New South Wales Supreme Court CITATION : Sydney West Plumbing Services & Anor v Hull & Ors [2001] NSWSC 740 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 3356/99 HEARING DATE(S) : 3 August 2001 JUDGMENT DATE : 3 August 2001 Sydney West Plumbing Services Pty Limited (In Liquidation) (First Plaintiff) John Edward Star (Second Plaintiff) v Mark Anthony Hull (First Defendant) PARTIES : Michael Hull (Second Defendant) Eunice Margaret Hull (Third Defendant) Michael Edward Hull (Fourth Defendant) David Andrew Hull (Fifth Defendant) JUDGMENT OF : Acting Master Berecry COUNSEL : Ps: Mr F Lever Ds: Mr J Stevenson SOLICITORS : Ps: Gray & Perkins, Lawyers Ds: Warren F Ball & Co, Solicitors CATCHWORDS : Summary dismissal - whether claim shows plaintiff suffered loss - enforceability of shareholders - creditor's rights LEGISLATION CITED : Supreme Court Rules 1970, Pt 13 r 5 Corporations Law, s 598 CASES CITED : Sycotex v Baseler (1994) 122 ALR 531 DECISION : Notice of Motion dismissed. No orders as to costs. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION ACTING MASTER BERECRY FRIDAY, 3 AUGUST 2001 3356/99 - SYDNEY WEST PLUMBING SERVICES PTY LTD v JOHN EDWARD STAR JUDGMENT 1 ACTING MASTER: The application this morning is a Notice of Motion filed 23 July 2001 seeking two forms of relief in the alternative. The only relief pressed this morning is paragraph 2 which seeks summary dismissal of the proceedings under Pt 13 r 5 of the Supreme Court Rules, 1970. 2 Mr Stevenson refers to the Amended Statement of Claim relying on the relief sought in paragraph 14(a), that is, the statutory provisions for compensation sought under the Corporations Law. Reference was made to s 598(2). It was submitted that there is a requirement that the first plaintiff ("the Company") must show that it has suffered or is likely to suffer damage or loss. 3 The Amended Statement of Claim pleads a number of consensual aspects of the plaintiffs' case, such as, the administrator ("the second plaintiff") was appointed on 18 July 1994, on 31 August 1994 the second plaintiff was appointed the liquidator and that, on 7 July 1994, a debt to Westpac was owed by the Company. That debt totalled a sum of about $381,000. Between 8 July 1994 and 15 July 1994 the debt was paid. 4 It is also pleaded that there was a guarantee executed between the second and third defendants and Westpac in respect of facilities made available to the first plaintiff by Westpac. At all material times, the second and third defendants were directors of the Company along with the other defendants and are the parents of the other defendants. 5 Although it was not pleaded in the Amended Statement of Claim, counsel for the plaintiffs, Mr Lever, says that the evidence will be that, as at 7 July 1994, the directors of the Company were aware that the Company was in financial difficulties. That is borne out by the fact that, on 18 July 1994, an administrator was appointed and, no doubt, the usual meeting of directors would have been held and a belief would have been formed that the Company, in all probability, could not pay its debts as and when they fell due. It is asserted that the directors breached their duties that they owed to the Company. 6 By paying out the guarantee, that relieved the obligation of the second and third defendants under the guarantee. However, what it created was a shell of a company, which had no assets to pay out the unsecured creditors, leaving a shortfall of about $300,000 with little likelihood of that money being recovered. 7 The objection to the Amended Statement of Claim, however, is that the plaintiffs do not show that the Company has suffered any loss. It is said that any loss that is suffered may be a loss suffered by the unsecured creditors. 8 It seems to me that reading s 598 in those terms is a narrow and restrictive way of reading that section. Mr Lever has referred me to the decision of Gummow J in Sycotex v Baseler (1994) 122 ALR 531, where his Honour links the rights of shareholders and creditors with the company and discusses when an obligation to creditors can be enforced. His Honour states, at p 550, that:- "… there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator." 9 The point Mr Lever makes is that, once a liquidator is appointed, there is a crystallisation of the claim by the creditors through the liquidator for any damages that have been sustained as a result of the actions of the directors of the company. 10 Any damages that flow from the actions of the directors, if at the end of the day they are established, would be based on the payment of about $381,000 to Westpac at a time when it was known by the directors that the Company was not in a position to meet its debts as and when they fell due. In my mind, that is fairly clearly pleaded in the Amended Statement of Claim. It seems to me that, at the very least, the plaintiffs do have an arguable case. 11 Limitation issues arise where, if the proceedings were to be dismissed under Pt 13, the liquidator would be left in a position where, in all probability, there could be no recovery of funds for payment out to unsecured creditors. 12 Therefore, I decline to make the order sought in paragraph 2 of the Notice of Motion. The Notice of Motion is dismissed. The appropriate order for costs is that there be no order as to costs. ********** Last Modified: 09/03/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.