New South Wales Supreme Court CITATION : Chief Commissioner of State Revenue v Reliance Financial Services Pty Ltd [2006] NSWSC 1017 HEARING DATE(S) : 15/09/06 JUDGMENT DATE : 29 September 2006 JURISDICTION : Equity Division Corporations JUDGMENT OF : White J DECISION : The applicants' interlocutory process filed on 31 March 2006 is dismissed with costs. CATCHWORDS : CORPORATIONS – Winding-up – Applications for winding-up – Substitution of applicants – Defendant company appointed applicants as receivers and managers of assets of third company – Defendant agreed to indemnify applicants for moneys payable to them as remuneration to extent such remuneration not recovered from assets of third company – Applicants claim status as creditors of defendant – Applicants seek order substituting them as applicants for winding-up of defendant – Where applicants have not recovered any remuneration from third company – Whether applicants are creditors of defendant – Held that defendant in breach of obligation to indemnify applicants – Held that defendant's liability is in unliquidated damages, not debt – Applicants contingent creditors only – Contingent creditors not entitled to order for substitution without leave of Court – Where no leave sought – Application dismissed. LEGISLATION CITED : Corporations Act 2001 (Cth) Tokich Holdings Pty Ltd v Sheridan Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 180; 22 ACLC 955 Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133 Reliance Financial Services Pty Ltd v Lemery Holdings Pty Ltd [2005] NSWSC 651 Rankin v Palmer (1912) 16 CLR 285 Wren v Mahony (1972) 126 CLR 212 Alexander v Ajax Insurance Co Ltd [1956] VLR 436 Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471 CASES CITED : First Line Distribution Pty Ltd v Paul Whiley & Ors (1995) 18 ACSR 185; (1995) 13 ACLC 1216 Reinsurance Australia Corp Ltd v Odyssey Re (Bermuda) Ltd (2000) 36 ACSR 348; (2001) 19 ACLC 401 Jabbour v Custodian of Absentee's Property of State of Israel [1954] 1 All ER 145 Council of the City of Penrith v Government Insurance Office of NSW (1991) 24 NSWLR 564 Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Mason & Carter, Restitution Law in Australia, 1995 ed Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; 57 ACSR 147 Chief Commissioner of State Revenue PARTIES : v Reliance Financial Services Pty Ltd FILE NUMBER(S) : SC 1295/06 COUNSEL : Plaintiffs/Applicants: J K Chippindall Defendant: D Allen SOLICITORS : Plaintiffs/Applicants: M D Nikolaidis Defendant: Proctor & Associates IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Friday, 29 September 2006 1295/06 Chief Commissioner of State Revenue v Reliance Financial Services Pty Ltd JUDGMENT 1 HIS HONOUR: The applicants seek an order under s 465B of the Corporations Act 2001 (Cth) for an order that they be substituted as applicants for the winding-up of the defendant ("Reliance"). They claim to be creditors of Reliance. Reliance disputes that they are creditors. 2 On 7 July 2004, Reliance purportedly appointed the applicants as receivers and managers of the property of Lemery Holdings Pty Ltd. The appointment was purportedly made pursuant to an alleged equitable charge dated 1 July 2004 between Lemery Holdings and Reliance. Lemery Holdings challenged the validity of the receiver's appointment and the charge on which it was based. Ultimately, Reliance did not seek to assert the validity of the charge pursuant to which the applicants were appointed as receivers. On 29 June 2005, Campbell J declared that the appointment of the applicants as receivers and managers over the assets of Lemery Holdings was a nullity and gave consequential relief. 3 To establish their status as creditors, the applicants primarily rely upon a deed of indemnity made on 7 July 2004 between them, Reliance, and a Mr Sam Cassaniti. Mr Cassaniti and Reliance were together described as the "Mortgagees". Lemery Holdings was called the "Mortgagor". The applicants were called the "Receivers". The deed relevantly provides: " In consideration of the Receivers consenting to act as Receivers and Managers of the assets of the Mortgagor pursuant to the Equitable Charge the Mortgagees jointly and severally undertake as follows:- 1. To indemnify the Receivers jointly and severally and keep them indemnified against any and all claims, demands, suits, actions, proceedings, costs or debts of whatsoever nature and wherever made or instituted, incurred or claimed pursuant to s 419 of the Corporations Act ("Act") or any provision in any Statute which may replace that Act or otherwise arising out of or in the course of or relating to his receivership. 2. To indemnify the Receivers for all payments made or liabilities incurred by them during the course of, or incidental to their receivership, including any moneys properly payable to them, their partners or staff by way of remuneration calculated at the scale of rates utilised by the firm of which the receivers are partners and to the extent that the same shall not have been otherwise recovered from the assets of the Mortgagor. 3. To indemnify the Receivers as provided for in this deed notwithstanding that the Equitable Charge for any reason whatsoever may be or deemed to be void, unenforceable or inoperative or in any way defective and whether or not the Receivers are deemed to have been duly and validly appointed or whether or not they shall have had the power to act as such. " 4 The applicants claim that Reliance is indebted to them pursuant to this deed for their professional fees for work done between 7 July 2004 and 20 May 2005, and for disbursements incurred by them during that period. The charge for professional fees for time spent by the applicants or their staff totals $70,956. They claim $2,519.33 for disbursements incurred between 7 April 2004 and 20 May 2005. One of the applicants, Mr Warner, also claims to be entitled to remuneration for professional services provided to Reliance in relation to the matter of Lemery Holdings during the period from 22 June 2005 to 12 July 2005. The amount claimed is $10,426.67. No invoice for this charge was produced by the applicants. Mr Warner deposes that "the amount due to me in my current professional practice was billed through the Worrells Partnership and is payable to the Worrells Partnership". 5 The applicants received two itemised bills of costs from a solicitor, Mr Nikolaidis, for work done on their instructions as purported receivers of Lemery Holdings. The first bill relates to work done during the period from 6 September 2004 to 17 November 2004. It is in the amount of $99,981.70, including $29,390.85 for counsel's fees and other disbursements. The balance of the bill is for professional fees for Mr Nikolaidis or his staff. The second bill from Mr Nikolaidis was rendered on 12 May 2006 and covers the period from 18 November 2004 to 8 July 2005. It is for the sum of $78,007, including $11,390.22 for counsel's fees and other disbursements. 6 There is no evidence that the applicants have paid any part of the bills of costs rendered by Mr Nikolaidis. 7 The costs agreement between Mr Nikolaidis and the applicants includes a term that "the costs due and payable by the receiver under this Costs Agreement shall only be due and payable from funds recovered by him during the course of his receivership or arising from his indemnity from the secured creditor." The "costs" referred to in this clause cover both charges for professional time and disbursements incurred (clause 2). 8 Reliance has paid $35,000 to the applicants. The evidence does not disclose when that sum was paid, or to what accounts the payment was allocated. 9 Proceedings were commenced by the solicitors retained by the applicants on 7 September 2004 on behalf of Lemery Holdings, Mr Cassaniti, and Reliance. The proceedings were brought against directors of Lemery Holdings. The plaintiffs sought a declaration and orders in relation to the proceeds of sale of premises of Lemery Holdings. Orders had been made on 1 June 2004 in other proceedings for the proceeds of sale of that property to be paid into court. 10 The applicants submitted that they had sought to complete the contract but the directors of Lemery Holdings wrongly intercepted the proceeds of settlement. They contend that it was only through their efforts, and the litigation which they caused to be commenced against the directors of Lemery Holdings, that ultimately sums totalling $628,417.90 were paid into court. Those payments were made on 21 September and 7 October 2004. It appears that a number of parties have made claims to the moneys paid into court. Mr Warner was asked: " Q. Do you maintain that you have a lien over the moneys in court? A. I may have a lien, but the lien, to the extent that I have one, may not fully satisfy my costs and expenses which I have incurred. " He added that: " I may have a claim for a certain amount of my time which was spent in those particular proceedings for protecting, preserving and realising the fund, but I carried out other duties as receiver and manager prior to those proceedings commencing and I would have absolutely no right for those costs to be paid out of that fund ." 11 No evidence was led as to the precise status of the proceedings in which claims to the moneys in court are to be determined. Although assertions were made from the bar table as to how much of the moneys paid into court remained available for distribution, there was no evidence dealing precisely with that question. Having regard to the amount paid into court, I proceed on the basis that if the applicants are entitled to claim an equitable lien over the moneys in court, on the basis that it was through their efforts that the sum was realised, the moneys in court may be sufficient to cover the applicants' claim for time spent by them, and costs incurred by them, in realising the fund. 12 Mr Warner deposed that he had carried out other duties as a receiver and manager prior to the commencement of those proceedings for which he would have no claim on the fund. The applicants did not seek to show that the receivers' claims for time spent, or costs incurred, in activities which could not create a claim on the fund in court, exceeded the $35,000 paid by Reliance. 13 Reliance submitted that there was a genuine dispute as to whether it was indebted to the applicants. First, it submitted that it was arguable from evidence given by Mr Cassaniti that there was an oral agreement between Mr Cassaniti and the applicants that the applicants would only look to moneys received from Lemery Holdings for payment. Secondly, Reliance submitted that it would not be known whether it could be called on to make good its indemnity, until the applicants had exhausted their claim against the property of Lemery Holdings, and in particular, their claim to a lien over the sum paid into the court. Until that was known, no obligation to indemnify the applicants had occurred under the deed. Thirdly, Reliance submitted that the indemnity provided for in the deed did not create a debt, except in the respect of any moneys paid by the receivers. 14 In their written submissions, the applicants accepted that "the balance of authority suggests that an order for substitution ought not to be made as a matter of discretion if the debt of the alleged substituted creditor is disputed." However, they also submitted that it was significant that Reliance was presumed to be insolvent by reason of its not having satisfied the statutory demand of the original applicant, and had failed to provide any evidence of solvency. 15 I dealt with this question in Tokich Holdings Pty Ltd v Sheridan Constructions (NSW) Pty Ltd (in liq) (2004) 185 FLR 180; 22 ACLC 955. No submissions were advanced on behalf of the applicants which would cause me to reconsider the views I there expressed, beyond the mere assertion that the presumed insolvency of the defendant and its failure to adduce evidence of solvency on this application was relevant to deciding whether the applicant should be substituted, even if there were a genuine dispute as to their status as creditors. For the reasons which I gave in Tokich Holdings, I remain of the view that a dispute as to whether a substituted applicant has standing should be decided on the hearing of the application for substitution, and, as a matter of discretion, in the usual case, a person claiming to be a creditor will not be substituted as an applicant if there is a genuine dispute as to his or her debt, even if the company is presumed to be insolvent. 16 Where the issue of the applicant's standing as a creditor turns upon the construction of a written contract, and not upon disputed matters of fact, the court can determine whether the applicant has standing as a creditor, even though there is a genuine dispute as to whether, on the proper construction of the agreement, the applicant is owed a debt. 17 In support of its first contention, Reliance relied upon evidence of Mr Cassaniti that on 7 July 2004, he spoke to Mr Warner about Mr Warner and Mr Worrell being appointed as receivers to the property of Lemery Holdings. According to Mr Cassaniti, a conversation to the following effect took place: " Warner: 'You give me a lot of work, so you know I won't charge you unless we all make money out of this.' I said: 'Thanks Anthony, you know that Leon [Nikolaidis] will do this on spec and because I refer so much business to him, he does not charge me for any work he does for me or my companies.' Warner: 'Don't worry Sam, I have spoken to Leon, he agrees so long as you pay for the barristers, there is no problem.' " 18 This conversation is denied by Mr Warner. Although I permitted cross-examination of Mr Cassaniti, there was no challenge to his evidence in this respect, presumably because counsel accepted that so far as questions of fact are concerned, the relevant issue for present purposes is whether there is a genuine dispute as to the applicants' claimed debt. 19 If Mr Cassaniti's evidence is accepted, it amounts to no more than a representation that Reliance would not be charged unless "we all make money out of this". Counsel for Reliance initially submitted that this representation would afford a defence to an action brought on the deed, either because it would amount to a collateral contract, or on the ground of estoppel. Counsel readily conceded that the alleged oral agreement could not be relied upon as a collateral contract, as it was inconsistent with the written contract (Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133). However, he pressed the submission that the conversation raised an arguable defence of estoppel. 20 I will infer that Reliance, through Mr Cassaniti, assumed that the applicants would not charge for their services as receivers and managers unless assets of Lemery Holdings were obtained which could be applied towards satisfaction of Reliance's claimed debt. There is no evidence that by appointing the applicants as receivers in reliance on that assumption, Reliance thereby acted to its detriment. The receivers took steps to seek to secure the assets of Lemery Holdings over which Reliance claims a charge. In this, they were ultimately successful. Although Reliance did not seek to support the validity of the purported charge pursuant to which the applicants were appointed receivers, it does maintain that it is a secured creditor of Lemery Holdings (Reliance Financial Services Pty Ltd v Lemery Holdings Pty Ltd [2005] NSWSC 651). There is no evidence that any step was taken or omitted by the defendant relying upon the representation, allegedly made by Mr Warner, which has occasioned detriment to the defendant. I do not accept that the mere ability of the receivers to claim an indemnity in terms of the deed is such a detriment. Accordingly, I reject the first ground upon which Reliance contended that the claimed debt is disputed. 21 Counsel for Reliance submitted that the indemnity provided by the deed of 7 July 2004 did not create a debt except in respect of any disbursements actually paid by the applicants, as distinct from disbursements incurred by them. Counsel also submitted that the applicants did not incur personal liability to Mr Nikolaidis for his professional fees, or for the disbursements incurred by Mr Nikolaidis, because of the term of his retainer quoted in para [7] above. Counsel also submitted that no promise was made by Reliance to pay remuneration to the applicants for themselves or their staff at the scale of rates used by the applicants' firm. Rather, the promise was to indemnify the receivers for such remuneration to the extent that such remuneration was not recovered from the assets of Lemery Holdings. It was submitted that Reliance's liability to indemnify the receivers for payments made by them, or liabilities incurred by them, was limited to an indemnity to the extent that the receivers did not recover such payments, or obtain satisfaction for such liabilities, from the assets of Lemery Holdings. It was submitted that no such liability arose until it was determined that the applicants were not entitled to satisfaction out of the assets of Lemery Holdings, and that was a matter still to be determined. It was also submitted that if Reliance was liable under the deed of indemnity, such liability sounded in damages and not in debt. 22 I agree with the submission that Reliance is not presently indebted to the applicants pursuant to its agreement to indemnify the applicants against liabilities incurred to third parties which have not been paid. By the deed of 7 July 2004, Reliance did not promise that it would itself pay the debts and liabilities which the applicants incurred. It agreed to indemnify the applicants against such debts or liabilities, as well as against payments made by them. Such an indemnity does not create a debt due by Reliance to the applicants, at least to the extent the applicants have not paid the liabilities in respect of which the indemnity is given (Rankin v Palmer (1912) 16 CLR 285 at 289-290; Wren v Mahony (1972) 126 CLR 212 at 221, 226-227, 229). 23 There is no evidence that the applicants have paid any liabilities which they have incurred, although it might be inferred that the applicants must have paid at least some of the disbursements totalling $2,519.33. As Reliance has paid $35,000 to the applicants, the applicants cannot point to any disbursement which they have paid for which they have not been indemnified under the deed. 24 Counsel for Reliance also submitted that the applicants had no liability to Mr Nikolaidis for legal costs, including disbursements of Mr Nikolaidis, except to the extent that moneys were recovered from the assets of Lemery Holdings. As the applicants have not paid Mr Nikolaidis' bills of costs, it is unnecessary to decide whether that contention is correct. Even if it is not correct, it would not follow that Reliance is presently indebted to the applicants pursuant to the deed in respect of that liability. 25 The more difficult question is whether Reliance owes a present debt to the applicants for their remuneration. Reliance promised "to indemnify the receivers for … any moneys properly payable to them, their partners and staff by way of remuneration calculated at the scale of rates utilised by the firm of which the receivers are partners and to the extent that the same shall not have been otherwise recovered from the assets of the mortgagor." 26 Two questions arise. The first is whether, on the proper construction of this clause, Reliance is in breach of its promise to indemnify the applicants where the applicants have not been paid their remuneration, but where they have a claim to assets of Lemery Holdings which have been paid into court, which may be sufficient to satisfy their claim for remuneration after allowance is made for the $35,000 already paid by Reliance. If that question is answered favourably to the applicants, the second question is whether Reliance's present liability on its indemnity gives the applicants the status of creditors of Reliance. 27 I accept that these are disputable questions. However, they raise no question of disputed fact and should be resolved on the present application. 28 Counsel for Reliance is clearly correct in submitting that the relevant promise is not to pay remuneration calculated at the appropriate scale of rates, but to indemnify the applicants for their remuneration to the extent that the same "shall not have been otherwise recovered from the assets of the mortgagor". As matters presently stand, it is clear that the applicants have not recovered any of their remuneration from the assets of the mortgagor. They may or may not be entitled to do so in the future. The clause does not provide for an indemnity to the extent to which remuneration cannot be recovered from the assets of the mortgagor. Rather, it provides for an indemnity to the extent the remuneration shall not have been recovered from the assets of the mortgagor. 29 The question is, when do the applicants become entitled to remuneration? If, at that time, they have not recovered their remuneration from the assets of the mortgagor, Reliance becomes immediately liable to indemnify the applicants. 30 No evidence was directly led on the question of when the applicants were entitled to recover their remuneration. However, they must have been entitled to render accounts from time to time as work was done. At least by the time it was declared that the applicants had not been validly appointed as receivers to Lemery Holdings, they would then have been entitled to render an account for the work which was done. (Of course, the indemnity applies notwithstanding that the applicants were not validly appointed as receivers (clause 3)). The applicants rendered an invoice on 1 March 2006 for the work done by them up to 20 May 2005. The invoice would be payable within a reasonable period if no specific time for payment was fixed. The interlocutory process for an order for substitution under s 465B of the Corporations Act was filed on 31 March 2006, that is, thirty days after the date of the invoice. Thirty days is such a reasonable period. As at 31 March 2006, Reliance was liable to indemnify the applicants for their remuneration which had not been recovered from the assets of Lemery Holdings. At the date of hearing, the applicants had not recovered any of their remuneration from the assets of Lemery Holdings. Accordingly, Reliance remains under an existing liability to indemnify the applicants for their remuneration which has not been recovered from the assets of Lemery Holdings. 31 It does not follow that Reliance is a debtor of the applicants. Reliance's liability under the indemnity is a liability in damages, not in debt (Alexander v Ajax Insurance Co Ltd [1956] VLR 436). However, the liability is to pay a sum which is readily calculable by reference to the applicants' scale of rates. Does it follow that the applicants are creditors of Reliance who are entitled in that capacity, and not in their capacity as contingent creditors, to apply for Reliance's winding-up? 32 I was not favoured with submissions on this question from the applicants. An obligation to pay an ascertainable sum by way of liquidated damages which does not depend upon an assessment may create a debt (Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471 at 477; Alexander v Ajax Insurance Co Ltd at 440-441, 445). However, an obligation to pay unliquidated damages is not a debt (Box Valley Pty Ltd v Kidd at 477, 488, 489; First Line Distribution Pty Ltd v Paul Whiley & Ors (1995) 18 ACSR 185; (1995) 13 ACLC 1216; Reinsurance Australia Corp Ltd v Odyssey Re (Bermuda) Ltd (2000) 36 ACSR 348; (2001) 19 ACLC 401). 33 The fact that the applicants' claim for remuneration has been claimed in their invoice at specified rates, for specified hours of work, does not mean that the claim under the indemnity is otherwise than for unliquidated damages. The claim still requires an assessment of whether the work charged for was done, whether the time claimed was spent, and whether the rates charged were at the applicable scale. It is true that the same type of inquiry would arise on a claim for a quantum meruit, which has always been regarded as a claim in debt. The same type of inquiry would also arise if Reliance's promise had been to pay remuneration, rather than to indemnify the applicants against the consequence of their not recovering their remuneration from the assets of Lemery Holdings. A promise to pay remuneration would create a debt. However, the distinction between a claim in debt for breach of a promise to pay money, or in quantum meruit for reasonable remuneration for work done, and a claim for unliquidated damages pursuant to a promise to indemnify, is well-entrenched (Jabbour v Custodian of Absentee's Property of State of Israel [1954] 1 All ER 145 at 150-151; Alexander v Ajax Insurance Co Ltd at 448-450; Council of the City of Penrith v Government Insurance Office of NSW (1991) 24 NSWLR 564 at 568; Reinsurance Australia Corp v Odyssey at [17]-[23]). 34 I conclude that although Reliance is currently in breach of its obligation to indemnify the applicants, its liability is not a liability in debt, but in unliquidated damages. 35 The original applicant filed an originating process for Reliance to be wound up in insolvency. The persons who may apply for a company to be wound up in insolvency are presecribed by s 459P. Only persons who might themselves apply for the company to be wound up may be substituted as applicants under s 465B(1). The applicants claimed standing as creditors of Reliance (s 459P(1)(b)). In ss 459P(1)(b), the reference to a "creditor" (as distinct from a contingent or prospective creditor) is to a person to whom a debt is presently owed. The applicants are not such persons. 36 The applicants did not claim standing as contingent creditors of Reliance. I think it is clear that the applicants are contingent creditors of Reliance (Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 at 459). If they sued, they would be entitled to obtain a judgment for the amount of damages proved, and hence would become entitled to a judgment debt. However, under s 465B(1), the Court may only substitute as an applicant for winding-up a person "who might otherwise have so applied for the company to be wound up". A contingent or prospective creditor may only apply for the winding-up of a company in insolvency with the leave of the Court, although that leave may be given, in an appropriate case, nunc pro tunc (s 459P(2)). In their interlocutory process, the applicants did not seek leave to apply for the winding-up of Reliance as contingent or prospective creditors. Nor was any application made during the hearing to amend the interlocutory process in order to seek such leave. Reliance may have been able to advance arguments against the grant of such leave. As no such leave was applied for, the applicants are not entitled to an order for substitution on the ground that they are contingent creditors. 37 Counsel for the applicants submitted that the applicants had standing as creditors because they were entitled to sue on a quantum meruit for reasonable remuneration for the work done by them at Reliance's request, and because their work conferred benefits upon Reliance. However, the applicants' entitlement to be paid by Reliance for the work they did was expressly covered by the deed of 7 July 2004. As the applicants have a contractual right to be indemnified by Reliance, there is no scope for them to have an additional right, based on principles of unjust enrichment, to receive reasonable remuneration for their services (Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256; K Mason & J W Carter, Restitution Law in Australia, 1995, Butterworths, Sydney at [901] and [909]). In other words, the applicants' claim is based in contract, not restitution. It is not to the point that if the applicants were entitled to a quantum meruit claim for reasonable remuneration for the work done at Reliance's request, that claim would be classified as a claim for a debt and the applicants would have the status of creditors (Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; 57 ACSR 147 at [77]-[79]). Under their contract, the applicants are entitled to unliquidated damages, not to a debt. 38 For these reasons, the applicants' interlocutory process filed on 31 March 2006 is dismissed with costs. ****** 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.