ASIC v Australian Investors Forum

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5164/01 AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION V AUSTRALIAN INVESTORS FORUM PTY LTD & ORS JUDGMENT - APPLICATION BY CASABANCA PTY LTD 1 HIS HONOUR: In this proceeding the Australian Securities and Investments Commission sues five individuals and 23 companies for various forms of relief under the Corporations Act, including orders that four of the individual defendants (Mr Anthony, Mr Lloyd-Cocks, Mr Luvara and Mr Topperwien) be disqualified from managing corporations, compensation orders, and orders that the corporate defendants (with one exception, not relevant here) be wound up under s 461(1)(k) of the Act. The plaintiff's current pleading is its "Further Amended Statement of Claim" ("FASC") filed on 23 October 2002. 2 One of the companies, the 16th defendant, is Casabanca Pty Ltd. Mr Luvara was the sole director of the company. The FASC alleges breaches of various provisions of the Corporations Act by four of the individual defendants, including breaches of ss 180, 181 and 182. Some of the allegations relate to "round Robin" transactions, including a transaction involving Casabanca. After pleading the facts and contraventions concerning each transaction over some 85 pages, the FASC alleges that two of the companies (not Casabanca) are insolvent and should be wound up, and then says: "172. Further, by reason of all the matters pleading above, it is 'just and equitable' that all of the Corporate Defendants, with the exception of Sage, be wound up." 3 Paragraph G of the prayers for relief seeks an order that all of the Corporate Defendants, with the exception of Sage, be wound up pursuant to s 461(1)(k) of the Corporations Act. 4 The proceeding has been in the Corporations List for orders and directions many times over the last year. The Court has made interim asset preservation orders against various defendants including Mr Luvara, on the application of the Commission. The orders against Mr Luvara permit him to pay ordinary expenses up to a stated amount, and also to pay costs reasonably incurred in the proceeding, up to a stated amount which was originally $25,000 and is now $75,000. On 2 November 2001 the Court made orders, including orders under s 1323 appointing Mr Alexander Macintosh to be interim receiver and manager of the property of Casabanca. 5 Mr Luvara and Casabanca retained solicitors to act for them in the proceeding. In April 2002 they replaced their solicitors, engaging Tzovaras Legal to act for them. Tzovaras Legal prepared two documents, each called a "Disclosure Statement and Offer for Costs Agreement". One was expressed to be made to Mr Luvara and was signed by him. The other was expressed to be made to Casabanca and was signed by the firm but not by Casabanca. The omission of a signature on behalf of Casabanca is of no consequence, in my view, because there is evidence that after submission of the document Tzovaras Legal carried out legal services for the company to the knowledge of its director, in circumstances where I infer that the work was done pursuant to the offer document. 6 Subsequently Tzovaras Legal submitted two tax invoices for professional costs and disbursements directed to Casabanca. In fact both of those accounts were directed to "Dominic Luvara Casabanca Pty Ltd", but I am satisfied that Mr Luvara's name was present on the invoices as a point of contact at the company and that the invoices were directed to the company as accounts rendered for work done on behalf of the company. I have reached this conclusion taking into account the fact that other invoices were directed to Mr Luvara alone. The evidence is that Tzovaras Legal allocated costs and disbursements between Casabanca and Mr Luvara personally, and where work was done that was attributable to both of them, the cost of the work was apportioned between them. 7 The first tax invoice was dated 4 June 2002, and the second was dated 22 November 2002. Each invoice was headed "ASIC ats Casabanca Supreme Crt No 5164/01", clearly enough identifying the present proceeding although placing the parties in the wrong order. The first invoice related to the period from 16 April to 30 May 2002, and the second related to the period from 28 May to 21 November 2002. Each of them set out a lengthy narrative account of attendances during the relevant period. The total costs and disbursements were $17,410.68 for the first invoice and $25,700.45 for the second invoice, making a total of $43,111.13. 8 Tzovaras Legal acted on the sale of property owned by Casabanca in North Sydney. Settlement of the sale took place on 20 December 2002, and at that time $132,328.62 was paid by bank cheque in favour of "Casabanca Pty Ltd (Interim Receiver Appointed)" and was delivered to Mr Macintosh. In the course of his receivership Mr Macintosh has acquired other funds. I was informed from the bar table that approximately $500,000 has been paid into court. 9 Tzovaras Legal sought payment of its costs and disbursements of $43,111.13 out of the funds held by Mr Macintosh. He declined to make the payment. When the parties could not reach agreement, a notice of motion was filed by Tzovaras Legal on 20 December 2002, purportedly on behalf of Casabanca, seeking an order that Mr Macintosh pay out of Casabanca's assets a sum of $43,111.12 in respect of the two tax invoices. The present judgment relates to that application. 10 Mr Macintosh makes four points: (a) at no stage did he, as receiver and manager during the whole of the relevant period, instruct Tzovaras Legal to act on behalf of Casabanca; (b) Tzovaras Legal acted for Mr Luvara personally; (c) many of the services carried out, according to the tax invoices, related to matters not connected with the present proceeding; (d) there was no good reason why Casabanca should be represented in the proceeding, having regard to its impecunious financial position. 11 I accept that Mr McIntosh did not give any instructions to Tzovaras Legal. There is no contention to the contrary. That does not necessarily mean that Tzovaras Legal had no authority to act on behalf of Casabanca. The critically important question is whether the appointment of an interim receiver under s 1323 deprived the sole director of the company of all of his management powers, so that thereafter he had no power to instruct lawyers to act on the company's behalf - even for the purpose of defending the proceeding to wind the company up, and even though the appointment of the interim receiver was made by interlocutory application in that very proceeding.

12 Section 1323(1)(h)(ii) authorises the Court, where certain conditions have been satisfied, to appoint a receiver and manager of the property of a body corporate, "having such powers as the Court orders".

13 The powers of a receiver of property of the corporation are also dealt with in s 420. Subsection 420(1) provides: "420(1) Subject to this section, a receiver of property of a corporation has power to do, in Australia and elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objects for which the receiver was appointed."

14 Subsection 420(2) lists some 23 powers covering a very wide range of activities, introducing the list with the following words: "420(2) Without limiting the generality of subsection (1), but subject to any provision of the court order by which, or the instrument under which, the receiver was appointed, being a provision that limits the receiver's powers in any way, a receiver of property of a corporation has, in addition to any powers conferred by that order or instrument, as the case may be, or by any other law, power, for the purpose of attaining the objectives for which the receiver was appointed …".

15 In the present case the Court appointed Mr Macintosh receiver and manager of all of the property of Casabanca, expressly with the powers in s 420(2)(a), (b), (e), (f), (g), (k) insofar as it extends to allow for the execution of any document but not otherwise, (o), (p), (q), (r) and, with the proper leave of the Court, (t). Significantly for present purposes, the Court's order did not extend to the power in s 420(2)(u), "to make or defend an application for the winding up of the corporation".

16 As Lunn A-J remarked of the earlier equivalent legislation in Re Merchant Nurseries Pty Ltd (1985) 10 ACLR 143, at 149, it is difficult to "marry together" the preamble to s 420(2) and s 1323(1)(h)(ii). Section 1323 envisages that the Court will make an order conferring powers on the receiver, and the receiver's powers will be those set out in the order. That is the usual practice of the Court in respect of court-appointed receivers, although it may not strictly be necessary: see James O'Donovan, Company Receivers and Managers (Law Book Company, looseleaf), paragraph [23.20]. Section 420 applies to a receivership created by an order under s 1323: Corporate Affairs Commission (NSW) v Transphere Pty Ltd (1985) 9 ACLR 820; Re Merchant Nurseries Pty Ltd at 149. Section 420(2) gives a receiver of property of the corporation the specific statutory powers listed in the subsection, "subject to any provision of the court order by which … the receiver was appointed, being a provision that limits the receiver's powers in any way". In the present case, it appears that by specifically listing only some of the powers in s 420(2), the Court's order has limited the receiver's powers in respect of the matters listed in s 420(2) but not specified in the order. That being so, the receiver does not have any of the s 420(2) powers that have not been specifically conferred on him.

17 There are some wide statements about the powers of a receiver and manager of the business and property of a company. For example, in Moss Steamship Company Ltd v Whinney [1912] AC 254, a case about a receiver and manager appointed to carry on the business of a brewery for the benefit of debenture holders, Lord Atkinson said (at 263): "The appointment of a receiver and manager over the assets and business of a company does not dissolve or annihilate the company, any more than the taking of possession by the mortgagee of the fee of land let to tenants annihilates the mortgagor. Both continue to exist; but it entirely supersedes the company in the conduct of its business, deprives it of all power to enter into contracts in relation to that business, or to sell, pledge, or otherwise dispose of the property put into the possession, or under the control of the receiver and manager. Its powers in these respects are entirely in abeyance."

18 One would expect the Court, in appointing a receiver and manager to run a brewery business, to ensure that the appointee had plenary powers to do so. In the present case, however, the appointment was an interim appointment to the property of a company that was not a trading company, and the receiver was given limited powers. In such circumstances, the important part of Lord Atkinson's observations is that the appointment does not dissolve or annihilate the company. Given the limited scope of the receiver's powers, it may not be the case that every power of the board of directors of the company has been superseded.

19 There is no direct or close analogy to the position of an interim receiver with limited powers such as Mr Macintosh in the present case. Nevertheless, some assistance can be gained through a comparison of the position of such a receiver and the position of a provisional liquidator, provided that the differences between them are kept in mind.

20 Until the commencement of the Corporate Law Reform Act 1992 in June 1993, the board of directors of a company had a residual power to appeal against the making of a winding up order after it had been made and a liquidator had been appointed. The history of the residual power was examined by Barrett J in Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171. His Honour noted that the power was recognised by the High Court in Robert H Barber & Co Ltd v Simon (1914) 19 CLR 24, and he expressed the opinion that the idea was traceable to Re Diamond Fuel Co (1879) 13 Ch D 400. By analogy, courts have held that directors have a residual power to defend winding up proceedings notwithstanding the appointment of a provisional liquidator: Re Rick Wilson Pty Ltd and the Companies Act (1982) 7 ACLR 354, 355; Re Laverton Nickel NL and Companies Act [1979] CLC [40-519] at page 32,086; see generally James O'Donovan, "Provisional Liquidators: Questions and Answers" (1987) 5 C & SLJ 253, 258.

21 The residual powers of directors, to appeal against the winding up order and to defend winding up proceedings after the appointment of a provisional liquidator, appear to have been abolished by the Corporate Reform Act 1992, which introduced s 471A. So far as the right of appeal is concerned, s 471A(1) and (1A) have the effect that a person cannot perform or exercise a function or power as an officer of the company without the approval of the Court. As to the directors' position when a provisional liquidator has been appointed, ss 471A(2) and (2A) have the same effect while the provisional liquidator is acting. In the Brolrik case, Barrett J reviewed some conflicting authorities on the effect of s 471A on the directors' power of appeal from the winding up order, and concluded that the section had taken away that power unless the approval of the Court was obtained. It is clear from his reasoning that he drew no relevant distinction between the directors' residual power to appeal and their residual power to defend the winding up proceeding after the appointment of a provisional liquidator.

22 I respectfully agree with his Honour's reasoning and conclusions. Therefore the position now is that if the company is in provisional liquidation, the directors cannot act as officers of the company without the Court's approval, and therefore they cannot, without such approval, incur expenses for defending the winding up proceeding.

23 There is no provision equivalent to s 471A in the case of receivers and managers. The reasoning in the pre-1993 cases therefore remains available by analogy. The rationale for the residual power in the case of the company in provisional liquidation appears to have been that it was thought inappropriate to give a provisional liquidator the carriage, on behalf of the company, of the defence to the winding-up proceeding in the course of which he was appointed: Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (No 2) (1984) 2 ACLC 507. It seems to me that the same rationale would point to the existence of a residual power in the present case. In a case where a receiver has been appointed on an interim basis, on the application of the Commission, in a proceeding brought by the Commission for the winding up of the company, it would be inappropriate to give the receiver carriage of the defence to the winding up application. That conclusion is consistent with the general nature of the office of a court-appointed receiver, who is not an agent of either of the parties to the litigation and is generally not required to take an active role as between the parties: Corporate Affairs Commission (NSW) v Smithson (1984) 9 ACLR 371, 377. Since it is not appropriate for the receiver to defend the winding up application, and the company is entitled to put forward a defence notwithstanding the Court's interim orders, it is rational to conclude that there is a residual power in the board of directors to do so.

24 Therefore the absence of any authority from Mr Macintosh to Tzovaras Legal did not deprive the solicitors of the authority to act for Casabanca in its defence. Tzovaras Legal received instructions to act for Casabanca from its sole director, who in the circumstances had the authority to give those instructions. The fact that Tzovaras Legal also acted for Mr Luvara personally did not prevent them from acting for Casabanca. The evidence shows, in my view, that the firm received instructions from both Mr Luvara and the company. The fact that the company was in a poor financial position did not necessarily mean that it was inappropriate for it to defend the proceeding. It was open to Tzovaras Legal to make such financial arrangements as the partners thought fit as to the terms on which it would represent the company.

25 Mr Macintosh's third point (paragraph (c) above) seems to me to have some more substance than the other points. He contends that many of the services carried out by Tzovaras Legal related to matters unconnected with the proceeding. I agree with him that a perusal of the matters itemised in the tax invoices shows that there are some that appear to have no connection with the litigation. On the other hand, other items clearly are related to the company's defence of the proceeding. Further, I see no reason for objecting to the methodology adopted by Tzovaras Legal of apportioning common costs and disbursements to the company and Mr Luvara equally. Therefore this point does not wholly prevent Tzovaras Legal from recovering some payment. The correct approach is to assess which of the items claimed were reasonable costs and disbursements incurred in relation to the company's defence of the proceeding (allowing for apportionment between the company and Mr Luvara of their common costs in relation to the proceeding), and which items related to something else. That will be a task for a costs assessor, unless the parties can reach agreement.

26 Casabanca submits that I should make an order that Mr Macintosh pay Tzovaras Legal's costs and disbursements out of the assets under his control. I have been referred to authorities on asset preservation orders, which are to the effect that a defendant should be allowed a reasonable sum for legal expenses out of the restrained assets, provided the defendant satisfies the Court that it has no other assets from which it could pay these expenses: Atlas Maritime Co SA v Avalon Maritime Ltd; The Coral Rose (No 3) [1991] 1 WLR 917; Clark Equipment Credit of Australia v Como Factors Pty Ltd (1998) 14 NSWLR 552; Commissioner of Taxation v Manners and Terrule Pty Ltd (1985) 81 FLR 131. Consistently with those authorities, on 20 August 2002 the Court made orders which increased the amount permitted to be expended by Casabanca for legal costs (by way of exception to the asset preservation orders) to $75,000, a figure which amply accommodates the amount claimed by Tzovaras Legal.

27 An order authorising the payment of legal costs out of restrained assets is significantly different from an order directing payment of costs out of an identified fund under the control of a receiver. Nevertheless, authority indicates that in a case such as the present, an order of the latter kind may be appropriate. In NMB Postbank Groep NV v Naviede [1993] BCLC 707 Chadwick J held that, where the plaintiff brings an action asserting proprietary claims over assets of the defendant company and obtains an order appointing an interim receiver of the defendant's assets for the purpose of protecting those claims, it may nevertheless be appropriate for the Court to direct the receiver to release funds to permit the defendant to pay for the costs of its defence. His Lordship expressed the view that, since the appointment of a receiver is a discretionary remedy, the terms of the appointment at an interlocutory stage are a matter in the discretion of the Court, and in exercising that discretion the Court may make an order which releases from the receivership funds properly required to prosecute the defence (at 712). The Court's task is to balance the plaintiff's interest in ensuring that assets to which it may ultimately be entitled are not wasted in defending the claims, against the defendant's interest in seeing that the claims are properly defended on their merits.

28 In the present case, it is relevant that the principal claim against Casabanca in the proceeding is a claim to wind it up on the just and equitable ground, having regard to the facts and circumstances concerning every one of the numerous transactions pleaded in the FASC. Given the breadth and seriousness of these allegations, it is clearly appropriate that the company be given an opportunity to defend itself, and it is obvious that a proper defence requires the release of substantial funds. The Court has already determined that legal expenses of up to $75,000 be allowed by way of exception to the asset preservation orders, and consistently with that determination, it seems to me appropriate to determine now that funds not exceeding $43,111.12 be released from the funds retained by Mr Macintosh, to pay such part of the two tax invoices as relates to Casabanca's costs and disbursements in defending the proceeding.

29 My conclusion, therefore, is that Casabanca is entitled to an order directing Mr Macintosh to release, out of the funds under his control, an amount sufficient to meet such of the costs and disbursements claimed in the two tax invoices as are reasonable costs and disbursements relating to the company's defence of the proceeding, such items to be identified by agreement, and in the absence of agreement, by external assessment. I shall direct Casabanca to bring in short minutes of the proposed order.

30 Just as Mr Luvara as the sole director of Casabanca was authorised to instruct Tzovaras Legal to act for the company in defence of the proceeding, so also was he authorised to instruct Tzovaras Legal to make the present application. I shall hear the submissions of the parties to the application as to the most appropriate orders with respect to the costs of the application. **********

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