Adultshop.com Ltd v Members of the Classification Review Board

REASONS FOR JUDGMENT Introduction 1 This is an application made under ss 511 and 479(3) of the Corporations Act 2001 (Cth) for a direction that it is within the power of the applicants, Mr Anthony Gregory McGrath and Mr Christopher John Honey, to cause Pan Pharmaceuticals Limited (in liquidation) ("Pan") to assign to Mr James Selim those causes of action against the Commonwealth of Australia as are identified in cl 10 of a Deed of Settlement dated 15 April 2008 between the applicants, Mr Selim, Pan, Pan Laboratories Australia Pty Limited ("Pan Laboratories") and Zurich Australian Insurances Limited ("Zurich"), and that the applicants may properly do so. 2 The Deed of Settlement relates to the proceeding NSD 489 of 2004 brought in this Court by the liquidators against Mr Selim and also to certain cross‑claims made by Mr Selim against the liquidators, the Commonwealth of Australia and also a proceeding brought by Mr Selim against Zurich. 3 The proceeding against Zurich is to be heard with the main proceedings which were instituted by the liquidators. Those proceedings are listed for hearing to commence before Emmett J on 2 June 2008. The liquidators have estimated the length of the hearing to be in the region of five to six months of Court time including the hearing of Mr Selim's cross‑claims. 4 Mr Selim has not settled his cross‑claims against the Commonwealth. Those cross‑claims include a claim for contribution to any liability that he may have to Pan and a claim for losses said to have been suffered personally by Mr Selim as a majority shareholder in Pan. There is also a claim under s 236 of the Act for leave to bring a derivative action in the name of Pan. 5 The issues which arise on the application are first, whether the liquidators have power to assign the cause of action, and second, if so, whether they would be justified in doing so. Background 6 The basis of the Deed of Settlement and the reasons why the liquidators agreed to it are explained in an affidavit of Mr McGrath sworn 21 April 2008. I will refer to the principal parts of that affidavit. 7 The background to the appointment of Mr McGrath and Mr Honey as liquidators of Pan and Pan Laboratories is explained in [8] to [10] of the affidavit and need not be repeated. It is sufficient to say that at a meeting of creditors which commenced on 1 September 2003 and which concluded on 23 September 2003, it was resolved that Pan and Pan Laboratories be wound up in insolvency pursuant to s 439C(c) of the Act and that Mr McGrath and Mr Honey be appointed joint and several liquidators of those companies. Other entities in the Pan group were placed into liquidation in October 2003. 8 Prior to the insolvency of Pan, that company was listed on the Australian Stock Exchange. The business of Pan comprised the contract manufacturing of pharmaceuticals and other products which are often referred to as "complementary medicines." Pan held various licences in respect of those goods under the Therapeutic Goods Act 1989 (Cth) for the manufacture of those products. 9 Mr Selim was the majority shareholder and Chief Executive Officer of Pan. The appointment of Mr McGrath and Mr Honey as administrators and later liquidators of Pan followed a decision of the Therapeutic Goods Administration (TGA) to suspend the manufacturing licences of Pan. 10 Initially the suspension was for a period of six months commencing on 28 April 2003 but subsequently further notices were given under the Therapeutic Goods Act for suspension and product recalls. The notices under that Act referred to breaches by Pan of its licence conditions and the standards of the Australian Code of Good Manufacturing Practice. 11 After the commencement of administration of Pan, Mr McGrath and Mr Honey caused a review to be undertaken of the circumstances which resulted in the notices given under the Therapeutic Goods Act. The solicitors were assisted by a team of consultants specialising in Good Manufacturing Practice. As a result of their inquiries the liquidators determined that the matters identified by the report under the Therapeutic Goods Act resulted from systemic failures at Pan and in particular the failure to have in place adequate systems to ensure compliance with Good Manufacturing Practice. 12 The liquidators determined that Pan should commence proceedings in the Federal Court against Mr Selim seeking damages for breach of duties owed to Pan under s 180 of the Corporations Act. The damages claimed in the action are for the losses that Pan has suffered as a result of the licence suspensions, the recall of the products and the claims that have been made by more than 200 sponsors of the products. Those sponsors did so pursuant to various agreements apparently entered into with Pan or the Pan group. 13 Mr Selim denied liability in the proceedings and brought cross‑claims against the liquidators, Key Pharmaceuticals Pty Limited, the Commonwealth of Australia and several officers of the TGA. 14 Mr Selim settled his cross‑claim against Key Pharmaceuticals and orders were made dismissing that claim. 15 Mr Selim's cross‑claims against the Commonwealth primarily relate to claims of misleading representations said to have been made by the TGA and other Commonwealth officers during the period prior to the initial suspension of Pan's manufacturing licences in April 2003 and also relating to the TGA's audits of Pan. 16 In the second further amended third cross-claim, Mr Selim seeks contribution pursuant to s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) to the extent of an indemnity for any liability that Mr Selim may have to Pan. 17 In the second further amended fourth cross‑claim, Mr Selim seeks damages against the Commonwealth by reason of the loss said to be suffered by him personally in respect of the diminution in value of his shareholding in Pan. 18 In the alternative Mr Selim seeks, as I have said above, an order pursuant to s 236 of the Act for leave to bring derivative proceedings on behalf of Pan in Pan's name against the Commonwealth. Mr Selim's claims against the TGA officers allege that the officers are guilty of misfeasance in public office. The liquidators are a party to this cross‑claim by reason of the application for leave to bring a derivative action. 19 The Commonwealth filed applications to strike out the two cross-claims made against it. The applications made by the Commonwealth were filed on 12 May 2006, however during argument in Court on those applications Mr Selim amended the cross‑claims and the Commonwealth determined, following those amendments, no longer to press either of the applications to strike out the cross‑claims. Mr Selim has retained solicitors and senior and junior counsel to represent him in the cross‑claims. 20 Zurich's involvement in the proceedings results from its role as the underwriter and issuer of a directors' and officers' liability insurance policy. In early 2004 Mr Selim commenced proceedings in the Supreme Court of New South Wales against Zurich for indemnity in respect of the claims made against him by the liquidators and for his defence costs. Those proceedings were transferred to the Federal Court. They are proceedings under NSD 1603 of 2004 and are apparently to be heard together with the principal proceedings. Zurich has denied that it is liable to indemnify Mr Selim in the insurance proceedings. 21 In early February 2008 the liquidators sought approval of the Committee of Inspection of Pan to engage in settlement negotiations with Mr Selim and a mediation was arranged for mid February 2008. The proceedings were not settled at the mediation, but negotiations continued and were ultimately successful. The Deed of Settlement 22 As a result of the parties' negotiations, the Deed of Settlement was entered into on 15 April 2008. I will refer briefly to the terms of that Deed. 23 The principal terms of the Deed of Settlement for present purposes are to be found in cll 10, 11, 12 and 16. Clause 10 provides for the liquidators, subject to Court approval, to assign to Mr Selim all the causes of action which Pan has against the Commonwealth of Australia arising out of or in any way connected with the matters alleged in the principal proceedings or the cross‑claims against the Commonwealth. Pan, the liquidators and Mr Selim agreed to execute a deed of assignment in the terms set out in the Deed of Settlement. 24 It is not appropriate for me to refer to the monetary terms recorded in c 10 of the Deed of Settlement, however I should refer to cl 10.6, which provides that within seven days of the execution of the Deed, the liquidators are to make an application to the Court seeking approval for the assignment of the causes of action to Pan. 25 The Deed of Settlement provides in cl 11 for Mr Selim to indemnify the liquidators in respect of any costs that may be incurred by them in relation to the cross‑claims against the Commonwealth or otherwise in respect of any cause of action assigned to Mr Selim. 26 There are a number of conditions subsequent set out in cl 10. Other than to say that one of them is obtaining Court approval, I do not consider it is necessary to spell out the remaining conditions subsequent or the various other provisions of that clause. 27 Clause 16 of the Deed of Settlement provides for the parties to keep the terms of the Deed confidential. There are exceptions which are set out in cl 16.2, including the need to make disclosure of the terms of the Deed to the Court on this application. 28 One other provision which is relevant to the present application is cl 17, which provides for an appropriate public announcement of the settlement to be made in due course. 29 The liquidators have obtained the advice of Senior Counsel in relation to the proposed assignment. The liquidators were provided with a joint opinion of Mr John Sheahan, SC, and Mr Scott Nixon. The liquidators determined upon the basis of the advice and the other matters to which I have referred that it is appropriate, subject to the approval of the Committee of Inspection and subject to orders being made on this application, for Pan to assign to Mr Selim the causes of action against the Commonwealth. The Committee of Inspection passed an appropriate resolution at a meeting held on 21 April 2008. The Court's power to give directions 30 Before turning to the question of whether the liquidators have power to assign the cause of action I should deal briefly with the power of the Court to give directions. Since Pan is in voluntary liquidation pursuant to s 439C(c) of the Act, the liquidators may apply to the Court pursuant to s 511 of the Act: (a) to determine any question arising in the winding up of [the]company; or