FEDERAL COURT OF AUSTRALIA The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (In Liq) (No 7) [2007] FCA 1836 THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) AND JOHN STEPHEN BAX v BGR CORPORATION PTY LTD (IN LIQUIDATION) (ACN 059 820 807), THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897), CORDATO PARTNERS (SERVICES) PTY LTD (ACN 075 518 964), MAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804), MAIN CAMP CORPORATION PTY LTD (ACN 054 989 516), SNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490), ADVANCED TECHNOLOGY RESEARCH PTY LTD (ACN 088 655 163) AND BUSINESS & RESEARCH MANAGEMENT LIMITED (ACN 070 946 664) NSD 1140 OF 2005 RARES J 26 OCTOBER 2007 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1140 OF 2005 BETWEEN: THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) First Plaintiff JOHN STEPHEN BAX Second Plaintiff AND: BGR CORPORATION PTY LTD (IN LIQUIDATION) (ACN 059 820 807) First Defendant THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897) Second Defendant CORDATO PARTNERS (SERVICES) PTY LTD (ACN 075 518 964) Third Defendant MAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804) Fourth Defendant MAIN CAMP CORPORATION PTY LTD (ACN 054 989 516) Fifth Defendant SNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490) Sixth Defendant ADVANCED TECHNOLOGY RESEARCH PTY LTD (ACN 088 655 163) Seventh Defendant BUSINESS & RESEARCH MANAGEMENT LIMITED (ACN 070 946 664) Eighth Defendant JUDGE: RARES J DATE OF ORDER: 26 OCTOBER 2007 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The advice and direction of the Court is that David John Kerr, as liquidator of BGR Corporation Pty Limited (In Liqidation), would be justified on the material contained in the affidavits and exhibits in the evidence in the interlocutory process filed on 28 September 2007 and heard on 26 October 2007 in making a demand or demands pursuant to s 459E of the Corporation Act 2001 (Cth) as he may be advised on the second defendant, the Triad Health Products Group of Companies Pty Limited, for payment of: (a) the sum of $311,558.86; and (b) the sum of $340,000; the subject of orders 2 and 4(a) made on 19 February 2007, together with such interest as the first defendant may be entitled to claim in accordance with the rules of Court. 2. The liquidator is entitled to his costs properly incurred of the application out of the assets of BGR Corporation Pty Limited (In Liquidation). 3. The second defendant pay 25% of the costs of the interlocutory process. 4. The third defendant pay 25% of the costs of the interlocutory process up to and including 24 October 2007. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1140 OF 2005 BETWEEN: THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) First Plaintiff JOHN STEPHEN BAX Second Plaintiff AND: BGR CORPORATION PTY LTD (IN LIQUIDATION) (ACN 059 820 807) First Defendant THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897) Second Defendant CORDATO PARTNERS (SERVICES) PTY LTD (ACN 075 518 964) Third Defendant MAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804) Fourth Defendant MAIN CAMP CORPORATION PTY LTD (ACN 054 989 516) Fifth Defendant SNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490) Sixth Defendant ADVANCED TECHNOLOGY RESEARCH PTY LTD (ACN 088 655 163) Seventh Defendant BUSINESS & RESEARCH MANAGEMENT LIMITED (ACN 070 946 664) Eighth Defendant JUDGE: RARES J DATE: 26 OCTOBER 2007 PLACE: SYDNEY REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 This is an application under s 479(3) of the Corporations Act 2001 (Cth) made by an interlocutory process filed on 28 September 2007. Initially, the interlocutory process was filed by the first defendant, BGR Corporation Pty Limited (In Liq). At today's hearing the liquidator, Mr Kerr, has been joined as a party to the application. The application arises in the winding up of BGR, which was ordered in these proceedings earlier this year. It involves, in part, issues that arose between the parties in giving effect to judgments and orders which I delivered and made at the time of resolving the substantive dispute in the principal proceedings. 2 Originally, the interlocutory process sought a number of declarations. These concerned the amounts due under declarations made earlier this year. The amounts were due to BGR by the second defendant, The Triad Health Products Group of Companies Pty Limited, and the third defendant, Cordado Partners Services Pty Limited. During the course of argument today, the applicants on the motion, BGR and Mr Kerr, have indicated that they seek the following substantive relief: (1) a judgment or order that Triad and Cordado Partners Services pay to BGR $476,695.04, being 90% of the costs which the liquidator has ascertained as due and payable, together with interest, pursuant to order 1 made on 28 February 2007 as varied by the order made on 29 March 2007; (2) directions in terms of prayers 10, 11 and 12 of the interlocutory process filed on 28 September 2007, namely: '10. A direction as to whether the Liquidator is authorised to cause BGR Corporation Pty Ltd (In Liquidation) to issue a statutory demand to: (a) [Triad]; or (b) [Cordato Partners Services]; or (c) both and, if so, in what amount or amounts. 11. A direction as to whether the Liquidator is authorised to cause BGR Corporation Pty Ltd (In Liquidation) to apply to appoint a receiver to the affairs of: (a) [Triad]; (b) Cordato [Partners Services]; or (c) both. 12. An order that [Triad] and [Cordato Partners Services] pay the costs of this application (on an indemnity basis).' 3 Following his appointment, Mr Kerr had his solicitors, Gadens, write to the solicitors for Triad and Cordado Partners Services seeking, among other things, payment of three different liabilities due by them to BGR that were the subject of final orders in the principal proceedings, namely: (1) consultancy fees overpaid to Triad of $311,550.86; (2) dividends overpaid to: (a) Triad of $340,000; (b) Cordado Partners Services of $40,000; (3) the amount of 90% of the costs paid by BGR for or in respect of the legal costs and disbursements of Triad and Cordado Partners Services as defendants in the proceedings, which was due by them jointly and severally. At that stage that sum had not been quantified by the liquidator. 4 The liquidator's correspondence with each of Triad and Cordado Partners Services commenced on 13 March 2007. Cordato Partners Services acknowledged the claim on 30 March 2007 indicating that it would forward a detailed reply by 2 April 2007. However, as events turned out, no such reply was ever sent. The solicitors for Triad responded on 5 April 2007. They asserted that: · the liquidation of BGR was proceeding as a solvent winding up and that Triad would become entitled at the conclusion of the process to a substantial liquidation dividend proportionate to its shareholding; · in making orders relating to Triad: '[t]he Court's plain intention was that the amounts found to have been overpaid by way of consultancy fees ($311,550.86), and by way of dividends ($340,000.00), should be restored to BGR, and the orders made by the Court appropriately reflect the extent to which Triad's entitlement to participate in the proportionate distribution of the surplus assets of BGR will be affected by adjustments identified in those orders.' (The meaning of that assertion is not particularly clear to me.) · the liquidator had, as they understood it, substantial cash resources from a realisation of the assets of BGR with which to proceed with the liquidation; · there could hardly be any real advantage in Triad paying over to the liquidator the funds in question at that time and that those funds were not required to support the conduct of the winding up; · Triad had an entitlement to be paid out of the assets of BGR consultancy fees amounting to approximately $1.165 million, including interest. (Earlier today I rejected Triad's application to amend order 6 made on 12 February 2007 in which it had sought to reflect its assertion of an entitlement to those consultancy fees: Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 6) [2007] FCA 1812. Nonetheless, when the correspondence was engaged in, the claim of Triad to consultancy fees was being advanced by Triad's solicitors.) · Triad's solicitors were preparing a formal proof of debt setting out what was due to Triad and said: 'In our view, until such times as the final accounts between Triad and BGR are prepared which will reflect the totality of the adjustments to be made, it is inappropriate for your client to demand payment from our client of discrete amounts of monies such as referred to in your letter dated 13 March 2007. In light of the above, you should assume that the unspecified steps which you have foreshadowed to recover the amounts referred to in your above-mentioned letter, may need to be resisted. To press these claims at this time will undoubtedly occasion considerable expense both to our client and to BGR. As the majority shareholder in BGR, our client will object most strenuously to the Liquidator being allowed any costs, fees expenses or remuneration needlessly incurred in relation to any proceedings instigated for that purpose. Such expenses would not be "properly incurred" within the meaning of Section 5561(a) or (dd) of the Corporations Act.' 5 On 24 July 2007 Gadens responded to Triad's solicitors' letter of 5 April 2007. They noted that BGR then had $571.20 in its bank account, but anticipated receiving some moneys from some tax refunds, the entitlement to which arose before the liquidator's appointment. In a letter also sent that day, Gadens pressed Triad for payment of the two outstanding sums due in respect of overpaid consultancy fees and the overpaid dividend, together with their then quantification of the 90% of legal costs. A similar letter was sent to the solicitors for Cordado Partners Services seeking payment of the overpaid dividend and the then quantification of the legal costs. 6 On 7 August 2007 Triad's solicitors wrote back to Gadens and asserted that: · they assumed the winding up of BGR was proceeding as a solvent winding up and that their client would be entitled to a substantial liquidation dividend; · the outcome of Triad now making any payment to BGR in liquidation, assuming on the balance of accounts that it was liable to do so, would simply cause unnecessary financial disruption to Triad in circumstances where any such liability could properly be accounted for in the liquidator's final statement of account; · BGR and the liquidator should assume that any recovery action instigated by them: '… [i]s likely to be vigorously resisted by our client and any such action will of course occasion considerable expense both to out client and to BGR.' · if the liquidator declined to defer recovery action, they may have to institute proceedings on behalf of Triad, including to apply to the Court for a stay of the orders made in the principal proceedings. 7 The solicitors for the liquidator and BGR later responded denying Triad's assertions. 8 On 7 August 2007 Cordato Partners Services also responded to Gadens' letter of 24 July 2004. That response dealt with a number of matters and raised the assertion that there were offsets which were conceived to be available to it in respect of the amounts claimed. On that basis, it said that it would not be appropriate for BGR or the liquidator to make a demand at that time. 9 Earlier this week Cordato Partners Services paid $40,000 to BGR in respect of the overpaid dividend. Shortly afterwards, when the amount of interest claimed was quantified, it also paid the agreed amount of interest. The only currently relevant outstanding amount which may be due by Cordato Partners Services under the orders made in February 2007 is in respect of the repayment of 90% of legal costs paid by BGR for the benefit of Triad and Cordato Partners Services. ARGUMENTS ON THE APPLICATION 10 Both Triad and Cordato Partners Services argue that the application by the liquidator for directions under s 479(3) is unnecessary and inappropriate. They contend that Mr Kerr has already made up his mind to issue statutory demands under s 459E of the Act and he ought not trouble the Court with an application that, in effect, has no utility. Their individual positions are slightly different. Cordado Partners Services noted that whatever assertions as to the vigorous defence of any proceedings and the like may appear in the correspondence from Triad's solicitors to the liquidator's and BGR's solicitors, Cordato Partners Services has not made any such assertions. It simply put forward a relevantly neutral response in its letter of 7 August 2007 which would not justify the present application for directions in respect of its stance. 11 Both Triad and Cordado Partners Services emphasised that the function of the Court on an application such as the present was not to determine rights between parties but was simply to give any appropriate advice to its officer, the liquidator. They argued that it would be inappropriate to treat the present application as one in which substantive rights could be adjudicated, including the quantification of sums which may or may not be due, where that quantification had not been the subject of previous orders. CONSIDERATION 12 The principles applicable in an application such as this were discussed by McLelland J in Re GB Nathan & Co Pty Limited (in Liq) (1991) 24 NSWLR 674 at, particularly, 679-680. He held that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such. McLelland J said 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 were disobeyed, is that if the liquidator has made full and fair disclosure to the court of the material facts, he or she 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 or her in accordance with the direction. 13 Triad and Cordado Partners Services do not suggest that the liquidator has failed to make full and frank disclosure of all material facts in the present application. 14 In a number of decisions, courts have recognised that one purpose of invoking the procedure under s 479(3) and its analogues is to give the liquidator guidance on matters of law or principle and to protect him or her against accusations of acting unreasonably or improperly: cf: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; Onefone Australia Pty Ltd v One.Tel Ltd [2007] NSWSC 112 at [12]; Meadow Springs Fairways Resort Ltd (In Liq) v Balanced Securities Ltd [2007] FCA 1443 at [45]-[49] per French J. 15 The evidence established that until Cordado Partners Services' recent payments of slightly over $40,000 were made, the liquidator held approximately $5,000 in funds. The issues arising in the winding up are by no means straightforward. In my opinion, the bringing of the interlocutory process in September 2007 has provoked a number of outcomes which will be of assistance in the liquidation of BGR. Those outcomes included Cordato Partners Services' payments and the ventilation and disposition of Triad's assertion that despite order 6 made on 12 February 2007, it still could claim for unpaid consultancy fees in the winding up. 16 More importantly, I am of opinion that the liquidator was entitled to seek directions under s 479(3), having regard to Triad's assertions that a claim to recover the outstanding and quantified sums, representing the overpaid consultancy fees and overpaid dividend, would be vigorously resisted. Given the paucity of then available funds, it was an appropriate course for the liquidator to seek directions from the Court. There was a dispute between the contributories and shareholders of BGR and him as to his conduct of the winding up in respect of whether he would be justified in utilising the statutory remedy under s 459E of the Act to recover those amounts. That dispute involved both Triad and Cordato Partners Services, until the latter paid the amounts due earlier this week. The liquidator was entitled to seek guidance in respect of those matters. 17 Substantive and justified criticisms were made of the way in which the interlocutory process, as originally filed, framed the relief sought. It had asked for the liquidator to be authorised to issue statutory demands. That was a direction which it was inappropriate to seek. Rather, the liquidator should have sought the advice of the Court as to whether he would be justified in causing BGR to issue statutory demands to recover the amounts due from Triad and Cordato Partners Services' debtors. The liquidator and BGR also sought directions in their amended interlocutory process as to whether, as an alternative to using the procedure of statutory demands, a receiver ought be appointed to the affairs of Triad or Cordado Partners Services or both. In my opinion, that remedy would not have been appropriate in the present circumstances, but the liquidator and BGR did not press for it by the end of argument. That claim was also criticised. Those criticisms were pointed out in correspondence emanating from both Triad's and Cordato Partner Services' solicitors but not acted on by the liquidator or BGR until during the course of the argument today. 18 Ultimately, the parties ought agree the amount which each of Triad and Cordato Partners Services is liable to pay under the orders made in February 2007 in respect of their costs paid by BGR. There is no present dispute about the amount and its quantification because the claim by BGR has only been made in the last 24 hours and has not been able to be investigated by Triad and Cordato Partners Services. Thus I am not in a position to give advice at present. 19 It is unfortunate that the matter has had these procedural disputes and difficulties. But I am of opinion that, in the circumstances, it is appropriate that I give the liquidator advice that on the material before me he would be justified in causing s 459E demands to be made upon Triad for the two quantified sums (for overpaid consultancy fees and the overpaid dividend). I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 28 November 2007 Counsel for the Plaintiffs: R Alkadamani Solicitor for the Plaintiffs: Haywards Counsel for the First Defendant: D Pritchard SC Solicitor for the First Defendant: Gadens Lawyers Counsel for the Second Defendant: BA Coles QC and S Docker Solicitor for the Second Defendant: Shaw Reynolds Bowen & Gerathy Counsel for the Third Defendant: J Johnson Solicitor for the Third Defendant: Cordato Partners Date of Hearing: 26 October 2007 Date of Judgment: 26 October 2007