FEDERAL COURT OF AUSTRALIA Woods v Dodge [2003] FCA 1066 WINDING UP – unregistered managed investment scheme – liquidator's application for direction that he has taken possession of mortgaged property – whether jurisdiction – whether jurisdiction should be exercised where litigation in State Supreme Court on foot PRACTICE AND PROCEDURE – winding up of unregistered managed investment scheme - proper parties to application by liquidator for possession of mortgaged property Corporations Act 2001 (Cth) ss 479(3), 601EE Lysnar v National Bank of New Zealand Ltd (No 2) [1936] NZLR 541 cited Kays Leasing Corporation Pty Ltd v CSR Provident Fund Nominees Pty Ltd [1962] VR 429 cited W G Goetz & Sons Ltd v Esanda Finance Corporation Ltd [1999] VSC 334 cited Re GB Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1291 followed Re Ward (1987) 66 CBR 165 cited Re Sportsman's Leisure & Hobby Warehouse Pty Ltd (in liq) [1990] 2 Qd R 93 followed Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (Receiver and Manager appointed) (1994) 49 FCR 334 not followed Re Gapes Interstate Transport Pty Ltd [1970] 2 NSWR 365 cited Re Reid Murray Holdings Ltd [1969] VR 315 discussed Rees v Bank of New South Wales (1964) 111 CLR 210 cited Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 cited Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 cited JOHN WILLIAM WOODS AS LIQUIDATOR OF THE LEWIS DRISCOLL & BULL UNREGISTERED MANAGED INVESTMENT SCHEME v HAYDN JAMES DODGE & SHEILA ANNE DODGE T3017 of 2003 HEEREY J 7 OCTOBER 2003 MELBOURNE (HEARD IN HOBART) IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY T3017 OF 2003 BETWEEN: JOHN WILLIAM WOODS AS LIQUIDATOR OF THE LEWIS DRISCOLL & BULL UNREGISTERED MANAGED INVESTMENT SCHEME APPLICANT AND: HAYDN JAMES DODGE & SHEILA ANNE DODGE RESPONDENTS JUDGE: HEEREY J DATE OF ORDER: 7 OCTOBER 2003 WHERE MADE: MELBOURNE (HEARD IN HOBART) THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicant pay the respondents' costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY T3017 OF 2003 BETWEEN: JOHN WILLIAM WOODS AS LIQUIDATOR OF THE LEWIS DRISCOLL & BULL UNREGISTERED MANAGED INVESTMENT SCHEME APPLICANT AND: HAYDN JAMES DODGE AND SHEILA ANNE DODGE RESPONDENTS JUDGE: HEEREY J DATE: 7 OCTOBER 2003 PLACE: MELBOURNE (HEARD IN HOBART) REASONS FOR JUDGMENT 1 Mr John William Woods (the Liquidator) was by order of this Court on 5 July 2002 under s 601EE of the Corporations Act 2001 (Cth) appointed liquidator of the Lewis Driscoll & Bull Unregistered Managed Investment Scheme (the Scheme). Prior to that appointment Mr Peter Royston Worrall (the Manager) had on 11 December 1998 been appointed Manager of Lewis Driscoll & Bull by an order of the Supreme Court of Tasmania under s 119 of the Legal Profession Act 1993 (Tas). Lewis Driscoll & Bull was a legal practice which had been carried on by Mr Thomas Peter Baron. 2 Lewis Driscoll & Bull operated the Scheme in the course of its practice. Moneys deposited with the firm by clients were advanced on loans secured by mortgages over real estate in Tasmania. Two of such mortgages secured moneys loaned to Haydn James Dodge and his wife Sheila Anne Dodge, the security being their property at Unit 2/35 Wolstenholme Drive, Sorell, title Volume 127796 Folio 19 (Wolstenholme Drive). 3 There is before the Court an application under s 479(3) of the Corporations Act "for the following directions/orders: 1. Whether or not the applicant is entitled to take possession of (Wolstenholme Drive). 2. Further or consequential orders or directions." 4 Section 479(3) provides: "The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up." Parties to the proceeding 5 The application for the winding up of the Scheme and the appointment of a liquidator was made in proceeding No T3002 of 2002. The applicant was the Australian Securities and Investments Commission (ASIC), the first respondent was Mr Baron, the second Mr Worrall and the third Mr Woods. 6 The present application, which was filed on 28 July 2003, is numbered T3017 of 2003. It is headed "Interlocutory Application". The title is the same as last year's winding up application; ASIC is the applicant and Messrs Baron, Worrall and Woods are respectively first, second and third respondents. 7 The definition of what is an interlocutory application has eluded universal agreement, notwithstanding the attention of the finest legal minds over the years. I am inclined to think the present application is not interlocutory. More importantly however, it would seem to be a source of confusion if the present proceeding, which bears a different file number from last year's, has the same parties named in its title, even though ASIC and Messrs Baron and Worrall have played no part and Mr and Mrs Dodge, who have played a part, are not named. 8 I shall therefore order that the title to the proceeding be amended so that the Liquidator is applicant and Mr and Mrs Dodge are respondents. Default under mortgages 9 The two mortgages are dated 16 August 1995 and 8 December 1995 and secure advances of respectively $176,500 and $20,000. 10 On 30 September 1998 Mr and Mrs Dodge failed to pay interest due under the mortgages and have been in default ever since. 11 On 29 January 2003 the Liquidator served notices of default. Supreme Court of Tasmania proceedings 12 On 24 June 1999 and 6 July 1999 the Manager commenced proceedings in the Supreme Court seeking summonses under s 146(2) of the Lands Titles Act 1980 (Tas) requiring Mr and Mrs Dodge to show cause why possession of Wolstenholme Drive should not be delivered up to him. Those proceedings and others against Mr and Mrs Dodge were consolidated by order of the Master and on 29 April 2000 a statement of claim was filed seeking amounts due under mortgages and a declaration that the Manager was entitled to possession of Wolstenholme Drive and four other properties. The plaintiff is stated to be Mr Baron "by" the Manager. 13 On 11 July 2000 Mr and Mrs Dodge filed a defence and counter-claim which raise the following pleas. The defendants deny that they entered into the mortgages. Alternatively they did so in circumstances where Mr Baron was acting as their solicitor and adviser. The interests of Mr Baron as mortgagee and his interest as the solicitor and adviser to the defendants were in actual or potential conflict. Mr Baron was in a position of unfair advantage so far as the defendants were concerned and took advantage of that fact. Mr Baron was negligent in failing to advise or properly advise the defendants in relation to the mortgages. He acted in breach of the Trade Practices Act and/or the Fair Trading Act. He failed to take any or any reasonable steps to ensure that the defendants were aware of and able to meet any obligations arising under the mortgages. The loans secured by the mortgages were part of a scheme devised by and for the benefit of Mr Baron and/or others. Mr Baron made advances under the mortgages that were neither known to or authorised by the defendants. In the premises any mortgages should be set aside and the defendants should be relieved of any liability thereunder. A claim for damages is made. 14 On 29 August 2000 the plaintiff sought further and better particulars of the defence and counter-claim. Such particulars were filed on 27 August 2001. The allegations emerging from the particulars can be summarised as follows. Mr Baron through the firm Lewis Driscoll & Bull and Messrs Quinton McCulloch and Alistair McCulloch through the firm McCulloch & McCulloch, solicitors, operated businesses that lent money secured by way of mortgages against real estate. Mr Baron and/or the McCullochs and or/their wives jointly and/or severally owned or had interests in five properties in Sorell (including Wolstenholme Drive) and a property in Castray Esplanade in Hobart. Mr Baron and the McCullochs owed various sums of money secured against the properties. It was in Mr Baron's interests for the Dodges to borrow money from Mr Baron so that the Dodges could purchase properties from Mr Baron and/or the McCullochs and/or their wives, which properties were onerous or encumbered and/or the sales of which enabled Mr Baron and/or the McCullochs and/or their wives to discharge liabilities secured against the properties. Mr Baron and/or the McCullochs were solicitors and trusted professional advisers to the Dodges. They did not recommend that the Dodges obtain independent legal advice as to any obligations they might be undertaking. The interests of Mr Baron as vendor or potential vendor of some or all of the properties and the interests of the Dodges as the purchaser or potential purchasers were disparate and in conflict. As the eventual recipient of moneys lent to the Dodges by way of mortgage loan, Mr Baron had interests which were in conflict with his obligations as the solicitor and adviser to the Dodges as purchasers and borrowers. Mr Baron knew that the Dodges relied upon him for advice in relation to legal matters in relation to business and financial matters. Mr Baron sold properties to the Dodges both directly and indirectly without ensuring that they were independently and/or properly advised in relation thereto and in circumstances whereby Mr Baron was relieved of onerous obligations. 15 Specifically in relation to Wolstenholme Drive it is alleged that it was originally purchased by Mr Baron and Mr Dodge in partnership. The purchase was funded by a joint loan from the McCullochs. The partnership was dissolved in about 1993 and the property divided between Mr Baron and the Dodges. The part transferred to the Dodges was then mortgaged to Mr Baron and the loan from the McCullochs repaid. Different allegations are made in relation to the other properties. In respect of one, 5 Gordon Street, Sorell, it is alleged that when it came on to the market in 1994 Mr Dodge told Mr Baron that he wanted to buy the property to enable him to develop the adjoining one. Unbeknownst to Mr Dodge, Mr Baron then bought the property, subdivided it and sold one part to his secretary who in turn sold it to one Tait who in turn sold it to Mr Dodge, financed by a loan from Mr Baron. Mr Baron purchased the entire property for $35,000 and Mr Dodge paid $85,000 for the part that he purchased. Were it not for Mr Baron's negligence and breach of duty the Dodges would have not entered into the mortgages. They therefore claim that the mortgages be set aside or in the alternative they be awarded damages in a sum equivalent to the amount found to be due and owing. They claim $199,798.44 and interest thereon at a reasonable rate compounding. 16 As far as the material before me indicates, no action has been taken by either side in the Supreme Court proceedings since the filing of those further and better particulars in August 2001. Alleged taking of possession by the Liquidator 17 In an affidavit sworn on 28 July 2003 the Liquidator deposed that, due to the failure of the Dodges to deliver up possession of Wolstenholme Drive, he instructed his agent Mr Dick Roberts to take possession of it. As a precaution against the prospect of a breach of the peace he requested the assistance of the Tasmania Police Force. 18 Shortly before 9.08 am on 18 June 2003 the Liquidator received a telephone call from Detective Inspector Michael Grant who told him that together with other police officers and Mr Roberts they had entered the dwelling on Wolstenholme Drive and that the Liquidator could attend the property. 19 The Liquidator then drove to the property and entered the dwelling on the property through an open front door. Mr Dodge was in the property. He telephoned his solicitor. Various discussions took place between the persons present. The Liquidator advised Mr Dodge that he (the Liquidator) was in possession of the property and that Mr Dodge was required to leave it. Mr Dodge said that his solicitor had advised him to use force to eject "us" (presumably the Liquidator, his agent Mr Roberts and the police). The Liquidator, "to prevent a breach of the peace", left with his agent voluntarily. 20 The Liquidator further deposed: "I now wish to sell the property and for that purchase require sole possession of the property. I am concerned that if I am required to pursue the Supreme Court proceedings instituted by (the Manager)…the matters will not be quickly resolved resulting in the nett proceeds of sale reducing over time and being insufficient to repay principal and interest to the investors in the Unregistered Managed Investment Scheme." 21 The Liquidator was not cross-examined. Mr Dodge swore an affidavit but it was not read by his counsel. Accordingly there is no dispute as to primary facts. Hearing of application 22 Although no direction had been made by the Court, quite properly the application and the Liquidator's affidavit were served on Mr and Mrs Dodge. They entered an appearance and were represented by counsel who opposed the making of the directions or orders sought. 23 Counsel for the Liquidator submitted that under s 78(1)(b) of the Land Titles Act 1980 (Tas) the Liquidator was entitled to enter into possession provided he did so peaceably without attempting to use force: Lysnar v National Bank of New Zealand Ltd (No 2) [1936] NZLR 541, Kays Leasing Corporation Pty Ltd v CSR Provident Fund Nominees Pty Ltd [1962] VR 429, W G Goetz & Sons Ltd v Esanda Finance Corporation Ltd [1999] VSC 334. Counsel submitted that the possession taken by the Liquidator was appropriate for the character of the property in question, that is to say a suburban dwelling. The Liquidator had entered peaceably and did not abandon possession but only left because of the threat of force by Mr Dodge. Counsel said the direction sought would give confirmation as to the efficacy of the act that the Liquidator had done. 24 Counsel for Mr and Mrs Dodge pointed out that there was no evidence or explanation as to why the Liquidator had not taken further steps in the Supreme Court proceedings. The Liquidator was not seeking a direction but rather a judgment determining the rights of the parties as a matter of law. The allegations made in the defence and counter-claim, if accepted, would result in the mortgages being set aside. Counsel contended that in any event the Liquidator had not done all that was necessary to manifest possession. He had not, for example, physically removed Mr and Mrs Dodge and their chattels, changed the locks and cancelled services from utilities. Can a determination of substantive rights as against third parties be made under s 479(3)? 25 The terms of the application quoted above on their face seek a direction as to some prospective action of the liquidator. However, as has been seen, what in reality is sought is a finding as to the legal consequence of events which have already occurred. This distinction is of some significance in itself, as will later appear. 26 The function of s 479(3) and its predecessors has been the subject of conflicting decisions by Australian courts. In Re GB Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1291 McLelland J of the Supreme Court of New South Wales reviewed the legislative pedigree of the comparable section in the Corporations Law (also s 479(3)). His Honour referred to earlier provisions in the United KingdomCompaniesandBankruptcyActsand the Law of Property Amendment Act 1859 (Imp). His Honour observed (at 1293) that these various statutory provisions for directions were a development from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the Court. The purpose was to protect an administrator from personal liability. However, this would not affect the rights of creditors and beneficiaries as between themselves. His Honour concluded (at 1295): "The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only property subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the Court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction." 27 His Honour referred to a number of Australian authorities and to a decision of the Supreme Court of New Brunswick dealing with the Canadian Bankruptcy Act, Re Ward (1987) 66 CBR 165 at 171 where Dickson J said: "It seems well settled in law that in an application under s 16 of the Act a court must confine itself, in giving directions, to matters concerning administration of the estate and has no authority to resolve substantive matters in dispute between a trustee and third party." 28 McLelland J pointed out (at 1295) that there are instances in the cases where a court has, in proceedings commenced as a liquidator's application for directions, gone on to make orders declaratory of substantive rights. This was sometimes a convenient course in order to avoid the need to commence further proceedings involving further cost and delay. But his Honour noted: "However it is important that the distinction between the two kinds of proceedings be not lost sight of or blurred and such a fundamental change should not be permitted unless the Court is satisfied that those affected either consent to that course [authorities cited] or will not suffer injustice in consequence of the alteration to the status of the proceedings." 29 In an earlier decision Cooper J, as a judge of the Supreme Court of Queensland, had reached the same conclusion: Re Sportsman's Leisure & Hobby Warehouse Pty Ltd (in liq) [1990] 2 Qd R 93. After reviewing the authorities his Honour said (at 98): "In my opinion, the weight of authority in Australia, and in this Court, is against the proposition that a direction under s 379(3) [of the Companies (Queensland) Code] binds parties as to their substantive rights or is appealable. To the extent that such a direction has any binding force it is limited to the protection of the liquidator, in undertaking the winding up, from actions for breach of duty." 30 A different view was taken by Northrop J of the Federal Court in Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (Receiver and Manager appointed) (1994) 49 FCR 334. His Honour held that he could in the course of an application for directions under s 479(3) of the Corporations Law make binding declarations as to the rights of different classes of creditors of a company which had operated a mortgage investment scheme. His Honour referred to G B Nathan and said (at 351) that McLelland J had made "no reference to the many authorities where courts have made binding orders under the equivalent provisions of s 479(3)." 31 In particular, Northrop J said, no reference had been made to Re Gapes Interstate Transport Pty Ltd [1970] 2 NSWR 365 and Re Reid Murray Holdings Ltd [1969] VR 315. His Honour said (at 352) that it was accepted that courts have power to make final orders in preference claims on applications by a liquidator under s 479(3) or similar sections and there was "no logical reason" why final orders binding on other persons could not be made on such applications in relation to other subject matter. 32 McLelland J responded in Re BPTC Ltd (1996) 14 ACLC 845. His Honour noted (at 845) that s 479(3) and comparable sections in the NSW Trustee Act "… are essentially concerned with future action by a liquidator or a trustee, as the case may be. Typically, under either provision, the Court would give a direction to the effect that the applicant, as such liquidator or trustee as the case may be, would be justified in acting in a specified way or on a specified basis." 33 His Honour referred to Melbourne Asset Management and expressed the view that Northrop J had acted on a misconception as to the decisions of Reid Murray and Gapes. Neither of those cases, McLelland J pointed, out involved an application by a liquidator for directions under the equivalent of s 479(3). The basis of the summary jurisdiction exercised in those cases was the inherent, and not a statutory, power of the Court. 34 The rejoinder of McLelland J in Re BPTC seems correct. In Reid Murray a company was being wound up by the Court and the liquidator issued a summons seeking a determination that certain payments and transfers were void as against him. On the same day he issued a writ claiming the same relief. It was argued that the then equivalent of s 479(3) (s 274(1) of the Companies Act 1961 (Vic)) only applied to voluntary liquidations. Counsel argued that there was no corresponding provision applicable in the case of a compulsory winding-up and that therefore the Court did not have jurisdiction in summary proceedings by the liquidator. Adam J (at 317) referred to a substantial number of cases in England, Australia and New Zealand where courts had entertained summary applications by liquidators in compulsory liquidations for determination of questions of preferences "without express statutory authority". Among those his Honour noted were the High Court decisions Rees v Bank of New South Wales (1964) 111 CLR 210 and Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266. Adam J concluded (at 318) that "… legislative provision analogous to that provided for the liquidator in a voluntary winding-up by s 274 is unnecessary for the conferring of jurisdiction where the winding-up is by the Court itself. In such a case there is, I consider, an inherent or implied jurisdiction in the Court on application by its own officer – the official liquidator – to assist him in carrying out his duties in the winding-up and in the absence of legislative provision. There seems no reason for the Court to decline jurisdiction unless raised by action commenced by writ." However his Honour considered that in the circumstances the proceeding under the writ issued on the same day would be more efficacious by reason of the availability of pleadings and interlocutory procedures. His Honour accordingly stayed the summary proceedings. 35 In Gapes Street J followed Reid Murray. 36 In Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 Mansfield J in the Federal Court heard an application under s 479(3) of the Corporations Law by a liquidator seeking directions as to whether two proceedings in the Australian Capital Territory Supreme Court should be continued. This was therefore the traditional case of an officer of the Court seeking protection in relation to a proposed course of action. The application did not raise any question of substantive rights. 37 Mansfield J noted (at 362) that "the giving of directions may not be appropriate where substantive rights of third parties are at stake, or where important facts are in dispute". His Honour adverted to the differences between the decisions of Northrop J and McLelland J but thought the question did not arise in the application before him. 38 If the issue were determinative of the present application, I would be inclined to follow GB Nathan and Sportsman's Leisure. Mclelland J's explanation of the historical origins of s 479(3) is compelling. Moreover, the language of the provision applies awkwardly at best to a determination of rights as between the liquidator and third parties. In this context "directions" conveys the notion of some bilateral communication between Court and liquidator in the form of order or approval or guidance. It is a straining of the language to have it extend to the situation where, for example, the liquidator is saying "I ask the Court to direct me that A owes $X to me". No doubt there are many instances in the cases of summary proceedings by liquidators, but they seem (apart from Melbourne Asset Management itself) to be confined to preference proceedings and to rest on the inherent authority of the Court and/or particular procedural rules. Should a direction be made in the present case? 39 But in any event it is common ground that there is a discretion to give any direction. I am satisfied that the discretion should not be exercised in this case. 40 What the Liquidator is really seeking is a judicial finding that certain past events bear a particular legal character, namely the taking of possession by a mortgagee. It is inappropriate to make such a direction where the issue of the validity of the mortgages themselves is the subject of existing litigation in the Supreme Court of Tasmania. Just as Adam J in Reid Murray considered that proceeding by way of action was more appropriate in the circumstances of that case, I think it would be highly undesirable for this Court to make an isolated finding which is part of a much larger litigious controversy of which the Supreme Court is seized. The question whether a mortgagee (or someone claiming under the title of a mortgagee) has taken possession of the mortgaged property and, if so, in what circumstances, could bear on the grant or refusal of an order to set aside the mortgage. And, as a matter of comity, it is obvious that litigation over real estate in Tasmania and the conduct of practitioners of the Supreme Court of Tasmania is quintessentially a matter for that Court. 41 Moreover, there is the question of utility. Even if the Liquidator obtained the directions sought, it seems highly unlikely that he could then proceed quickly to a trouble-free sale of a vacant Wolstenholme Drive. To enforce his right to possession he would have to obtain some further order, either from this Court or the Supreme Court, and in the light of the existing litigation and the Liquidator's inaction for a lengthy period it seems probable that Mr and Mrs Dodge would seek and obtain interlocutory relief. All this would involve further substantial cost, to no useful purpose. 42 I therefore dismiss the application for directions. There will be an order that the Liquidator pay the cost of Mr and Mrs Dodge. I certify that the preceding forty two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 7 October 2003 Counsel for the Applicant: P Tree Solicitor for the Applicant: Toomey Maning & Co Counsel for the Respondent: P Barker Solicitor for the Respondent: Clerk Walker & Stops Date of Hearing: 29 September 2003 Date of Judgment: 7 October 2003