New South Wales Supreme Court CITATION : Quintano v B W Rose Pty Ltd [2008] NSWSC 720 HEARING DATE(S) : 14 July 2008 JUDGMENT DATE : 15 July 2008 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Leave granted CATCHWORDS : CORPORATIONS - voluntary administration and winding up - leave to proceed with common law proceeding for damages for personal injury and common law cross-claim - voluntary administrator appointed shortly before scheduled commencement of four-week hearing - relevant considerations LEGISLATION CITED : Corporations Act, 2001 (Cth), ss 440D, 500 CASES CITED : Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203 3731/08 Luke Quintano (P) B W Rose Pty Ltd (D) 20130/04 PARTIES : Luke Quintano (P) B W Rose Pty Ltd (D1; X-D1 to First Cross-Claim; X-C to Second Cross-Claim; R) AWS Security Services Pty Ltd (D2; X-C to First Cross-Claim; X-D1 to Second Cross-Claim; A) Prestige Insurance Brokers (Aust) Pty Ltd (X-D2 to Second Cross-Claim; X-C to Third Cross-Claim) Syndicate 3245 (Managing Agent: Heritage Managing Agency Ltd London)(X-D1 to Third Cross-Claim) Syndicate 1218 (Managing Agent: Heritage Managing Agency Ltd London)(X-D2 to Third Cross-Claim) FILE NUMBER(S) : SC 3731/08; 20130/04 D Hooke (P) A Spencer (D1; X-D1 to First Cross-Claim; X-C to Second Cross-Claim; R) COUNSEL : S G Campbell SC with A Parker (D2; X-C to First Cross-Claim; X-D1 to Second Cross-Claim; A) A Harding (X-D2 to Second Cross-Claim; X-C to Third Cross-Claim) J Newby (X-D1& X-D2 to Third Cross-Claim) Beilby Poulden Costello (P) Leitch Masson Dent (D1; X-D1 to First Cross-Claim; X-C to Second Cross-Claim; R) SOLICITORS : Curwoods Lawyers (D2; X-C to First Cross-Claim; X-D1 to Second Cross-Claim; A) MCW Lawyers (X-D2 to Second Cross-Claim; X-C to Third Cross-Claim) McCabe Terrill Lawyers ( X-D1 & X-D2 to Third Cross-Claim) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J TUESDAY 15 JULY 2008 3731/08 LUKE QUINTANO V B W ROSE PTY LTD 20130/04 LUKE QUINTANO V BERND WALTER ROSE (T/AS SKELSYS LANSDOWNE INN) & ANOR JUDGMENT 1 HIS HONOUR: The substantive issue before me is whether I should grant leave to a plaintiff and a cross-claimant to proceed against the first defendant a company in voluntary administration. No party opposes the granting of leave, but some neither consent to nor oppose it. The Common Law proceeding 2 B. W. Rose Pty Ltd (admin apptd) ("the Company") owns property at 977 Hume Hwy, Carramar, near Lansvale in western Sydney, on which there is a nightclub called "Skelsey's". The plaintiff claims that in the early hours of 15 December 2002, a patron of the nightclub shot him in the head, and he suffered brain damage. By a statement of claim filed on 27 April 2004, and amended on 1 October 2004, he has brought an action for damages for personal injuries (No 20130 of 2004) against the Company as first defendant, and against the second defendant ("AWS"), which supplied security services for the nightclub ("the Common Law proceeding"). 3 In November 2004, AWS filed a cross-claim against the Company ("the First Cross-Claim"), claiming contribution or indemnity under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and also seeking relief for breach of contract. 4 It is an agreed fact for the purposes of the matters before me that the Company's public liability insurer is insolvent. In substance the Company is therefore uninsured. In those circumstances the Company has made claims against AWS and also the Company's insurance broker, Prestige Insurance Brokers (Aust) Pty Ltd ("Prestige"), by a cross-claim filed in March 2005 ("the Second Cross-Claim"). Against AWS the Company alleges breach of a contract to provide security services to the Company, negligence in the supply of such services, and misleading and deceptive conduct under s 52 of the Trade Practices Act with respect to failure to supply adequate security services and equipment and false representations. The Company alleges it engaged Prestige to secure public liability insurance, which was taken out with the Cameron Group, and that Prestige was negligent in arranging this insurance in various particularised ways, including failure to obtain insurance with an Australian-based company. The Company also alleges misleading and deceptive conduct under s 52 against Prestige, and seeks indemnity and/or contribution. 5 In December 2006, Prestige filed a cross-claim ("the Third Cross-Claim") against two underwriting syndicates based in London ("the London Underwriters"), seeking declaratory and other relief to establish that the London Underwriters are liable to indemnify it against any liability it might have under the Second Cross-Claim. 6 The Common Law proceeding was set down for hearing on 14 July 2008 with an estimated hearing time of four weeks, but a problem has arisen that has led to the present proceeding in the Equity Division and deferral of the commencement of the Common Law hearing until 21 July. The problem is that the Company has gone into voluntary administration and is likely to move into liquidation at a meeting of creditors tomorrow. The applications for leave 7 Section 440D(1) of the Corporations Act provides that during the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except with the administrator's written consent or with the leave of the Court in accordance with such terms (if any) as the Court imposes. Under that provision the administrator's consent or the Court's leave is required to permit the plaintiff to continue his claims against the Company and to permit AWS to continue with the First Cross-Claim. 8 According to an ASIC company extract dated 9 July 2008, the directors of the Company at the time of the shooting were Bernd Walter Rose and Deborah Lea Rose. Ms Rose ceased to be a director on 12 July 2004, leaving Mr Rose as the sole director. Mr Rose is recorded as the sole shareholder. 9 Mr Rose died on 12 April 2008. On 13 June 2008, orders were made in the Probate List of this Court in the estate of Mr Rose, granting Special Letters of Administration ad colligenda bona defuncti, limited to a number of matters including: (a) appointing a director and/or Administrator to [the Company]; (b) determining the assets and liabilities of the Estate …; (c) accessing the Estate's CBA Term Deposit Account … to meet expenses of the Estate and make a secured loan to [the Company]. 10 During the hearing of the applications I expressed concern as to the manner of appointment of the voluntary administrator. Section 436A empowers the board of directors of a company to appoint a voluntary administrator if the directors resolve that the company is insolvent or likely to become insolvent at some future time, and that an administrator should be appointed. It is not open to someone else, such as the legal personal representative of the sole director/shareholder's estate, to form that opinion and accordingly make the appointment, unless the administrator first becomes the director of the company. The Court cannot authorise the administrator of the estate to appoint a voluntary administrator to a company in circumstances not envisaged by the Corporations Act. However, Mr Spencer of counsel, appearing for the Company in administration, informed me (though there is no direct evidence of this) that the Special Administrator of the Estate of the late Mr Rose appointed himself sole director of the company and then adopted a resolution in accordance with s 436A for the appointment of a voluntary administrator (Transcript, page 6-7). That overcomes the problem. 11 The first meeting of creditors of the Company in administration was held on 26 June 2008, and the creditors confirmed the appointment of Mr Turner as administrator. The second meeting of creditors is due to be held on 16 July 2008. The voluntary administrator has not recommended any deed of company arrangement to creditors and it is anticipated that the creditors will resolve that the Company be wound up. 12 If the Company's creditors resolve that the Company be wound up, the winding up will proceed as a creditors' voluntary winding up by virtue of s 446A, and thereafter under s 500(2), no civil proceeding may be proceeded with against the Company except by leave of the Court and subject to such terms as the Court imposes. That will require the Court's leave for the plaintiff to continue the proceeding and for AWS to continue the First Cross-Claim. 13 In these circumstances there are two applications for leave. First, by an originating process in the Equity Division filed on 11 July 2008, the plaintiff seeks leave to bring and continue the Common Law proceeding against the Company, both under s 440D on the basis that the Company is in administration, and under s 500(2) in the event that the Company goes into a creditors' voluntary winding up. Secondly, by a notice of motion filed in the Common Law proceeding on 11 July 2008 and made returnable before me, AWS seeks leave, also under s 440D and s 500(2), to continue with the First Cross-Claim against the Company. 14 There is no disagreement amongst the parties as to the correct approach to the applications for leave under s 500(2). Where an applicant for leave has a provable claim, the applicant must persuade the Court that there is some good reason on the balance of convenience why the claim should be pursued by court action to judgment rather than by lodging a proof of debt with the liquidator. The Court considers whether the claimant has a case involving a real dispute which is not futile and involves serious questions, whether the action will impede orderly winding up, and whether it will cause prejudice to other creditors (see Ford's Principles of Corporations Law, LexisNexis, looseleaf, [27.126]). 15 The application for leave under s 440D(1) raises much the same considerations, except that (as Young J pointed out in Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203), it is normally undesirable to allow one creditor to interfere with the tasks which an administrator must carry out over the very short time frame set by Part 5.3A. But that consideration is of much reduced force here, because the evidence indicates a likelihood that the Company will move into a deemed creditors' voluntary winding up by virtue of the decision of the creditors at their meeting tomorrow. Considerations relevant to the applications for leave 16 Mr Turner, in his role as voluntary administrator of the Company, neither consents to nor opposes the plaintiff's application for leave. Presumably, though he does not say so, he takes the same attitude to AWS's application in respect of the First Cross-Claim. Mr Turner has given affidavit evidence to assist the Court, particularly in respect of the Company's financial position. 17 AWS supports the plaintiff's submissions, and also submissions put to the Court on behalf of Mr Turner. As I have mentioned, it has made its own application for leave to pursue the First Cross-Claim. Prestige also has appeared on the applications, and neither opposes nor supports them. The London Underwriters appeared that made no submissions to oppose the applications. 18 Mr Turner's evidence about the assets and liabilities of the Company is as follows: · the only assets of the Company are the property at 977 Hume Hwy, Carramar, which is leased and is subject to a mortgage, and is in a poor state of repair, and a small balance in a bank account; · four years ago the property was valued at $1.7 million, but he has not yet been able to obtain a current valuation, though he believes the value may have fallen since 2004; · the mortgage debt is about $1.2 million and the mortgage is in default; · he has identified unsecured creditors of about $205,000; · if the Company is unsuccessful in the Common Law proceeding there are likely to be cost orders against it on the plaintiff's claim and the Second Cross-Claim, which Mr Turner is unable to quantify (I should add that the plaintiff's claim for damages is for a substantial sum, well in excess of the Company's net assets). 19 The solicitor on the record for the Company in the Common Law proceeding, who is already a creditor of the Company, has asked to be put in funds in the amount of $100,000 for costs associated with the conduct of the Common Law proceeding. The Special Letters of Administration in the Estate of the late Mr Rose contemplated that money in the deceased's CBA term deposit account would be made available to the Company on secured loan for the purpose of defending the Common Law proceeding, but the Commonwealth Bank has recently frozen the bank account, claiming a lien under a personal guarantee given by the deceased, and so that money is presently not available to the Company. 20 Mr Turner's evidence is that on the basis of the 2004 valuation of the Carramar property, the Company's equity after deducting the mortgage debt, estimated costs of sale and administration, and current unsecured creditors, is about $200,000. He evidently has in mind that this equity could be made available, perhaps by second mortgage borrowing secured over the Carramar property, for the Company's defence and cross-claim and for his remuneration, and he proposes to raise the matter for discussion at the creditors' meeting. He says that if the case is defended on behalf of the company, then in all probability most of the Company's equity will be used in the defence and cross-claim. Counsel for the Company in administration informed me that it was likely that Mr Turner (assuming the creditors resolve to wind the Company up and he becomes liquidator) will not expend the Company's funds in actively defending the proceeding. 21 Mr Turner expects that if the Company's defence and cross-claim were to succeed, then the currently identified unsecured creditors would be paid in full, although he does not expect to be able to recover any costs order against the plaintiff. He says that if the plaintiff were to be successful against the Company, the likely dividend to creditors would be substantially reduced. In fact it would probably be eliminated. 22 The Court's assessment of the financial evidence is impeded by the uncertainty of the valuation figure. The figure is out of date, and very little evidence is given about it. The basis of the valuation and the assumptions underlying it are unknown, as is the extent of deterioration of the property (if any) over the last four years and general movement in the market for property of that kind. Therefore the proposition that there is a surplus that will be available to fund the Company in the Common Law proceeding without detriment to the identified unsecured creditors is quite dubious. On the other hand, as counsel for the plaintiff pointed out, it is possible that the position might be better than Mr Turner envisages, as Mr Turner does not mention the value of the liquor licence which, according to his affidavit, will revert to the owner of the freehold on termination of the tenancy. Counsel for the plaintiff also referred to the rental paid by the tenant of the premises, but I was informed from the bar table by counsel for the Company in administration that the annual expenses of the Company exceed the annual rent, by a small amount. 23 In the circumstances, I can do no better than to assume that Mr Turner's opinion about the likely net surplus is accurate. None of the parties submitted that I should do otherwise. The significance of proceeding this manner is twofold: first, that there is a reasonable prospect, depending upon the outcome of litigation, that the identified unsecured creditors as well as the secured creditor will be paid; but secondly, there is the risk that the limited surplus available will be used up and perhaps the costs of litigation will exceed what is available to fund it (substantially so, in the event of adverse costs orders). 24 I do not have evidence of the prospects of success of the plaintiff's claim against the Company. I was informed from the bar table, both by counsel for the Company in administration and by counsel for Prestige, that the Company's prospects of success against Prestige are not high. I was told that the claim is essentially one of negligence and misleading and deceptive conduct, relating to alleged failure by Prestige to advise Mr Rose of the risks of placing insurance with an overseas insurer. Mr Rose filed and served an affidavit on those matters before he died. I am told that Prestige has filed very detailed affidavit evidence refuting Mr Rose's allegations in strong terms and deposing that there was in fact a very full and comprehensive explanation given to Mr Rose of those risks. The Company will have difficulty in contradicting that evidence given that Mr Rose has died. I am not asked to grant leave to the Company in administration to pursue the Second Cross-Claim against either AWS or Prestige, but the prospects of success of the cross-claim effect whether the Company can pass all or part of the verdict against it to someone else. 25 The considerations I have set out so far point against granting leave: · the uncertainty about the Company's financial position means that there is a real risk of damage to the identified unsecured creditors, through a verdict or adverse costs orders, and through expenditure of the Company's funds litigation (even if Mr Turner does not actively contest the hearing); · the low prospect of success against Prestige suggests that the Company may not be able to recoup any, or significant part of, a verdict against it; and · if leave is not granted, the plaintiff will be prevented from making out his case against the Company. 26 There are, however, some considerations that favour the granting of leave, and in my opinion they are, on balance, the stronger. 27 First, in the Common Law proceeding it is relevant that, before the appointment of Mr Turner and, indeed, during Mr Rose's lifetime, the Company prepared for the litigation and is now substantially ready for the hearing. In substance, the Company has already incurred the costs of preparing for the hearing. 28 Secondly, continuation of the litigation gives the Company some prospect of success, either against the plaintiff or on the Second Cross-Claim. While there is evidence of poor prospects in the claim against Prestige, there is no evidence that the prospect of succeeding against AWS is low. 29 Thirdly, counsel for the Company in administration submitted that if the Court were to deny leave, it could not be sure there would be no re-litigation of the issues on a disputed proof of debt. I agree. In my judgment there is a real prospect that, if quantification of the plaintiff's claim does not take place in the Common Law proceeding, it would take place in an appeal to the Court on a disputed proof of debt. That would be highly undesirable, because it would raise substantially the same issues as the Common Law proceeding, but in circumstances where some of the costs of preparation for the Common Law hearing would have been lost and there would be substantial delay, antithetical to the achievement of the just, quick and cheap resolution of the real dispute. 30 Plainly the Common Law proceeding involves a real dispute involving serious questions. Allowing the action to continue will impede the orderly winding up of the Company, but not for as long a time as denying leave and leaving it to the plaintiff and AWS to pursue their claims on disputed proofs of debt. I have concluded that on balance, granting leave is less likely to prejudice other creditors than denying it. Conclusion 31 I shall make the following orders: A In proceeding No 3731 of 2008 : (1) Grant the Plaintiff leave pursuant to s 440D(1) of the Corporations Act 2001 (Cth) to proceed with proceeding No 20130 of 2004 in the Supreme Court of New South Wales ("the Common Law proceeding") against the Defendant; (2) Each party to pay its own costs of and in relation to this proceeding, without prejudice to the Plaintiff's right to recover his costs as costs in the cause in the Common Law proceeding; B. On the Second Defendant's Notice of Motion in proceeding No 20130 of 2004 : (1) Grant the Second Defendant, as Cross-Claimant in its Cross-Claim filed on 25 November 2004, leave pursuant to s 440D(1) of the Corporations Act 2001 (Cth) to proceed against the First Defendant as First Cross-Defendant to that Cross-Claim; (2) Each party pay its own costs of and in relation to the notice of motion filed on 11 July 2008, without prejudice to the right of any party to recover their costs as costs in the cause. 32 Leave should be granted, for the same reasons, to permit the plaintiff and AWS to proceed against the Company in liquidation, if it goes into liquidation as a result of tomorrow's creditors' meeting. In my view the simplest way of dealing with the grant of leave in those circumstances will be for me to make orders in chambers, equivalent to the above orders but under s 500(2), provided that a communication is sent to my Associate by each of the plaintiff and AWS and that Mr Turner provides to my associate an affidavit that the creditors have resolved at their meeting that the Company be wound up and that he be appointed liquidator. I shall adjourn the applications to 9:30 a.m. on Friday 18 July 2008 for further directions but I shall vacate that directions hearing if I receive those communications and that affidavit in the meantime. ********** 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. 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