Parbery & Anor re Lecan Constructions Pty Ltd (In Liq) [2006] NSWSC 662

New South Wales Supreme Court

CITATION : Parbery & Anor re Lecan Constructions Pty Ltd (In Liq) [2006] NSWSC 662

HEARING DATE(S) : 05/06/06

JUDGMENT DATE : 4 July 2006

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Liquidators' application adjourned

CATCHWORDS : CORPORATIONS - winding up - creditor giving assistance, indemnification or protection by which recoveries made by liquidators - whether it should be ordered that such creditor be afforded advantage over others - whether such order may also require application of proceeds of recovery in ways not entailing advantage to such creditor

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.556(1), 564,

Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 CASES CITED : Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B&P) 38 State Bank of New South Wales v Brown (2001) 38 ACSR 715

PARTIES : Stephen James Parbery and Mark Julian Robinson in their capacity as joint liquidators of Lecan Constructions Pty Limited (In Liquidation) - Applicants

FILE NUMBER(S) : SC 2873/06

COUNSEL : Mr M.J. Cohen - Applicants

SOLICITORS : Dibbs Abbott Stillman - Applicants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

TUESDAY, 4 JULY 2006

2873/06 STEPHEN JAMES PARBERY & ANOR RE LECAN CONSTRUCTIONS PTY LIMITED (IN LIQUIDATION) JUDGMENT 1 Mr Parbery and Mr Robinson are the liquidators of Lecan Constructions Pty Limited ("Lecan") under the form of creditors voluntary winding up that follows on from voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). 2 By their originating process filed on 23 May 2006 expressed to be based on s.564 of the Corporations Act, the liquidators apply for the following order: "1. The liquidators be entitled to distribute property of Lecan Constructions Pty Ltd (In Liquidation) (the ' Company '), being the proceeds of settlement of Proceedings No. 5426 of 2002 commenced in this Honourable Court by the Applicants, as follows: (a) firstly, to Beljen Developments Pty Limited ACN 078 361 510 (' Beljen ') in full payment of any amount advanced or paid by or on behalf of Beljen pursuant to the agreement dated 24 November 2004 between Beljen and the Applicants as liquidators of the Company (the ' Agreement '); (b) secondly, to the solicitors for the Applicants any amount payable by Beljen pursuant to the Agreement but which remains unpaid at the date of distribution; and (c) thirdly, as follows: (i) 35% of the balance, after the payments referred to in orders 1(a) and 1(b) above, in reduction of the Applicants' costs of the voluntary administration and liquidation of the company; (ii) 35% of the balance, after the payments referred to in orders 1(a) and 1(b) above, in reduction of the legal costs incurred by the Applicants in their capacity as liquidators of the Company and in their capacity as voluntary administrators of the company and owed as at the date of the Agreement by the Applicants to the firm known as Henry Davis York; and (iii) 30% of the balance, after the payments referred to in orders 1(a) and 1(b) above, in payment of the whole or any part of any debt admitted by the Applicants as owing by the Company to Beljen." 3 The supporting affidavit was sworn by Mr Robinson. In that affidavit, Mr Robinson gives an account of litigation initiated by Lecan, at the behest of its liquidators, against Jitsu Pty Limited ("Jitsu"). The proceedings were initiated by the liquidators in November 2002. The claim was essentially for recovery of a debt from Jitsu, together with associated claims against one Touma who had been a director of both Lecan and Jitsu. In October 2005, a settlement was reached under which Lecan received $150,001. The proceedings were later dismissed and Lecan recovered a sum of $32,738.38 representing security for costs previously provided. In a commercial sense, therefore, the settlement yielded some $182,739.38. 4 The liquidators' need for funding to pursue the litigation was raised at a meeting of the committee of inspection in April 2004. Thereafter, on 7 May 2004, the liquidators wrote to all known creditors inviting offers of financial support for the litigation. The circular to creditors read in part as follows: "We note that the Corporations Act (Cth) 2001 provides a mechanism for a liquidator to apply to the Court to obtain an order that the funding creditors be given an advantage in the distribution of funds received from the proceedings in consideration of the risks taken to fund the litigation. Upon successful completion of the proceedings we intend to apply to the Court to obtain the following Orders: · That the funding creditors be entitled to receive a priority for the repayment of sums advanced to fund the proceedings; and · That the funding creditors also be entitled to receive 100% of the balance of the remaining proceeds, after satisfying the costs of the liquidation, in priority of all other unsecured creditors. We must inform creditors that it is entirely at the Court's discretion that these Orders be made and therefore there is no guarantee that the orders we intend to seek will be made by the Court." 5 A few creditors initially expressed interest in providing financial assistance to the liquidator. By August 2004, however, Beljen Developments Pty Limited ("Beljen") alone remained interested. On 24 November 2004, a formal agreement was entered into between the liquidators and Beljen. At that point, the balance of funds held by the liquidators was $906.62. By the agreement, Beljen agreed to indemnify the liquidators for all legal costs related to the proceedings, limited to a maximum of $90,000. There was then provision for the timing of disbursement of funds. The liquidators, for their part, promised to distribute any proceeds of the litigation as follows, subject to obtaining the court's approval: "(a) Firstly, in full payment of any amount advanced or paid by or on behalf of Beljen pursuant to this agreement; (b) Secondly, in the proportions specified in paragraph 3(c) below in payment of: (i) The Liquidators' costs of the voluntary administration and liquidation of Lecan such costs to be calculated at the date of distribution (' Liquidators Fees '); (ii) Legal costs incurred by the Liquidators in their capacity as liquidators of Lecan and in their capacity as voluntary administrations of Lecan and owed as at the date of this agreement by the Liquidators in those capacities to the firm known as Henry Davis York ('HDY's Fees'); and (iii) In payment of the whole or any part of any debt admitted by the Liquidators as owing by Lecan to Beljen as at the date of the court approval (' Beljen Debt '); (c) The Proceeds are to be distributed as to: (i) 35% in reduction of the Liquidator's Fees; (ii) 35% in reduction of HDY's Fees; and (iii) 30% in reduction of the Beljen Debt." 6 It is with a view to performing this part of the agreement that the liquidators have made the present application. 7 There is, however, a discrepancy between what the liquidators now seek from the court and what the agreement contemplates. The agreement proceeded on the footing that Beljen would pay all the legal expenses. It appears that, as at 17 May 2006, Beljen had paid $57,340.84 out of a total of $68,426.65 rendered by Dibbs Abbot Stillman, the solicitors in the litigation. The balance of $11,085,81 is acknowledged to be the responsibility of Beljen under the agreement and is intended to be dealt with by paragraph (b) of the order. Otherwise, the order sought accords with the contractual provision. 8 It is necessary to refer to one other aspect of the factual background relevant to an understanding of the order sought. Dibbs Abbott Stillman were the solicitors acting in the litigation at the time the agreement with Beljen was made. The agreement was entirely prospective in its operation. It therefore dealt only with legal costs still to be incurred as of 24 November 2004. At an earlier stage, Henry Davis York had acted for the liquidators in the litigation and more generally in the liquidation and the earlier voluntary administration. They ceased acting in August 2004. At that point, Henry Davis York had rendered fees totalling $62,364.05. No part of those fees has been paid and the intention reflected by the funding agreement (and the application now before me) is that Henry Davis York should have 35% of the balance of the settlement proceedings after Beljen is made whole for its funding, with that 35% going towards reduction of the fees owed by the liquidators to Henry Davis York. The balance to which I have referred would be split so that Henry Davis York received 35% in the way I have just described, another 35% went to the liquidators on account of their remuneration as both administrators and liquidators (respectively $12,451.66 plus GST and $190,189.15 plus GST, all of which has been approved by creditors but remains unpaid) and the remaining 30% went to Beljen by way of preferred dividend in respect of its debt admitted to proof. 9 As I have said, the application is advanced under s.564 of the Corporations Act. That section is as follows: " Power of Court to make orders in favour of certain creditors