. There are authorities in which the term "prima facie case" has been used to describe the case required to be demonstrated by an applicant for leave. But we are not aware of any case in which it has been held that an applicant must adduce evidence of every element of its claim. To impose that burden would be to shut out many meritorious claims. It is commonplace for actions against companies to depend upon documentary evidence. Until there is discovery of relevant documents, it may be impossible for an applicant to prove each element in its case. On occasions, it may also be necessary for the applicant to interrogate the respondent or subpoena other parties. These steps cannot be taken until the action is commenced.

3. The reason for imposing a requirement of leave, in the case of litigation against companies in liquidation, was explained a century ago by Manning J, of the New South Wales Supreme Court, in Thomson v. Mulgoa Irrigation Co Ltd (1893) 4 BC (NSW) 33:
   

"All that s.140 means is that a company in liquidation is not to be harassed and its assets wasted by unnecessary litigation, and the leave of the Court is therefore required as a safeguard. Before any action can be brought or continued against a company, the Court must investigate the intended litigation."

1. Manning J did not suggest that it was necessary to prove all the elements of an applicant's claim. In the case before him, he was content that the applicant for leave "pledge his oath that he has a valid and unimpeachable document". By the word "document", he was referring to the mortgage relied on in a foreclosure suit, the validity of which was under challenge. It was sufficient that "an affidavit of merits" was provided, covering the basic issue in the case.

2. In Re Sydney Formworks Pty Ltd (in liquidation) (1965) NSWR 646 at 649-650 McLelland CJ in Eq expressed the reason for the requirement of leave in this way:
   

"This view is in keeping with what I consider to be the obvious intention of the section, namely, to ensure that the assets of the company in liquidation will be administered in accordance with the provisions of the Companies Act and that no person will get an advantage to which, under those provisions, he is not properly entitled, and to enable the Court effectively to supervise all claims brought against the company which is being wound up."

1. In this case, McLelland CJ in Eq did not find that a prima facie case had been demonstrated. The main issue he had to determine was the effect of commencement of an action without prior leave. He held that, in such a case, the section requiring leave could not be pleaded in bar of the action. He also held that the court administering the liquidation could give leave to continue the action. So far as the case report reveals, the merits evidence before his Honour was confined to evidence that the plaintiff had been employed by the company and had sustained an injury in the course of his employment. There was apparently no evidence suggesting negligence by the company, a matter which was, of course, integral to the plaintiff's case.

2. Re A.J. Benjamin Ltd (in liquidation) and The Companies Act (1969) 90 WN (Pt 1) (NSW) 107 was another personal injuries claim. In his reasons for judgment Street J made it clear that the evidence before him did not establish a prima facie case. He also made it clear that this did not matter. He said at p 109:
   

"I have described the applicant's evidence as superficial for the reason that it contains merely the bare allegation that he was injured in June

1962. It contains no attempt to present an outline of the material upon which the applicant intends to rely in bringing against the company a claim such as he now seeks leave to bring. Ordinarily an application under s.230 should be supported, inter alia, by some evidence that there is a question to be determined in the proceedings which it is desired to proceed with or commence. This is a point, however, which could be satisfied by the applicant filing a further affidavit. The respondent accepts the reality of the situation that evidence could be furnished by the applicant to meet this deficiency, and, taking a common-sense view of the situation, does not press that particular objection. I mention it, however, as I do not wish this case to be taken as a precedent recognizing that applicants for leave need not disclose in a prima facie sense the case that they seek leave to bring."

1. In a judgment written for the Queensland Full Supreme Court in 1983 McPherson J, a recognized authority on company law, expounded the history of, and principles governing, the requirement of leave. The case was Ogilvie-Grant v. East (1983) 1 ACLC 742. At 743-745 he said:
   

"The prohibition against commencing or proceeding with an action or other proceeding against a company once a winding up order is made has been a feature of legislation with respect to liquidation of companies from at least the time of the United Kingdom Companies Act 1862 ... It has since been extended to the case of a company to which a provisional liquidator has been appointed, and more recently to the case of a creditors' voluntary winding up: see sec. 263(2) of the Act. ... The statutory restriction on actions and proceedings has always been accompanied by a power to grant leave to proceed, whether upon terms or otherwise; but the section itself gives no direct indication of the circumstances in which such leave is to be granted, and there has been surprisingly little close examination of the subject in the decided cases.

'The precise purpose and function of provisions similar to sec. 230(3) have seldom been explained. From time to time the suggestion has been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably amongst all creditors so that none of them will gain an advantage over others: see e.g. Re Sydney Formworks Pty. Ltd. ... But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well in some cases as unnecessary. This explanation has been accepted in a number of Canadian cases and appears also to have been adopted by Street J, in Re A.J. Benjamin Ltd.' ... "As a matter of history, a winding up by the Court was and remains today an administration conducted by the Court: ... Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a 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 material: ... There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstance that on appeal it is possible under modern rules of procedure for the Judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so.

"The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a Judge, is therefore reduced largely to one of choosing between alternative forms of procedure. The effect of sec. 230(3) is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. This is really all that is meant in this context by expressions such as 'convenience' and 'balance of convenience' that appear in judgments on the matter: see, for example, Re The Queensland Mercantile Agency Company Ltd. (1888) 58 LT 878 at p 879; (Stewart v. Intercity Distributors Limited (1960) NZLR 944 at p 946 and cf. Century Mercantile Co. v. Auckland Provincial Fruitgrowers' Co-operative Society Ltd. (1921) NZLR 272 at p 276.) 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."

1. It will be noted that McPherson J did not stipulate for a prima facie case. On the contrary, "the amount and seriousness of the claim" and "the degree of complexity of the legal and factual issues involved" were stated to be two of the circumstances requiring consideration.

2. So far as we are aware, the most recent discussion of the relevant test is that contained in the judgment of Rogers CJ in Comm D in Capita Financial Group Ltd v. Rothwells Ltd (No.2) (1989) 7 ACLC 634. At 636 his Honour referred to the courts "uniformly over the years" demanding "that there be evidence of a prima facie case". But it is apparent that he was not using the term "prima facie case" in its technical sense; that is, evidence of all the elements of the cause of action. His Honour cited in support of his statement a number of cases, including all those mentioned above, in which there was no prima facie case, in the technical sense of the word; and no requirement of it. At 637 Rogers CJ in Comm D. said that it is "quite clear from the evidence (which he identified) that there is a real dispute between the parties". He referred to the course taken by Street J in Re A.J. Benjamin and followed a similar course himself. He directed that the plaintiff's statements of evidence be verified on oath. He said that this material "will then stand, no doubt, as adequate evidence of a prima facie case"; but, as an experienced commercial judge, he would have realised that the statements would not necessarily prove every element in the case. They might well need to be supplemented by documentary evidence.

1. Upon a close reading of the relevant authorities, it is apparent to us that the courts have not in fact required applicants for leave to demonstrate a prima facie case against the company in liquidation, in the technical sense of that term. They have required to be affirmatively satisfied that the claim has a solid foundation and gives rise to a serious dispute. Having regard to the course actually taken by the courts, the term "prima facie case" is misleading. Perhaps it should be avoided in the future.

2. The test which has actually been applied is akin to that now used in considering whether interlocutory relief should be granted: "a serious question to be tried". See Castlemaine Tooheys Limited v. The State of South Australia (1986) 161 CLR 148 at 153, where Mason ACJ made it clear, with reference to the very same question which arose in the context of an interlocutory debate, that the test of "a serious question to be tried" is generally to be preferred to that of "a prima facie case". It is appropriate that the same standard of proof of the merits should be required for each of these forms of relief. In a particular case an applicant may need both orders. We would think it anomalous if an applicant had to meet a higher requirement merely to commence an action than that necessary to obtain an order potentially imposing a substantial burden on the respondent.

3. In our opinion Morling J did not fall into error of law in relation to the evidence required to found an order for leave. The evidence tendered to him clearly established the existence of a serious claim and a real dispute. We need not consider whether, as counsel for both sets of respondents contend, the evidence went so far as to demonstrate a prima facie case, in the technical sense of that term.

4. Mr Coles also contended that Morling J erred in taking into account several matters that were extraneous to the decision he had to make. We need not detail these matters. We do not regard any of them as extraneous to the exercise of the wide discretion committed to his Honour.

5. Finally, Mr Coles argued that Morling J should have imposed upon the applicants for leave a condition that they undertake to pay the liquidator's costs of the principal proceedings, regardless of its outcome. He submitted that such a condition was justified by the applicants' comparatively small holdings of Auspet units. The position would be different, he said, if the principal proceeding was brought by a major unit holder.

6. It seems to us that this proposition has only to be stated to be rejected. The likely effect of such a condition would be to force the applicants to abandon their claims. Mr Coles does not suggest that their claimed losses are trivial or nominal. If the facts are as alleged by the applicants, by reason of the appellant's conduct they have sustained losses that are real and substantial, though less than the losses sustained by some (perhaps many) other unit holders. The size of the claims may influence the liquidator's decision as to the course he should take in relation to them. But it cannot warrant the Court closing its door to the applicants. The burden of litigation costs is a matter of real and justifiable concern to the courts and the community. It would be perverse for a court to discriminate against litigants with a small (though real) stake in a dispute, often people with smaller financial resources, by imposing upon them a special burden to which larger protagonists were not subject.

7. As indicated earlier, we expressly left open the question whether the third respondents should recover their costs, if the appeal failed. However, after hearing counsel on the matter, we believe that there is no reason for us to depart from the usual practice of ordering the unsuccessful appellant to pay the costs of all the respondents. This is not a case where a party failed to participate in a matter at first instance, but, nonetheless, was allowed to appeal and did so successfully. In such a case it might be said that, if the party had put argument at first instance, the appeal might have been unnecessary. In the present case, although the third respondents did not participate at first instance, their position was upheld. As it seems to us, they should have been named as respondents in the filed Notice of Appeal. That not having been done, they were entitled to apply to be joined as respondents and to defend the result already attained.

8. The appeal should be dismissed and the appellant ordered to pay the costs of all respondents.