Reported Decision : (2006) 24 ACLC 964 New South Wales Supreme Court CITATION : Pitt-Owen v Lenin [2006] NSWSC 748 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 21/06/06 Written submissions - 05/07/06, 06/07/06 JUDGMENT DATE : 28 July 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Leave to proceed to be granted CATCHWORDS : CORPORATIONS - winding up - whether leave to proceed against company should be granted - proceedings upon company's causes of action against its landlord - such causes of action assigned - where landlord claims unpaid rent against company - whether claim for rent alone can be proved - nature of subject matter of assignment of causes of action having regard to set-off at commencement of winding up LEGISLATION CITED : Corporations Act 2001 (Cth), ss.500(2), 553C, Part 5.3A, Barton v Atlantic 3 Financial (Australia) Pty Ltd (2004) 212 ALR 348 CASES CITED : Gye v McIntyre (1991) 171 CLR 609 Ogilvie-Grant v East (1983) 7 ACLR 669 Stein v Blake [1996] AC 243 PARTIES : David Albert Pitt-Owen - Plaintiff Michael Lenin - Defendant FILE NUMBER(S) : SC 2304/06 COUNSEL : Ms N.C. Bearup - Plaintiff Mr M.A. Ashhurst - Defendant SOLICITORS : Levitt Robinson - Plaintiff Hicksons - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 28 JULY 2006 2304/06 DAVID ALBERT PITT-OWEN v MICHAEL LENIN JUDGMENT 1 I have before me an application for leave under s.500(2) of the Corporations Act 2001 (Cth) to proceed by way of cross-claim against a company which is subject to creditors voluntary winding up as a consequence of voluntary administration under Part 5.3A of that Act. The company is Sydney Accommodation Group Pty Limited ("SAG"). 2 An associated company, Diamondgaze Pty Limited, is involved in the proceedings and is also in the course of being wound up. However, the application for leave to proceed is made in respect of SAG only. 3 That application is made by Mr Lenin, the sole defendant in the proceedings. The sole plaintiff is Mr Pitt-Owen. He, as the alleged assignee of causes of action said to have accrued to SAG, sues Mr Lenin in relation to certain representations said to have been made by Mr Lenin to SAG at the time SAG took a lease of certain premises at Kirribilli from Mr Lenin. Mr Pitt-Owen, as assignee, also sues Mr Lenin for alleged breaches of the covenant for quiet enjoyment contained in the lease. 4 Mr Lenin, by way of defence to the claims advanced by Mr Pitt-Owen, denies the validity of that the alleged assignment by SAG to Mr Pitt-Owen, denies the making of the alleged representations and denies breach of the covenant for quiet enjoyment. 5 By the proposed cross-claim (a copy of which was produced to the court and initialled and dated by Austin J on 29 May 2006), Mr Lenin proposes to proceed against four cross-defendants, being SAG, Mr Albarran (the liquidator of SAG), and two persons who are said to have guaranteed obligations of SAG. The relief sought by the proposed cross-claim is: (a) a declaration as to the amount for which Mr Lenin is entitled to prove in the winding up of SAG for unpaid rent under the Kirribilli lease; (b) judgment against Mr Albarran for unpaid rent in respect of the Kirribilli property for the period of his tenure as voluntary administrator; (c) judgment against the guarantors commensurate with their alleged liability as guarantors; and (d) a "declaration pursuant to s.553C of the Corporations Act " that Mr Lenin is entitled to set off against such amount (if any) as is found to be payable by him to Mr Pitt-Owen the amount in which Mr Lenin is entitled to prove in the winding up of SAG as referred to at (a) above. 6 The claims against Mr Albarran and the guarantors sought to be agitated through the proposed cross-claim are ancillary to the claims against SAG. The principal claim is in respect of rent payable by SAG as lessee. The claim against Mr Albarran is ancillary in that any liability he, as administrator, might have for rent under the lease stems from the lease under which SAG is tenant. And the claims against the guarantors are ancillary because they depend on the viability and validity of the claims against the lessees as principal debtors. 7 Were it not for the supervening winding up of SAG, the cross-claim would be filed, the proceedings would go ahead and the court would determine the various claims and counter-claims and ascertain any net amount owed to any claiming party by any other party against whom the claiming party claimed. Mr Lenin contends that that is the course that ought to be allowed even though SAG is now in the course of being wound up. The liquidator takes the opposite view and says that, so far as claims against SAG are concerned, the ordinary process of proof of debt should be followed. 8 The first point the liquidator makes is that there is no reason why the claim against SAG for unpaid rent that Mr Lenin wishes to agitate by way of cross-claim cannot simply be proved in the winding up. To the extent that it was found by the liquidator to be valid, he would recognise the gross value as a component in the calculation of the net position admitted pursuant to s.553C, the other component of the calculation under that section being any gross figure found in the proceedings to be owed by the companies in liquidation to the claimants for rent. 9 On the view thus taken by the liquidator, the proceedings would be the vehicle for determining what, if anything, was owing to Mr Pitt-Owen, as the assignee from SAG, in respect of the causes of action in the proceedings as currently constituted (that is, without the cross-claim). If, as Mr Lenin contends, the assignment is found to be invalid, the proceedings as currently constituted may be the source of some conclusion or indication of what is recoverable by SAG upon those causes of action. Quite separately, so the liquidator says, the proof of debt process would be the means of determining the unpaid rent due by SAG for which Mr Lenin is to participate in SAG's winding up. 10 Ms Bearup of counsel, who appeared for Mr Lenin to pursue the application for leave to proceed, based her submissions on s.553C of the Corporations Act: " Insolvent companies—mutual credit and set-off (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent." 11 Ms Bearup made the point that set-off under s.553C operates at commencement of the winding up (see Gye v McIntyre (1991) 171 CLR 609; Stein v Blake [1996] AC 243). That section operates upon claims by and against the company at the date made relevant by s.554, that is, the date which is, under Division 1A of Part 5.6, the date on which the winding up is taken to have begun. Section 553C has therefore already played a part in shaping the subject matter of any valid assignment by SAG to Mr Pitt-Owen. It is relevant to note, in this connection, that the purported assignment was made after the commencement of the winding up of SAG. There is accordingly a question as to what was assigned. 12 The purported assignment was effected by a deed dated 19 May 2004 between Mr Albarran, as liquidator of both SAG and the second company, Diamondgaze Pty Ltd, Mr Pitt-Owen and the two guarantors to whom reference has already been made. Recital C reads as follows: "The Liquidator has formed the view, based upon legal advice which he has received, that there exist viable causes of action against Michael Lenin, arising from representations made by Lenin and the circumstances which led to Lenin granting leases in 1998 over the premises respectively known as 12A Carabella Street, Kirribilli in the said State, ( 'the Glenferrie Lodge' ) and in 1999 over 63 Fletcher Street, Bondi, in the said State ( 'the Bondi Lodge' ), to one or other of the Companies and, in the case of Glenferrie Lodge for breach of the Lessor's covenant as to quiet enjoyment contained in clause 11.1 of the Lease over that property ( 'the choses-in-action' )." 13 The relevant operative provision is in these terms: "In consideration of the Assignee promising to make the payments to the Liquidator in accordance with the Schedule hereto, the Liquidator assigns to the Assignee and forever quits claim to the choses-in-action and covenants that he will not make or support any action or claim to the proceeds therefrom from an award, entitlement or verdict made or given in the course of or resulting from the litigation, other than as hereinafter provided." 14 It is in this context that Ms Bearup's submission to which I have already referred was made. The submission is, in essence, that, because s.553C operated at the commencement of the winding up of SAG, the subject matter of the subsequent assignment by means of the deed dated 19 May 2004, so far as concerns SAG, could only be any net balance due to SAG by Mr Lenin after allowing for any debt due to Mr Lenin by SAG for unpaid rent. Despite its terms, Ms Bearup says, the deed could not operate upon the gross and undiminished liability of SAG to Mr Lenin since that liability was, by operation of s.553C, converted into a net amount (owing by SAG to Mr Lenin or by Mr Lenin to SAG) at the commencement of the winding up. 15 Ms Bearup relied upon the decision of Moynihan J in Barton v Atlantic 3 Financial (Australia) Pty Ltd (2004) 212 ALR 348. In that case, a winding up order was made on 25 November 2003. On the same day, the winding up was stayed until 12 January 2004. By a deed dated 9 January 2004, the company assigned to another person the company's choses in action "as regards" one Barton. Application was made to Moynihan J by Barton for a declaration that what was assigned was only any balance due by him after taking account of, and setting off, all amounts due by the company to him. He sought, in the alternative, a declaration that the assignment of what might be termed the "gross" chose in action was subject to an equity constituted by Barton's right of set-off against the company. His Honour made the first of these declarations. 16 Moynihan J said: "[40] The issue now is whether the set off under the section operates automatically when the liquidation is ordered so as to bring about an extinguishment of the plaintiff's liability to the extent of the set-off, or whether the section is procedural in the sense that it requires the taking of an account at some stage during liquidation and, until that occurs, the mutual claims retain their separate identities. [41] In the former case the set off took place before the assignment of 9 January 2004 and in the latter it did not. The position is, in my view, now settled by a line of authorities to which I now turn. [42] The plaintiff in Stein v Blake [1996] AC 243 ; [1995] 2 All ER 961 had instituted proceedings against the defendant for breach of contract. The defendant counter-claimed for damages for misrepresentation. The plaintiff was bankrupted before trial. His trustee purported to assign the plaintiff's right of action against the defendant to a third party. Lord Hoffman, the other members of the House agreeing, held that on bankruptcy s 323 of the Insolvency Act 1986 (UK) (the equivalent of s 553C of the Corporations Act) operated to the effect that the choses in action represented by the cross-claims were no longer capable of assignment. All that was assignable was the amount due after the mandatory account taken pursuant to the section. [43] Because of this the House (at AC 255G; All ER 968) rejected the view, taken by the Court of Appeal, that the separate causes of action survived the bankruptcy and could be assigned subject to the equity of the set off as a 'fallacy'. [44] Lord Hoffman (at AC 255; All ER 968) explained that the subsequent litigation was merely part of a 'process of retrospective calculation' from which it would appear that from the date of the bankruptcy the only choses in action continuing to exist as an assignable item of property was the claim for any net balance. [45] The House of Lords in Stein applied the decision of the High Court in Gye v McIntyre (1991) 171 CLR 609 ; 98 ALR 393 where it was held by a unanimous court that s 86 of the Bankruptcy Act (UK) and s 553 of the Corporations Act 1966 (Commonwealth), the equivalent of s 323 of the Insolvency Act, was a: … statutory directive ('shall be set off') which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the Bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustees. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self executing in the sense that its operation is automatic and not dependent upon the option of either party: — page 622 of the report. [46] In Citicorp Australia Ltd v Official Trustee and Bankruptcy (1996) 71 FCR 550 at 551F ; 141 ALR 667 at 669–70 and following the Full Court of the Federal Court concluded that it should follow the reasoning of the House of Lords in Stein . See also GM and AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888; (1997) 26 ACSR 639 (Court of Appeal) and Metal Manufacturers Ltd v Hall (2002) 41 ACSR 466 at 469 per Gzell J in which a similar approach was applied. This approach is also consistent with the decision of the Full Court of Queensland in Martin v Lewis (unreported, Appeal 57 of 1984). [47] Re Capel; Ex parte Marac Finance Australia Ltd v Capel (1994) 48 FCR 195 ; 120 ALR 480 was decided after the Court of Appeal decision in Stein v Blake but before that of the House of Lords. Drummond J construed the decision in Gye v McIntyre to the effect that s 86 of the Bankruptcy Act that the rights of claims by and against the bankrupt, arising out of mutual dealings, was to be taken to be the right to recover or prove any balance 'if the two claims were set off against each other at the date of the sequestration order'. [48] In doing so, Drummond J stated that he did not understand the High Court to be saying that s 86 operated "on the date of the bankruptcy" to extinguish a claim and cross-claim by and against the bankrupt and to convert them into a claim for a balance. He went on to hold that the trustee could assign the bankrupt's interest in the cross-claims prior to the taking of an account because the assignee would take the bankrupt's claim subject to all equities, including the right of set off under s 86. [49] That approach is not without its attractions and was not without support in some earlier cases but the weight of authority is, in my view, now clearly against it." 17 I respectfully agree with the analysis made by Moynihan J. On that basis, I accept Ms Bearup's submission. The deed of 19 May 2004, if effective as an assignment, was to cause to be assigned to Mr Pitt-Owen any balance due by Mr Lenin to SAG after allowing for any sum due by SAG to Mr Lenin and set-off pursuant to s.553C. This is because the deed operated after the winding up had begun. 18 But does it follow that ascertainment of the amount to be taken into account against SAG (that is, the sum due by SAG to Mr Lenin) must – or ought most conveniently – be ascertained in the proceeding in which Mr Pitt-Owen, as SAG's assignee, sues Mr Lenin; or may it more appropriately be determined by proof of debt lodged by Mr Lenin in the winding up of SAG? 19 In my opinion, the matter needs to be determined in the proceedings in which Mr Pitt-Owen, as assignee of SAG, sues Mr Lenin. This is principally because any concept of proof in SAG's winding up by Mr Lenin for the gross amount of any debt due to him is not, in the circumstances, a meaningful concept. Proof for what I have termed the gross amount is precluded by s.553C(1)(c): "… only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be". Because the subject matter of the assignment is not ascertainable except by reference to this "balance of account", and because the extant proceedings in which the subject matter of the assignment is pursued by Mr Pitt-Owen are necessarily the occasion for a determination in the first instance of the amount, if any, due by SAG pursuant to the causes of action asserted by Mr Pitt-Owen as assignee, it seems to me inevitable that the court must also determine in those proceedings the amount, if any, due to SAG by Mr Lenin in respect of the matters raised in the cross-claim. 20 The liquidator has raised a number of matters of a practical kind against the grant of leave to proceed. I am of the opinion, however, that the inevitability to which I have referred cannot yield these. 21 The judgment of McPherson J (with whom Campbell CJ and Sheahan J concurred) in Ogilvie-Grant v East (1983) 7 ACLR 669 makes it clear that s.471B is designed to ensure that a company in liquidation is not "subjected to a multiplicity of actions which would be both expensive and time-consuming, as well in some cases as unnecessary". As McPherson J also observed, a claimant in the position of Mr Lenin (qua Kirribilli rent) should lodge a proof of debt and pursue his rights that way – unless he can show some good reason to the contrary. The circumstances to which I have referred represent a good reason in this case. 22 Leave under s.500(2) will therefore be granted to enable Mr Lenin to file and proceed with a cross-claim in the form produced to the court on 29 May 2006 and initialled and dated by Austin J on that date. ********** 31/07/2006 - Typo - date of judgment on cover sheet - Paragraph(s) Judgment cover sheet 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.