Re Home Corp Projects [2002] NSWSC 879

Reported Decision : (2002) 20 ACLC 1751

New South Wales Supreme Court

CITATION : Re Home Corp Projects [2002] NSWSC 879 CURRENT JURISDICTION: Equity Division Corporations List FILE NUMBER(S) : SC 4699/01 HEARING DATE(S) : 09/09/02 (Written submissions 24/09/02, 25/09/02) JUDGMENT DATE : 27 September 2002

PARTIES : Australian Home Mortgage Corporation Pty Limited (In Liquidation) - Applicant John Howard Mann - Liquidator JUDGMENT OF : Barrett J

COUNSEL : Mr J T Johnson - Applicant Mr K J Pringle, Solicitor - Liquidator SOLICITORS : Watson Mangioni - Applicant Gordon & Johnstone - Liquidator CATCHWORDS : CORPORATIONS - winding up - creditor providing financial support to liquidator in pursuit of recovery action - whether creditor should be given advantage in order of priority LEGISLATION CITED : Corporations Act 2001 (Cth) Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 Re Kyra Nominees Pty Ltd (1987) 11 ACLR 767 CASES CITED : Re Parkston Ltd (2000) 35 ACSR 114 Re Pinnacle Construction Pty Ltd [2001] NSWSC 1210 Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (1998) 26 ACSR 22 State Bank of NSW v Brown (2001) 38 ACSR 715 DECISION : Limited advantage awarded to creditor

- 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

FRIDAY, 27 SEPTEMBER 2002

4699/01 – HOME CORP PROJECTS PTY LTD v HOME CORP PROJECTS (NO 100) PTY LTD JUDGMENT 1 By its interlocutory process filed on 30 August 2002, Australian Home Mortgage Corporation Pty Ltd (in liquidation) seeks an order under s.564 of the Corporations Act 2001 (Cth) in the liquidation of Home Corp Projects Pty Ltd. I shall refer to these companies as, respectively, "Mortgage Corp" and "Projects". A third relevant company, Home Corp Projects (No 100) Pty Ltd, will be referred to as "No 100". All three companies have some commonality of ownership and directorate. Their financial affairs are said to be intermingled. 2 In September 2001, Projects sought in this court an order for the winding up of No 100 or, at least, for the appointment of a provisional liquidator in the first instance. This followed an earlier move by Mortgage Corp to obtain an order for the winding up of No 100, apparently on the basis of an alleged debt which became the subject of a statutory demand which was afterwards set aside. The subsequent winding up proceedings initiated by Projects were later compromised on the basis that a sum of $90,000 would be paid by No 100 to Projects. Mortgage Corp paid $4,850 towards the legal costs incurred by Projects in connection with the litigation against No 100 which was thus settled. This contribution was made at the behest of Mortgage Corp's liquidator and in the context of the following resolution passed at a meeting of the committee of inspection on 14 September 2001: "The Liquidator of Australian Home Mortgage Corp. Pty. Limited (In Liquidation) be authorised to offer funding to the Liquidator of Home Corp Projects Pty. Limited (In Liquidation) to support an application for the appointment of a Provisional Liquidator/Liquidator to Home Corp Projects (No 100) Pty. Limited. Alternatively, if the offer is not accepted by the Liquidator of Home Corp Projects Pty. Limited (In Liquidation) or for any reason the Liquidator of Home Corp Projects Pty. Limited (In Liquidation) does not wish to proceed, then the Liquidator of Australian Home Mortgage Corp. Pty. Limited (In Liquidation) is authorised to commence proceedings in the District Court for recovery of monies owed by Home Corp Projects (No. 100) Pty. Limited." 3 It will be seen that the resolution of the committee was not particularly specific. It authorised an offer of "funding". No amount was mentioned. Nor was there any reference to indemnity. The evidence discloses, in addition to this resolution, that $4,850 was provided by Mortgage Corp (which sum Mortgage Corp recovered, or will recover, as a result of the favourable outcome) and that other creditors – or, at least, Mr Mann as trustee of the bankrupt estate of Mr Leishman (a creditor) – did not receive an opportunity to contribute to or underwrite the Mortgage Company's legal costs. Total costs of the proceedings were somewhat more than $50,000. There is no evidence as to the extent to which these have been paid or to the source or sources to which the liquidator will resort in obtaining funds. In particular, there is no evidence that Mortgage Corp has become bound to provide anything beyond the $4,850 already provided. No such commitment can be inferred from the resolution of 14 September 2001. 4 It is in these circumstances that Mortgage Corp seeks an order under s.564(a) that the debt due to it by Projects be paid, in whole or in part, in priority to those of other creditors out of property recovered by the liquidator of Projects. Mortgage Corp's preferred position is, needless to say, that it should be granted priority as to the whole of its debt. Mr Mann, in the capacity to which I have referred, opposes the making of any order, saying that he and other creditors had no opportunity to be part of the support that Mortgage Corp now says is deserving of preferential treatment and that, in any event, a contribution by way of loan to the extent of $4,850, if deserving any such treatment, does not deserve it to the extent of priority for the total debt. 5 I should record, at this point, the liquidator's expectations as set out in his report to creditors dated 21 August 2002. His summary of receipts and payments for the 13 months to that date (actual and expected) shows receipts of $100,045.18, of which $90,000 represents the settlement sum, $10,000 represents cash at bank at appointment and $45.18 represents interest. The proceeds of the settlement thus represent almost 90% of available funds. Total payments are $76,470.45 of which $46,873.53 is for legal fees and $4,850 is reimbursement of Mortgage Corp. I infer from this (and it was, I think, accepted in argument) that total legal fees were $51,723.53 and that the whole of this related to the proceedings which produced the settlement of $90,000. 6 The cash surplus in the hands of the liquidator is (or will be) $23,574.73. If the Mortgage Company is afforded full priority for its debt of $65,081.39, there will be no return to other creditors. If the Mortgage Company is given no priority, there will be a dividend of some 5.92 cents in the dollar for all creditors. 7 Neither Mr Johnson of counsel who appeared for the Mortgage Company nor Mr Pringle who appeared for Mr Mann offered submissions as to the construction and effect of s. 564, beyond Mr Johnson's observation that a case involving Tosich Constructions (no doubt Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (1998) 26 ACSR 22) was one in which priority had been afforded to a creditor, although not for the full amount of the debt. I therefore proceed to make my own analysis. 8 Looking at s.564(a), the first task is to decide whether this case is one in which either "property has been recovered under an indemnity for costs of litigation" given by Mortgage Corp, or "property … has been protected or preserved by the payment of money or the giving of indemnity by" Mortgage Corp. There may be some residual doubt as to whether a creditor who provides funds to a liquidator to enable the liquidator to continue litigation can be said to have indemnified the liquidator for costs of the litigation. The view of Franklyn J in Re Kyra Nominees Pty Ltd (1987) 11 ACLR 767 that there is no "indemnity" in that case was questioned by Branson J in Power Demolitions Pty Ltd v Tosich Constructions Pty Ltd (above). I note that the view to which Branson J inclined was preferred by Santow J in Re Parkston Ltd (2000) 35 ACSR 114. His Honour said that: "the actual provision of funds by unsecured creditors to the liquidator would meet that description in providing the liquidator with a measure of protection in respect of the costs of the litigation instituted by him." 9 I agree with the approach taken by Santow J which seems to me to accord also with the decision of Campbell J in Re Pinnacle Construction Pty Ltd [2001] NSWSC 1210. The matter may, in any event, be of limited importance given that both Franklyn J and Branson J accepted that a creditor outlaying money as distinct from undertaking to hold harmless falls within the second limb of s.564(a), the property preserved or protected by the payment of money by the creditor being the right of action the liquidator is enabled to pursue. 10 I therefore conclude that, in the present case, Mortgage Corp is, in the context of the compromise by which the liquidator of Projects came to receive $90,000 from No 100, properly regarded as a creditor to which s.564(a) applies. 11 It then becomes necessary to consider the factors by reference to which the court's decision under s.564(a) is to be made. These are identified in the judgment of Brownie J in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 as including the sum recovered, the failure by other creditors to provide indemnity, the proportion between the debts of the indemnifiers and others, the public interest in encouraging creditors to assist in the recovery of assets and the overall circumstances. 12 Brownie J added that "it will be an extremely rare case" in which contributing creditors receive 100% of the proceeds of the funded litigation. Cases decided in the six years or so since Brownie J made that observation make it necessary to reconsider the "extremely rare" description. In both Parkston and Pinnacle the supporting creditors were awarded the whole of the proceeds. The decision to that effect in Parkston was upheld on appeal: see State Bank of NSW v Brown (2001) 38 ACSR 715. In the Court of Appeal, judgments were delivered by Spigelman CJ and Hodgson JA, with whom Handley JA agreed. The purpose and effect of s.564 (or, more precisely, s.450 of the Companies (New South Wales) Code which was in the same terms) were described in the following passage in the judgment of the Chief Justice: "There is a public interest dimension in proceedings by a liquidator. As the Full Court of the Federal Court said in Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301; at 306; 120 ALR 262: 'A liquidator, when engaged in litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant. The liquidator comes to the company as an officer of the court under a duty and responsibility to get in and maximise the assets of the company for distribution for the benefit of creditors.' With respect to s450 of the Companies Code, Hayne J said in Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610; at 612: '… the discretion covered by s 450 is a broad and general discretion and one that is to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies.' It is in the public interest that all of the assets of a company are available for creditors. This extends to assets which can only be collected by litigation. Encouragement of liquidators to realise all of the assets of a company, if necessary by litigation, is intended to redound to the advantage of all creditors. The primary rule, is found in s 440 of the Companies Code: '440 Except as otherwise provided by this Code, all debts proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they shall be paid proportionately.' Section 450, relevantly, 'otherwise provides'. The respondents submitted that a further public interest was served by s 450, over and above the interests of the body of creditors. They submitted that litigation by liquidators enforces the law and there is a public interest in such enforcement, relevantly, in the present case, to ensure that directors perform their duties. In my opinion, a power to make an order which is "just", for a purpose expressed in terms of giving creditors "an advantage over others in consideration of the risk assumed by them" is not designed to serve a public interest of that character. The litigation which may have resulted in the recovery, protection or preservation of property, within s 450, could be of any character and will not necessarily involve any kind of public interest. The thrust of the appellant's primary submission was the fact of incongruity in the exercise of a power which was intended to encourage conduct to serve the interests of all creditors, in such a way that some creditors receive no benefit in fact. There is an element of incongruity in such a result. That is why the exercise of the power in such a way as to give 100% of the proceeds to funding creditors should be rare.