Reported Decision : 54 ACSR 683 New South Wales Supreme Court CITATION : Turner v Universal Home Loans [2005] NSWSC 834 HEARING DATE(S) : 15 & 16 August 2005 JUDGMENT DATE : 15 August 2005 JURISDICTION : Equity JUDGMENT OF : Campbell J DECISION : Leave granted on the assumption that leave is necessary CATCHWORDS : CORPORATIONS - administration - leave to proceed against company in administration - whether necessary when the company in administration is the plaintiff and a subsidiary application for security for costs is made against that plaintiff Corporations Act 2001 (Cth) LEGISLATION CITED : Corporations Law Pasdale Pty Ltd v Concrete Constructions (1995) 19 ACSR 693 CASES CITED : Simoon Pty Ltd v Renbay Systems Pty Ltd (1995) 18 ACSR 415 Warren Donald Turner - First Plaintiff Mortgage Elimination Services Pty Limited - Second Plaintiff PARTIES : Universal Home Loans Pty Limited - First Defendant Jay McNabb - Second Defendant Cherie Catherine McNabb - Third Defendant FILE NUMBER(S) : SC 2895/03 S Jacobs - First Plaintiff COUNSEL : J S Drummond - Defendants P Bolster - Administrator of Second Plaintiff Koffels - Plaintiffs SOLICITORS : Hewitts Commercial Lawyers - Defendants LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST CAMPBELL J MONDAY 15 AUGUST 2005 2895/03 WARREN TURNER & ANOR v UNIVERSAL HOME LOANS PTY LIMITED & ORS JUDGMENT – Ex Tempore 1 HIS HONOUR: The first matter which needs to be determined in today's application is whether leave should be granted to proceed against a company which has had an administrator appointed to it. The application which is listed is an application for security for costs brought against two plaintiffs. The first plaintiff is a natural person, Warren Turner ("Mr Turner"). The second plaintiff is Mortgage Elimination Services Pty Limited ("MES"), a corporation which was placed into administration on 5 August 2005. Mr Drummond, for the applicants/defendants, seeks, as a precaution, leave under section 440D Corporations Act 2001 to proceed against MES. He has directed my attention to two authorities which are not altogether consistent on whether such leave is really needed. 2 The first of them is the decision of Finn J in Pasdale Pty Ltd v Concrete Constructions (1995) 19 ACSR 693. That case arose under the Corporations Law, but section 440D of that Law is in terms identical to section 440D Corporations Act 2001. Each of those provisions said: "(1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. (2) Subsection (1) does not apply to: (a) a criminal proceeding; or (b) a prescribed proceeding." 3 In Pasdale Pty Ltd v Concrete Constructions (1995) 19 ACSR 693, an administrator was appointed to a company which was the plaintiff in litigation which was already on foot at the time of appointment of the administrator. The respondent to that litigation sought an order for security for costs of that litigation. Finn J construed section 440D(1) as not applying to that application for security for costs. In broad terms, his Honour took the view that, in the particular context in which 440D occurred, and taking into account the objectives of the part of the Corporations Law in which it occurred, the expression "a proceeding in a court against the company" referred to a proceeding in which the company was a defendant, not to a proceeding in which the company was a plaintiff. His Honour took the view that the relevant "proceeding" did not extend to subsidiary applications which might be made by a respondent against a company which was in administration, where that subsidiary application was in litigation commenced by the company which is in administration. 4 In Simoon Pty Ltd v Renbay Systems Pty Ltd (1995) 18 ACSR 415, Santow J noted that the Corporations Law contained a definition of "proceeding" which said: "proceeding" means (a) a proceeding in a court; or (b) a proceeding or hearing before, or an examination by or before, a tribunal, whether the proceeding, hearing or examination is of a civil, administrative, criminal, disciplinary or other nature;" 5 His Honour said that the concluding words of that definition suggested a broader denotation than that which Finn J had adopted, and whose natural meaning would ordinarily encompass a security for costs application. Santow J did not decide whether it was necessary for leave to be granted under section 440D to permit an application for security for costs to be made against a plaintiff company. His Honour took the view that, as the case before him was one where it would be appropriate to grant leave if leave were necessary, he would make an order granting leave for abundant caution, in case it was necessary. 6 The Corporations Act 2001 does not appear to contain the definition of "proceeding" to which Santow J referred as appearing in the Corporations Law. Even so, I propose to adopt the same course as Santow J adopted – that is to say, if it would be appropriate to grant leave assuming that leave were necessary, to grant it. I therefore turn, on the assumption that leave is necessary, to whether this is an appropriate case in which to grant it. 7 The proceedings in question are ones which seek to recover certain loans, commissions, trailer income, and costs of services provided to the first defendant. The situation is complicated by the fact that a deed was entered on 20 July 2005, where MES assigned to Mr Turner, all its rights to recover the various amounts which were the subject of the litigation. That assignment is one which was effected in consideration that Mr Turner would prosecute the proceedings and seek to recover from the defendants any amounts which, but for that assignment, would be recoverable by MES. Mr Turner promised that any amount he recovered would be allocated firstly, in payment of certain costs which had been ordered against the first and second plaintiffs in certain District Court proceedings, and secondly, in paying 75 percent of any amount which might be left over to MES. 8 The administrator has not yet formed a view about whether the deed is one which is valid and effective. 9 I have been informed that, as a consequence of the entering of that deed of assignment, an application is likely to be made to remove MES from being a plaintiff in these proceedings. That application is one which will be dealt with when and if it is made. However, it is submitted that when that application is likely to be made, there would be no point in granting leave to proceed against MES. 10 I am not prepared to assume that it is absolutely inevitable that that application will be made, or will succeed. If the application is made, and succeeds, and if there were to be an order on foot which stayed the action until such time as security was provided, it would be in no way harmful to MES that an order for security had been made against it, and that an action had been stayed until such time as the security was provided, in circumstances where MES did not wish to proceed with the action in any event. 11 Thus, I do not regard that as a reason for not granting leave. 12 There is evidence before me that MES has been insolvent for a considerable period of time. There is some strange evidence of two sets of financial accounts of MES, which do not appear to be mutually consistent. One of them, printed on 27 May 2003, shows a balance sheet position of MES as at June 2001 as being that it had net assets of $334,000; as at June 2002 a deficiency of net assets of $352,000 and as at April 2003 had a deficiency of net assets of $367,000. Those balance sheets are ones which were provided to the defendants in the year 2003, as an exhibit to an affidavit. The second set of financial accounts is one which came to light in the course of some District Court proceedings earlier this year. Those financial accounts are both profit and loss accounts and balance sheets. They are a set of accounts printed on 20 March 2005. They show that in the year to 30 June 2001 MES had sustained a loss of $22,000, and had a deficiency of assets of the order of $39,000, that in the year to 30 June 2002 it had sustained a loss of the order of $414,000 and had a balance sheet deficit of assets of the order of $453,000, and that in the year to 30 June 2003 it had suffered a further loss of $499,000 and had a deficiency of assets on its balance sheet of the order of $863,000. 13 This is a case where there is a realistic prospect that an order for security for costs would be made against MES. It would not be appropriate for the administrator to proceed on the basis that there might be brought into the administration assets recovered through the litigation, if that was not done on terms whereby the defendants in the litigation were protected for costs, in the event that the litigation failed. It is of particular relevance here that the deed of assignment to which I have already referred, contains express acknowledgments that to properly prosecute the proceedings will lead to significant further solicitor/client costs which Mr Turner will be liable to pay, and which MES is unlikely to be in a position to pay. The deed also contains an acknowledgement that the proceedings are vigorously defended and that there is an appreciable risk that the defendants might succeed in defending the proceedings, leading to a further exposure on the part of Mr Turner to an adverse costs order, including in respect of the costs of the defendants in defending any claim in respect of which MES could have recovered any amount of money or benefit, but for the existence of the deed. 14 In all these circumstances, and on the assumption that the granting of leave is necessary, I grant leave to proceed with the present application against MES. ********** 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. 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