New South Wales Supreme Court CITATION : Bridgecorp Finance v Sterling Estates [2006] NSWSC 961 HEARING DATE(S) : 6 and 20 March, 3 April 2006 JUDGMENT DATE : 18 September 2006 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Order that the defendant pay the plaintiff's costs, including its costs of the adjournment application CATCHWORDS : CORPORATIONS - voluntary administration - successful application for adjournment of winding up proceeding - creditors later approve deed of company arrangement - whether company should be ordered to pay the plaintiff's costs of winding up proceeding - whether plaintiff's costs should include costs of unsuccessfully resisting adjournment application LEGISLATION CITED : Corporations Act 2001 (Cth), ss 440A, 447A, 459R, 466, 467, 556, 1335 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 171 CASES CITED : Bridgecorp Finance Ltd v Sterling Estates Development Corporation Pty Ltd [2006] NSWSC 33 McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2 Nortel Networks Australia Pty Ltd v Coretel Pty Ltd [2002] NSWSC 799 PARTIES : Bridgecorp Finance Limited (P) Sterling Estates Development Corporation Pty Ltd (D) FILE NUMBER(S) : SC 4319/05 COUNSEL : D Creas (Sol)(P) J T Johnson (D) SOLICITORS : Bartier Perry (P) Baker & McKenzie (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J MONDAY 18 SEPTEMBER 2006 4319/05 BRIDGECORP FINANCE LIMITED V STERLING ESTATES DEVELOPMENT CORPORATION PTY LTD JUDGMENT 1 HIS HONOUR: This judgment relates to a contested application for costs, arising after a winding up proceeding against the defendant company was adjourned when voluntary administrators were appointed. The voluntary administration has led to a deed of company arrangement. The winding up proceeding has not been dismissed, but s 459R(1) of the Corporations Act is an obstacle to its continuation, there being no current order of the court extending the six months period under s 459R(2). 2 The defendant company was one of two principal companies in the Sterling group of companies. The other principal company was Sterling Guardian Pty Ltd. The principal activity of the Sterling Group was the re-development of the site formerly occupied by Camperdown Children's Hospital into residential home units. The development property was the subject of various mortgages and charges. 3 On 3 August 2005 the partners of Minter Ellison, solicitors, filed an originating process for winding up the defendant in insolvency, relying on the defendant's failure to satisfy a statutory demand. The matter was listed before the Register in Equity on 1, 8 and 29 September and 27 October 2005. On 11 November 2005 Bridgecorp Finance Ltd, the present plaintiff, obtained judgment against the defendant for $5,231,739.44. The winding up proceeding returned to the Registrar on 24 November 2005, when it was adjourned for two weeks to consider an application for Bridgecorp to be substituted as plaintiff. On 8 December 2005 the Senior Deputy Registrar made an order substituting Bridgecorp as plaintiff, Minter Ellison withdrew, and the proceeding was relisted for 31 January 2006. An amended originating process was filed on 22 December 2005. 4 On Friday 27 January 2006 the plaintiff appointed receivers to certain items of real property of the defendant, under a fixed and floating charge. On Monday 30 January 2006, the day before the winding up application was listed for hearing, David Winterbottom and Martin Madden were appointed administrators of the defendant and Sterling Guardian, and they were subsequently appointed administrators of three other Sterling companies. 5 When the winding up proceeding returned to court on 31 January 2006, the administrators applied for an adjournment under s 440A of the Corporations Act and the court's inherent power to adjourn an application. The matter was adjourned to 1 February 2006 to allow the administrators to file evidence, and it came before Campbell J on that day. His Honour granted an adjournment until 6 March 2006 and extended the period for winding up under s 459R(2) to 20 March 2006 (Bridgecorp Finance Ltd v Sterling Estates Development Corporation Pty Ltd [2006] NSWSC 33). 6 The administrators argued for an adjournment on the basis that there was a proposal for a deed of company arrangement, which in their view was worthy of consideration by the creditors. Very little information was presented to the court about the proposal, but Campbell J proceeded on the basis that the administrators had been appointed only two days earlier and he was not able to infer that they had any prior access to the information they would need for the purpose of assessing the viability of the proposal (at [11]). His Honour reviewed evidence about potential sales of the company's stock of home units, pointing out that there was a possibility that all secured creditors would be paid out of the realisation of home units, and at least some evidence suggesting that a purchaser was offering a price above market value (at [17]). Although there was a possibility of recoveries in a winding up, including an action against directors for insolvent trading, his Honour took the view that he should allow the administrators to place before creditors a recommendation about whether there were worthwhile prospects of recoveries, as part of a reasoned consideration of the advantages and disadvantages of liquidation compared with a deed of company arrangement (at [21]). He concluded (at [23]) that he was satisfied that there was sufficient evidence to justify an adjournment of the winding up application until after the second meeting of creditors, but he observed that if a further adjournment was sought, it would be necessary for considerably more evidence to be put before the court. He did not address the question of costs of the application for adjournment. 7 The administrators reported to the creditors of all five Sterling companies by a report dated 15 February 2006 ("the Report"). The Report discussed the directors' proposal for a deed of company arrangement (DOCA). The Report said the administrators had formed the opinion, in view of the information available at the time of the Report, that it would be in the creditors' interest to wind up the Sterling companies; however, since there were reasonable prospects that key uncertainties in the proposed DOCA might be eliminated in the ensuing weeks so as to put the administrators in a position to recommend the DOCA proposal to creditors, the administrators supported an adjournment of the second meetings of creditors. The meetings for the five companies were held on 24 February 2006, and the creditors voted overwhelmingly in favour of an adjournment. The plaintiff did not vote against the resolution to adjourn. When the proceeding came before the court in the Corporations List on 6 March 2006, it was adjourned until 20 March 2006 in light of the adjournment of the creditors' meetings. 8 On about 16 March 2006 the administrators dispatched another report to creditors ("the Supplementary Report"), enclosing a notice reconvening the meetings of creditors. The administrators reviewed the directors' proposal and concluded that it would be in the creditors' interest to resolve that the Sterling companies execute a deed of company arrangement as proposed. 9 In the Corporations List on 20 March 2006, the proceeding was adjourned again in light of the adjournment of the creditors' meetings, and the period for winding up was extended under s 459R(2) until 27 March 2006. At the reconvened second meetings of creditors held on 24 March 2006, the creditors of each Sterling company voted in favour of the proposed DOCA, the plaintiff abstaining. 10 When the matter returned to the Corporations List on 27 March, directions were made for the filing of affidavits in relation to the question of costs, and the argument for costs eventually came before me. No further extension of time was ordered under s 459R. 11 In these circumstances the plaintiff seeks an order dismissing the proceeding, and also an order for costs against the defendant company, including its costs of unsuccessfully resisting the application for an adjournment. The proposal to dismiss the proceeding is not opposed, and clearly that order should be made, since the extended period for determination of the winding up application has expired and s 459R(1) prevents the application for winding up from being determined outside that period. The company in administration does not oppose an order for costs as such, but it opposes an order that would allow the plaintiff to recover the costs of unsuccessfully resisting the adjournment application. 12 The court's power to make an order that a company in administration pay the costs of the plaintiff in a winding up proceeding, whose application was forestalled by the administration, is found in s 1335(2) of the Corporations Act. That provision states that the costs of any proceeding before the court under the Act are to be borne by such party to the proceeding as the court, in its discretion, directs. There is nothing in Part 5.3A inconsistent with the court exercising this discretion while the company is under a deed of company arrangement, although the status and recoverability of the amount payable under the costs order may give rise to difficulties (McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2). Section 1335(2) would not give the court jurisdiction to make an order against the administrators personally, unless (unusually) they were parties to the winding up proceeding, but in the present case the order is sought against the company in administration rather than against the administrators, and therefore the discretion under s 1335(2) is available. 13 The Corporations Act gives little guidance as to the circumstances in which the court should exercise its statutory discretion under s 1335(2) in favour of an unsuccessful plaintiff in a winding up proceeding. Under s 467(1)(a) the court may, on hearing a winding up application, dismiss the application with or without costs. That confirms the court's power to make an order for costs in favour of the plaintiff, but it does not offer guidance as to the discretionary principles to be applied. Where a winding up application succeeds, the costs in respect of the application for the order (including the applicant's taxed costs payable under s 466) have the priority ranking accorded by s 556(1)(b). Section 466(2) obliges a liquidator, unless the court orders otherwise, to reimburse the taxed costs of the applicant for winding up. Those provisions reflect the legislature's policy that the claim of the applicant for winding up to recover costs out of the assets of the company in winding up is not only to be recognised, but to be afforded high priority. It seems to me that, prima facie, the same approach is appropriate where the plaintiff's application for winding up does not succeed because of the intervention of another form of external administration, namely voluntary administration followed by administration under a deed. 14 According to s 466(1), the person on whose application a winding up order is made must, at their own cost, prosecute all proceedings in the winding up until a liquidator has been appointed. But that does not, in terms, prevent the court from exercising its discretion under ss 1335(2) and 467(1)(a) to make an order for costs in favour of the unsuccessful plaintiff. 15 In my opinion the plaintiff has made out its case for an order for costs in its favour in the present case, including its costs of resisting the adjournment application. In causing the company to seek an adjournment of the winding up proceeding, the administrators were seeking an indulgence and were accepting the burden of satisfying the court that it was in the interests of the company's creditors for the company to continue under administration. It is plain from his judgment that Campbell J regarded the application for an adjournment as less than compelling, though he found in favour of an adjournment on balance. His judgment shows that the evidence presented to the court about the proposed deed of company arrangement was very thin and incomplete. Indeed, the position of the administrators themselves up until after the initial meetings of creditors on 24 February 2006 was to oppose the deed proposal on the ground that key elements of it were uncertain. I do not agree with the submission made on behalf of the defendant that the administrators' opposition to the proposed deed in their Report was merely on the basis that "a number of loose ends" needed to be addressed. Further, the administrators were appointed on the day before the proposed hearing of the winding up application, notwithstanding that the idea of a deed proposal had been under discussion for some time, as Campbell J pointed out. 16 In these circumstances it was not unreasonable for the plaintiff to oppose the adjournment application. Therefore, if the deed proposal had been rejected by the creditors, the court would in all probability have made an order for costs in favour of the plaintiff that would have included the costs of resisting the adjournment. 17 It was suggested on behalf of the defendant that the plaintiff's position was rendered less meritorious because it is a secured creditor rather than an ordinary unsecured creditor, and the proposal was to involve all the secured creditors being paid. In my opinion that consideration did not make it any the less reasonable for the plaintiff to resist the adjournment application. Nor do I regard it as a matter of significance that Campbell J did not deal with the question of costs when he decided to grant the adjournment application. No doubt his Honour assumed that the question of costs would be addressed at a later time. 18 Sometimes the claim by a plaintiff for costs in a winding up proceeding is catered for in the deed of company arrangement itself. That practice is desirable because it generally removes the need for the plaintiff to make an application to the court (although, of course, there may be some contested aspects of the claim for costs). In the present case the DOCA is not in evidence, and I shall proceed on the assumption that it makes no relevant provision. 19 Where the deed proposal, embryonic at the time of the adjournment application, has later been developed and approved by the creditors, there is no good reason for taking an approach to costs different from the approach taken where the creditors reject the proposal. The principal question for the court to consider is whether the plaintiff's opposition to the application for adjournment was reasonable in the circumstances in which the application was made. The issue is not whether the plaintiff's scepticism about the prospects of a proposal emerging that would be attractive to the creditors is vindicated by later events. 20 I was referred to two authorities on the question of costs. They demonstrate how the court has exercised its discretion in circumstances broadly similar to, though not identical with, the present case. While, therefore, they are not precedents, they are worth briefly noting as examples of the exercise of discretion. 21 In Nortel Networks Australia Pty Ltd v Coretel Pty Ltd [2002] NSWSC 799 Barrett J granted an adjournment under s 440A(2), accepting the case for an adjournment while observing that it was not strong (at [18]). He ordered that the costs of the application for adjournment were to be costs in the cause. That is consistent with my view in the present case, which is that an order for costs in favour of the plaintiff upon the dismissal of the winding up proceeding should include the plaintiff's costs of the adjournment application. 22 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 171 was, like the present case, a case where administrators were appointed just before the hearing of the winding up application was listed to occur. Gzell J granted an adjournment under s 440A(2), although he acknowledged that there were some criticisms of the figures upon which the administrator had relied in his evidence (at [15]). His Honour reserved the plaintiff's costs of the application but he gave a direction under s 447A designed to require that any deed of company arrangement would provide for the plaintiff's costs of the winding up proceeding (including, presumably, its costs of unsuccessfully opposing the adjournment application) to be paid by the administrators in priority to all other amounts payable by them. His Honour's view that provision should be made for the plaintiff in the winding up proceeding to recover its costs from the assets of the defendant company is consistent with my approach to the exercise of discretion in the present case. 23 In the Bidald Consulting case Gzell J was concerned about the recoverability of the amount of the plaintiff's costs in the event that the company became subject to a deed of company arrangement, and so he made an order requiring that the deed itself make provision for those costs. In the present case I have not been asked to make any such order. 24 I shall therefore make the following orders: (1) Proceeding dismissed. (2) Order the defendant to pay the plaintiff's costs as agreed or assessed, including the plaintiff's costs with respect to the defendant's application for an adjournment determined by the court on 1 February 2006, and the plaintiff's costs with respect to the argument for 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.