Arnautovic v Nichola

Supreme Court of NSW|2009-08-20|Before: Mr J, Barrett J, Austin J, Macready J, White J

CITATION : Arnautovic v Nichola [2009] NSWSC 831

CATCHWORDS : Corporations Law. Application for extension of time under s 588FF(3)(b) of the Corporations Act. Extension granted. No matter of principle.

PARTIES : SULE ARNAUTOVIC AND RODERICK MACKAY AS JOINT LIQUIDATORS OF AUSTRALIAN COAL TECHNOLOGY PTY LTD (IN LIQUIDATION) AND AUSTRALIAN COAL TECHOLOGY PTY LTD (IN LIQUIDATION) v NICK NICHOLA & ORS, MULTOTEC PTY LTD AND METSO MINERALS (AUSTRALIAN) LIMITED AND DAVID BROWN

COUNSEL : Mr J Baird for plaintiffs Mr DR Stack for 3rd defendant

SOLICITORS : Sparke Helmore for plaintiffs Deacons for 3rd defendant

1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1636/2009 SULE ARNAUTOVIC AND RODERICK MACKAY AS JOINT LIQUIDATORS OF AUSTRALIAN COAL TECHNOLOGY PTY LTD (IN LIQUIDATION) AND AUSTRALIAN COAL TECHOLOGY PTY LTD (IN LIQUIDATION) v NICK NICHOLA & ORS, MULTOTEC PTY LTD AND METSO MINERALS (AUSTRALIAN) LIMITED AND DAVID BROWN JUDGMENT 1 This is the hearing of an application by the plaintiffs who are the liquidators of Australian Coal Technology Pty Limited (in liquidation) ("ACT"). They were previously the administrators of the company. The originating process was filed 20 February 2009 and there has been an amended originating process filed 12 June 2009 which seeks an order pursuant to section 588FF(3)(b) of the Corporations Act 2001 (Cth) that the period within which applications under section 588FF(1) of the Act may be made against any of the defendants be extended up to and including 3 September 2009. However, at the conclusion of the hearing the application was amended to extend the time for an order against the third defendant up to and including 16 November 2009. 2 In the originating process there were proceedings against other defendants. The proceedings against the first defendants have been discontinued and the proceedings against the second and fourth defendants were dealt with by Barrett J in Arnautovic & Anor as joint liquidators of Australian Coal Technology Pty Ltd v Nichola & Ors trading as Middletons Lawyers [2009] NSWSC 233. In those proceedings, which were not opposed, his Honour extended the time up until 3 September 2009. Background 3 The first plaintiffs were appointed as joint voluntary administrators of ACT pursuant to Section 436A of the Act on 3 March 2006. On 26 May 2006, at an adjourned meeting of creditors of ACT, the first plaintiffs were appointed as joint liquidators of ACT. 4 The relation-back day for the winding up of ACT was 3 March 2006 which meant that the last day for filing any application under Section 588FF(1) was accordingly 3 March 2009 (per s 588FF(3)). As I have mentioned the application was filed on 20 February 2009 within that time. 5 The liquidators' formal letter of demand in respect of the preference claim which they were considering against the third defendant, Metso Minerals (Australia) Limited ("Metso Minerals") was also given by letter of 20 February 2009 and an email of 23 February 2009. 6 In Sutherland & Anor as joint liquidators of Australian Coal Technology v Hanson Construction Materials Pty Ltd [2009] NSWSC 232, Barrett J determined a separate question as to the solvency of the second plaintiff during the relevant periods. The hearing of the application was on 3 March 2009, barely two weeks after notification of the preference claim by the liquidator. In that case, his Honour held that ACT was insolvent at all times during the period commencing 30 November 2005 ending on 3 March 2006. Subject to certain exceptions, that finding is binding on Metso Minerals if the liquidators institute proceedings for a preference claim. 7 ACT was incorporated on 6 April 1994. ACT was principally engaged in the business of engineering design, construction and testing of coal preparation plants. In the year prior to the appointment of the administrators it had undertaken three significant projects. One of the projects which I will refer to later was a contract on 21 January 2005 with Newlands Coal Pty Ltd as agent for Mount Isa Mines Limited to supply and install a coal preparation plant at the Newlands coal mine near Mackay in Queensland. The contract was for a large sum in excess of $77 million. Considerations of application under section 588FF(3)

8 The relevant principles are conveniently summarised by Justice White in New Cap Reinsurance Corp v Reaseguros Alianza SA [2004] NSWSC 787, where his Honour said, at [52] to [55]: "[52] Austin J summarised the principles upon which the Court's discretion under s 588FF(3)(b) should be exercised. Referring to the judgment of Finn J in Taylor v Woden Constructions Pty Ltd (Federal Court, 23 September 1998, unreported), his Honour said: The following propositions, with which I respectfully agree, emerge from that case:

(a) ordinarily, the issues raised on an extension application are threefold:

(i) the explanation for the delay in bringing the proceedings;

(ii) a preliminary review of merits of the foreshadowed proceedings - that is, an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit;

(iii) whether the likely actual prejudice resulting form the grant of an extension is sufficiently substantial to outweigh the case for granting an extension;

(b) where the liquidator's purpose in seeking the extension of time is simply to put himself into a position where he can properly decide whether or not to bring proceedings, a preliminary inquiry into the merits of any consequent proceedings may not always be necessary.

[53] The principles were also considered by the Court of Appeal in BP Australia Ltd v Brown (2003) 58 NSWLR 322 at 356-358. The Court of Appeal described the question as being what was fair and just in all of the circumstances having regard to factors which include the plaintiff's explanation for delay and whether the defendant would suffer prejudice as a result of the extension, other than the prejudice of being required to repay money if the proceedings succeed.

[54] In assessing what is fair and just in all the circumstances, regard must be had to the reason for the imposition of the limitation period, both as applicable to limitation periods generally and those relevant to s 588FF(3)(b). In Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541, McHugh J at 552-553 identified four broad rationales for the enactment of limitation periods, namely: First, as time goes by, relevant evidence is likely to be lost. Second, it is oppressive, even 'cruel', to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Third, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them Insurers, public institutions and businesses, particularly limited liability companies, have a significant interest in knowing that they have no liabilities beyond a definite period. … The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible. (Citations omitted).

[55] In Itek Graphix Pty Ltd v Elliott (2002) 54 NSWLR 207 at 224, Ipp AJA identified the issue of prejudice as being one which ordinarily should be of paramount importance. But the absence of prejudice is not itself decisive. It is rather a relevant factor to be taken into account in the exercise of the general discretion. ( BP Australia Ltd v Brown at 358). There is an onus on the applicant to show why it is fair and just that the general rule established by s 588FF(3)(a) should not apply." 9 It is clear from this judgment that the Court is required to consider any explanation for the delay in bringing the proceedings and whether the likely actual prejudice resulting from the grant of an extension is sufficiently substantial to outweigh the case for granting an extension. 10 This case is one where the liquidators' purpose in seeking the extension of time is to put themselves in the position where they can properly decide whether or not to bring proceedings and thus a preliminary inquiry into the merits of any consequent proceedings is not necessary. 11 This case is one where the liquidators' purpose in seeking the extension of time is to put themselves in the position where they can properly decide whether or not to bring proceedings and thus a preliminary inquiry into the merits of any consequent proceedings is not necessary. 12 13 Metso Minerals drew my attention to the significance of the three year time limit which was explained in BP Australia Limited v Brown [2003] NSWCA 216; 58 NSWLR 322. They referred to what Chief Justice Spigelman said at paragraphs [109] to [115]: " [109] Indeed, the Parliament went further than the recommendations of the Harmer Report, which proposed a provision in the following terms: "AT8 An application under AT3, AT4, AT5 or AT6 shall not be made by the liquidator after the expiration of three years from the relevant date unless the court, by order, so allows".

[110] As can be seen, further consideration of the issue of timeliness led to the inclusion both of the introductory phrase "may only be made" in s 588FF(3), and also to the stipulation that an application for an extension beyond the three year period should be made within the originally stipulated period. By reason of this significant strengthening of the original proposal, the consideration of the relevant issues in the Harmer Report is not as useful as may otherwise have been the case. That the Parliament went further than this comprehensive inquiry recommended does, however, indicate the weight to be afforded to the policy purpose of encouraging greater expedition in the conduct of a liquidation.

[111] The policy considerations that arise in this context are not dissimilar to those which arise with respect to periods of limitation generally. These were stated by McHugh J in Brisbane South Regional Health Authority v Taylor (1997) 186 CLR 541 at 552-553, in the following terms:

"… Courts and commentators have perceived four broad rationales for the enactment of limitation periods. First, as time goes by, the relevant evidence is likely to be lost. Second, it is oppressive, even 'cruel', to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Third, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them. Insurers, public institutions and businesses, particularly limited liability companies, have a significant interest in knowing that they have no liabilities beyond a definite period. As the New South Wales Law Reform Commission has pointed out: 'The potential defendant is thus able to make the most productive use of his or her resources and the disruptive effect of unsettled claims on commercial intercourse is thereby avoided. To that extent the public interest is also served.' " (References omitted.)

[112] There is, in my opinion, a broader public interest to be served by allowing persons who have had dealings with companies which become insolvent to conduct their commercial affairs with a degree of certainty about their exposure to having past transactions unravelled.

[113] I note the traditional hostility of the common law to the exhumation of bodies which was once described as an "inhuman and barbarous felony". ( Re Haynes' Case (1614) 12 Co Rep 113; 77 ER 1389. See also R v Lynn (1788) 2 TR 733; 100 ER 395; R v Sharpe (1857) 7 Cox CC 214; 169 ER 959.) In this respect, equity followed the common law. (P W Young, "The Exclusive Right to Burial" (1965) 39 Australian Law Journal 50; Beard v Baulkham Hills Shire Council (1986) 7 NSWLR 273 especially at 280.) This policy is informed by considerations of decency and human respect. Nevertheless, in my opinion, there is also a public policy against the disinterring of corporate corpses. Commercial life must at some stage rule off the past and focus energy on the future.

[114] The commercial and economic life of the community is sometimes better served by allowing the loss to lie where it falls, so that all concerned may proceed with a high degree of certainty as to their financial position. The passage of time, even the passage of three years, can be seen to legitimately alter the balance of conflicting interests in this regard.

[115] A creditor or other person who has received the benefit of a voidable transaction is at risk of having to surrender it. The time limit in s 588FF(3) has the effect that at the end of the period of three years, such a person will know whether s/he remains at risk. In a legislative scheme which seeks to balance conflicting commercial interests of this character, that appears to me to be a perfectly reasonable requirement. Those who have an interest, or who represent those who have an interest, to disturb transactions must indicate, within three years, whether they wish to keep open the option of doing so. In this, as in other areas, legal policy favours certainty." Delay bringing proceedings 14 The first matter to be observed, is that the factors which his Honour Barrett J in Arnautovic & Anor as joint liquidators of Australian Coal Technology Pty Ltd v Nichola & Ors trading as Middletons Lawyers decided were appropriate for consideration in the case against the second and fourth defendants (set out in paragraph 14 of his Honour's judgment), are not relevant factors in this case. The delay is due to other reasons that apply in the present case and these reasons are not the liquidators' policy of prioritising work, which concentrated on the larger claims rather then the smaller claims with which his Honour was then dealing. 15 In the present case, it is clear that early in the liquidation the liquidators had identified the relevant payments made to Metso Minerals during the period from 30 November 2005 to 3 March 2006, which is when ACT was deemed to have been insolvent. These payments total $681,701.46. They are now considering whether or not to challenge these payments. The liquidators were then conscious of the three-year limitation period for recovery of preference payments. 16 The reason why the liquidators did not immediately pursue Metso Minerals and the other larger preference claim creditors, was because of the liquidators attempt to pursue a claim by ACT in respect of its contract with Newlands Coal Pty Ltd. Upon the appointment of the joint liquidators as voluntary administrators on 3 March 2006, Newland Coal purported to terminate the contract. They retained a large quantity of goods and equipment delivered to the mine, which the liquidators say, Newlands Coal did not own. The liquidators valued the equipment at $16,658,736. The liquidators proposed proceedings against Newland Coal for recovery or damages for conversion. Some creditors including Metso Minerals had retention of title claims against items of unfixed equipment on the Newland Coal mine site and, accordingly, the liquidators endeavoured to take a united front to recover goods and equipment from Newland Coal. 17 The liquidators proceeded with that course as there was in place an interim short-term litigation funding agreement to allow them to proceed. 18 This was prudent on the part of the liquidators because although they did have funds it would be costly litigation. Cross-examination of Mr Arnautovic, a joint liquidator, in the course of the hearing before me showed that at 2006 the liquidators held funds of $1,424,678; at May 2007, they had $1,900,488; at November 2007, $1,728,089; at May 2008, $2,301,264; and at November 2008, $2,329,787. 19 In a report to creditors of 3 March 2009 the liquidators referred to the claim against Newlands Coal. They referred to the short-term litigation funding agreements and noted they had expired and there had been little dialogue during previous 12 months in attempting to settle the claims against Newlands Coal. They indicated that the claim had not been abandoned and that its continuation would depend upon the success of the preference recovery actions to provide sufficient funds for them to begin that litigation. 20 The liquidators decided to continue the investigation of the present preference claim rather than enlist the support of Metso Minerals and no doubt other creditors in support of the claim against Newlands Coal. 21 It is not clear when the funding ran out, but it was probably in early 2008, since a report to members and creditors of 19 March 2008 states that the liquidator's litigation funding agreements with IMF Australia Ltd had expired and there were no funding agreements in place to pursue Newlands at that time. 22 On the evidence before me, the change in the liquidators' position towards Metso Minerals became obvious in the first demand on 20 February 2009, if it had not become obvious earlier. 23 In the cross-examination of Mr Arnautovic, before me, evidence was given about the arrangements made by the liquidators with Metso Minerals to get their cooperation earlier. It is plain that the liquidators, at that stage, did not make it clear they were considering a preference claim against Metso Minerals. If he had done so the cooperation of Metso Minerals might not have been available. The evidence of Mr Arnautovic was in these terms: Q. The first time you ever made any demand on Metso Minerals was 20 February 2009? A. Correct.

Q. No other earlier payment had been made? A. No.

Q. Notwithstanding you knew about the possibility of a claim for in excess of three years? A. Correct.

Q. It was open to you if you desired to join them to the preference proceedings, wasn't it? A. Yes.

Q. In terms of the level of return to which my clients are concerned do I take the level of creditors of Australian Coal exceed $115 million? A. They are within the vicinity of $170 million.

Q. And the sum sought to be investigated as concerns my client is $680,000? A. Correct.

Q. Have you worked out what the return would be to creditors in terms of cents in the dollar if those sums were recovered from my client? A. I am having a guess, probably .7 cents in the dollar.

Q. Less than a cent? A. That is right.

Q. So this investigation you want to pursue has the possibility of yielding to creditors less than .7 of a cent in the dollar? A. Incorrect.

Q. Why? A. Because of the reasoning in my affidavits as to where we are going, we have embarked on recovery of preference to fund a larger claim in this administration which would see a higher return to creditors.

Q. You are investigating this for the purpose of commencing some other proceedings? A. Being sure we have enough funds to litigate against the coal mine.

Q. Who are you considering suing? A. Newlands Coal a subsidiary of Xstrata Coal.

Q. You entered into an agreement with my client in relation to a potential action with that company? A. We proposed to enter into an agreement.

Q. Was that agreement ever finalised? A. We never commenced the formal claim against Newlands, it is some time now, I believe we got to draft documentation.

Q. What was proposed in there would be a claim made against the coal mine? A. Correct.

Q. Newlands the name of the entity, Newlands Coal Proprietary Limited? A. Correct.

Q. One of the claims involved the recovery of certain goods under a retention of title clause? A. More for conversion.

Q. You are aware Metso Minerals also claimed that it had a retention of title claim as against Australian Coal in respect of certain pieces of equipment? A. Correct.

Q. An agreement was discussed whereby Metso Minerals would forego its claim provided they join with you in taking proceedings against Newlands Coal? A. Correct.

Q. Is that a reason why you didn't pursue recovery of preference payments against Metso Minerals? A. Correct, along with the others who were subject to the extension of time application, Multotec and David Brown.

Q. You wanted their support in relation to a claim? A. For a bigger claim.

Q. You knew if you raised with Metso Minerals the possibility of a claim for the recovery of preference payments they wouldn't assist you in terms of a potential claim against Newlands Coal? A. It was unlikely.

Q. That is why you didn't do anything in relation to the recovery of preference payments, isn't it? A. In relation to Metso?

Q. In respect to Metso? A. Correct.

Q. When the possibility of some settlement along those lines ended you decided to reverse your position and make this application? A. I don't quite understand the question.

Q. In these proceedings you do not assert --? A. Which proceedings?

Q. In which you are giving evidence today --? A. Yes.

Q. It is not asserted you have an entitlement to recover those moneys from my client? A. We have made a claim against Metso, we need more time to ascertain whether there is actually a preference.

Q. You want to investigate whether or not you have an entitlement to bring a claim? A. Correct. Explanation for delay 24 The Liquidators' explanation for the delay was put forward in Mr Arnautovic's affidavit of 27 February 2009 in these terms: "Having considered the practical advantages in taking a united front to recover the goods and equipment from Newlands including costs, I sought cooperation from the second, third and fourth defendants (and others) in bringing a claim against Newlands. Unfortunately, after the interim/short-term litigation funding agreements expired, the litigation funder decided not to continue funding an investigation or a claim against Newlands to recover the unfixed goods and equipment or seek damages for conversion. The liquidation was not sufficiently funded at that time to proceed with the proposed claim against Newlands. I had to reassess my priorities and redirect my attention on other avenues of recovery, in particular, on investigation potential voidable unfair preference claims." 25 Mr Arnautovic's cross-examination reinforced his explanation. Although the change in position may be seen by the defendant as opportunistic and contrary to the position put forward by the liquidators earlier in the liquidation, the liquidators had a duty to pursue the best interests of all the creditors at a time when the funding had expired. 26 I have referred to the level of funding the liquidators achieved earlier in the liquidation. Given the size of the claim, the resources of the proposed defendant and the issues involved it would be likely that the funds held would not have been sufficient to proceed with the claim unaided as the liquidator, Mr Arnautovic says in his affidavit. There is nothing in the material that suggests that the liquidators were acting inappropriately when they pursued the first cause of action. 27 The change of position as a result of the loss of litigation funding may be very opportunistic but it is justified by the liquidators' obligations to pursue the best interests of the creditors. Although some time has passed since the funding became unavailable, I accept the explanation for the delay. 28 Mr Arnautovic's affidavit sworn 17 April 2009 [10] to [23], has identified three issues that will be investigated in the extended time period. The issues generally relate to the reconciliation of invoices and the overall indebtedness of ACT to Metso. In addition, Mr Arnautovic points out that further work undertaken during this time would include a consideration of the Metso Mineral's possible defences. It seems that discussions with Metso in order to obtain further information will not be available. Prejudice suffered by Metso Minerals if leave were to be given 29 Metso Minerals submitted that there was inherent unfairness in the course this liquidation has followed because they did not have an opportunity to participate in the question of solvency that was dealt with in separate proceedings. They submitted that in circumstances where: (a) the payments made to Metso Minerals were known to the liquidators well before the commencement of the preference proceedings;

(b) the liquidators have always had sufficient funds to investigate and bring recovery proceedings against Metso Minerals;

(d) Metso Minerals did not participate in the preference proceedings;

(e) the first time any demand was made against Metso Minerals was by letter (to the incorrect, but related entity) dated 20 February 2009;

(f) Metso Minerals will be bound by the determination made by Justice Barrett in the preference proceedings

it is oppressive and unfair for the plaintiffs to litigate recovery proceedings against them. 30 In addition, in cross-examination it was suggested to Mr Arnautovic that the only purpose for the extension was that they wished to use the usual remedies available to a liquidator, namely, the examination of witnesses and the production of documents, to ensure that they had a good case and thus they would put themselves in a situation of advantage. Given that the law allows this advantage to a liquidator, for good reason, I do not see this as a relevant matter.

Conclusion 31 It is clear that the defendant will suffer the ordinary prejudice of possibly having to pay the monies claimed. Apart from the question of whether there has been a proper explanation for the delay the substantive matter of prejudice put forward was that the defendant effectively did not have the opportunity to participate in the Court's determination of the question of insolvency. 32 In February 2009 the defendant was given two weeks' notice of the change in the liquidators' position before the time for action expired. The preference proceedings on 29 September 2008 were set down for hearing on 3 March 2009 which resulted in the defendant effectively being denied an opportunity to participate in the proceedings. 33 Reference was made to Dywer v R-Jay Pty Ltd [2007] SASC 115. The decision of Justice Debelle supported the proposition that one needed to have all the defendants made aware of the proceedings to determine the question of solvency. The question in that case arose in the context of setting down actions for trial and the need for one defendant to join in and obtain an expert report to resist a determination of insolvency. In that case there were a number of discretionary reasons as to why it was appropriate for his Honour to delay setting a trial date to enable the relevant defendant to participate in the hearing. 34 Bearing in mind that the three year time limited s 588FF(8) on its face must allow for situations where a second action is commenced within time after earlier proceedings have already determined the question of insolvency. The presumption would apply in that case and there would have been no opportunity to participate in the earlier proceedings. 35 There is thus no right to participate although if there are opportunities to allow participation, the Court may structure hearings and join appropriate defendants if there are good discretionary reasons to do so. 36 I note that there are no factual matters advanced to suggest that there would have been a different outcome had the defendant participated in the preference proceedings. 37 For these reasons I do not see this matter as sufficiently prejudicial to incline me to refuse the application. 38 The extension sought is until 16 November 2009. This said to be necessary to allow orders for production of documents and examination of directors. 39 This process will take at least three months as the relevant persons are in Western Australia and there will need to be further time to consider the results with the benefit of a transcript. Taking these factors into account time should be extended to 16 December 2009. 40 I make the following orders:

That pursuant to s 588FF(3)(b) of the Corporations Act the period within application under s 588FF(1) of the Act may be made against the third defendant be extended up to and including 16 December 2009.

That the plaintiffs' costs of this application be costs in the winding up of the second plaintiff and I make no orders as to the third defendant's costs. **********

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