Active Adult Management Pty Ltd v Milstern Retirement Living Pty Ltd

Judgment

1. HER HONOUR: Before me for hearing on 8 September 2017 was an application by the first and second defendants (Milstern Retirement Living Pty Ltd and Milstern Health Care Pty Ltd, to whom I will refer collectively as the applicants) in proceedings listed for hearing before me commencing on 12 February 2018 for leave to join an additional defendant (Milstern Retirement Services Pty Limited (MRS)) as a party to these proceedings and for leave (if that be necessary) to commence a cross claim (in the names of MRS and the applicants) against the first plaintiff (Active Adult Management Pty Limited (in liq) (AAM)), in circumstances where such a cross claim might otherwise be prohibited by s 500 of the Corporations Act 2001 (Cth). The applicants have already filed a cross claim (on 7 August 2017) without the leave that is now sought.
2. The respondents to the motion (the plaintiffs in the principal proceedings - AAM, LSW Debt Pty Ltd (LSW Debt) and Mr Michael Kelso - to whom I will refer collectively as the respondents) consent to the joinder of MRS as a defendant and consent to leave being granted to the applicants to cross claim against AAM in relation to certain claims (namely, claims for the recovery of lessee's contribution to outgoings in respect of 15 retirement village units for the period from November 2012 and for retention fees allegedly payable on the sale or future sale of those 15 units) but otherwise oppose the grant of leave.
3. The respondents' opposition to the grant of leave in respect of certain of the cross claims now sought to be brought against AAM is on the basis that they are the subject of proofs of debt that were submitted to the liquidator of AAM (in his then capacity as administrator) in November 2012; in respect of others of the cross claims their opposition is on the basis of their concern that this will significantly expand the ambit of the present dispute (and prejudice the existing February 2018 trial date) "for no good reason", in that it is likely that there will be no return for unsecured creditors in the liquidation of AAM.
4. The third defendant in the principal proceedings, the Registrar General, has filed a submitting appearance and has taken no role in the present application.
5. I made rulings in relation to the applicants' motion on 14 September 2017, as well as directions for the ongoing conduct of the proceedings. I indicated that I would publish my reasons for those rulings as soon as possible thereafter. These are those reasons. Consistent with the orders made on 14 September 2017, MRS is named as the fourth defendant (though it was not, of course, a party at the time the present application was made and determined).

Background

1. The underlying dispute in the principal proceedings relates to registered leasehold interests in 15 units located across three retirement villages in Sydney (those being the retirement villages known as Strathfield Gardens, Lindfield Manor and Windsor Gardens, respectively). In summary, and this is drawn largely from the respective parties' submissions and the material in the Court Book (and is here referred to solely by way of background without making any factual findings at this interlocutory stage of the proceedings), the dispute has arisen as follows.

The parties

1. AAM (that is, the first plaintiff in the principal proceedings) is registered as the lessee of the 15 units in question. LSW Debt (the second plaintiff in the principal proceeding) is the first registered mortgagee over the assets of AAM and Mr Kelso (the third plaintiff in the principal proceedings) is the second registered mortgagee over those assets, which assets include the leasehold interest held by AAM in the relevant units. Mr Kelso is said to supply the guiding mind and will of LSW Debt. LSW Debt acquired its interest in the first registered mortgages by assignment from Westpac Banking Corporation. LSW Debt and Mr Kelso have indemnified AAM in respect of, and are funding, the costs of these proceedings.
2. Of the two applicants, Milstern Retirement (that is, the first defendant in the principal proceedings) is the registered proprietor (and lessor) of the units in the Strathfield Gardens and Lindfield Manor retirement villages. Milstern Health (the second defendant in the principal proceeding) is the registered proprietor (and lessor) of the units in the Windsor Gardens retirement village.
3. The soon-to-be joined fourth defendant (MRS), a related company to the applicants, is the current operator of the three retirement villages and has been at all relevant times except for the period between 1 December 2009 and 17 February 2012 when AAM was the operator of the retirement villages. The operation of the retirement villages in question is governed by the Retirement Villages Act 1999 (NSW).

The Operator Agreement and the power of attorney

1. In October 2007, the applicants (and MRS) entered into agreement with Meridien Retirement Living Pty Limited (Meridien) for the sale of the freehold of seven retirement villages (including the three at which the units the subject of the present proceedings are located) and for the sale by MRS of the business of operating those retirement villages. The sale contracts were not completed by the due date (7 December 2007) for want of finance. Negotiations took place for the management of the retirement villages by AAM while finance was being arranged for the completion of the sales.
2. For that purpose, on 23 December 2009, MRS, AAM and Meridien entered into a "Management, Sales and Marketing Agreement" (referred to in these reasons as the Operator Agreement), which agreement was later supplemented by a Deed of Acknowledgement and Agreement dated 17 March 2011. The Operator Agreement was expressly made subject to the provisions of the Retirement Villages Act (see Recital A of the Operator Agreement).
3. The applicants point to various terms of the Operator Agreement, including that: AAM was to collect all "Gross Revenue" on behalf of MRS, discharge all Operating Expenses, as defined, and pay any balance to MRS (after applying any set-off to which AAM was entitled in accordance with cl 9) (cl 7); that AAM was to calculate the Management Fee payable by MRS to AAM using the formula in Schedule 4), issue a tax invoice to MRS and pay the Management Fee within 7 days of receipt of the tax invoice (cl 8); and that AAM was to be responsible for employee entitlements accruing after 1 December 2009 (cl 23) Clause 9 of the Operator Agreement permitted AAM to set off, against any amount payable to MRS under the Agreement (including any amount under cl 7 - the Net Proceeds) any amount owing at that time by MRS to AAM in accordance with cl 8.2 (i.e., the Management Fee). Under the Operator Agreement, MRS was to advance a sum of $50,000 to fund the Resident Levy Account (cl 15).
4. Pausing there, the parties disagree as to the complexity or otherwise of the formula for calculation of the Management Fee (as set out in Schedule 4 to the Operator Agreement). The formula in question is as follows: Management Fee = Net Proceeds - Guaranteed Amount Where: Guaranteed Amount means the amount of $1.3 million annually (as adjusted in accordance with paragraph (b) apportioned to reflect the period for which the fee is calculated.
5. The term "Net Proceeds" is the term used in cl 7.2 as "the balance (if any) of the Gross Revenue after the payment or deduction of all Operating Expenses and after applying any set-off which the Operator is entitled to in accordance with clause 9". The respondents contend that, though inelegantly phrased, the formula was understood or interpreted by the parties as meaning that the risk of running the retirement villages was to fall on AAM because it took all the revenue and had to pay all the expenses but that in addition it was required to pay $1.3 million annually to MRS (see T 39).
6. The respondents further contend that the cross claim is misconceived in that it seeks to bring a claim for outgoings payable on the units of which AAM was the lessee during the time that AAM was the operator, whereas the outgoings were part of the gross revenue which was to be paid to the owner - in other words it is said that MRS cannot both be paid the annual $1.3 million guaranteed amount fee and in addition be required to remit all of the gross revenue (and all of the retention fee) (see T 39).
7. Returning to the terms of the Operator Agreement, pursuant to cl 14.1, AAM was entitled, inter alia, to arrange the refurbishment of the units and to carry out other capital works, and to "buy-back" any of the units if it wished to do so. The reference to buying-back the units should be understood, presumably, as should references in submissions to the sale of units, to the acquisition of the leasehold interest in the units (they being held on long-term leases).
8. Pursuant to cl 14.2 of the Operator Agreement, MRS was required to grant to AAM or its nominee a "limited power of attorney" to enter into Village Contracts (defined by reference to the meaning of that term in the Retirement Villages Act) on behalf of MRS and generally to sign any documents and do any other things necessary or desirable for the operation of the Villages. In addition, under cl 13.3, MRS was required to grant to AAM (or a nominee of AAM) a "limited power of attorney" to sign all necessary documents to effect the sale on behalf of MRS of specified units owned by MRS.
9. MRS and the applicants executed a power of attorney dated 6 July 2010 in favour of AAM. Part of the present dispute arises because AAM exercised the power of attorney to execute documents varying the leases in respect of the units "bought back" by it (or, more precisely, the leases in respect of which it had acquired the leasehold interest). The variations to which the applicants point were (they say) to the effect that, while AAM was the operator of the relevant village, it was excused from liability for lessee's contributions to outgoings in respect of that unit. (Insofar as they complain about the variation to a clause in the leases dealing with the assignment of lease and referring to payment of the retention amount - cl 16.2.7 in the sample lease included in the Court Book - the respondents point out that there was no variation to cl 19.4 of the leases which provided that neither the lease nor any interest therein shall be surrendered or assigned unless, inter alia, the lessee pays to the lessor the retention amount. So they maintain that regardless of any variation there is a clear obligation in the lease to pay a retention amount - T 34.)

Dealings in relation to the leasehold over 28 units in the retirement villages

1. During the period between entry into the Operator Agreement (in December 2009) and February 2012, AAM acquired the leasehold over 28 units in the retirement villages (including the 15 units now the subject of proceedings) for the purpose of renovating and on-selling the leasehold interests for profit.
2. Before being placed into liquidation in 2012, AAM had "sold" 13 of the 28 units in respect of which it had acquired the leasehold interest in the exercise of its rights under the Operator Agreement (leaving it with the registered leasehold interest in the 15 units the subject of the present proceedings).

Cessation of AAM's role as Operator

1. On 23 December 2011, MRS gave notice pursuant to cl 25.2 of the Operator Agreement of its intention to terminate the Operator Agreement 120 days from the date thereof.
2. On 3 January 2012, MRS served a statutory demand on AAM in respect of claimed debts totalling $1,710,408.84 described as relating to unpaid fees (or moneys due and payable) under the Operator Agreement. That sum was comprised of the $1.3 million "Guaranteed Amount" for the period 1 December 2009 to 31 December 2010 (at $3,561,64 per day), calculated at $2,710,408.04 less an amount of $1 million that it was acknowledged as having been paid by AAM.
3. Also on 3 January 2012, MRS and each of the applicants revoked the power of attorney that had been granted to AAM on 6 July 2010 (and had been registered on 21 July 2010) in relation to the various retirement villages (including the three presently the subject of the dispute).
4. On 17 February 2012, lawyers acting for AAM notified the lawyers acting for MRS and the applicants that the MRS entities' actions had made it impossible for AAM to continue operating the retirement villages and constituted a repudiation of the Operator Agreement, which repudiation was accepted, thereby terminating the Operator Agreement. AAM thus ceased from that time to be the operator of the retirement villages.

The 2012 proceedings

1. Proceedings were commenced in this Court in March 2012. In those proceedings AAM alleged that the applicants had and were continuing to frustrate its attempts to sell the remaining 15 units by, inter alia, refusing to grant access to the retirement villages and refusing to make available the disclosure material required under the Retirement Villages Act.
2. Certain undertakings were provided to the Court by MRS and the applicants on 3 April 2012, designed to facilitate the sale of the 15 units. At the same time an undertaking was given to the Court by AAM that at settlement of any surrender and grants of new leases in respect of properties listed in the schedule, AAM would deposit into a named firm of solicitors' trust account any retention amount calculated pursuant to the relevant leases pending determination of the Court proceedings or agreement of the parties.
3. Ultimately, however, on 20 March 2012, the proceedings were dismissed by a Registrar of the Court (without a determination on the merits and in the absence of AAM) following: the appointment of administrators to AAM on 12 November 2012, the appointment on 13 November 2012 of a receiver and manager to all the assets and undertakings of AAM pursuant to a general security agreement (formerly fixed and floating charge) registered by St George Bank Limited as a division of Westpac Banking Corporation, and then the appointment of the administrators as liquidators of AAM in February 2013. An order was made that AAM pay the defendants' costs. At the time of the dismissal of those proceedings it does not appear that consideration was given as to the status of the undertakings that had been given to the Court back in April 2012.
4. Proofs of debt were lodged in the administration of AAM by MRS (and in the name of the three respective retirement villages) in November 2012. The MRS proof of debt claimed an amount of $2,343,794.66 calculated in part by reference to an annual $1.3 million "management fee". A total of $1,798,630.14, plus interest, was claimed by way of management fee for the period from 1 October 2010 up to 17 February 2017. The proofs of debt lodged in the name of the retirement villages claimed outgoings said to be outstanding for the period December 2009 to November 2012.

Commencement of the present proceedings

1. In the period from 2012 through to mid-2016, the 15 units remained vacant. Access to the retirement villages was in the control of MRS, as operator. In the principal proceedings the plaintiffs (i.e., the present respondents) contend that they made various attempts during this period to sell the leasehold over the 15 units but that their efforts were frustrated by the applicants. The applicants in turn argue that AAM had abandoned the leases (which AAM denies) and that the leases have been terminated.
2. The principal proceedings were commenced in May 2017 after the respondents learnt that the applicants had purported to re-let 3 of the 15 units over which AAM held the registered leasehold interest to third party retirees (units 65 and 66 Windsor Gardens and unit 22 Strathfield Gardens). A regime was agreed (without prejudice to AAM's contention that it held the leasehold interest in those units) in order not to prejudice the position of the retirees who had acquired or sought to acquire interests in the units. Interlocutory relief was sought, and granted by Parker J, to restrain the applicants from leasing or purporting to grant a lease over the remaining 12 units. As a condition of the grant of that interlocutory relief, the respondents gave both the usual undertaking as to damages and an undertaking to prosecute these proceedings expeditiously.
3. The respondents have received no moneys in respect of the sale of the leasehold interests in the two Windsor Garden units. The proceeds of sale of the Strathfield Gardens unit have been placed in a joint trust account.
4. The respondents point out that the liquidation of AAM is nearing finality (noting that the liquidator had previously commenced steps for the deregistration of AAM); that there is no insurance in respect of the claims; and that the mortgagees (LSW Debt and Mr Kelso) have indemnified AAM in respect of its costs of these proceedings. They say (and broadly speaking this seems to be accepted by the applicants) that it is common ground that no return to unsecured creditors is likely.

Claims made by the respondents (as plaintiffs) in the principal proceedings

1. The respondents have indicated in their submissions in relation to the present application that they do not press the estoppel claims made at [89]-[94] of their statement of claim. Those claims will be treated as having been abandoned.
2. The respondents identify the principal issue in the proceedings as being whether (as the applicants contend) AAM abandoned its interest in the 15 units by mid-2016 (relevant to the question whether the purported termination of AAM's leases was valid or invalid). In the event that it is found that the termination of the leases was invalid, and that the leases had not been abandoned by AAM, orders are sought in aid of the sale of the leasehold interests held over the remaining 12 units. Further, or in the alternative, an order is sought that the applicants account for any sale proceeds received consequent upon the re-letting of the 3 units and for damages.
3. Declaratory relief is sought as to the (alleged) lack of entitlement of the applicants, upon the sale of each of the remaining 12 units, to payment of any recurrent charges calculated in a period where the unit in question was not occupied as a residence by a natural person or any retention amount (or departure fee) calculated in accordance with the relevant lease or otherwise.
4. The respondents accept that an issue will likely arise in the proceedings as to whether the relevant applicant (as lessor) has any entitlement to unpaid outgoings and to payment of a retention fee from the sale proceedings; as well as whether any such entitlements take priority over the claims of the secured creditors (the registered mortgagees) and/or can be set off against any judgment in favour of the respondents but it says that this raises complex issues better left for trial.

Respondents' position on the present application

1. The respondents accept that the issue of any deduction to be made from the sale proceeds of each unit in respect of outgoings and retention fee will be "in play" in the principal proceedings (to use the terminology of Brereton J in Re Equitrust Pty Ltd [2012] NSWSC 1049 at [12]) and hence they do not oppose leave being granted for the applicants to bring a claim for outgoings allegedly payable in respect of the 15 units after 22 November 2012 (the date the proofs of debt were lodged) or for the retention fee allegedly payable on sale (upon terms that no step to enforce any such entitlement may be taken without the Court's leave) (see [34]-[40] of the cross claim).
2. However, they oppose leave to file the cross claim insofar as it seeks to expand the factual area of enquiry to include the conduct of AAM during the period that it was the operator of the villages (from December 2009 to February 2012) and to include claims concerning the 13 "sold" units (for outgoings and retention fees the subject of the proofs of debt that were lodged in November 2012).
3. The respondents maintain that if leave to file the cross claim is not so limited then the proceedings will not be able to be ready for hearing commencing on 12 February 2017. By way of illustration, short minutes of order were handed up at the hearing of the present application setting out the steps proposed by the respondents for the preparation of the matter (if the cross claim is confined as the respondents contend it should be) in readiness for a February hearing - including the filing of a reply to the defence and defence to cross claim by 20 September 2017, filing of any reply to the defence to cross claim by 27 September 2017, filing and service of the plaintiffs' evidence by 11 October 2017, the defendants' evidence by 8 November 2017 and evidence in reply by 29 November 2017; as well as a time frame for categories of discovery to be exchanged by 29 November 2017 and the making available for inspection of those categories agreed to be discovered by 18 December 2017.

Applicable principles

1. A preliminary issue (which for practical purposes was largely conceded by the applicants in the initial written submissions filed on the present application) is whether leave is necessary at all. In Dealquip Australia Pty Ltd v 33 Electra Pty Ltd (No 2) [2013] NSWSC 1382, White J, as his Honour then was, referred (at [19]) to the observations of Santow J in Simoon Pty Ltd v Renbay Systems Pty Ltd (1995) 13 ACLC 1792 at 1793 and Ipp JA in Doran Constructions Pty Ltd (In Liq) v Beresfield Aluminium Pty Ltd (2002) 54 NSWLR 416; [2002] NSWCA 95 at [7] to the effect that the word "proceeding" is capable of having either a broad or a narrow meaning depending on context. His Honour noted that in Skinner v Jeogla Pty Ltd [2001] NSWCA 15; (2001) 19 ACLC 1163 Spigelman CJ had referred (at [16]) to Humber & Co v John Griffiths Cycle Company (1901) 85 LT 141 as authority for the proposition that where proceedings have been pursued by a company after it has been ordered to be wound up, other parties may take "defensive proceedings" without leave.
2. White J considered that the term "defensive proceedings" in this context encompassed prosecuting an appeal (referring to Distinctive FX9 Pty Ltd v Statewide Developments Pty Ltd [2012] NSWCA 393). His Honour concluded that an application for summary dismissal for want of prosecution was not a proceeding for which leave was required under the there relevant provision (s 471B of the Corporations Act), following the approach indicated by Anderson J (with whom Kennedy and Ipp JJ agreed) in the Full Court of the Supreme Court of Western Australia in BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 (at 859).
3. In the present case, the cross claim, though clearly responsive to the claim brought by AAM (and in that sense reflexive or defensive in nature), is not a procedural application brought in proceedings initiated by the company in liquidation (AAM). It seeks to prosecute causes of action in its own right. I share the view indicated in the first set of submissions for the applicants that the better view is that leave is required in the present case.
4. Turning then to the principles applicable on an application for leave to proceed against a company in liquidation (in this case under s 500(2) of the Corporations Act), the parties accept that this involves the exercise of a discretion. That discretion falls to be exercised having regard to the fact that, without the relevant restriction, a corporation in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well as in some cases completely unnecessary (see Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314 at 315-317 (McPherson J)).
5. In Re Gordon Grant (which was cited with apparent approval in Global Partners Fund Limited v Babcock & Brown Limited (in liq) [2010] NSWCA 196), his Honour considered that the question whether a claimant should be permitted to proceed by action, or should be required to submit a proof of debt and, if dissatisfied, appeal to a judge, was largely one of choosing between alternative forms of procedure, and said: … The effect of s. 230(3) is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. This is really all that is meant in this context by expressions such as "convenience" and "balance of convenience" that appear in judgments on the matter: see, for example, Re The Queensland Mercantile Agency Company Ltd. (1888) 58L.T. 878, 879; Stewart v. Intercity Distributors Limited [1960] N.Z.L.R. 944, 946; and cf Century Mercantile Co. v. Auckland Provincial Fruitgrowers' Co-operative Society Ltd. [1921] N.Z.L.R. 272, 276. It, of course, follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed. [my emphasis]
6. In Global Partners Fund, the Court of Appeal (at [47]) referred to the relevant legal principles identified by Hammerschlag J at first instance with apparent approval, which had included that the plaintiff must satisfy the Court that its claim "has a solid foundation and gives rise to a serious dispute (sometimes termed a serious issue to be tried)".
7. Factors relevant to the exercise of the discretion, as identified in cases such as those referred to above and by Nicholson J in ONG v Lottwo Pty Ltd (in liq) [2013] SASCFC 57 (at [61]) include: the degree of complexity of the legal and factual issues involved; the prospects that a proof of debt will be rejected; the stage to which the proceedings, if already commenced, may have progressed and their complexity; whether there is a broad overlap with issues already "in play" in the proceedings; the impact that the proceedings would have both on the company and on the company's creditors; whether there is insurance involved; whether the liquidator would be unduly distracted by the proceedings (determined by reference to the prospects of success and the utility resulting from the likely outcome of the proceedings); and whether the creditor will be able to obtain relief from the liquidation.
8. More recently, in DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96 Leeming JA (at [57]) observed that, while it is not necessary to demonstrate an absence of prejudice to the creditors or the orderly winding up of the company in order to obtain leave, the inability of an applicant to do so tells against the grant of leave.

The cross claim

1. The parties agree that the claims sought to be made in the cross claim, in respect of which the respondents oppose the grant of leave, may be grouped into the following three categories: first, claims based on breach of the Operator Agreement (see [7]-[17] of the cross claim); second, claims based on the alleged misuse of the power of attorney granted to AAM (see [18]-[25] of the cross claim); and, third, claims for loss or damage referable to the pleaded breaches of the Operator Agreement, alleged unauthorised actions under the power of attorney and pleaded breach of fiduciary obligation other than those in respect of the post-November 2012 period for outgoings and retention fees (see [30]-[33] of the cross claim. I deal with each in turn.

(i) Claims based on breach of the Operator Agreement

1. The applicants seek damages in an amount "not less than $1.848 million" for alleged breaches of the Operator Agreement, in essence relating to the alleged failure by AAM to pay MRS amounts said to be due under the formula contained in the Operator Agreement (see [15] of the cross claim). They contend that MRS entered into the said agreement both in its own capacity and as their agent (referring in that regard to the Deed of Agreement and Acknowledgment dated 17 March 2011) (see [7] of the cross claim).
2. As noted earlier, AAM was required to collect "Gross Revenue" (including General Services Charges) and to pay "Operating Expenses" of the Villages and was permitted to retain the balance, subject to the payment to MRS of an annual "Guaranteed Amount" of $1.3 million.
3. It is not disputed that the claim for those amounts is not presently "in play" in the principal proceedings. The respondents emphasise that the amounts said to be outstanding for the period to November 2012 are the subject of the proof of debt lodged by MRS in November 2012 and that the liquidator has indicated that he is likely to admit that proof of debt (should funds be available for a distribution to unsecured creditors). Insofar as the applicants contend on the present application that no proof of debt was lodged in the liquidation as such (the proof of debt claim form having been submitted prior to the placement of AAM into liquidation and in the course of the administration of AAM, presumably for the purpose of establishing voting rights for the first creditors' meeting), the respondents point to the fact that the notice of motion filed on the present application is itself predicated on a proof of debt having been lodged (since it contemplates its withdrawal as a condition of the grant of leave).
4. The respondents submit that there is no real prospect that a debt allegedly owed by AAM to a third party (MRS) would be set off in equity against any damages payable by the applicants to the respondents and argue that in those circumstances leave to bring these claims should be refused.
5. Furthermore, the respondents argue that the alternative claim for breach by AAM of fiduciary duties allegedly owed to the applicants, which mirror the contractual duties owed to MRS, is barely arguable in the face of the parties' decision to set out the terms of their relationship in a contract; that leave to bring such a claim would be futile and that leave to bring that claim should be refused.
6. The applicants argue that the fact that the proof of debt form was lodged in November 2012 is of little moment since the liquidator has not yet admitted that proof of debt and has indicated that he will only adjudicate on the proof of debt should funds become available for distribution to unsecured creditors, (which the applicants submit it is common ground is unlikely to occur).
7. As to the availability of a set-off in equity (as between any damages owed by the applicants to AAM and any amount owing by AAM for breach of the Operator Agreement), the applicants again point to the allegation that MRS entered into the Operator Agreement in its own capacity and as their agent (see [7] of the cross claim) and maintain on that basis that there is at least an arguable set-off available.
8. Finally, the applicants press for leave also to bring the alternative claim (for breach of fiduciary obligation) on the basis that there is no evidence that the hearing date will be lost if such a claim is made and, in any event, that this is not a relevant consideration on the exercise of the discretion whether or not to grant leave (see T 48).
9. The applicants also raised the possibility that (even absent the benefit of a set-off) the unsecured damages claim may not be worthless having regard to the contents of the affidavit filed by the respondents' solicitor on the present application (referring to [22] of Ms Xavier's affidavit sworn 18 August 2017 where reference is made to the liquidator having recently learnt that there are charges over other retirement villages than those villages the subject of this case). Further, the applicants suggest that even on the figures put forward (at [28] of Ms Xavier's affidavit) as to the position of Mr Kelso as secured mortgagee (namely, that Mr Kelso's claim is "in the vicinity of $5.6 million"), his claim will not necessarily consume all the equity in whatever property AAM has (said to be worth in excess of $6 million - at [30] of Ms Xavier's affidavit).

(ii) Claim based on the Power of Attorney

1. The claims sought to be made by the applicants in relation to the power of attorney granted in favour of AAM by them on 6 July 2010 relate in essence to the proposition that the power of attorney was a limited power of attorney and that the use by AAM of the power of attorney to vary the leases it held in relation to all 28 of the units (the 15 units in respect of which it retains the registered leasehold interest and the 13 units which it sold during the time that it was the operator of the retirement villages) amounted to a breach by AAM of the Operator Agreement, a breach of fiduciary duties owed to the applicants and MRS, and was beyond power.
2. The variation in question was the addition of a new clause to the effect that (see cl 16.2.7 of the lease in respect of Unit 66, Windsor Gardens) the provisions of the clause dealing with assignments, subleases and mortgages did not apply where the lessee is and remains the operator of the relevant village. The significance of this was that the relevant clause (which was not to apply while the lessee is the operator of the relevant village) was one that precluded assignment of the lease without the prior written consent of the relevant lessor and that this was not to be arbitrarily or unreasonably refused or withheld if, inter alia, the lessee "shall pay to the Lessor the Retention Amount" referred to in the lease (see cl 16.2.6 of the abovementioned lease).
3. At [26(c)] of the cross claim it is alleged that the effect of this new clause was that while AAM remained the Operator, it (as lessee) was relieved from the obligation to pay the Lessee's Contribution to Operating Expenses (i.e., the Outgoings) otherwise payable under the lease in respect of the said units.
4. The respondents argue that since AAM ceased to be the Operator of the retirement villages on 17 February 2012 any claim for damages arising out of the allegedly improper exercise of the power of attorney to effect the variation referred to in the cross claim is limited to a claim for Outgoings in respect of the period up to and including 17 February 2012. It relies on the fact that proofs of debt were lodged in November 2012 in the name of each of the retirement villages for Outgoings for units owned by AAM in the period December 2009 to November 2012.
5. Further, it is submitted that the power of attorney claims, if permitted, would expand the proceedings to include pre-February 2012 issues about the proper construction of the Operator Agreement including its payment mechanism, and about the 13 units sold during the period that AAM was the operator. It is submitted that the claim is weak in light of AAM's entitlement under the Operator Agreement to Gross Revenue, including General Services Charges but that even assuming that a claim for damages went forward and was upheld, the claim is unsecured and would rank behind the secured indebtedness. Hence it is submitted that leave to bring these claims should be refused.
6. The respondents accept that where the effect of the variation to a lease is limited to a time period when AAM was the Operator then the detriment caused to the applicants must itself be limited to losses incurred during that period but they maintain that this is not a reason to deny the applicants redress for those losses.
7. They place emphasis on the fact that not all the variations effected by use of the power of attorney are confined to the period that AAM is the Operator. In particular they note that a further variation to the leases was the addition of a new clause to the effect that the lease was not to be further assigned on re-sale of the premises but was to be surrendered by the lessee simultaneously upon entry into a new lease by the purchaser of the leasehold interest in the premises (cl 16.2.8 in the abovementioned lease). While no reference is made to this variation in the cross claim, the applicants note that there is reference to the clauses introduced by that variation in the statement of claim. The applicants point out that the cross claim alleges that the variation of the lease is void because the instrument was executed beyond or in breach of the power given to AAM under the power of attorney.
8. As to the complaint by the respondents that if the power of attorney claim is allowed it would expand the proceedings (to include pre-February 2012 issues about the proper construction of the Operator Agreement including its payment mechanism and the 13 sold units), the applicants do not accept that this is the case but maintain that even if that premise is accepted that is not a reason to refuse leave where, on the face of it, they say they have a well-grounded case for arguing that the variations were in breach of AAM's fiduciary duties.
9. As to the respondents' argument that any claim for damages arising under the Power of Attorney claim would be futile as those damages would be unsecured, the applicants point out that the relief they claim is not confined to a claim for equitable compensation but extends to a claim for the variations to be avoided (noting that there are still 15 leases on foot, on the respondents' case). Moreover they say that the existence of unsecured claims against AAM may be a significant matter when AAM seeks to claim damages against the applicants (noting that the respondents have foreshadowed a contention that the mortgagees' claims will have priority and have conceded that such an argument gives rise to complex issues better left for trial (referring to the respondents' outline of submissions at [24]).

(iii) Claim for retention fees in respect of the 13 "Sold Units"

1. The final group of claims in respect of which the respondents oppose the grant of leave relate to the claim for recovery of the Retention Fees paid when the 13 units were sold by AAM prior to February 2012. (As noted earlier, the respondents accept that the issue as to any Retention Fee payable on the sale of the 15 units is "in play" already and do not oppose it now being raised by way of cross claim.)
2. At [32] of the cross claim it is alleged that the failure to pay a Retention Fee on the sale of each of the 13 units sold by AAM was in breach of the relevant lease. The first issue raised by the respondents in this regard is a perceived inconsistency arising from the allegation as to breach by AAM of fiduciary obligations (see [29] of the cross claim) by reference to the matters pleaded at [26], the allegation at [29] being particularised by reference to the use of the power of attorney by AAM "to remove its own obligation to pay money to the relevant Cross Claimant upon sale of the properties comprised in the Retirement Villages" (and see the pleading at [26(c)] referred to earlier). In other words, as I understand it, the perceived inconsistency is between an allegation that moneys are due by AAM under the relevant leases and an allegation that AAM breached its fiduciary obligations by using the power of attorney in order to remove or relieve itself from an obligation to pay moneys under the relevant leases.
3. The respondents accept that the proofs of debt lodged in the name of the Villages in November 2012 did not claim Retention Fees in respect of the 13 units which had been sold, but maintain that leave should not be granted for such a claim now to be brought as this would expand significantly the factual and legal issues the subject of the primary claim. The respondents say that this would involve an enquiry into the sale and accounting for the proceeds of sale of the 13 units sold prior to February 2012. They maintain that any such claim is unsecured, and say that there is little or no prospect that moneys owing pursuant to those sales would be set off in equity against any damages payable by the applicants to the respondents.
4. Furthermore, they argue that leave should not be granted to bring such a claim because it is weak, that argument being on the basis that under the Operator Agreement it was AAM (and not any of the Applicants) that was entitled to receive Retention Fees in respect of any units sold while AAM was the Operator of the relevant retirement village (suggesting that it was for this reason that those amounts were not included in the proofs of debt lodged in 2012).
5. The applicants' response to this criticism of the cross claim is that it does not take into account that the relief sought under the power of attorney claim is that the variations to the relevant leases should be avoided. They accept that the pleading at [26(c)] is that the effect of the new clauses was to relieve AAM from the liability to pay a contribution to Operating Expenses (which they say is relevant to make good the allegation that the exercise of the power was to benefit AAM at the expense of the Applicants) but point out that this was not the only effect of the variations. In that regard they point to the variations which excluded (see cl 16.2.7) from the operation of the relevant lease the assignment clause in the lease (under which they say the entitlement on the part of the applicants, through their agent MRS, to claim a Retention Fee upon an assignment of any of the leases held by AAM arose).
6. Hence they explain the allegation at [32] of the cross claim that one of the consequences of the breach of the fiduciary obligation in relation to the power of attorney was the loss of the Retention Fees payable to the applicants through their agent, MRS.
7. Again as to the set-off issue, the applicants place weight on the allegation that the payment of the Retention Fees was due to MRS as their agent.
8. Finally, as to the complaint that such a claim would significantly increase the factual and legal issues the subject of the primary claim (which is not accepted by the applicants to be correct) they again submit that this is not a persuasive consideration if the claim has merit.
9. The applicants maintain that, in circumstances where proceedings are brought on behalf of an insolvent company (AAM) by the mortgagees who have indemnified the company and funded the proceedings, the usual considerations for refusing leave to proceed against a company in liquidation are absent in this case. They emphasise that the cross claims are defensive (referring to what was said in Dealquip at [17]-[22] and DSG Holdings at [54]) and are intimately interwoven with the same transactions upon which AAM seeks relief.
10. The applicants contend that the case brought by the respondents is not confined to a factual enquiry from February 2012 (noting that the statement of claim pleads the parties' dealings from October 2007 (at [11]ff)) and say that expansion of the issues to the period when AAM was operator is unlikely to be significant in that the main factual enquiry is limited to the price at which AAM "sold" the 13 units in that period and the remaining legal issues that arise are the construction of the Operator Agreement and the power of attorney (neither of which is a lengthy agreement). The applicants argue that there will be a substantial, if not total, factual overlap between the issues raised in the cross claim and those raised in the principal proceedings.
11. Moreover, they argue that even if it were correct that the trial would run longer if all cross claims were permitted to be made that would only be a relevant consideration if the increased length of the trial caused a burden on the insolvent company (in circumstances where, at the instance of the company, it is going to be involved in any event in a 3-week hearing). They argue that, given that the liquidators were about to deregister the company at an earlier stage; the liquidators see no prospect of any dividend ever being paid to unsecured creditors; and the company's legal expenses are being paid for by the mortgagee and it holds a complete indemnity from the mortgagee for any adverse costs order; no complaint can be made by AAM as to an increase in the duration of any hearing. The applicants also maintain that it is speculative to suggest that the hearing date would have to be vacated when the parties have not served their evidence in chief and the hearing is some 5 months away but in any event point out that they are the parties (being the subject of the injunctive relief) in whose interest it is for an early hearing.
12. The applicants argue that the present case has the added feature that, in seeking the aid of this Court, the respondents have not made good on defaults under the Operator Agreement, through which AAM obtained the right to "buy back" the 28 leaseholds which remain the subject of contention in these proceedings; the power of attorney (which it is alleged it misused to its benefit); and access to the cash flow of the retirement villages (for which it is alleged it has never accounted properly to the applicants).

Determination

1. AAM accepts that on its claim issues as to the proper construction of the Operator Agreement will be raised in the context of the 15 units over which it held the registered leasehold interest after its position as operator came to an end. There is no expansion of the case by dealing in that context with a claim for breach of contract (by non-payment of outgoings/retention fee) in relation to the 13 units that were sold prior to the termination of the Operator Agreement (since the construction issues will be the same). The respondents accept that.
2. I accept that proofs of debt have been lodged in the administration (now winding up) of AAM both by MRS (for the "Guaranteed Amount" under the Operator Agreement up to November 2012) and in the names of the Villages (for operating expenses over the same period) but in circumstances where there is at least an arguable claim that any such amounts could be the subject of an equitable set-off (if for no other reason than by reason of the allegation that MRS entered into the Operator Agreement as agent for the applicants) and since there is nothing to suggest that the conduct of such a claim against the company will prejudice the winding up of the company or any pari passu distribution (however unlikely) to unsecured creditors, that is not a determinative factor against the grant of leave.
3. There is at least an arguable claim that the sums claimed by AAM from the applicants by way of damages for breach of the leases (that it contends have not been abandoned and were invalidly terminated) could be the subject of an equitable set-off in respect of damages for which AAM may be held liable to MRS (as agent for the applicants for breach of the Operator Agreement) or for any misuse of the power of attorney when executing the variations of lease.
4. Equitable set off exists where "the party seeking its benefit can shew some equitable ground for being protected against his adversary's demand" (Rawson v Samuel (1841) 41 ER 451 at 458).
5. In essence, the respondents' claim involves an assertion that the applicants wrongfully terminated the leases (the applicants said they did so on the basis that the leases had been abandoned). The basic question would be whether the applicants' proposed claims are essentially "bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant" (HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479 at [136]). In Hawes v Dean [2014] NSWCA 380, after referring (at [64]) to HP Mercantile and the examples given in that case, Barrett JA noted (at [65]) that they shared a common feature, namely: … two wrongs or defaults [that] are so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right. It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim. [my emphasis]
6. Clearly these notions of conscience do not operate at large (see Hawes v Dean at [61] and the authorities cited therein) and it is necessary in each case to examine earlier authorities to identify the sorts of claims which have been said to impeach a plaintiff's title to a legal demand. That said, Keane JA (as his Honour then was), with whom McMurdo P and Fraser JA agreed, drew attention in Forsyth v Gibbs [2008] QCA 103 to the holistic but principled approach to be taken (at [9]-[10]): Consistently with the technique of equity, which does not seek to define what an elephant is but knows one when it sees one, the principles governing the availability of equitable set-off of cross-claims are couched in open textured terms, such as "sufficient connection" and "unfairness". In some cases, it will be necessary to engage in an evaluation of a range of facts which might establish "sufficient connection" or "unfairness" of the relevant kind. But the principles to be applied are not so vague or subjective that it is never possible to determine, for the purposes of an application for summary judgment, that the facts alleged by a defendant simply fall short of what is required. It is important to emphasise that the availability of an equitable set-off between cross-claims does not depend upon an unfettered discretionary assessment of whether it would be "unfair" in a general sense for a plaintiff to insist on payment of the debt owed to it while the cross-claim remains unpaid. It is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim. [footnotes omitted]
7. In the present case whether equitable set off will be available - because the asserted claims are sufficiently closely connected such that it would be inequitable for the respondents to be permitted to proceed with their claim without making allowance for the applicants' claim (Roadshow Entertainment Pty Ltd v ACN 053006269 Pty Ltd (1997) 42 NSWLR 462) - will depend on a range of matters, such matters not capable of full elaboration at this interlocutory stage. The present does not appear to be one in which the agreements or transactions in respect of which each party sues are "entirely distinct" (Forsyth v Gibbs at [13]).
8. Accordingly, the availability of equitable set-off is a matter that cannot be determined at this stage and as to which it would be inappropriate further to comment at this stage. Suffice it to say that I am not persuaded that it is unarguable.
9. Concern as to the increased length of the hearing does not arise in that the insolvent company is indemnified as to costs and there is no suggestion that delay in completion of the winding up will prejudice unsecured creditors. Of more concern to me is the possibility that the hearing date may not be able to be maintained, having regard to the fact that it was set on an expedited basis. A not insignificant block of the Court's time has been set aside for that hearing to commence in February next year (and hence is unavailable to other litigants). I have in mind the mandate under the Civil Procedure Act 2005 (NSW) for the just, quick and cheap resolution of the real issues in dispute between the parties; and that other litigants in this Court should not be prejudiced because of listing issues caused by the vacation and re-listing of hearing dates that have already been fixed as warranting an expedited hearing.
10. There is a sufficient overlap in the issues potentially to be raised in the principal proceedings such that I am not persuaded that this is a case where the appropriate course would be to leave the claims contained in the proofs of debt to be dealt with in the liquidation (with then a potential appeal to the Court in relation to any determination by the liquidator adverse to the applicants). Rather, I consider that there is good reason in this case to depart from the proof of debt procedure and to determine the interlinked issues once and for all.
11. I am satisfied that there is a serious issue to be tried as to the cross claims and that there is no discernible detriment to the administration of the winding up or to any unsecured creditors. There is no reason to think that a grant of leave will "unleash" other litigation against the company in liquidation.
12. Balancing the matters referred to above, and having regard both to the potential for broad fiduciary duty claims significantly to expand the ambit of the factual enquiry required for the purposes of these proceedings and to the difficulty in seeing how the fiduciary duty claims (based on mirror alleged contractual breaches) will add anything material to those contractual claims, I do not consider that leave should be given to raise the broad fiduciary duty claims that are put in the alternative to the contractual breach claims. Nor do I consider it appropriate to permit an expansion of the power of attorney claims beyond what I understand to be the narrow scope sought to be raised by the applicants. Senior Counsel for the applicants made clear that what is contended is that on the proper construction of the Operator Agreement the power of attorney was a limited power of attorney and its exercise was subject to fiduciary obligations (arising on the construction of the agreement and by reason of provisions of the Powers of Attorney Act 2003 (NSW)). He disavowed any broader claim than that, by reason simply of the fact that the variation of lease operated (allegedly) to the benefit of AAM and to the disadvantage of MRS, the use of the power of attorney to vary the lease by the insertion of the clause identified in the cross claim amounted to a misuse of the power of attorney and breach of fiduciary obligation, and was beyond power. He also disavowed any claim based on an assertion that the power of attorney had been revoked at an earlier time (doubt in this regard arising from the use of the words "purported" or "purportedly" in the pleading).
13. Therefore, I propose to restrict the grant of leave so as to exclude the broad fiduciary duty claims that have been raised as an alternative to the contract claims and to hold the applicants to their position that the alleged breach of fiduciary duty involved in the exercise of the power of attorney is limited to what follows from the proper construction of the power of attorney (and any duties imposed by law in relation to the exercise of such powers of attorney) and the fact of execution of the variations of lease that it is said benefited AAM and were to the disadvantage of MRS. In that regard, as adverted to above, use of the adjective "purported" and adverb "purportedly" should not be permitted as it raises scope for doubt as to the ambit of the claim.
14. Moreover, insofar as application was made (at the conclusion of the hearing of the present application) to amend the relief claimed in the cross claim annexed to the notice of motion in effect to expand the variations of lease about which complaint is made beyond those relating to the new cll 15.2.7/16.2.7, I would not allow this. Objection was raised thereto by the respondents not least because this would be inconsistent with the undertakings proffered to the Court in April 2012 (and arguably still on foot). I agree. There is no pleading in the cross claim directed to any other variation of the lease than that relating to cll 15.2.7/16.2.7.
15. Accordingly, I will give leave for the bringing of a cross claim against AAM to plead the issues pleaded in the cross claim which is attached to the notice of motion (and which has already been filed) other than [11], [12] insofar as it refers to [11], [26] insofar as it uses the words "purported" and "purportedly"; and [29].
16. I will reserve the question of costs to be dealt with in the context of the principal proceedings in due course.

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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: 15 September 2017