Crawford v Oswald Park [2006] NSWSC 987

New South Wales Supreme Court

CITATION : Crawford v Oswald Park [2006] NSWSC 987

HEARING DATE(S) : 28 April 2006

JUDGMENT DATE : 22 September 2006

JURISDICTION : Equity

JUDGMENT OF : Austin J

DECISION : Order for distribution as per liquidator's plan of distribution of 19 July 2005, subject to adjustments for reasonable costs and interest. Leave to proceed under s 500(2).

CATCHWORDS : CORPORATIONS - members' voluntary winding up - application for determination of question arising in winding up - whether jurisdiction should be exercised to resolve disputed factual claim - CONTRACT - binding determination by counsel - effect

LEGISLATION CITED : Corporations Act 2001 (NSW), ss 479, 500, 511

Brooks v Burns Philp Trustee Company Ltd (1969) 121 CLR 432 CASES CITED : Dean-Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209 Re GB Nathan & Co Pty Ltd (in liq) (1991) 5 ACSR 673

Janine Elizabeth Crawford (P; R1) PARTIES : Oswald Park Pty Ltd (in liq) (D1; R2) Lachlan Charles McIntosh (D2; A)

FILE NUMBER(S) : SC 5559/05

B A Coles QC with G B Colyer (P; R1) COUNSEL : A P Lo Surdo (D1; R2) J Stevenson SC with S W Balafoutis (D2; A)

McCabe Terrill (P; R1) SOLICITORS : Eakin McCaffery Cox (D1; R2) Shaddick Baker & Paull Solicitors (D2; A)

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

AUSTIN J

FRIDAY 22 SEPTEMBER 2006

5559/05 JANINE ELIZABETH CRAWFORD V OSWALD PARK PTY LTD (IN LIQ) & ANOR JUDGMENT 1 HIS HONOUR: The first defendant ("Oswald Park") is in members' voluntary liquidation. The liquidator is Kevin Shirlaw. The plaintiff, Mrs Crawford, and the second defendant, Mr McIntosh, are sister and brother. They are the directors and sole shareholders in Oswald Park. They are therefore contributories of the company in liquidation. 2 The liquidator has prepared a plan of distribution of the company's surplus funds as at 19 July 2005 ("the 2005 Plan"). Under the 2005 Plan, the distribution to Mr McIntosh would be reduced by the total amount said to be owing by Mr McIntosh to the company according to his loan account, including two amounts recorded as reversals of journal entries, in the sums of $39,734.05 ("the First Amount") and $102,682 ("the Second Amount"), together with interest. Mr McIntosh asserts that those deductions should not be made. His sister strenuously disagrees with him. 3 Section 511(1)(a) of the Corporations Act 2001 (Cth) allows the liquidator, or any contributory or creditor, to apply to the court "to determine any question arising in the winding up" of the company. Section 511(2) says that the court, "if satisfied that the determination of the question … will be just and beneficial", may accede wholly or partly to the application on such terms and conditions as it thinks fit and make such order as it thinks just. 4 By Further Amended Originating Process filed on 13 February 2006, Mrs Crawford makes an application under s 511(1)(a) to determine whether Oswald Park should proceed to distribute the net balance of its funds to its shareholders. The form of the order she proposes is as follows: "An order pursuant to section 511 of the Act that the First Defendant proceed with the distribution of the net balance of funds to shareholders of the Company as per the liquidator's draft plan of distribution dated 19 July 2005, adjusted to reflect interest accrued on the accounts of the Company to date." She also seeks an order that Mr McIntosh pay the costs of the application on an indemnity basis. 5 As presently constituted, Mrs Crawford's proceeding is against Oswald Park in liquidation and Mr McIntosh as defendants. Counsel for Oswald Park (by its liquidator) submitted that the proceeding should have been brought against the liquidator rather than the company, because as presently constituted, it is a proceeding requiring leave under s 500(2) and leave has not been granted. Although there may be some scope for argument as to whether, having regard to the nature of the relief sought, the proceeding is one "against the company", my view is that on balance, this submission is correct. I therefore intend to grant Mrs Crawford leave under s 500(2), nunc pro tunc, to commence and proceed with the present proceeding. 6 By an interlocutory process filed on 14 February 2006, Mr McIntosh seeks to invoke s 511(1)(a) for the purpose of achieving a different outcome. He asks the court to make a determination under s 511(1)(a) that the liquidator of Oswald Park is not entitled to reduce the funds to be distributed to him by deducting the First and Second Amounts, and an order under s 511(2) directing the liquidator not to reduce the amount of funds distributed to him in that way. He seeks a determination under s 511(1)(a) that he does not owe Oswald Park the First and Second Amounts, and an order under s 511(2) for the liquidator to distribute the company's surplus assets without making those deductions. 7 Thus, the issue between the parties, which both sides seek to have determined by their respective applications, is whether Mr McIntosh owes Oswald Park the First and Second Amounts. It seems to be accepted that if he does, then it would be appropriate to deduct those amounts in calculating the final distributions of surplus assets to the contributories of the company. I note, however, as counsel for Mr Shirlaw pointed out, that the actual amounts of the final distributions will have to be adjusted to take into account interest and the liquidator's costs. 8 In the interlocutory process, paras 3 and 4, Mr McIntosh sought orders under s 1321 of the Corporations Act, directing the liquidator not to deduct the First and Second Amounts from the funds distributed in the winding up. Section 1321 allows a person aggrieved by an act, omission or decision of [relevantly] a liquidator to appeal to the court. It was submitted on behalf of Mr Shirlaw at the hearing that he had made no relevant decision, and consequently s 1321 was not available. In my opinion it is plain on the facts before me, to which I shall refer below, that Mr Shirlaw prepared a plan of distribution as at 19 July 2005, but he did not act on the plan because he received a threatening letter from Mr McIntosh's solicitors and then the matter came to be subject to the present litigation. At the hearing senior counsel for Mr McIntosh accepted that this was so and informed me that his client did not move on paras 3 and 4. Scope of ss 511(1)(a) and 511(2) 9 Mrs Crawford seeks a binding determination of the question whether the First and Second Amounts are owing and whether, accordingly, the liquidator should or should not deduct those amounts from the final distribution to Mr McIntosh. In the interlocutory process, Mr McIntosh also sought determinations of these matters under s 511(1)(a). But in the written submissions made on his behalf just prior to the commencement of the hearing, senior counsel for Mr McIntosh submitted that a proceeding brought by a contributory under s 511 is not an appropriate vehicle for resolution of such a dispute. In his oral submissions, senior counsel for Mr McIntosh explained that while he conceded that the court has the power to determine whether Mr McIntosh owes the First and Second Amounts to the company, it is not appropriate or useful to do so. But this was a preliminary submission and his primary submission was that the court should make a determination under s 511(1(a) in accordance with para 5 of the interlocutory process, that is a determination that Mr McIntosh does not owe Oswald Park the First and Second Amounts or interest on those amounts. 10 In my view it is appropriate to rely on s 511(1)(a), in conjunction with s 511(2), to determine whether the First and Second Amounts are owing, in the particular circumstances of the present case. Senior counsel for Mrs Crawford sought to distinguish s 511, which applies in the case of a members' or creditors' voluntary winding up, from s 479(3), the power of a liquidator to seek the court's directions in a winding up by the court. He noted that s 511(1)(a) allows the court to "determine any question" arising in the winding up, suggesting the binding determination of the rights of the parties, whereas s 479(3) simply allows the court to give directions. He also noted that while s 479(3) is available only to the liquidator, s 511(1) can be invoked not only by the liquidator but also by any contributory or creditor. He submitted therefore that s 511(1) is wider in scope that s 479(3), referring to Dean-Willcocks v Soluble Solution Hydroponics (1997) 42 NSWLR 209, a case also cited of behalf of Mr McIntosh. 11 I find it unnecessary to decide, in the present case, whether s 511 allows the court to grant relief in circumstances where that relief would not be available under s 479(3). In my opinion, if there had been a court-ordered winding up, the court could have dealt with the matters raised in this proceeding in an application by the liquidator under s 479(3), for a direction that he would be justified in making the final distribution to the contributories on a basis reflecting whether the First and Second Amounts were all one of owing. Therefore, a fortiori, the court may make a determination of the dispute under s 511(1)(a). 12 In New South Wales the leading case on the scope of s 479(3) and the circumstances where it is appropriate for the court to give directions is Re GB Nathan & Co Pty Ltd (in liq) (1991) 5 ACSR 673. There McLelland J observed (at 678) that s 479(3) does not enable the court to make binding orders in the nature of judgments, and that the function of a liquidator's application for directions is to give him advice as to his proper course of action in the liquidation rather than to determine the rights and liabilities arising from the company's transactions before the liquidation. However, he continued (at 678-9): "It should be observed that there are instances where a court has, in proceedings commenced as a liquidator's application for directions, gone on to make orders declaratory of substantive rights, clearly intended to be of binding effect on the parties to the proceedings …. The procedures of the court are sufficiently flexible to enable proceedings commenced as an application for directions to be changed into proceedings for the determination of substantive rights, and this is sometimes a convenient course in order to avoid the need to commence further proceedings involving additional cost and delay …. However it is important that the distinction between the two kinds of proceedings be not lost sight of or blurred, and such a fundamental change should not be permitted unless the court is satisfied that those affected either consent to that course …, or will not suffer injustice in consequence of the alteration to the status of the proceedings." 13 The present case never was an application by a liquidator for directions. It always was the other kind of case referred to by his Honour. His Honour's observations confirm that even under s 479(3), an application for relief of the kind sought in the present case can be entertained, provided that the issues arise in the context of a liquidator's application. Given the terms of s 511(1), the proviso need not be satisfied in an application under s 511. The question is whether this is the kind of case in which a court, acting under s 479(3), would allow a substantive determination of rights to occur. 14 In my view this is just such a case. Here, the liquidator and the affected parties are all before the court. Although it cannot be said that the parties have consented to having their dispute resolved under the section, the two principal protagonists have proceeded, until just before the hearing, on the basis that s 511 was the appropriate source of jurisdiction to resolve their dispute, and the costs of preparation of the hearing were incurred accordingly. Indeed, Mr McIntosh's interlocutory process is inconsistent with his submission that the hearing that the court should not proceed under s 511. The issue to be determined was presented to the court by affidavit and documentary evidence without any cross-examination of witnesses. The court is not, therefore, required to resolve matters of credit of witnesses. Although some questions of fact are contested, the primary issues relate to the proper construction of their documents and minutes of an alleged agreement in light of admissible evidence of the surrounding circumstances. Perhaps most importantly, if the court were to decide that it is inappropriate to resolve the dispute under s 511, after hearing full argument, it would be sending them away without the "just and beneficial" exercise of the power that s 511(2) contemplates. Facts to February 2001 15 Ms Crawford and Mr McIntosh are the children of Frederick McIntosh (who died in 1985), and June McIntosh (who died in 1997). Oswald Park is a family company established by the late Mr and Mrs McIntosh and now owned in equal shareholdings by Mrs Crawford and Mr McIntosh. The constitution of the company divides the shares into several classes of cumulative preference and ordinary shares but the effect of clause 152(b) of the constitution is that surplus assets on winding up are to be distributed amongst the members in proportion to their capital contributions at the commencement of the winding up. The capital contributions of the shareholders, as such, are equal. 16 In about 1972 Oswald Park acquired about 48 ha of land at Kurrajong, about 75 km west of Sydney. The land, referred to as "Belltrees Estate", was subdivided into 13 lots in January 2000. By the time of the hearing, all lots had been sold and the assets of Oswald Park are cash in bank accounts. However by September 2001 only three lots had been sold, and Mrs Crawford estimated that the value of the remaining 10 lots was approximately $4.58 million. 17 In about 1996 Mr McIntosh and his family moved in with his mother, Mrs Jane McIntosh, who was at that time living in a house on Lot 102 in the Belltrees Estate. Mrs Crawford later claimed that Mr McIntosh moved after his business failed and he was forced to sell his home at Dural. Mr McIntosh asserts that he moved to Belltrees Estate under the terms of an oral agreement he made with his mother and sister on 22 and 23 January 1993, according to which he would renovate the house on Lot 103 and live with his mother while the renovations took place, and work full-time to supervise the subdivision and orderly realisation of the assets of Oswald Park, and would draw a reasonable amount from the company's account for living expenses and outgoings. 18 Mr McIntosh and his family moved in with his mother in January 1996, and Mr McIntosh supervised renovations of the house on Lot 103. He moved into the renovated house with his family in September 1996. He ran the affairs of Oswald Park from the location. According to Mr McIntosh's evidence, there were problems with the subdivision including dealing with an action group of local residents, a council moratorium on subdivisions, difficulties with the relevant water authority in litigation with contractors. He said he was paid a monthly sum by Oswald Park for managing its affairs, together with rent-free occupation of the house, the use of a motor vehicle and part of the expense of running another motor vehicle, outgoings in relation to the house, and petty cash. 19 Between 1996 and 1999 Mrs Crawford kept Oswald Park's books and made financial records, which she handed over from time to time to the company's accountants, Harrington McNamara. The arrangements obviously created the potential for financial disputes, with Mr McIntosh drawing money from the company without any clearly defined arrangements, and Mrs Crawford keeping financial records. 20 At that time the company's accountants were Harrington McNamara. According to the evidence of Mr Harrington, Mrs Crawford entered accounting data into Oswald Park's cash book and delivered to him each year, and then Oswald Park's accounts were prepared under his supervision and provided to the directors for review and signature. 21 Mrs Crawford and Mr McIntosh entered into an agreement on 29 November 1998, after their mother died, relating to the adjustment of their respective rights in their mother's estate and the funding of an option for Mr McIntosh to purchase Lot 105 of the Belltrees Estate subdivision. Mrs Crawford later alleged that the agreement was unconscionable and that she signed it without proper legal advice. 22 Sometime in late 1999 or early 2000, when Mr McIntosh and Mr Harrington were reviewing the draft accounts for the 1999 financial year, Mr McIntosh protested that his loan account had been debited for various matters that, according to his arrangements, should have been paid by the company. Subsequently Mr Harrington credited Mr McIntosh's loan account and debited the subdivision expense account (or, in one case, retained profits) for various items relating to private use of a motor vehicle, insurance payments, company telephone expenses, directors fees, rent and payment to Pest Control. Some of these matters have become controversial. I note, in particular, that one of the credits to the loan account was for directors fees of $58,400. 23 Late in 1999 Ms Crawford retained an accountant to advise her with respect to Oswald Park. She claimed that she did so at the suggestion of Mr McIntosh, but that he prevented the accountant from obtaining access to information about the company. Mrs Crawford complained that there had been no sales of lots in the subdivision for many months after subdivision approval, and alleged that she was not consulted about the affairs of the company and was not able to gain access to information necessary to understand what was happening about the sale of the lots. 24 In February 2001, Mr McIntosh's solicitor informed Mrs Crawford that she had been removed as a director of Oswald Park and that Mr Paul Harrington had been appointed in her place. According to Mrs Crawford, on the same day Mr McIntosh withdrew approximately $350,000 from Oswald Park's bank account and placed it in a term deposit in the name of the company, controlled by him. She says that on the same day he withdrew $15,000 from Oswald Park's cheque account and deposited it into an account of the company, also controlled by him. The 2001 proceeding 25 On 1 March 2001 Mrs Crawford commenced a proceeding by originating process in the Equity Division of this Court (No 1625 of 2001) against Oswald Park, Mr McIntosh and Mr Harrington. She sought relief on the oppression ground, including an order that Oswald Park purchase her interest and that there be an appropriate reduction in share capital, or a winding up order. She also sought a declaration that Mr Harrington was not a director and an injunction to restrain the defendants from acting as if she was no longer a director. 26 Mrs Crawford alleged oppression arising out of her brother's closing of the company's bank account and exclusion of her from the management of the company. She alleged that she had not been informed of legal proceedings taken against the company in which judgment had been entered, and that the company was under threat of winding up. 27 On 20 August 2001 Mr McIntosh filed a cross-claim in the 2001 proceeding, asserting two causes of action. 28 The first cause of action alleged an agreement made on 23 January 1993 between Mrs Crawford, Mr McIntosh and their mother, Mrs June McIntosh. According to the cross-claim, it was agreed that Mr McIntosh and his family would leave their existing home and relocate at the Kurrajong property owned by Oswald Park. Oswald Park would sell Mr McIntosh part of the land (referred to as "Lot 105"), and Mr McIntosh would renovate the property and reside in it, and supervise the realisation of the assets of Oswald Park with a view to the orderly liquidation of the company. Part of the realisation of the assets was to involve the subdivision of the Kurrajong land. Mr McIntosh said it was agreed that he would set aside his existing business activities and devote himself full-time to the supervision of the orderly realisation of the assets of Oswald Park, and that he would draw a reasonable sum for living expenses from the account of Oswald Park, as well as car expenses and other out-of-pocket expenses, generally at the rate that Mrs Jane McIntosh was withdrawing at the time for her living expenses. Mr McIntosh claimed that he performed and acted in reliance on this agreement but Mrs Crawford later repudiated it. 29 In the second cause of action, Mr McIntosh alleged an agreement, partly in writing dated 29 November 1998, between him and Mrs Crawford. He said that for the purpose of adjusting their respective rights in the assets of the estate of their deceased mother Mrs Jane McIntosh, Mrs Crawford and Mr McIntosh agreed to the value of a property at Bilgola that had passed to Mrs Crawford under Mrs Jane McIntosh's will. Mr McIntosh was to have an option to purchase Lot 105 from the company, under funding arrangements which involved Oswald Park repaying money owed by it to the estate of Jane McIntosh on loan account, and the estate in turn make the money available to Mr McIntosh, to whom Mrs Jane McIntosh had been indebted. Mr McIntosh claimed that Mrs Crawford repudiated the agreement. 30 Mr McIntosh made various claims against Oswald Park for amounts said to be owing to him, or him and his wife, or one of his associated companies (The Comac Company Pty Ltd and Lachlan's Interiors Pty Ltd), particularised in a series of "invoices" dated 14 August 2001 but relating to work alleged to have been done at various times going back to February 1990. The invoices were tendered (Exhibit D2). The total amount claimed is $532,372.75. These invoices were not recorded so as to be reflected in any of the company's financial statements, presumably because they were regarded as released as a result of the mediation. Mediation before Mr Morling QC, the Heads of Agreement and the Facilitating Deed 31 On 25 September 2001 a mediation was held in respect of the 2001 proceeding. The mediator was Trevor Morling QC. The mediation was attended by: · Mrs Crawford, her junior counsel and solicitor and forensic accountant; · Mr McIntosh, his solicitor and senior and junior counsel; · the respective spouses of Mrs Crawford and Mr McIntosh, and Mrs Crawford's son; and · Paul Harrington, a defendant in the 2001 proceeding and at that time a director of the company. 32 The mediation resulted in "Heads of Agreement" being entered into, and subsequently, a Facilitating Deed dated 6 December 2001 was executed.