ACN 168 479 614 Pty Ltd (formerly known as Steller Developments Pty Ltd) (in liq) (Receivers & Managers appointed) v Smedley, in the matter of ACN 168 479 614 Pty Ltd

Federal Court of Australia|2022-03-03|Before: Goodman J

Counsel for the Applicant: Ms A Smith

Solicitor for the Applicant: Hogan Lovells

Counsel for the Respondents: The respondents did not appear

ORDERS NSD 1300 of 2021 IN THE MATTER OF ACN 168 479 614 PTY LTD (FORMERLY KNOWN AS STELLAR DEVELOPMENTS PTY LTD) (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED)

BETWEEN: ACN 168 479 614 PTY LTD (FORMERLY KNOWN AS STELLAR DEVELOPMENTS PTY LTD) (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) Applicant

AND: NICHOLAS SMEDLEY First Respondent

SIMON PITARD Second Respondent

JAMES CIRELLI (and others named in the Schedule) Third Respondent

AND BETWEEN: THOMAS VINES Cross-Claimant

AND: NICHOLAS SMEDLEY (and others named in the Schedule) First Cross-Respondent

order made by: GOODMAN J DATE OF ORDER: 3 March 2022

Pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), the applicant have leave to proceed against the second respondent.
Pursuant to s 500(2) of the Corporations Act 2001 (Cth), the applicant have leave to proceed against the fifth respondent.
The applicant may not enforce any judgment against the second respondent or the fifth respondent without further leave of the Court.
Costs reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 On 3 March 2022, I made orders granting leave to the applicant to proceed against the second respondent, a bankrupt, and the fifth respondent, a company in liquidation. These are my reasons for making those orders.

Background 2 The applicant, which has been in liquidation since 6 March 2020, is a company of which the first, second, third and fourth respondents were directors at relevant times. The second respondent became bankrupt on or about 30 June 2021. 3 The fifth respondent is a member of the same group of companies as the applicant and has been in liquidation since 20 December 2019 pursuant to a creditors' voluntary winding up. 4 On 14 December 2021, the applicant commenced this proceeding by the filing of an Originating Application and a Statement of Claim. In essence, the claim is that the respondents are liable pursuant to a Deed of Guarantee. 5 However, this is not a straightforward contractual claim. As the applicant submitted, the Guarantee "is affected by certain drafting infelicities". In these circumstances, the applicant advances: (1) a construction case, pursuant to which it contends that the Court should construe the Guarantee in a particular way; and (2) in the alternative, a rectification case, by which it seeks an order that the Guarantee be rectified so as to reflect the construction for which the applicant contends. 6 The applicant gave notice of its application for leave to proceed to: (1) the second respondent's trustee in bankruptcy, who indicated that he consented to the applicant being granted the leave it sought against the second respondent. He also indicated that he did not intend to appear at the hearing of the proceeding and that he considered the proceeding to be an appropriate process for determining the extent to which the applicant is a creditor of the second respondent's bankrupt estate; and (2) the liquidator of the fifth respondent, who indicated that he was unfunded and would submit to any order that the Court may make. 7 As at the date of the hearing of the application: (1) the first respondent had not filed a Defence but, in correspondence from his solicitors, had denied that he signed the Guarantee and had suggested that the Guarantee was the result of fraudulent conduct and thus was not binding on any of the respondents; (2) the third respondent had not filed a Defence; (3) the fourth respondent had filed: (a) a Defence by which he denied that the Guarantee has the meaning for which the applicant contends; and (b) a Cross-Claim against three cross-respondents (being the first and third respondents and another person who is not a respondent to the applicant's claim), by which he sought an order that, in the event that he were to be found liable under the Guarantee, the cross-respondents would be liable to indemnify him.

Section 58(3)(b) of the Bankruptcy Act 8 Section 58(3)(b) of the Bankruptcy Act 1966 (Cth) provides: (3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: … (b) except with leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. 9 In Hillig; in the matter of Battaglia [2019] FCA 2191, Wigney J said at [6]-[8]: [6] The principles concerning leave under s 58(3)(b) of the Bankruptcy Act are well settled. The purpose of the requirement of leave is to ensure that a bankrupt is not subjected to a multiplicity of actions which would be both expensive and time-consuming, and in some cases unnecessary: see Zervas v Burkitt [2019] NSWCA 112 at [15]. [7] The requirement for leave focusses attention on the choice between litigation and the proof of debt procedure in a bankruptcy. It will generally be appropriate for leave to be granted in cases where the issues would be better and more comprehensively dealt with by a contested trial of the action in a court proceeding than would be the case if the creditor was required to lodge a proof of debt in the debtor's bankruptcy: Allanson v Midland Credit Ltd (1977) 30 FLR 108; [1977] FCA 66. That would particularly be the case where the creditor's claims involve other parties. [8] The relevant factors to be taken into account cannot be stated exhaustively and will vary from case to case: see Burkitt at [15]. Nevertheless, the factors generally considered to be relevant to such applications include: the amount and seriousness of the claims; the degree and complexity of the legal and factual issues involved; the stage to which the proceedings have progressed; the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt; whether the claim has arguable merit; whether proceedings are already in motion at the time of the bankruptcy; whether the proceedings will result in prejudice to creditors; whether the claim is in the nature of a test case for the interest or large class of potential claimants; whether the grant of leave will result in further litigation; whether the cost of the hearing will be disproportionate to the size of the bankrupt estate; the risk of delay; and whether pre-trial procedures such as discovery and interrogatories are likely to be required or beneficial: see Cassegrain v Gerard Cassegrain & Co Pty Ltd (in liq) [2012] NSWCA 435 at [33].

Section 500(2) of the Corporations Act 10 Section 500(2) of the Corporations Act 2001 (Cth) provides: After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes. 11 A recent and convenient summary of the relevant principles concerning the exercise of the discretion under s 500(2) of the Corporations Act is that set out by Halley J in ZOLL Medical Australia, in the matter of Cardiac Defibrillators Australia Pty Ltd (in liq) v Cardiac Defibrillators Australia Pty Ltd (in liq) [2022] FCA 167 at [25]: [25] The principles which are relevant to the exercise of the discretion under s 500(2) may be summarised as follows: (a) the purpose of s 500(2) is to prevent a company's assets being dissipated by unnecessary litigation: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In liquidation) [2018] NSWCA 139 (Seymour Whyte) at [16] (Sackville AJA), citing In the matter of DSHE Holdings Limited (recs and mgrs apptd) (in liq) [2018] NSWSC 82 (DSHE Holdings) at [18] (Black J); Re Gordon Grant and Grant Pty. Ltd. [1983] 2 Qd R 314 (Re Grant) at 316 (Campbell CJ, Sheahan J and McPherson J); (b) the power to grant leave is discretionary: Seymour Whyte at [16], citing DSHE Holdings at [18] (Black J); White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 5) [2018] FCA 184 at [21] (Perram J); (c) a plaintiff for leave will be required to show why it should not be left to prove its debt in the winding up: Seymour Whyte at [16], citing DSHE Holdings at [18]; (d) a plaintiff must establish that the claim has a solid foundation and gives rise to a serious question to be tried: Seymour Whyte at [16], citing DSHE Holdings at [18]; (e) factors relevant to the exercise of the court's discretion may include the degree of complexity of legal and factual issues: Seymour Whyte at [16], citing DSHE Holdings at [18]; Zamattia v Jainti Pty Ltd (in liq) in its capacity as Trustee of the Zambito Trust [2022] NSWCA 3 (Zamattia) at [8] (Leeming JA). It may also include whether there are complex procedural matters such as discovery or interrogatories involved: Zamattia at [8]; Re Grant at 317; (f) the effects that the proceedings may have on creditors of the company in liquidation are to be taken into account: Zamattia at [8]; (g) leave should generally be granted for a proprietary claim which cannot be accommodated within the proof of debt procedure: Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [40] (Barrett J); on appeal Chahwan v Euphoric Pty Ltd and Another (2008) 227 ALR 43; [2008] NSWCA 52 at [8] (Beazley, Tobias and Bell JJ); Oliveri v P M Sulcs & Associates Pty Limited (in liq) [2012] NSWSC 1311 at [10] (Black J); Richardson v Lo Pilato (Liquidator); In the Matter of Trojan Hospitality (ACT) Pty Limited (In Liq) [2014] FCA 888 at [52]-[54] (Foster J); and (h) the Court will normally grant leave as of right where plaintiffs seek to recover their own property from the company because such claims cannot be accommodated within the proof of debt regime. Claims which can only be resolved by court proceedings include rectification, specific performance, injunction and rescission of a contract: Commonwealth v Davis Samuel Pty Ltd (No 5) (2008) 68 ACSR 336; [2008] ACTSC 124 (Davis Samuel) at [34]-[36] (Refshauge J); cited with approval in Palace v RCR O'Donnell Griffin Pty Ltd (in liq) [2021] QCA 137 at [40] (Sofronoff P and Morrison and Bond JJA); QNI Resources Pty Ltd and Others v Park and Others (2015) 116 ACSR 321; [2016] QSC 222 at [49] (Bond J). 12 It may be seen that there is considerable overlap in the matters which inform the exercise of the discretions to grant leave found in s 58(3) of the Bankruptcy Act and s 500(2) of the Corporations Act and it is convenient to consider them together.

Consideration 13 I made the orders on 3 March 2022 for the following reasons. 14 First, the applicant's claims appear to be reasonably arguable. 15 Secondly, the proceeding will involve some complexity. The applicant seeks a declaration that the Guarantee should be construed in a particular way, or alternatively, that the Guarantee should be rectified so as to reflect the construction for which the applicant contends. The fourth respondent through his Defence and the first respondent via correspondence have indicated that the applicant's claims will be contested. In particular, there is likely to be a significant evidentiary contest as to the circumstances surrounding the alleged entry of the applicant and the respondents into the Guarantee and as to their common intention at that time. 16 Thirdly, rectification claims should generally be determined by the Court, rather than as part of a proof of debt procedure: see ZOLL at [25(h)]. 17 Fourthly, the applicant's claim involves parties other than the second and fifth respondents, namely the first, third and fourth respondents who are all alleged to be parties to the Guarantee. Given the nature of the relief sought, it is appropriate that these parties have an opportunity to be heard. This is best achieved in this proceeding. 18 Fifthly, it seems likely that any determination of a proof a debt will be challenged in a court proceeding, in any event, in view of the complexity of the issues and the amount involved, namely $121 million. 19 Sixthly, the proceeding is unlikely to have a negative effect on the creditors of the second and fifth respondents in circumstances where the trustee and the liquidator have indicated that they do not intend to participate in the proceeding and the orders sought by the applicant on this application included an order preventing enforcement of any judgment against the second and fifth respondents without the further leave of the Court. 20 Finally, the trustee consented to leave being granted, and indicated that he believed the Court's determination of the issues would assist him in the management of the bankrupt estate; and the liquidator did not oppose the application for leave and indicated that he would submit to any order the Court may make. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman.

SCHEDULE OF PARTIES NSD 1300 of 2021 Respondents Fourth Respondent: THOMAS VINES Fifth Respondent: STELLAR ESTATE PTY LTD (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) Cross-Respondents Second Cross-Respondent JAMES CIRELLI Third Cross-Respondent ALASTAIR WILLIAMS

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