New South Wales Supreme Court CITATION : HP Mercantile v Australian Rural Group [2005] NSWSC 895 HEARING DATE(S) : 31 August 2005 JUDGMENT DATE : 31 August 2005 JURISDICTION : Equity JUDGMENT OF : Campbell J DECISION : Leave refused CATCHWORDS : CORPORATIONS - winding up - leave to proceed against company in liquidation - leave to proceed against company subject to a deed of arrangement - standing to sue concerning alleged breach of requirements of deed establishing prescribed interest scheme - otherwise turns on its own facts Corporations Act 2001 (Cth) LEGISLATION CITED : Managed Investments Act 1998 (Cth) Brash Holdings Ltd (admr apptd) v Katile Pty Ltd (1994) 13 ACSR 504 Hirlian v Rodgers [2005] NSWSC 295 CASES CITED : Re National Express Group Australia (Swanston Trams) Pty Ltd; Thiess Infraco (Swanston) Pty Ltd v Smith (2004) 50 ACSR 434 Vagrand Pty Ltd (in liquidation) v Fielding (1993) 41 FCR 550 HP Mercantile Pty Limited - Plaintiff PARTIES : Australian Rural Group Limited (in liq) - First Defendant JA & BM Bowden & Sons Pty Ltd (under administration) - Second Defendant FILE NUMBER(S) : SC 3681/05 P Stitz - Plaintiff COUNSEL : A P Coleman - First Defendant S Golledge - Second Defendant Versace McKenzie Lawyers - Plaintiff SOLICITORS : Clayton Utz - First Defendant Gadens Lawyers - Second Defendant LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J WEDNESDAY 31 AUGUST 2005 3681/05 HP MERCANTILE PTY LIMITED v AUSTRALIAN RURAL GROUP LIMITED (IN LIQUIDATION) & ANOR JUDGMENT – Ex Tempore 1 HIS HONOUR: This is the hearing of an interlocutory process which seeks leave to continue proceedings, firstly, against a company in liquidation, and, secondly, against a company which is subject to a deed of company arrangement. 2 The plaintiff in these proceedings is the assignee of certain entitlements relating to seven different prescribed interest schemes. Each of those prescribed interest schemes was one under which members of the public could invest in an agricultural venture. It appears that the schemes were at least to some extent tax driven. The Deeds Establishing the Schemes 3 The schemes all came into existence under deeds which were executed over a period from December 1990 to February 1998. Thus, they were all entered before the Managed Investments Act 1998 (Cth) came into force on 1 July 1998, and they had the general type of structure which is associated with prescribed interest schemes. 4 The first defendant has come to fulfil the role of what is called, in the deeds, "the Representative". This is the entity which, in broad terms, fills the role which a trustee for members ordinarily fills in a prescribed interest scheme. 5 There was, under each of the deeds, also an appointment of a Manager to each scheme. Tree Top Projects Pty Ltd (in Liquidation) came to be the Manager of each of the projects. 6 The schemes had deeds which bear a fairly strong family resemblance one with the other, and it is possible to take the deed relating to one of the schemes, the Tumut River Orchard Project, as being typical in the respects which are relevant here. The deed is one which was expressed to be between the initial Manager of the scheme, the initial Representative of the scheme, and various members of the public who might come to be parties to the scheme at a later date. Such members of the public are referred to in the deed as "Growers". The application before me has proceeded as though the first defendant is in all respects in the same position as the original Representative was, under the deed. 7 The deed recites that the Manager wishes to appoint the Representative to be the representative in respect of the interests of the Growers in certain Project Agreements which are to be entered into. Those Project Agreements are ones proposed to be entered by a Grower who makes application to the Manager to become a member of the scheme. The deed spoke as though each Grower would be conducting, on an individual allotment of land, a business of growing certain agricultural products. However, there was provision for the Manager to carry out the actual agricultural activities, and to have a power to delegate the conduct of those activities. The deed goes into some detail about the administrative arrangements under which the prescribed interest scheme will be operated, but does not say in so many words whether the relationships which arise pursuant to it are contractual ones, or ones of trust. 8 Clause 11 of the deed contains provisions that: "11.1 The Manager shall be entitled to be paid all moneys payable to it under the Project Agreements. 11.2 In addition to the amounts specified in clause 11.1 the Manager shall be entitled to be reimbursed for all costs and expenses incurred or payable by the Manager in accordance with clause 16.4." I infer that there was provision under individual Project Agreements for the Manager to be paid fees for its activities in managing. 9 Clause 16.1 contained provision that "The Representative shall open a bank account styled the Tumut River Orchard Investment Account ("Investment Account") into which it shall deposit (a) the Gross Sale Proceeds …" 10 Clause 16.2 provided that the Representative would administer and manage that account. Clause 16.3 entitled and obliged the Representative to pay out of that account "… all reasonable costs and expenses properly incurred for the purposes of the Project in accordance with this Deed, including any payments, remuneration or indemnities to which the Representative, the Manager and the Auditor are respectively entitled." 11 Clause 16.4 identified certain particular sub-categories of the costs and expenses incurred in connection with the scheme. Clause 16.7 provided that if the Investment Account had insufficient funds to enable payment of the categories of expenditure identified in Clause 16.4, the Manager would advance enough money to enable those expenses to be paid, but would have a right to be reimbursed from the Investment Account for the amounts so advanced. 12 There was provision in the deed for an Auditor to be appointed. The appointment was, pursuant to clause 15.1, to be made by the Representative. Clause 15.2 provided, "The Auditor's fees and expenses shall be subject to the approval of the Representative in consultation with the Manager and shall be payable out of the Investment Account as an expense of the Project." 13 The Gross Sale Proceeds which were to be deposited into the Investment Account, were defined as meaning "the gross proceeds from the sale of Fruit by the Growers pursuant to the Farming Agreements …" The Farming Agreements thereby contemplated were agreements between a Grower and the Manager to, in effect, operate the farming allotment of that Grower and to sell the fruit from it. The definition of "Farming Agreement" contemplated that that sale of fruit would be on the terms of a document which was annexed to the deed. It was under clause 11 of that pro forma Farming Agreement that there was provision for each Grower to appoint the Manager as his agent and nominee to sell the fruit which was harvested pursuant to the Agreement. Even though the farming operations which were contemplated by the deed were individual farms, of individual Growers on individual allotments, the Manager had power, under this clause, to pool the fruit from various farms. The Manager had complete discretion as to the manner in which it sold that fruit. The Rights Assigned to the Plaintiff 14 The plaintiff in the present proceedings is the assignee of three different categories of rights which have arisen in relation to the scheme. One category of such rights is Auditor's fees. It appears that the Auditors of the project were, for a period, not paid, and they have assigned (through one or two intermediaries) their right to be paid to the plaintiff. 15 The second type of claim which the plaintiff is the assignee of, is the claim of the Manager to be paid fees. The third type of claim is a claim of the Manager to be reimbursed various expenses connected with the scheme. 16 The assignment of these rights to the plaintiff took place in August 2001, and October 2001. A further deed of assignment dated 22 December 2004 sought to clarify the precise identity of certain of the claims which had been assigned. Each of the instruments of assignment referred to the claims which were assigned as being debts. 17 In January 2002 the plaintiff sent notice of the assignment to the liquidator of the Representative, and, in February and May of 2002, also sent letters of demand to the Liquidator, requiring the payment of the various amounts it had been assigned. The Commercial List Proceedings 18 On 27 June 2005 the Originating Process for the proceedings which I am now hearing was filed. It was filed in circumstances where the plaintiff was fearful that a limitations period would expire on 30 June 2005. In consequence, on 29 June 2005 his Honour Justice White made an order which, in effect, granted leave to the plaintiff to commence certain proceedings in the Commercial List of this Court, but left open the question of whether leave should be granted for the plaintiff to continue those proceedings. His Honour established a regime whereby, when a determination was made about whether leave to continue the proceedings should be granted, the rights of the parties would be determined in the same way as though the question of whether leave to commence and continue was all decided at the one time. It is the interlocutory application for leave to continue the proceedings which is now before me. 19 The summons which has now been filed in the Commercial List is a document of some 36 pages, which sets out, in the familiar Commercial List format, the claims made, the nature of the dispute, the issues likely to arise, and the plaintiff's contentions. The plaintiff's contentions are pleaded over some 20 pages. 20 There is a diffuseness in the claims which are made by those contentions. It is not clear the exact nature of the claims which are being made, or the legal basis upon which they are asserted. 21 The relief which is sought, in relation to the Tumut River Orchard Project, is as follows: "(a) A declaration that [a company not party to these proceedings] holds the property leases over the land described in and required by the Tumut River Orchard Project Investment Deed dated 31 December 1990 (as amended) on which the Tumut River Orchard Project is located on trust for the First Defendant, in its capacity as representative under the said deed, up to and including 12 May 2010 or until the said project is terminated, whichever is the earlier. (b) A declaration that the [Second] Defendant holds the property sub-leases over the land described in and required by the Tumut River Orchard Project Investment Deed dated 31 December 1990 (as amended) on which the Tumut River Orchard Project is located on trust for the First Defendant, in its capacity as representative under the said deed, up to and including 11 May 2010 or until the said project is terminated, whichever is the earlier. (c) A declaration that pursuant to the terms of the Tumut River Orchard Project Investment Deed dated 31 December 1990 (as amended) [a company not party to these proceedings] and the [Second] Defendant are required to pay all Gross Sale Proceeds of the Tumut River Orchard Project (as that term is defined in the said deed) without deduction or set off to the First Defendant who is required to deposit such proceeds without deduction or set off into the Investment Account established in accordance with Clause 16.1 of the said deed. (d) A declaration that monies deposited in the said Investment Account are to be disbursed by the First Defendant in the following order of priority: "(i) First Priority to any amounts paid by the current or any previous manager under the said deed which are reimbursable under Clause 16.7 of the said deed with all such payments under Clause 16.7 to be made on a pari passu basis irrespective of the order in which such reimbursable payments were made and irrespective of whether the entitlement for reimbursement is to the current or a previous manager under the said deed. (ii) Second Priority to any costs, expenses, remuneration or other payments which are payable under Clause 16.3 of the said deed with all such payments under Clause 16.3 to be made on a pari passu basis irrespective of the order in which such costs, expenses, remuneration or other payments were made and irrespective of whether the entitlement for payment is to the current or a previous manager, representative or auditor under the said deed. (iii) Thereafter in accordance with the said deed. (e) A declaration that the plaintiff is entitled to be paid the following amounts from the said Investment Account without deduction or set off: (i) $97,668.64 pursuant to Clause 16.7 of the said deed, and (ii) $34,456.00 pursuant to Clause 16.3 of the said deed, and (iii) $12,089.07 pursuant to Clause 16.3 of the said deed." 22 I mention that the defendants are differently numbered in the Commercial List summons to the way that they are numbered in the proceedings I am now hearing, and I have, in this quotation, substituted the numbering which the parties have in these proceedings. 23 It appears that there has never been any Investment Account opened for these Projects, and that, therefore, there is no fund to which any obligations under clause 16.3 or 16.7 of the deed can presently attach. As well, the liquidator's current estimate is that the liquidation will result in a nil payment to unsecured creditors, and will conclude this year. Application for Leave to Continue Against First Defendant 24 A claim for leave to bring or continue legal proceedings against the company in liquidation is made under section 471B Corporations Act 2001 (Cth). Concerning such an application, the applicant for leave must show that the claim has a solid foundation and gives rise to a serious dispute, in a sense analogous to the "serious question to be tried" test which is used for interlocutory injunctions: Vagrand Pty Ltd (in liquidation) v Fielding (1993) 41 FCR 550. That case establishes that it is not necessary for the applicant for leave to show a prima facie case, in the sense of proof of every element of the claim made. 25 In argument, Mr Stitz, counsel for the plaintiff, submitted, and stressed, that the substantial relief which the plaintiff seeks is against parties other than the first defendant. The plaintiff wishes to contend that the various investment schemes have been mismanaged, and that the Manager, and various sub-managers who the manager appointed under its power of delegation, have failed to observe their obligations under the deeds. What the plaintiff seeks to achieve by the proceedings, I am told, is to compel the Managers and sub-managers to give an account of the way in which they have managed the schemes, and to pay to the Representative amounts of Gross Sale Proceeds which, the plaintiff says, should have been paid to the Representative, to be paid into the Investment Account. Once the money is in the Investment Account, the plaintiff says that it will be entitled, pursuant to clause 16 of the deed (and its analogues in the various other investment schemes) to be paid the various amounts which have been assigned to it. The plaintiff does not seek to have the first defendant part with a cent of its own money, just to fill the role that the deed requires it to fill of administering the Investment Account. In this way, Mr Stitz submits, there is no diminishing of the rights of ordinary creditors to prove in the liquidation and be paid such dividend as might be declared. 26 The company in liquidation opposes the grant of leave. It points to the fact that the declaration of entitlement to be paid, in paragraph (e) of the claim for relief, is one which does not say that it is contingent upon money actually being paid into the Investment Account. If the declaration in paragraph (e) were to be made, it would provide a basis on which the first defendant would be unable to oppose judgment being entered against it for the amount of the liability which had been declared to exist. 27 The way in which the case is put against the first defendant, in the statement of contentions, includes allegations that "In breach of clause 16.3 of the Tumut Deed, the First Defendant has not paid to [the auditors] the Tumut Audit Fees from the Tumut Investment Account". Similar allegations of breach are made, in relation to the other two categories of claim which have been assigned to it, by paragraph 32 and 35 in the contentions. 28 A reader of this summons would not, in my view, get the message that the only claim sought to be made was one which did not cut into the assets of the first defendant, or that the declaration which was sought was contingent upon any assets being paid into the Investment Account. 29 As well, however, there is a deeper problem. To the extent to which there are contractual obligations arising under the deed, those contractual obligations are ones which exist between the Representative, the Manager and (I shall assume for present purposes) the various Growers. It is only the parties to the deed who can enforce the contractual obligations contained in it. If there is a trust arising under the deed establishing the prescribed interest scheme at all, the beneficiaries of that trust are the Growers. The only people who are entitled to assert a breach of an equitable obligation are those people to whom the equitable obligation is owed. What the plaintiff is seeking to do, in these proceedings, is to assert rights like those which the Growers might have to enforce the benefit of a trust, and, having enforced those rights to recoup the trust fund, namely, the Investment Account, to then have that Investment Account applied in a way whereby the benefit will flow not only to the Growers, but also to the plaintiff, as the assignee of claims which, under clause 16 of the deed, are to be paid from the Investment Account. 30 In my view, that type of claim is one which is unknown to the law. It frequently happens that, when a contractual or an equitable obligation owed by A to B is not performed, other people suffer in consequence of B not having the assets he or she would have had if the obligation had been performed. The fact that those other people have suffered does not confer upon them entitlement to enforce B's contractual or equitable rights. Thus, even if the pleading were to be clarified to make clear whether it seeks to enforce contractual obligations or seeks to enforce a trust, I am not persuaded that the claim is one which would be viable as a matter of law. 31 To the extent to which the claim, read literally, seems to assert a liability on the first defendant to pay money, it would be the type of claim which would be provable in a liquidation. To the extent to which a claim, on its face, appears to be one which is provable in the liquidation, there is no reason why it should be taken out of the ordinary course of the liquidation, and given effect to by a proof of debt. 32 When a court is asked to grant leave to permit a claim to be brought against a company in liquidation, the claim which the Court considers is the claim which is actually sought to be brought, not the claim as it might possibly be amended: Hirlian & Ors v Rodgers [2005] NSWSC 295. The actual claim which is articulated in the summons is one which, insofar as one can distil either a contractual or a trust claim from it which would result in money flowing into the Investment Account, is not a viable one, at the suit of this plaintiff. This plaintiff is not the assignee of any right to enforce any such trust, or of any right to recover damages for breach of contract. 33 There is an additional twist to the claim which the plaintiff seeks to make in relation to one of the Projects, known as the Harcourt Vines Project. Concerning it, the plaintiff asserts that a purported resignation of the first defendant as Representative is ineffective, and that it ought be declared that it is still the Representative. Once that has happened, what is sought to happen is to have the same sort of relief against the first defendant as is claimed in relation to the other projects. When the end which is sought to be achieved in relation to the Harcourt Vines Project is not one concerning which it is appropriate to grant leave, the fact that there is an additional twist in the means by which that end is arrived at, does not assist the plaintiff. Application for Leave Against Second Defendant 34 The second defendant in these proceedings is a company which was a sub-manager of one of the investment properties. It is subject to a deed of company arrangement. Leave to proceed is sought against it under section 444E Corporations Act 2001 (Cth). 35 The deed of company arrangement is one which binds various creditors of the company, namely people who at 31 January 2003 had a claim against it. The deed establishes a moratorium so far as such claims are concerned. Claim in the deed is defined as: "A debt or debts payable by and all claims against the [company] (present or future, certain or contingent, ascertained or sounding in damages) being debts or circumstances giving rise to claims which occurred on or before [30 January 2003]." That definition is one of broad scope : Brash Holdings Ltd (admr apptd) v Katile Pty Ltd (1994) 13 ACSR 504. It will cover every possible demand, claim or liability including for future breaches of contract provided the debtor was bound by the contract at the relevant date: Re National Express Group Australia (Swanston Trams) Pty Ltd (recs and mgrs apptd) (subject to deed of company arrangement); Thiess Infraco (Swanston) Pty Ltd, v Smith and Others (as deed administrators of National Express Group Australia (Swanston Trams) Pty Ltd (recs and mgrs apptd) (subject to deed of company arrangement) (2004) 50 ACSR 434. 36 The particular claims which are made against the second defendant include: "(1) A declaration that pursuant to terms of the Tumut River Orchard Project Investment Deed … the [second] defendant … [is] required to pay all Gross Sale Proceeds of the Tumut River Orchard Project … without deduction or set off to the [Representative], who is required to deposit such proceeds without deduction or set off into the Investment Account established in accordance with clause 16.1 of the said deed." 37 The summons also seeks an order that the second defendant pay any "Gross Sale Proceeds" of the project which have been received or appropriated by it and not previously paid to the first defendant. This claim is not clearly formulated as to its legal basis. One reading of it is that it is an allegation that the fourth defendant has engaged in a breach of contract. If that reading be correct, the claim is the type of claim which is provable in the administration, and no reason is shown why it would be appropriate for that claim to be conducted outside the ambit of that administration. There are also other obstacles to the grant of leave to bring that claim. There are the same problems of the standing of the plaintiff to sue the second defendant as there are of its standing to sue the first defendant. The assignments which the plaintiff has received is an assignment of various debts. That of itself does not give a right to sue for breach of contract, in failing to pay money into a particular account. As well, however, there is no skerrick of evidence that there ever was any money which has been misapplied. 38 There is in evidence a contract called a "Forward Sale Agreement", under which the second defendant operated as the manager or sub-manager of the property on which the agricultural operations were carried out, and was entitled, by something in the nature of a share-farming agreement, to keep for itself all the proceeds of sale of the fruit apart from $150,000 per annum. I was invited to speculate that a project like this should generate far more money than $150,000 per annum, but in the absence of evidence I decline to do so. Even giving full force to the requirement that there is no need for an applicant for leave to prove every element of its case, and that in some circumstances it can be appropriate, once the Court is satisfied that there is a real dispute, to allow processes of discovery, and perhaps interrogatories, to deepen a plaintiff's knowledge of the circumstances of that dispute, in the present case I am not satisfied that the plaintiff has got over the threshold of showing the claim has a solid foundation and gives rise to a serious dispute. 39 There is a further claim which is brought against the second defendant, seeking a declaration that it holds certain property subleases on trust for the first defendant, in its capacity as a Representative under the deed. That claim, being a claim of the existence of a trust, is not the type of claim which would fall within the moratorium established by the deed of company arrangement, and hence is not one concerning which leave needs to be sought. 40 Mr Golledge, counsel for the second defendant, accepts that that is so. To the extent to which the litigation continues against the fourth defendant, making a claim of the type just outlined, he accepts that it would be necessary to make an application to strike the claim out. 41 In the result, I decline to grant either of the leaves which are sought. 42 I order that the interlocutory process filed 6 July 2005 be dismissed. 43 When White J gave leave for the plaintiff to commence the Commercial List proceedings, the plaintiff gave an undertaking that it would apply for leave to continue the proceedings and if leave was refused it would discontinue the claim against those defendants, and it would consent to an order that it pay the defendants' costs. 44 I order the plaintiff to pay the costs of the defendants of the interlocutory process, and of the originating process in number 3681/2005 in the Equity Division. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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