Supreme Court New South Wales Medium Neutral Citation: In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481 Hearing dates: 11 April 2018 Date of orders: 20 April 2018 Decision date: 20 April 2018 Before: Gleeson JA Decision: (1) Confirm the decision made by John Vouris, as the liquidator of Hawden Property Group Pty Ltd (in Liq) (Hawden Property) on 17 March 2016 to admit the proof of debt lodged by the controlling trustee of the bankrupt estate (the Hawes Estate) of David Richard Hawes for $9,648.05 (the Hawes Debt) subject to set-off under s 553C(1) of the Corporations Act, 2001 (Cth) against the sum owing (the Judgment Debt) by Mr Hawes and Glenside Group Pty Ltd (Glenside) pursuant to order 3 of the orders made by Justice Brereton in these proceedings on 3 September 2013, being $534,187.23. (2) Confirm the decision made by John Vouris as the liquidator of Hawden Property on 17 March 2016 to admit the proof of debt lodged by Glenside for $100,000.00 (the Glenside Debt) subject to set-off under s 553C(1) of the Corporations Act 2001 (Cth) against the Judgment Debt. (3) Declare that the Hawes Estate and Glenside Group Pty Ltd (deregistered) are not entitled to receive any dividend in the liquidation of Hawden Property in relation to their respective proofs of debt adjudicated upon by Mr Vouris on 17 March 2016. (4) Declare that Mark Roufeil (the liquidator) as liquidator of Hawden Property is entitled to apply the rule in Cherry v Boultbee as against the Hawes Estate, as the holder of 50 per cent of the issued share capital of Hawden Property, to share in the surplus available to contributories in the liquidation of Hawden Property. (5) Direct that on the proper application of the rule in Cherry v Boultbee in the circumstances of the liquidation of Hawden Property, the liquidator would be justified in: (a) treating the fund available for distribution to contributories as notionally increased by the amount of $504,946.75 (being the net judgment debt of $424,539.18 owing by the Hawes Estate to Hawden Property, together with the interest thereon pursuant to s 101 of the Civil Procedure Act 2005 (NSW), for the period from 15 August 2013 to 9 November 2015 (when Mr Hawes was made a bankrupt) being $80,407.57; (b) determining the amount of the share to which the Hawes Estate is entitled, as 50 per cent of the notionally increased fund; and (c) distributing to the Hawes Estate the amount (if any) of the share (so determined) less the amount of the contribution (being $504,946.75). (6) Order pursuant to s 488(2) of the Corporations Act, 2001 (Cth) that the liquidator have special leave to distribute the surplus in the winding up of Hawden Property Group Pty Ltd (in liq). (7) Pursuant to r 5.6.71 of the Corporations Regulations, 2001 (Cth), direct that the order authorising distribution of the surplus to a person entitled to it need not have annexed to it a schedule in accordance with Form 511. (8) Order that the requirements of rules 7.9 (2) and (3) of the Supreme Court (Corporations) Rules 1999 (NSW), that the liquidator publish a notice in accordance with Form 15, be dispensed with. (9) Order that paragraphs 4 and 6 of the liquidator's amended interlocutory process (the Process) filed on 11 April 2018, be stood over for further hearing before Gleeson JA on a date to be fixed. (10) Grant liberty to the liquidator's legal advisers to contact the Associate to Gleeson JA in order to have the relief sought in paragraphs 4 and 6 of the Process determined, after the liquidator has distributed the surplus. (11) Order that the costs of and incidental to the Process be paid from the assets of Hawden Property, on an indemnity basis. Catchwords: CORPORATIONS – winding up – distribution of surplus – Corporations Act 2001 (Cth), s 488(2) – grant of special leave to distribute surplus to contributories CORPORATIONS – winding up – insolvency set-off – Corporations Act 2001 (Cth), s 553C(1) – whether liquidator's decisions to apply insolvency set-off should be confirmed CORPORATIONS – winding up – application of rule in Cherry v Boultbee – where contributory indebted to company in liquidation under a judgment debt – where contributory became a bankrupt prior to winding up order Legislation Cited: Bankruptcy Act 1966 (Cth), s 86 Civil Procedure Act 2005 (NSW), s 101 Corporations Act 2001 (Cth), ss 447D(1) (now repealed), 479(3), 480, 485, 488, 511, 553C, Sch 2 (ss 5-15(c), 90-15(1) (Insolvency Practice Schedule (Corporations)), 601AB, Pt 5.4B Corporations Regulations 2001 (Cth), r 5.6.71 Insolvency Law Reform Act 2016 (Cth) Supreme Court (Corporations) Rules 1999 (NSW), rr 1.3, 2.13(3), 7.5, 7.9, 7.10 Cases Cited: Brealey v Shields [2009] NSWSC 1148 CGU Workers Compensation (NSW) Ltd v Ascom Service Automation (Australia) Pty Ltd [2005] NSWSC 747 Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171 Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 FAI General Insurance Co Ltd v FAI Car Owners Mutual Insurance Company Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164 Frigger v Kitay [2017] FCA 1278 Fused Electronics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7 GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd (1998) 4 VR 888 Gray v Gray [2004] NSWCA 408 Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60 Hawes v Dean [2014] NSWCA 380 Hawes v Dean [2013] NSWSC 745 Hiley v Peoples Prudential Assurance Co Ltd (in liq) (1938) 60 CLR 468; [1938] HCA 40 In the Matter of Glengrant Civil Pty Ltd (in liq) [2017] NSWSC 843 In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440 In the Matter of ICS Real Estate Pty Ltd (in liq) [2014] NSWSC 479 In Re Auriferous Properties Limited (No 2) [1898] 2 Ch 428 In Re Kaupthing Singer & Friedlander Ltd (In Administration) [2011] UKSC 48; [2012] 1 AC 804 In Re Overend Gurney & Co (1866) LR 1 Ch App 528 In Re SSSL Realisations (2002) Ltd [2006] Ch 610; [2006] EWCA Civ 7 Jeffs v Wood (1722) 24 ER 668 JLF Bakeries Pty Ltd v Baker's Delight Holdings Ltd (2007) 64 ACSR 633; [2007] NSWSC 894 Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443 Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) & Others (2004) 49 ACSR 531; [2004] NSWSC 383 Re ACN 007 537 000 Pty Ltd; Ex parte Parker (1997) 80 FCR 1 Re Anglican Development Fund Diocese of Bathurst [2015] NSWSC 440 Re Anne Lewis Pty Ltd [2016] NSWSC 1860 Maertin v Klaus Maertin Pty Ltd (in liq) (2009) 232 FLR 239; [2009] NSWSC 618 Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 Re Goy & Co Ltd [1900] 2 Ch 149 Reidy, In the Matter of eChoice Limited (Admin Apptd) [2017] FCA 1582 Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144 Re Rhodesia Goldfields Ltd; Partridge v Rhodesia Goldfields Ltd [1910] 1 Ch 239 Re RH Trevan Pty Ltd (in liq) [2013] NSWSC 1445 Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 In the Matter of Trussted Frames and Trusses Pty Ltd [2012] NSWSC 787 Walley, In the Matter of Poles & Underground Pty Ltd (Admin Apptd) [2017] FCA 486 Texts Cited: Rory Derham, Derham on the Law of Set-Off (4th Ed, 2010, Oxford University Press) Category: Principal judgment Parties: Mark Roufeil in his capacity as liquidator of Hawden Property Group Pty Limited (in liq) (ACN 003 528 345) (Applicant) Australian Securities and Investment Commission (First respondent) Paul Weston (as trustee of the Bankrupt Estate of David Richard Hawes) (Second respondent) Trevor Laurence Dean (Third respondent) Representation: Counsel: Mr DR Stack (Applicant) Ms V Evans (solicitor) (Third respondent) Solicitors: ERA Legal (Applicant) Uther Webster & Evans (Third respondent) File Number(s): 2009/290891 Judgment 1. GLEESON JA: On 3 September 2013, Hawden Property Group Pty Ltd (Hawden Property) was wound up by order of the Court and Mr John Vouris was appointed liquidator. The winding-up was on the just and equitable ground: Corporations Act 2001 (Cth), s 461(1)(k). 2. On 30 October 2017, Mr Vouris retired as liquidator of Hawden Property and Mr Mark Roufeil was appointed liquidator by a resolution of creditors of Hawden Property on that day. Subject to the matters referred to below, the liquidator has finalised the winding up and there is an anticipated surplus for distribution to members of approximately $241,000. 3. By interlocutory process filed 6 February 2018, the applicant, Mr Roufeil, as liquidator of Hawden Property, seeks directions from the Court pursuant to s 90-15(1) of Sch 2 of the Corporations Act - Insolvency Practice Schedule (Corporations) - which raise two issues relating to distributions to be made by the liquidator. The first concerns whether insolvency set-off under Corporations Act, s 553C applies in respect of proofs of debt lodged by two creditors who are also indebted to Hawden Property. The second concerns the basis on which the surplus assets of Hawden Property are to be distributed to its two members; in particular, whether the so-called rule in Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171 should be applied as between Hawden Property and one of its members who is indebted to Hawden Property, but is now bankrupt. 4. In addition, the liquidator seeks the special leave of the Court under Corporations Act, s 488(2) to distribute the surplus and orders pursuant to Corporations Act, s 480(d) that the liquidator be released and that the Australian Securities and Investments Commission (ASIC) deregister the company. 5. The finalisation of the winding up under s 480(d) is to be dealt with at a later date, given that such an order cannot be made until the distribution of all the company's property has been made: Re RH Trevan Pty Ltd (in liq) [2013] NSWSC 1445 at [18] (Black J). For the reasons given by Barrett J in FAI General Insurance Company Ltd v FAI Car Owners Mutual Insurance Company Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164 at [88], I do not consider it appropriate to make orders for release of the liquidator and that AISC deregister the company under s 480(d) prior to the distribution of the surplus under s 488(2): cf In the Matter of Glengrant Civil Pty Ltd (in liq) [2017] NSWSC 843 at [70]. Jurisdiction 1. Section 90-15(1) of Sch 2 of the Corporations Act – Insolvency Practice Schedule (Corporations) – applies to this application, given the repeal of s 479(3) of the Corporations Act by the Insolvency Law Reform Act 2016 (Cth). Section 90-15(1) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. A company is taken to be under external administration, if, among others, a liquidator has been appointed in relation to the company: s 5-15(c), Sch 2. Among other things, a court can make an order determining any question arising in the external administration of the company: s 90-15(3)(a). 2. The ambit of s 90-15 has not yet been fully considered in the authorities. In Reidy, In the Matter of eChoice Limited (Admin Apptd) [2017] FCA 1582, Yates J at [27] accepted that an application by an administrator for directions, that formerly would have been made under s 447D(1) of the Corporations Act (now repealed), would fall within the purview of the statutory power in s 90-15 to make an order that determines a question arising in the external administration of a company. 3. In Walley, In the Matter of Poles & Underground Pty Ltd (Admin Apptd) [2017] FCA 486 at [41], Gleeson J remarked that the question of whether to exercise the power in s 90-15 was "to be answered by reference to the principles applied to the exercise of the discretions previously contained in s 479(3) and s 511 of the Act". That may be accepted insofar as the external administrator seeks the directions of the Court, but the power under s 90-15 to "make such orders as it thinks fit in relation to the external administration of a company" (s 90-15(1)) including "an order determining any question arising in the external administration of a company" (s 90-15(3)(a)), is wider and accommodates the determination of substantive rights. Of course, the Court would not do so without affording potentially affected parties an opportunity to be heard: Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443, at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334 at 352 (Northrop J)); Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 at [45]-[46] (Davies J); In the Matter of ICS Real Estate Pty Ltd (in liq) [2014] NSWSC 479 at [25] (Brereton J). Notice of the application and proper parties 1. Notice of the application has been given to relevant interested persons: (a) ASIC in respect of Glenside Group Pty Ltd (Glenside Group) (deregistered), (b) Mr Paul Weston, the controlling trustee of the estate of Mr David Hawes (the Hawes estate), and (c) Mr Trevor Dean. Glenside Group and Mr Hawes lodged proofs of debt in the liquidation which have been admitted by the liquidator subject to insolvency set-off. Mr Weston (as trustee of the Hawes estate) and Mr Dean are contributories of Hawden Property. 2. ASIC indicated by letter to the liquidator's solicitors dated 9 February 2018 that it did not propose to intervene or seek leave to be heard on the application. Mr Weston indicated by letter to the liquidator's solicitors dated 14 March 2018 that he is sufficiently satisfied that all relevant matters had been referred to in the liquidator's affidavit and did not propose to file any evidence or appear at the hearing and make submissions. Mr Dean indicated by letter to my Associate dated 9 April 2018 that he adopts pars 40-58 of the liquidator's submissions (relating to the rule in Cherry v Boultbee), and he supports the orders proposed by the liquidator and did not propose to file any submissions. 3. Nevertheless, it is appropriate that the contributories of Hawden Property, Mr Weston (as trustee of the Hawes estate) and Mr Dean, and also ASIC in respect of Glenside Group (deregistered), be joined as respondents to the interlocutory process under the Supreme Court (Corporations) Rules 1999 (NSW) (the Corporations Rules), r 2.13(3). That is necessary to ensure that the questions raised by the liquidator's application for directions be determined in a manner that will be binding on the parties. It is also appropriate that the liquidator file an amended interlocutory process (as occurred on the hearing) joining ASIC, Mr Weston (as trustee of the Hawes estate) and Mr Dean as respondents, seeking appropriate declarations which raise for determination the issues which have been argued. It is well-established that directions given to a liquidator would have no binding effect on Mr Weston and Mr Dean: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679 (McLelland J); Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) & Others (2004) 49 ACSR 531 at [6] (Palmer J); [2004] NSWSC 383. Factual background 1. There is no dispute as to the facts. At all relevant times, Mr Hawes and Mr Dean were the only directors of Hawden Property and they each held one of the two issued shares in that company, which was incorporated on 30 May 1988. Hawden Property in turn held the only issued share in Hawden Constructions Pty Ltd (Hawden Constructions), which was incorporated on 23 October 2001, and Mr Hawes and Mr Dean were its only directors. 2. Between 1988 and 2005, Mr Hawes and Mr Dean engaged in various property development projects. Each project was a discrete venture utilising a variety of corporate and trust structures. One of the projects was a residential property development in respect of land at Clydesdale Place, Pymble (the Pymble Project). Hawden Constructions owned the relevant development land and Hawden Property provided the necessary funding for the project. 3. At some point, it seems in 2004 or 2005, Mr Hawes and Mr Dean decided to end their venture and go their separate ways. The separation of their affairs was effected by a number of settlement deeds, including a document referred to as the Clydesdale Deed dated 8 September 2005. Relevantly, the Clydesdale Deed provided that Mr Hawes and Glenside Group, a company controlled by Mr Hawes, would pay certain monies (the Pymble Project Monies), from project revenues generated from the Pymble Project to Hawden Property. The Clydesdale Deed also provided for the time for those payments to be made. 4. In 2009, Mr Hawes and his related entities commenced proceedings in the Equity Division seeking, among other things, contribution and rectification in respect of a number of deeds between Mr Hawes and Mr Dean (and their related entities), including the Clydesdale Deed (the contribution proceedings). The defendants filed a cross-claim seeking to recover the Pymble Project Monies. 5. On 12 June 2013, Brereton J delivered judgment in the contribution proceedings: Hawes v Dean [2013] NSWSC 745 and on 3 September 2013, his Honour delivered a further judgment and ordered that: 1. Hawden Constructions and Hawden Property be wound up and Mr Vouris be appointed liquidator; and 2. that Mr Hawes and Glenside Group jointly pay Hawden Property the sum of $534,187.23 (inclusive of interest of $190,187.23 to 14 August 2013) (the judgment debt). 1. An appeal by Mr Hawes and Glenside Group to the Court of Appeal was allowed in part, but did not disturb either the winding up order or the judgment debt: Hawes v Dean [2014] NSWCA 380. 2. On 9 November 2015, Mr Hawes became bankrupt and the Official Trustee in bankruptcy was appointed as trustee of his bankrupt estate. Subsequently on 23 December 2015, Mr Paul Weston replaced the Official Trustee as trustee of Mr Hawes' bankrupt estate. 3. On 9 October 2016, Glenside Group was deregistered by ASIC pursuant to s 601AB of the Corporations Act. 4. The winding up of Hawden Constructions was finalised on 12 October 2017 and Mr Vouris retired as its liquidator on 12 October 2017. Subsequently, on 24 December 2017, Hawden Constructions was de-registered. 5. The affidavit evidence of Mr Roufeil establishes that Mr Vouris and, in turn, Mr Roufeil, as liquidators, have undertaken appropriate investigations in order to identify and realise the assets of Hawden Property and that Mr Roufeil is not aware of any assets, which have not been realised. Publication of a notice dated 9 January 2015 calling for proofs of debt is established by affidavit evidence of a search of the insolvency pages of the ASIC website. The evidence establishes that the liquidators have undertaken appropriate investigations to identify the creditors of Hawden Property and Mr Roufeil is not aware of any creditors, which have not been identified in his affidavit sworn on 2 February 2018. 6. The liquidator has identified five unsecured creditors who are owed, in total, $225,148. Of these, Galway Pty Ltd, Leanwick Pty Ltd and Mr Dean have been paid in full. The two remaining unsecured and unpaid creditors are: 1. Mr Hawes, who is owed $9,648 (Hawes debt) in respect of a director's loan account; and 2. Glenside Group who is owed $100,000 (Glenside debt) in respect of consultancy services provided to Hawden Property. 1. On 17 March 2016, the previous liquidator (Mr Vouris) gave notice to Mr Weston as trustee of the Hawes estate of his decision to admit Mr Hawes' proof of debt but subject to set-off of the amount payable to Hawden Property by the Hawes estate under the judgment debt. Also on 17 March 2016, the previous liquidator gave notice to Glenside Group of his decision to admit its proof of debt subject to set-off of the amount payable to Hawden Property by Glenside Group under the judgment debt. 2. As at 2 February 2018, the liquidator held $289,165.65 on behalf of Hawden Property and expected to receive a refund of GST in an amount of $3,198.75. The liquidator's remuneration and expenses associated with this application have been estimated at $36,952.53, comprising the liquidator's remuneration ($20,000), disbursements ($100), and legal costs ($16,852.53). After allowing for these costs and expenses, the liquidator estimated that an amount of $255,411.87 will be available for distribution to the contributories of Hawden Property, being the Hawes estate and Mr Dean. 3. According to a statement of position as at 10 April 2018 in respect of Hawden Property (Ex B), the liquidator's latest estimate is that the fund available for distribution, taking into account estimated future receipts and future payments, will be $241,514.79 (the surplus). Insolvency set-off: Corporations Act, s 553C 1. Corporations Act, s 553C provides: 553C 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. 1. Despite some differences in wording, s 553C is based upon the concepts embodied in s 86 of the Bankruptcy Act 1966 (Cth). In Gye v McIntyre (1991) 171 CLR 609 at 623-624; [1991] HCA 60, a case involving a composition under the Bankruptcy Act, the High Court analysed the operation of s 86 and that reasoning has been applied to s 553C: Frigger v Kitay [2017] FCA 1278 at [47]; Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 at [209]; Re Anglican Development Fund Diocese of Bathurst [2015] NSWSC 440 at [18]; and Re ACN 007 537 000 Pty Ltd; Ex parte Parker (1997) 80 FCR 1 at 12. 2. The object of insolvency set-off is to do substantial justice between the parties. As the High Court explained in Gye v McIntyre at 618-619 (citations omitted): Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the "mutual credits" and "mutual debts", and later "mutual dealings", provisions were introduced into bankruptcy legislation. 1. Insolvency set-off is self-executing in the sense that its operation is automatic and not dependent upon the option of either party: Gye v McIntyre at 622; GM & AM Pearce & Co Pty Ltd v RGM Australia Pty Ltd (1998) 4 VR 888 at 891, 896 and 899; JLF Bakeries Pty Ltd v Baker's Delight Holdings Ltd (2007) 64 ACSR 633 at [17]; [2007] NSWSC 894. The effect of s 553C(1) is to bring about an extinguishment of the claims at the date of the winding up to the extent of the set-off. 2. The word "mutual" is to be understood as conveying the notion of reciprocity, rather than that of correspondence. It does not mean "identical" or "the same": Gye v McIntyre at 623. There are three aspects of the requirement of mutuality. First, that the credits, debts or claims arise from other dealings between the same persons. Second, that the benefit or burden of those credits, debts or claims lie in the same interests. In other words, it is the equitable or beneficial interests of the parties which must be considered. Third, that the credits, debts or claims must be commensurable for the purposes of set-off, meaning that they must ultimately sound in money: Gye v McIntyre at 623. 3. The debts in respect of mutual dealings which may be set-off under s 553C(1) include not only debts which are then due, but debts which are contingent and which ultimately mature into pecuniary demands: Hiley v Peoples Prudential Assurance Co Ltd (in liq) (1938) 60 CLR 468 at 497; [1938] HCA 40; Gye v McIntyre at 624. Application of insolvency set-off in present case 1. The Hawes debt, the Glenside debt, and the judgment debt are each debts between Mr Hawes and Glenside Group on the one hand and Hawden Property on the other hand, in their own right; they are for specific sums; and they existed at the time of the winding up of Hawden Property. 2. There is no suggestion in the materials that the exclusion from statutory set-off by s 553C(2) has any application to either the Hawes debt or the Glenside debt. 3. Although the judgment debt is a joint obligation of Mr Hawes and Glenside Group, the set-off under s 553C requires that a separate account be taken as at 3 September 2013 in respect of the mutual debts as between Mr Hawes and Hawden Property, and as between Glenside Group and Hawden Property. The combined effect of the two set-offs required by s 553C(1) is that the judgment debt owing by Mr Hawes and Glenside Group to Hawden Property is reduced to $424,539.18 as at 3 September 2013 (the net judgment debt). 4. I conclude that the respective determinations by the previous liquidator (Mr Vouris) on 17 March 2016 that statutory set-off under s 553C applies in respect of the proofs of debt lodged by Mr Hawes and Glenside Group are correct in law. The decisions of the previous liquidator in relation to the admission of those proofs of debt for nil amount should be confirmed and an appropriate declaration should be made. The rule in Cherry v Boultbee 1. The liquidator contends that the Hawes estate, as a contributory, is not entitled to receive any distribution from the surplus assets in the liquidation of Hawden Property without contributing to the assets of Hawden Property the amount of the net judgment debt (plus interest up to the date of Mr Hawes' bankruptcy). 2. The so-called "rule in Cherry v Boultbee" is a somewhat inaccurate expression. The rule originated in Jeffs v Wood (1722) 24 ER 668 and Cherry v Boultbee is in fact an example of an exception to the rule. So much is clear from the analysis of the authorities by Palmer J in Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liquidation) (2004) 49 ACSR 531; [2004] NSWSC 383 at [33]-[47]. See also In Re Kaupthing Singer & Friedlander Ltd (In Administration) [2011] UKSC 48; [2012] 1 AC 804 at [13]-[20]. While the rule originally developed in the context of deceased estates, it has been subsequently applied in bankruptcy and company liquidations. 3. In Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144, Sargant J, at 150, described the rule in the following terms: … where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute. 1. This description of the rule was adopted in Gray v Gray [2004] NSWCA 408 by Young CJ in Eq (Sheller and Bryson JJA agreeing) at [90]. Young CJ in Eq also observed at [91] that the rule was an illustration of a more fundamental principle of equity, that he who seeks equity must do equity. 2. More recently, Lord Walker observed In Re Kaupthing Singer & Friedlander that the rule is not a complex technical rule and does nothing more than provide a method of netting-off reciprocal monetary obligations. Lord Walker said at [8]: The expression "the rule in Cherry v Boultbee" suggests a technical rule of some complexity. Any such impression would be misleading. It is basically a simple technique of netting-off reciprocal monetary obligations, even where there is no room for legal set-off, developed and used by masters in the Court of Chancery in giving directions for the administration of the estates of deceased persons. Complication arises only in a situation of insolvency, where the equitable rule produces a different outcome from that produced by statutory set-off. 1. In Derham on the Law of Set-Off (4th Ed, 2010, Oxford University Press), at [14.02], the learned author notes that the authorities have emphasised that that Cherry v Boultbee has a wider application than set-off, and rests upon quite different principles. As Swinfen-Eady J said in Re Rhodesia Goldfields Ltd; Partridge v Rhodesia Goldfields Ltd [1910] 1 Ch 239 at 246-247, the rule is of general application that where an estate is being administered by the Court, or where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owes to the fund. This is because it would be inequitable that a person entitled to a share of a fund should not receive anything in respect of that share without paying what he may be bound to contribute to the same fund. 2. The authorities also indicate that nothing is in strict language set-off; rather, the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back. The Court in effect says to the person claiming to be paid "you have in your hands that which is applicable to the payment – pay yourself out of that": Re Rhodesia Goldfields at 246, citing In Re Goy & Co Ltd [1900] 2 Ch 149 at 153 (Stirling J). 3. Consistent with the authorities referred to above, the principle is best described as a right to appropriate a particular asset as payment, as opposed to a right of set-off or a right of retainer: Derham on the Law of Set-Off at [14.03]. 4. The application of the principle requires further explanation when the person entitled to participate in the relevant fund is a bankrupt or a company in liquidation. As R Derham states at [14.95]: [t]he question arises whether the rule in Cherry v Boultbee is to be applied as against the contributor's estate on the basis that the obligation to contribute is the full amount of the debt to the fund, or whether the obligation is limited to the dividend payable in the contributor's insolvency. 1. Where the contributor's insolvency occurs after the event which precipitated the establishment of the fund, the principle in Cherry v Boultbee prevents a person who was at the commencement of the liquidation, both a debtor to the company and a shareholder of the company, from receiving a rateable proportion of this surplus, without contributing to the assets of the company, the amount of his debt: Peruvian Railway at 151. 2. However, different considerations apply where the insolvency of the contributor occurs before the event which precipitated the establishment of the fund. If, at the commencement of liquidation, a shareholder is already a bankrupt, the only sum that has to be contributed is the dividend (if any) payable from the insolvent estate: Peruvian Railway at 151-152. The explanation for this qualification in the case of a bankruptcy is that bankruptcy vests the bankrupt's property in the trustee, whose obligation is limited to the payment of a dividend. In Otis Elevator Co v Guide Rails, Palmer J at [39] stated this qualification to the principle as follows: A person who is both a claimant on, and a debtor to, a fund cannot obtain payment of his claim out of the fund until he has first paid his debt into the fund PROVIDED THAT if the claimant's estate is being administered in insolvency at the time that his claim against the fund arises, the claimant's insolvent estate cannot obtain payment of the claim out of the fund until it first pays into the fund such dividend on the claimant's debt to the fund as is available from the claimant's insolvent estate. 1. Mr Stack, counsel for the liquidator, properly drew the Court's attention to an argument which Palmer J did not need to resolve in Otis Elevator v Guide Rails at [63] that the rule in Cherry v Boultbee has been impliedly ousted, in the context of company liquidations, by the Corporations Act. The premise of that argument seems to be that the Corporations Act provides for an exclusive code in respect of insolvency set-off in s 553C and that there is no room for the equitable principle. In addition, the application of the rule in Cherry v Boultbee to company liquidations was doubted in Fused Electronics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7 at 8. I do not accept the implied ouster argument, nor share the doubt expressed in Fused Electronics. 2. First, insolvency set-off and the equitable principle in Cherry v Boultbee cover different fields. As Brereton J observed In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440 at [38]-[39]: [38] … The application of the rule to company liquidations was doubted in Fused Electrics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7, but Leeds & Hanley Theatres and Peruvian Railway were not referred to, and the preferable explanation of that case is that the rule must yield to statutory provisions for set-off of mutual dealings and priority of debts; indeed it was for that reason that the non-applicability of the statutory set-off provisions was relevant in Leeds & Hanley Theatres and Peruvian Railway. [39] In each of Leeds & Hanley Theatres and Peruvian Railway, the availability of a set-off was excluded before it was held that the rule in Cherry v Boultbee applied: the debt owed to the company was not one in respect of which the countervailing debt owed by the company could be set-off, because of want of mutuality. This illustrates that the rule in Cherry v Boultbee applies only where set-off is not available. Accordingly, the rule in Cherry v Boultbee will apply in this case, unless the debts are amenable to set-off. 1. Second, the doubt referred to in Fused Electrics was dismissed, correctly in my view, by the English Court of Appeal in In Re SSSL Realisations (2002) Ltd [2006] Ch 610; [2006] EWCA Civ 7. This part of the Court of Appeal's reasons was not subject to any criticism in In Re Kaupthing, Singer & Friedlander. 2. In SSSL Realisations, Lord Chadwick (Parker LJ and Etherton J agreeing), explained at [99] that the inter-relation of the equitable principles applicable to the distribution of the fund in the statutory code for administration in insolvency has long been recognised in the authorities, including the observation of Lord Chelmsford in Grissell's case (In Re Overend Gurney & Co (1866) LR 1 Ch App 528) to which Wright J referred to in In Re Auriferous Properties Limited (No 2) [1898] 2 Ch 428 at 431: where there is no set-off under the statute "it necessarily follows in the last place" that the equitable principles must fill the gap. Application of the principle in the present case 1. Hawden Property was placed into liquidation on 3 September 2013 and Mr Hawes was declared bankrupt over two years later on 9 November 2015. The liquidator submitted that since Mr Hawes was not a bankrupt at the time of the liquidation of Hawes Property, Mr Hawes and accordingly, the Hawes estate, is not entitled to receive any distribution of the surplus without contributing to the net judgment debt (plus interest to the date of bankruptcy) to the assets of Hawden Property. I accept that submission. 2. The method of application of the principle in the present case is as follows: 1. the total notional fund available for distribution to the contributories is to be calculated by first adding to the relevant surplus, the amount of net judgment debt and interest thereon (up to the date of the bankruptcy of Mr Hawes); 2. the notional fund is then divided by two, in order to determine the 50 percent proportion payable to both contributories, Mr Dean and the Hawes estate; 3. the distribution is then paid to Mr Dean from the funds available to Hawden Property; 4. the distribution is then paid to the Hawes estate, but only insofar as there are funds still available to Hawden Property after payment of the distribution to Mr Dean. 1. Assuming the surplus available for distribution is as indicated at [25] above, the calculation of the notional increase in the fund available from which a dividend would be paid to the contributories of Hawden Property would be as follows: Surplus available for distribution (see [25] above) $241,514.79 Add Net Judgment Debt $424,539.18 Add Post Judgment Interest to date of bankruptcy of Mr Hawes $ 80,407.57 Total notional fund for distribution $746,461.54 Less distributions per shareholding to the other shareholder (Mr Dean) $373,230.77 Mr Hawes' estate entitled to payment of cash balance $0.00 1. In practical terms, given the relative size of the surplus and the net judgment debt, Mr Dean will receive the entirety of the surplus and the Hawes estate will receive nothing. Relief sought by the liquidator 1. The primary relief sought by the liquidator is an order pursuant to Corporations Act, s 488(2), that he have special leave to distribute the balance of the surplus funds in the liquidation of Hawden Property to Mr Dean and the Hawes estate. 2. While the power to distribute the surplus in a winding up has been delegated to the liquidator (by a combination of Corporations Act, ss 485(2) and 488(1)(c)), Corporations Rules, r 7.10 provides that such a delegation under Pt 5.4B of the Corporations Act is subject to the Corporations Act, the Corporations Regulations, these Rules, and any order of the Court. Relevantly, s 488(2) means that the liquidator nonetheless requires the Court's "special leave" to distribute a surplus: In the Matter of Trussted Frames and Trusses Pty Ltd [2012] NSWSC 787 at [2]-[3] (Brereton J). 3. The phrase "special leave" only requires that an application be made to the Court, rather than the matter being dealt with as part of some other administrative process: Maertin v Klaus Maertin Pty Ltd (in liq) (2009) 232 FLR 239; [2009] NSWSC 618 at [40]-[41] (Austin J) citing Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 (Young J); Re RH Trevan at [6]. The purpose of the provision is to ensure that there is, in reality, a surplus, in that creditors' claims have been recognised and met in full, and that the correct relativities among the contributories have been observed: CGU Workers Compensation (NSW) Ltd v Ascom Service Automation (Australia) Pty Ltd [2005] NSWSC 747 at [4] (Barrett J). 4. Corporations Rules, r 7.9(1) provides that the affidavit in support of an application for special leave to distribute a surplus must state how the liquidator intends to distribute the surplus, including the name and address of each person to whom the liquidator intends to distribute any part of the surplus. As indicated, there are only two contributories of Hawden Property. Subject to obtaining a declaration by the Court concerning the application of the rule in Cherry v Boultbee, the liquidator proposes to distribute the entire surplus to Mr Dean. 5. Rule 7.9(2) requires that at least 14 days before the date fixed for hearing of the application, the liquidator must publish a notice of the application in a daily newspaper circulating generally in the State or Territory where the company has its principal, or last known place of business. The form of the notice must be in accordance with Form 15: r 7.9(3). The liquidator seeks dispensation with this formal requirement. 6. Given that the debts of unsecured creditors have been discharged and that notice of this application has been given to the contributories and ASIC, it is appropriate to exercise the power under Corporations Rules, 1.3(1) to dispense with the requirements of r 7.9: Re Anne Lewis Pty Ltd [2016] NSWSC 1860 at [18] (Black J). 7. The liquidator also seeks dispensation from Corporations Regulations 2001 (Cth), r 5.6.71(1) which provides: An order in a winding up by the Court authorising the liquidator to distribute any surplus to a person entitled to it must, unless the Court otherwise directs, have annexed to it a schedule in accordance with Form 551. 1. Form 551 contemplates that there should be set out in respect of each contributory to whom surplus is to be distributed the amount of the distribution payable per share and the net distribution payable. It has been said that compliance with the form entails the specification of a specific and quantified amount of money in relation to each contributory: Brealey v Shields [2009] NSWSC 1148 at [10] (Barrett J). 2. Regulation 5.6.71(1) is plainly directed to cases where there are numerous contributories and there may be matters for adjustment between them, such as differing amounts paid up on shares and arrears of calls. That is not the present case which is a simple one. It is appropriate to dispense with compliance with the regulation: Brealey v Shields at [14]; FAI Car Owners Mutual Insurance Company Pty Ltd at [28]. Conclusion and Orders 1. The liquidator is entitled to the relief which he seeks on the present application. The relief sought under s 480(d) of the Corporations Act must be deferred until after the distribution of all the company's property has been made. 2. The liquidator seeks an order that his costs and expenses in connection with this application be paid out of the assets of Hawden Property, on an indemnity basis. Such an order is appropriate. 3. Accordingly, the Court makes the following orders: 1. Confirm the decision made by John Vouris, as the liquidator of Hawden Property Group Pty Ltd (in Liq) (Hawden Property) on 17 March 2016 to admit the proof of debt lodged by the controlling trustee of the bankrupt estate (the Hawes Estate) of David Richard Hawes for $9,648.05 (the Hawes Debt) subject to set-off under s 553C(1) of the Corporations Act, 2001 (Cth) against the sum owing (the Judgment Debt) by Mr Hawes and Glenside Group Pty Ltd (Glenside) pursuant to order 3 of the orders made by Justice Brereton in these proceedings on 3 September 2013, being $534,187.23. 2. Confirm the decision made by John Vouris as the liquidator of Hawden Property on 17 March 2016 to admit the proof of debt lodged by Glenside for $100,000.00 (the Glenside Debt) subject to set-off under s 553C(1) of the Corporations Act 2001 (Cth) against the Judgment Debt. 3. Declare that the Hawes Estate and Glenside Group Pty Ltd (deregistered) are not entitled to receive any dividend in the liquidation of Hawden Property in relation to their respective proofs of debt adjudicated upon by Mr Vouris on 17 March 2016. 4. Declare that Mark Roufeil (the liquidator) as liquidator of Hawden Property is entitled to apply the rule in Cherry v Boultbee as against the Hawes Estate, as the holder of 50 per cent of the issued share capital of Hawden Property, to share in the surplus available to contributories in the liquidation of Hawden Property. 5. Direct that on the proper application of the rule in Cherry v Boultbee in the circumstances of the liquidation of Hawden Property, the liquidator would be justified in: (a) treating the fund available for distribution to contributories as notionally increased by the amount of $504,946.75 (being the net judgment debt of $424,539.18 owing by the Hawes Estate to Hawden Property, together with the interest thereon pursuant to s 101 of the Civil Procedure Act 2005 (NSW), for the period from 15 August 2013 to 9 November 2015 (when Mr Hawes was made a bankrupt) being $80,407.57; (b) determining the amount of the share to which the Hawes Estate is entitled, as 50 per cent of the notionally increased fund; and (c) distributing to the Hawes Estate the amount (if any) of the share (so determined) less the amount of the contribution (being $504,946.75). 6. Order pursuant to s 488(2) of the Corporations Act, 2001 (Cth) that the liquidator have special leave to distribute the surplus in the winding up of Hawden Property Group Pty Ltd (in liq). 7. Pursuant to r 5.6.71 of the Corporations Regulations, 2001 (Cth), direct that the order authorising distribution of the surplus to a person entitled to it need not have annexed to it a schedule in accordance with Form 511. 8. Order that the requirements of rules 7.9 (2) and (3) of the Supreme Court (Corporations) Rules 1999 (NSW), that the liquidator publish a notice in accordance with Form 15, be dispensed with. 9. Order that paragraphs 4 and 6 of the liquidator's amended interlocutory process (the Process) filed on 11 April 2018, be stood over for further hearing before Gleeson JA on a date to be fixed. 10. Grant liberty to the liquidator's legal advisers to contact the Associate to Gleeson JA in order to have the relief sought in paragraphs 4 and 6 of the Process determined, after the liquidator has distributed the surplus. 11. Order that the costs of and incidental to the Process be paid from the assets of Hawden Property, on an indemnity basis. ********** 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. Decision last updated: 20 April 2018