Reported Decision : 7 DCLR (NSW) 243 New South Wales District Court CITATION: Wallis Commercial Interiors Pty Limited (In Liquidation) v Truecash Pty Limited [2008] NSWDC 150 HEARING DATE(S): 25 June 2008 JUDGMENT DATE: 23 July 2008 JURISDICTION: District Court Civil Jurisdiction JUDGMENT OF: Johnstone DCJ at 1 1. The Receiver is entitled to file a Notice of Change of Solicitor to take over the conduct of these proceedings in the name of the plaintiff company 2. As to costs: DECISION: A. The Liquidator is to pay the Receiver's costs of the application. B. The Commonwealth is to bear its own costs. C. The Liquidator is to pay the defendant's costs of the motion and of the adjournment CATCHWORDS: CORPORATIONS - whether the Receiver or the Liquidator should have conduct of proceedings in the name of the plaintiff company in respect of a debt the subject of a charge arising under a debenture pursuant to which the Receiver was appointed - the rights of the Receiver in respect of the asset are superior Atkins v Mercantile Credits Limited (1985) 10 ACLR 153 at 159 Bacel Contracting Limited v Modern Engineering (Bristol) Limited [1982] All ER 655 Deangrove Pty Limited (Receivers and Managers Appointed) v Commonwealth Bank of Australia [2001] FCA 173 at [40] Gough's Garage Limited v Pugsley [1931] KB 611 at 626 CASES CITED: Grassby v The Queen (1989) 168 CLR 1 Kolavo v Pitsikas [2003] NSWCA 59 Newhart Developments Limited v Co-operative Commercial Bank Limited [1978] 1 QB 814 at 821 Re Geneva Finance Limited; Quigley v Cook (1992) 7 WLR 492 Re Landmark Corporation (in liquidation) and the Companies Act (1968) 88 WN 195 at 196 Sowman v David Samuel Trust Limited (in liq) [1978] 1 WLR 22 at 30 Wallis Commercial Interiors Pty Limited (In Liquidation) (Plaintiff) PARTIES: Truecash Pty Limited (Defendant) Commonwealth of Australia (Intervenor Amicus Curiae) FILE NUMBER(S): 1939/07 Mr J Johnson for the Liquidator COUNSEL: Mr B Katekar for the Receiver Mr G Carolan for the Defendant Mr Van Aalst for the Intervenor Amicus Curiae MCW Lawyers for the Liquidator SOLICITORS: Etienne Lawyers for the Receiver Gillis Delaney for the Defendant Australian Government Solicitor for the Intervenor JUDGMENT The Proceedings 1. On 17 November 2003 the plaintiff company, Wallis Commercial Interiors Pty Limited (in liquidation) (WCI) entered into a debenture with the National Australia Bank (the NAB) under which WCI gave a charge over all its book debts, other debts and monetary claims. 2. On 28 July 2006 there was a winding up resolution in relation to WCI pursuant to which Mr Godfrey was appointed the Liquidator of WCI. Mr Godfrey commenced the substantive proceedings on 11 May 2007 by the filing of the Statement of Claim seeking to recover from the defendant, Truecash Pty Limited, an alleged loan of $696,030.68. An Amended Statement of Claim was filed on 22 June 2007 to change the name of the plaintiff such that the plaintiff became the company (WCI), not the Liquidator (Mr Godfrey). Nothing turns on this. 3. Subsequently, on 13 July 2007 the NAB assigned its right under the debenture to a Ms Anne Wallis, a guarantor of the monies payable by WCI to the NAB. Ms Wallis thereby acquired such rights as the NAB had under the debenture, including an entitlement to enforce the charge and a right to appoint a Receiver and manager of WCI as to so much of the assets and undertaking of WCI that is subject to the charge. 4. On 12 May 2008 Ms Wallis appointed a Receiver and Manager, Mr Gleeson. 5. In the meantime the substantive proceedings commenced in this court by the Liquidator had progressed and on 1 May 2008 were set down for hearing on 25 June 2008. The solicitors that have been acting for the Liquidator, Macedone Christie Willis, briefed counsel and prepared the matter for hearing. 6. On 18 June 2008 a Notice of Motion was filed on behalf of the Receiver by the firm Etienne Lawyers in the name of the plaintiff company together with a Notice of Change of Solicitor nominating Steven Brown from Etienne Lawyers as the solicitor for the plaintiff. The motion, which sought an order that the hearing date be vacated, came before Judge Truss on 20 June 2008. On that day counsel appeared for both the Receiver and the Liquidator. Her Honour made orders by consent standing the motion over for hearing on the hearing date for the substantive proceedings. She noted: "Parties will be seeking to have the Notice of Motion dealt with ... including the preliminary matter as to the standing of the Receiver and his entitlement to file a Notice of Change of Solicitor." 7. Then, on 24 June 2008, the day before the hearing, Etienne Lawyers, for the Receiver, gave notice of an intention to proceed on an Amended Notice of Motion, this time in the name of Mr Gleeson as Receiver, which in addition to seeking to vacate the hearing date sought a further order to the effect that Mr Gleeson be allowed to file a Notice of Change of Solicitor and take over the substantive proceedings in the name of the plaintiff company. 8. Such was the state of play when the matter came before me for hearing on 25 June 2008. In addition to counsel for the defendant, Mr G Carolan, there appeared Mr J Johnson of counsel for the Liquidator and Mr Katekar of counsel for the Receiver. Also appearing was Mr Van Aalst of counsel instructed by the Australian Government Solicitor, with a motion seeking leave for the Commonwealth of Australia to intervene and be heard amicus curiae under r 6.24 of the UCPR. I gave the Commonwealth leave to file its Notice of Motion in court and allowed Mr Van Aalst to intervene and be heard amicus curiae. 9. Argument proceeded throughout the morning until it became evident that the dispute as to which officer should have the conduct of the proceedings on behalf of the plaintiff company required to be determined and resolved before the substantive proceedings could continue to hearing as against the defendant. I therefore vacated the hearing date and put in place a timetable for written submissions in relation to the preliminary question on the motion as to whether the Receiver or the Liquidator should have conduct of the proceedings. 10. I subsequently received written submissions from the legal representatives of the Liquidator and the Receiver, as well as from the Commonwealth as intervenor amicus curiae. 11. The issue before me for determination now is whether the court should allow the Receiver to take over the conduct of the proceedings from the Liquidator on behalf of the plaintiff company. 12. The Receiver contends that its power to take custody and control of the property the subject of the charge is superior to that of the Liquidator who, acting properly, must hand over that control to the Receiver (para 8 of the Receiver's written submissions in reply dated 9 July 2008). Accordingly, the Receiver is entitled to assume control of these proceedings which relate to property the subject of the charge. The power of the Receiver to conduct the proceedings supersedes that of the Liquidator (para 12 of the Receiver's written submissions in chief of 24 June 2008). The Receiver's rights are to the exclusion of the Liquidator (oral submissions). The Liquidator's power to maintain the proceedings was extinguished by the appointment of the Receiver (e-mail from John Prowse at p 4 of his affidavit of 24 June 2008). 13. The debenture is unremarkable. It charges "the undertaking and all other present and future property and assets of the Company." It gives the Receiver the power to take, defend, compromise or appeal legal proceedings in the name in of the mortgagor company: cl 17.4(m). The Deed of Appointment of the Receiver relates to all property charged including all debts owed to the company: Schedule 1. The applicable legal principles 14. I was referred to numerous cases and various provisions of the Corporations Act, but counsel informed me that were unable to find any authority dealing with the present circumstances where a Receiver seeks to take over control of existing proceedings instituted by a Liquidator. The principles I draw from these cases and the provisions to which I was referred that apply to the present dispute are, in summary: (i) Both the Liquidator and the Receiver have the power to conduct the proceedings in the name of the company for the recovery of the alleged debt. The existence of the Liquidator merely precludes the Receiver from acting as the company's agent, but its power to conduct the proceedings is unaffected, except that he is required to fund the litigation himself; Gough's Garage Limited v Pugsley [1931] KB 611 at 626; Sowman v David Samuel Trust Limited (in liq) [1978] 1 WLR 22 at 30; Atkins v Mercantile Credits Limited (1985) 10 ACLR 153 at 159. (ii) A Receiver appointed by a debenture holder is entitled to the custody and control of assets covered by that debenture. That entitlement is superior to a Liquidator's right to take the company's property into his custody and control. A secured creditor is entitled to stand outside the winding up and rely upon the security: Re Landmark Corporation (in liquidation) and the Companies Act (1968) 88 WN 195 at 196. (iii) Thus a Receiver who has commenced litigation in the name of the company may continue to prosecute that litigation even upon the appointment of a Liquidator: Bacel Contracting Limited v Modern Engineering (Bristol) Limited [1982] All ER 655. (iv) The appointment of a Receiver with power to deal with the property of the company does not 'paralyse' the powers of others to deal with the company's property. Thus, where there is a right of action which the directors, although not the Receiver, would wish to pursue and where the rights of the Receiver are unaffected, the directors may pursue that right provided nothing in the course of the proceedings threatens the interests of the debenture holder: Newhart Developments Limited v Co-operative Commercial Bank Limited [1978] 1 QB 814 at 821. (v) The issue then is whether the exercise of that residual power by the directors has any effect on the Receiver's functions. It is a question of fact whether the exercise of any residual powers by the directors is detrimental to the functions of the Receiver: Re Geneva Finance Limited; Quigley v Cook (1992) 7 WLR 492. (vi) But the residual power of the directors is exercisable only in circumstances where the Receiver declines to pursue the claim: Deangrove Pty Limited (Receivers and Managers Appointed) v Commonwealth Bank of Australia [2001] FCA 173 at [40]. (vii) The rights of the Receiver are superior to those of the Liquidator. Although the rights are not exclusive, because the Liquidator has residual rights, there are limits to the exercise of those residual rights. Firstly, they must not be exercised in a way that is detrimental to the functions of the Receiver or the interests of the debenture holder (or its assignee). Secondly, and more importantly in the present context, the residual powers and rights of the Liquidator may only be exercised where the Receiver declines to exercise his powers in respect of the property. The various written submissions 15. The Liquidator's submissions were directed to the question of his right to continue to conduct proceedings pursuant to his residual powers and to various discretionary considerations as why he should continue to have conduct of the proceedings to the exclusion of the Receiver. 16. It was submitted firstly that there could be no doubt as to his residual powers and numerous cases were referred to: see footnote 12 on p 10. But as I have already indicated, that is not disputed. What is in issue is whether the occasion as arisen for the Liquidator to exercise those residual rights to the exclusion of the Receiver. 17. The Liquidator next submitted that there was no evidence on the part of the Receiver of an intention to maintain the proceedings. With respect that is not the question. The Receiver by this very application is seeking to exercise control of the asset in accordance with his superior right to do so. Rather it has not been demonstrated that the Receiver has any intention to exercise his powers in the proposed conduct of the proceedings in an improper manner or in a way that will breach his duties to the company, or the various creditors. 18. The balance of the Liquidator's submissions were directed at discretionary considerations (see para 19 in particular), which in my view would only become relevant if the Liquidator had established a basis for the exercise of his residual powers in preference to those of the Receiver. 19. For its part the Commonwealth submitted that there was a real prospect that its position as a priority creditor will be at risk if the Receiver is given conduct of the proceedings. That submission is developed at para 5 of the written submissions in chief. It also submitted that the chargee, Ms Wallis, has a conflict of interest and that this court should infer there is some undisclosed commercial advantage to the chargee: see paras 25 to 27. 20. All this, however, is conjecture. In reality the Commonwealth has not demonstrated any basis for displacement of the Receiver's superior right to control this asset, now that he has chosen to do so. Specifically, it has not been demonstrated that the Commonwealth's rights as a creditor, or any other creditor for that matter, are likely to be improperly affected by the conduct of these proceedings by the Receiver. 21. In my view, the Receiver in his written submissions in reply dated 9 July 2008 succinctly and adequately answered the concerns raised. These are set out at paras 18 to 22 and I will not read them out now but will incorporate them in the written reasons in the event that they are taken out by any party: "…the Receiver submits that the court should not accept the Liquidator's contentions in paragraph 19 of his submissions. Those contentions are summarised below, and the Receiver provides the following answers to them: · That there is no evidence that the Receiver will maintain the proceedings. Answer: This is a matter for the Receiver to determine through the proper exercise of his powers and subject to his obligations at law. To suggest that the Receiver should give such an undertaking is an attempt by the liquidator to fetter the discretion of the Receiver in the exercise of his powers. It is not a relevant criterion in determining whether the Receiver should be permitted to exercise those powers. · That there is no evidence that the Receiver has any funds to maintain the proceedings. Answer: This is not relevant either. In any event, to the extent that funds may be required, presumably the liquidator's existing funder, the Commonwealth, would be prepared to fund the Receiver in the same cause, should the appointor not have sufficient funds of her own to do so, or should she not wish to do so without such support. · The timing of the appointment gives rise "to an inference … that the appointment [of the Receiver] was designed by the Appointor to interfere with the due and proper conduct of the proceedings". The Receiver is acting in the interests of the appointor, Ms Wallis, who has interests adverse to those of WCI. Answer: For the above reasons, the Receiver is entitled to conduct these proceedings, and may well be in a better position than the liquidator to resolve the question of the amount still in issue, in the interests of WCI and its creditors as a whole without the need to pursue these proceedings any further. The Receiver's duties, generally, may be summarised as follows Blanchard The Law of Company Receiverships in Australia and New Zealand , 1982, para 1101, quoted by Gummow J in Re Just Juice Corp Pty Ltd (receivers and managers appointed) (1992) 8 ACSR 444 at 452: In general terms the duties of a receiver appointed under a debenture are by realisation or profitable management of the assets of the debtor company to produce cash and to apply it in or towards payment of the preferential creditors, meeting his own expenses and remuneration, paying off any security ranking ahead of the debenture and repaying the amount owing under the debenture. Thereafter he must account to the company for any surplus funds. In undertaking these tasks he must exercise his powers in good faith and, it is submitted, without acting in a manner which is negligent in the particular circumstances. He must also observe certain duties cast upon him by statute. The mere fact that the interests of the chargee are not congruent with the interests of the lower-ranking creditors does not prevent the Receiver from exercising his powers under the charge. The statutory and common law duties owed by the Receiver to WCI are addressed in more detail in paragraph 1 below. The Receiver has not conducted himself contrary to any of those duties and will not do so. · The Appointor has not undertaken not to remove the Receiver. Answer: No such undertaking is required to be given. In any event, if the Receiver is removed before these proceedings are concluded, the liquidator can take over the conduct of the proceedings. · The Appointor did not provide the Receiver with information as to the status of the proceedings where this would normally have been expected. Answer: The liquidator is relying on correspondence sent within days of the Receiver's appointment and immediately prior to the hearing of the motion. Nothing, or at least nothing of significance, can be inferred from this. · The Receiver has duties to WCI to act in the interests of its creditors as a whole, and has duties to the court under section 56 of the Civil Procedure Act to assist in furthering overriding purpose of facilitate the just, quick and cheap resolution of the real issues in the proceedings. Answer: The Receiver agrees that he has such obligations and proposes to conduct himself scrupulously in accordance with them. Reply to the Commonwealth's submissions In essence, the Commonwealth makes the following contentions: a) The Receiver has a conflict of interest between the interests of the appointor and the interests of the body of creditors as a whole. Therefore the Receiver should be prevented from exercising its powers in respect of this debt. b) The Commonwealth is a priority creditor and its interests would be adversely affected if a set-off were allowed to be negotiated by the Receiver. c) The Receiver is effectively seeking an injunction against the liquidator and the requirements for the giving of injunctive relief have not been made out. d) The Receiver is not an agent of the company so the only appropriate outcome would be for the Receiver to replace WCI as plaintiff. The Receiver's alleged conflict of interest 1. It is commonplace that the amount secured by a charge is less than the value of the security. In such a case, the chargor has an equity of redemption in the secured property – an everyday event. A Receiver is not deprived of the right to exercise the powers conferred on him by a secured creditor - which, in turn, were conferred on the secured creditor under contract by WCI - whenever the chargor has a valuable equity of redemption in the secured property 2. The Receiver is an officer of WCI (section 9) and in that capacity: · Owes an obligation of care and diligence to the company under section 180 – which, whilst insolvent, requires the duty to be directed to the interests of the creditors as a whole; · Owes the company an obligation to exercise his powers and discharge his duties in good faith in the bests interests of WCI (and its creditors) and for a proper purpose under section 181; · Must not use his position improperly to gain an advantage for someone else, or cause a detriment to WCI or its creditors, under section 182; · If the Receiver were to exercise a power of sale in respect of the debt, would be subject to a duty to exercise reasonable care under section 420A. There may also be a common law duty of care Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, although the existence of the common law duty in Australia may be doubted: Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. 3. These duties regulate the conduct of the Receiver having regard to the potentially competing interests of the various creditors, including in circumstances of the present kind See above at paragraph 0 and footnote 12, and Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. " 22. I refer also to paras 24 to 27 of the written submissions, which specifically addressed the suggestion that the interests of creditors, including the Commonwealth, would be adversely affected if the Receiver negotiates a settlement of the proceedings on the basis of the set off claimed by the defendants. The submissions were: "This is not the case for two reasons. The first reason is that, by operation of section 561, the Commonwealth would only stand to obtain priority over Anne Wallis if her charge was a "floating" charge – but not if the charge over the debt is "fixed". As the liquidator's submissions at paragraph 11 effectively concede, the debt owed to WCI by Truecash is the subject of a fixed charge in favour of Ms Wallis. It may be that this question is left for the Commonwealth and/or the liquidator to pursue elsewhere. But as the liquidator says at paragraph 23, that is not for determination on this motion. This is because, as the liquidator says, that issue could only arise when there is a fund of money for distribution by the liquidator. However these proceedings are ultimately concluded – by settlement or otherwise – the benefit (if any) obtained by Anne Wallis from the outcome of the proceedings may be subject to a challenge to her priority by the Commonwealth. Herein lay the second reason why the Commonwealth's interests are not affected by the outcome of this Motion: whether it is the liquidator or the Receiver who pursues these proceedings, the Commonwealth's priority position after Anne Wallis's fixed charge is unaffected. If the Commonwealth wishes to challenge that, it can." These submissions put to rest the Commonwealth's concerns, and those of the Liquidator on behalf of other creditors. Conclusions 23. I am not satisfied that it has been shown that the Receiver has an intention not to exercise, or to improperly exercise, his rights in respect of the disputed debt the subject of these proceedings, which is clearly subject to the charge under the debenture pursuant to which he was appointed. I find that no basis has been established for the exercise by the Liquidator of his residual powers in respect of the debt, in priority to the Receiver. 24. I find further: (i) The Receiver's superior right to the disputed asset gives him the authority to conduct these proceedings in the name of the company if, as he has elected, he chooses to do so. That includes a power to compromise the proceedings provided he does so consistently with his duties as Receiver to company and its other creditors. In that regard he is bound to exercise those duties in good faith in accordance with his statutory obligations. (ii) If in the future the Receiver were to be removed or failed to diligently and properly conduct the present proceedings, the Liquidator and the Commonwealth have appropriate recourse. The Liquidator, if appropriate, has the power to resume conduct of the proceedings. (iii) The Commonwealth's interests as a priority creditor will not be adversely affected. As an officer of the plaintiff company, the Receiver has obligations and owes duties to the company that are directed to the interests of creditors. Specifically the Receiver must not improperly gain an advantage for someone else or cause detriment to the company or its creditors. I am not satisfied that the Commonwealth's position is likely to be prejudiced by the Receiver assuming conduct of the proceedings. But if it is, the Commonwealth has rights against the Receiver that are sufficient to protect its position. Power to make the orders sought 25. The Commonwealth submitted that the court does not have the necessary power to make the orders sought by the Receiver (see for example para 22 of the written submissions dated 14 July 2008). 26. In my view the court has the necessary power: see the District Court Act at ss 9, 44 and 134(1)(h); see also Grassby v The Queen (1989) 168 CLR 1 and Kolavo v Pitsikas [2003] NSWCA 59. That being so, my duties under ss 56 - 60 of the Civil Procedure Act 2005 require me to determine these matters today. 27. For all these reasons I propose to make orders that the Receiver take over conduct of the proceedings from the Liquidator in the name of the plaintiff company. I order that the applicant, Bruce Gleeson, be entitled to file a Notice of Change of Solicitor to take over the conduct of these proceedings in the name of the plaintiff company. 28. No party submitted that costs should be other than in accordance with r 42.1. I make the following orders as to costs: A. The Liquidator is to pay the Receiver's costs of the application. B. The Commonwealth is to bear its own costs. C. The Liquidator is to pay the defendant's costs of the motion and of the adjournment. 29. The Commonwealth applied for a stay of the orders. I stay the orders for twenty-eight days. 30. I stand over the matter over for further directions on 29 August 2008 before the list judge in the Commercial List. 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