In the Matter of Section 564 of the Corporations Law & in the Matter of Allquip (W.A.) Pty Ltd (in liq) v Allan, Robert Hector & Ors [1997] FCA 1368

FEDERAL COURT OF AUSTRALIA COMPANIES - external administration - winding up - creditor funding recovery action by liquidator - whether funding creditor entitled to advantage over other creditors - extent to which funding creditor should share in proceeds of recovery action. Corporations Law s 564

Re Cartco Pty Ltd (1994) 12 ACLC 766 Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (In Liquidation) (1995) 13 ACLC 1569 Re Glenisia Investments Pty Ltd (1996) 14 ACLC 237

IN THE MATTER OF SECTION 564 OF THE CORPORATIONS LAW

AND IN THE MATTER OF ALLQUIP (W.A.) PTY LTD (IN LIQUIDATION) v.

ROBERT HECTOR ALLAN & ORS

WAG 3027 of 1995 CARR J 26 NOVEMBER 1997 PERTH

IN THE FEDERAL COURT OF AUSTRALIA

DISTRICT REGISTRY wag 3027 of 1995

GENERAL DIVISION

BETWEEN: IN THE MATTER OF SECTION 564 OF THE CORPORATIONS LAW AND IN THE MATTER OF ALLQUIP (W.A.) PTY LTD (IN LIQUIDATION)

(ACN 009 208 360)

Applicant

AND: ROBERT HECTOR ALLAN & ORS

Respondents

JUDGE: CARR J

DATE OF ORDER: 26 NOVEMBER 1997

WHERE MADE: PERTH

MINUTE OF ORDERS

THE COURT ORDERS THAT: 1. The applicant bring in a minute to reflect these reasons. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

DISTRICT REGISTRY WAG 3027 of 1995

GENERAL DIVISION

BETWEEN: IN THE MATTER OF SECTION 564 OF THE CORPORATIONS LAW AND IN THE MATTER OF ALLQUIP (W.A.) PTY LTD (IN LIQUIDATION)

(ACN 009 208 360)

Applicant

AND: ROBERT HECTOR ALLAN & ORS

Respondents

JUDGE: carr j DATE: 26 NOVEMBER 1997 PLACE: perth

EX TEMPORE REASONS FOR JUDGMENT Introduction This is an application by the liquidator of Allquip (W.A.) Pty Limited ("the Company") for an order under s 564 of the Corporations Law. The order sought is that "... the net value of property recovered by the Applicant, after payment of priority debts pursuant to section 556 of the Corporations Law, be paid to the Deputy Commissioner of Taxation". As I shall detail in a moment, the Commissioner of Taxation provided funds and indemnities in respect of certain proceedings against former office bearers of the Company and others. Section 564 of the Corporations Law relevantly provides that where property has been recovered under an indemnity for costs of litigation given by certain creditors, or expenses in relation to which a creditor has indemnified a liquidator have been recovered, the Court may make such orders as it deems just with respect to the distribution of that property and the amount of those expenses so recovered, with a view to giving those creditors an advantage over others in consideration of the risk assumed by them. The application is supported by an affidavit sworn by the liquidator. Notice of the application was given to all of the unsecured creditors of the Company. Only one of those creditors responded to that notice. That creditor was a company called T.M.H. Total Materials Handling Pty Ltd ("TMH"). In its letter of 12 November 1997, to the applicant's solicitors, TMH sets out why it opposed the proposed order in these terms: "Allquip ordered and received rollers on the 15th April 1991 for a total invoice value of $29,400.00. They then had their sister company Airside Maintenance, sell them to Westralian Transformers. This company then paid Airside for them in full." TMH did not appear this morning. Ms C.A. Bahemia, counsel for the applicant, told me that she had been in contact with the manager of TMH, who had told her that TMH did not intend to take any part in these proceedings. I do not consider the reason put forward by TMH in its letter is a sufficient reason for not proceeding to consider the application today, particularly in view of the fact that, despite being given notice that the application was listed for mention today, TMH has chosen not to appear or be represented. The liquidator's affidavit discloses the following facts. In June 1995, the applicant commenced proceedings in this Court in respect of certain alleged preferential payments and also to recover damages from the respondents, some of whom were former office bearers of the Company. In fact, the first respondent was, for a while, the original liquidator of the Company at a stage when it was being wound up voluntarily. The purpose of those proceedings ("the Proceedings") was to recover amounts which in total exceeded $1 million. By 14 September 1995, the Proceedings had reached the stage where a defence had been filed and certain orders in the nature of Mareva injunctions had been made against some of the respondents. An order had also been made that the liquidator provide security for costs in the sum of $20,000 within 42 days from 1 September 1995. On 14 September 1995, the liquidator reported these matters to the creditors of the Company. He asked for an indemnity from them to enable the claims against the respondents to be pursued. Details of the claim were set out in that report. The report expressly referred to section 564 of the Corporations Law and summarised its terms. Creditors were invited to ask for further information and were also invited to contribute, initially an amount of $20,000. On 11 October 1995, the Commissioner of Taxation confirmed that he was prepared to provide the money to secure the applicant's costs, that is $20,000, and also agreed to provide the liquidator with an indemnity in the further sum of $20,000 for the fees and expenses of the Proceedings. Later in 1995, the Commissioner agreed further to indemnify the liquidator to an amount of $20,000 for his fees as liquidator and those of his solicitors in progressing the claims against the respondents in the Proceedings. In fact, the Commissioner has paid out amounts totalling $30,969.28 in respect of those expenses. On top of that, there was the $20,000 paid into Court, as security for costs. That is, a total outlay by the Commissioner of $50,969.28 and exposure to further potential liability of an amount of just over $9000. No other creditor made any contribution. The liquidator has sworn that all of the moneys so paid by the Commissioner were paid since the Company went into liquidation and were paid for the specific purpose of enabling the liquidator to pursue the action against the respondents. On 7 October 1996, the Company recovered judgment against the first to fourth respondents in the sum of $130,000 which the liquidator has now received. After repaying to the Commissioner the amounts which were advanced, the liquidator has in hand an amount of $106,691. He estimates that after deducting his further costs and expenses there will remain a sum of $61,00 for distribution. The liquidator says that had the Proceedings not been continued, there would have been an amount for distribution to unsecured creditors of $28,000. This would have represented a distribution of approximately 6.27 cents in the dollar. If the Commissioner is to receive the whole of the sum of $61,000, this will represent a distribution of 47.84% of the debt owing to him. Of course, in that event, the other unsecured creditors will receive nothing. In Re Glenisia Investments Pty Ltd (1996) 14 ACLC 237 I made an order that the whole of the net proceeds of certain recovery proceedings be paid to the two creditors whom I described as "the Contributing Creditors". In delivering reasons for judgment in that matter, I reviewed some of the authorities. Apart from Re Glenisia, there have been other cases in which orders were made that the whole of the fund recovered be paid to the contributing creditors. They include Re Cartco Pty Ltd (1994) 12 ACLC 766. However, in Cartco the amounts involved were relatively small. A similar order was made in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (In Liquidation) (1995) 13 ACLC 1569 by Brownie J of the Supreme Court of New South Wales. It appears from the report of that case, that in that matter, but for the funds recovered pursuant to the indemnity, there would have been nothing available to creditors at all. In the present matter, I am satisfied that there should be a preferential distribution under s 564 of the Corporations Law to the Commissioner. I have regard to the facts that: . all of the creditors were given an equal opportunity to contribute and participate in the advantage; . the Commissioner (who was the only one to contribute) took a substantial risk and financed the whole of the Proceedings from September 1995 onwards (including the liquidator's expenses); and . there has been no relevant adverse response to the proposed distribution from any of the unsecured creditors. Nevertheless, I do not consider that the whole of the amount should be distributed to the Commissioner. The Proceedings were, until September 1995, funded by the general body of creditors, in the sense that "their" money financed the Proceedings to that date. The other unsecured creditors have, as a result of the liquidation being prolonged by the Proceedings, "lost" a payment of about 6.27 cents per dollar of their debt. Counsel for the applicant suggested that if I were not minded to make the order sought, then an alternative might be that some distribution could be made to TMH, the objecting creditor. I do not think that would be appropriate or fair. I think that if there is to be any distribution to the unsecured creditors, other than the Commissioner, then they should all be treated equally. In my view, it would be fair and reasonable and in accordance with the policy of the Act, that all of the unsecured creditors receive a distribution of 6.27 cents in the dollar and that the whole of the amount thereafter remaining be paid to the Commissioner. Ms Bahemia's submission that there is a public interest in encouraging creditors to provide funds for proceedings of the type which I have described earlier, is quite correct, and I accept it. I have taken that public interest into account in reaching the conclusion which I have just expressed. There will be orders accordingly. That is, that there should be a distribution of 6.27 cents in the dollar to all of the unsecured creditors, which of course will include the Commissioner, and that the balance remaining be paid to the Commissioner. The applicant is to bring in a minute to reflect that conclusion. I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Carr