Attard v James Legal Pty Ltd

Judgment Background 1By Originating Process filed on 27 November 2012 ("Originating Process"), Mr Philip Poat and Petminco Pty Limited ("Petminco") brought an application seeking to set aside a Notice of Rejection dated 22 October 2012 of a claim and accompanying proof of debt ("Proof of Debt") against Pool & Spa Builders (Aust) Pty Limited (subject to deed of company arrangement) ("Company"). The Defendants are the administrators ("Administrators") of a Deed of Company Arrangement ("DOCA") in relation to the Company. I will refer to the application to set aside the rejection of the Proof of Debt as the "Review Proceedings". The Originating Process also seeks to have the Court determine the true relationship between Mr Poat and the Company is that of an employer and employee, rather than there being a relationship by which Petminco was an independent contractor to the Company, and other relief. The Originating Process also sought an order that proceedings in the Local Court at Picton ("Local Court proceedings") be transferred to this Court and considered with the Originating Process. 2By Points of Claim filed on 7 February 2013, Mr Poat in turn identified the issues raised by the Review Proceedings as the application to set aside the rejection of the Proof of Debt; to determine the true relationship between Mr Poat and the Company and determine Mr Poat's entitlement to be paid by the Company. So far as the claim to transfer the Local Court proceedings to this Court is concerned, the Points of Claim also stated that: "... The Plaintiffs' claim that the Local Court matter is an integral part in determining the amount of commission due to the Plaintiffs. The Plaintiffs say that they compromised their claim against the Company to avoid expensive litigation and given the circumstances it would be unjust not to have a determination of the case. The [administrators] have relied on the untested evidence in the Local Court claim of Ray Awadallah to reject the Plaintiffs' Proof of Debt. The Plaintiffs say there was no basis to accept this testimony and the Defendants took no step to verify any of Ray Awadallah[']s evidence. In relation to all of the above [Mr Poat] claim[s] that the [administrators] have acted only in the interests of the Company and at no point acted within the interests of the the [sic] Plaintiffs as a legitimate creditor." 3By a further Interlocutory Process dated 25 January 2013, Mr Poat and Petminco again sought an order that the Local Court proceedings be transferred to this Court and incorporated in the Review Proceedings. 4When the matter was listed before me on 3 December 2012, I directed that there be a separate determination of the application for Order 6 of the Originating Process, namely the transfer of the Local Court proceedings to this Court, and of any application by the Plaintiffs for leave to proceed against the Company as a preliminary question. Since the Company is presently subject to the DOCA, the Local Court proceedings could not be pursued against it without leave to do so being granted under s 444E(3) of the Corporations Act 2001 (Cth). The Plaintiffs initially did not bring such an application. However, I inquired of Mr Poat whether he and Petminco sought such leave and he confirmed that such leave was sought. Ms Thomas and Ms Dulhunty, who respectively appear for the Administrators and the Interested Parties, sensibly did not oppose that application being heard at the same time as the application for the transfer of the Local Court proceedings to this Court. Both the Administrators and the Interested Parties opposed the grant of leave to continue the Local Court proceedings against the Company. The Administrators and the Interested Parties also opposed the application for transfer of the Local Court proceedings to this Court. 5Mr Poat seeks to represent Petminco in the proceedings. Rule 7.1(2) of the Uniform Civil Procedure Rules 2005 (NSW) permits a company within the meaning of the Corporations Act to commence and carry on proceedings in this Court by a director, where the director is also a plaintiff in the proceedings. Mr Poat is a plaintiff in the proceedings, since he seeks review of the rejection of the Proof of Debt. Rule 7.2 sets out certain requirements for an affidavit as to Mr Poat's authority to commence and carry on the proceedings which have not been complied with. However, it is likely that Mr Poat either has, or could readily secure, such authority since his evidence is that he is the sole director of Petminco. The affidavit required under rule 7.2 also requires Mr Poat to acknowledge certain matters as to his potential liability for costs, where he appears for the Company in the proceedings. I drew Mr Poat's attention to the prospect that he might be ordered to pay the costs of the proceedings where he represented the Company in accordance with the principles set out in Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 and May v Christodoulou [2011] NSWCA 75; (2011) 80 NSWLR 462 and Mr Poat acknowledged that matter. On that basis, I considered it appropriate to exercise the Court's power under s 14 of the Civil Procedure Act 2005 (NSW) to dispense with the requirement of r 7.1(2) of the Uniform Civil Procedure Rules on this occasion only. Should Mr Poat in future seek to represent the Company, rather than engaging a solicitor to do so, an affidavit complying with the requirements of r 7.1(2) should be filed. The proofs of debt 6It appears that Petminco originally submitted a proof of debt in May 2012 in the amount of $242,322 relating to services provided to the Company. The relationship between that figure, the amount claimed in the Local Court proceedings and the amount claimed in the Amended Proof of Debt is not clear. 7Petminco then withdrew that Proof of Debt and Mr Poat personally submitted the Proof of Debt in August 2012 which claimed a total of $572,341, in respect of "unpaid commissions, unpaid superannuation and unpaid holiday pay etc as set out in an attachment". That Proof of Debt refers to a shortfall of $21,506 in respect of commission in relation to deals invoiced by Peminco Pty Limited, which appears to be a different entity from Petminco. It refers to another claim in respect of invoices by a second corporate entity, Inexpensive Removals Pty Limited ("Inexpensive Removals") of $3,315, and a claim by Petminco of $4,943. The amount claimed by Inexpensive Removals is also stated, on a different page, as $33,115 rather than $3,315 and the larger figure appears to reflect the calculations set out in the Proof of Debt. There are also claims for holiday pay of $196,496, leave loading of $34,386, redundancy of $42,562, sick leave of $39,299, unpaid superannuation of $229,834 and unpaid invoices of $29,764 (which appears to be the sum of the invoices claimed by Peminco, Inexpensive Removals and Petminco, but adopting the lower rather than the higher figure for the claim by Inexpensive Removals). 8The administrators rejected the Proof of Debt in October 2012. The grounds of rejection included that the contractual relationship was not between Mr Poat and the Company but between the Company and Petminco or another entity, which has since been deregistered; the claims arising before 10 April 2006 were barred by the Limitations Act 1969 (NSW); any unpaid superannuation contributions would have been due to the Australian Taxation Office, rather than to Mr Poat personally; the Company had an offsetting claim in the amount of $27,707 against Mr Poat, arising under a cross-claim brought in the Local Court proceedings; and Petminco had received substantial monies by raising invoices for services including GST, and Mr Poat could not in equity claim as an employee for monies that had already been paid to corporate entities that he controlled as sole director and, in the case of Petminco, as sole shareholder. Mr Poat's evidence 9Mr Poat filed and read three affidavits dated 19 November 2012, 25 January 2013 and 7 February 2013, and the first of those affidavits annexed a substantial number of documents. Mr Poat also tendered a bundle of other documents, which were admitted subject to relevance. 10Mr Poat's evidence is that he submitted an amended proof of claim to the Administrators in July 2012 and that claim was rejected on 22 October 2012. It appears that, in fact, only a proof of debt by Mr Poat has been rejected by the Company's administrators, partly on the basis that Petminco, which had previously lodged but then withdrawn its proof of debt, is the proper claimant against the Company. It is difficult to see that Petminco could succeed in a claim to review in respect of a claim that it has withdrawn. 11Mr Poat's affidavit dated 19 November 2012 also attaches a copy of his Statement of Claim in the Local Court proceedings. Mr Poat gives evidence of various matters that are primarily relevant to the validity of his proof of debt, or possibly the Local Court Proceedings. These include the history of variations of commission rates payable over the period in which he or entities associated with him dealt with the Company and various difficulties in his dealings with the Company, Mr Awadallah and Ms Martinez. Mr Poat indicates that he commenced the Local Court proceedings claiming commissions due and seeking a finding that his position is that of employee and not contractor and notes that the administrators have declined to provide consent to the continuance of those proceedings. 12Mr Poat's affidavit dated 19 November 2012 also identifies several reasons why, he contends, he should be given leave to continue the Local Court proceedings, including that the proceedings deal with the same issues as the Proof of Debt and were commenced before the Company went into administration. The latter proposition seems to be correct, in that the Local Court proceedings appear to have commenced in late 2011, an Amended Statement of Claim was filed on 9 January 2012 and the Company was placed in administration on 10 April 2012. However, these matters do not necessarily favour the grant of the leave sought by Mr Poat. First, it will commonly, if not invariably, be the case that an application for leave to continue proceedings is brought in respect of proceedings commenced before a company went into administration, but the grant of leave to continue such proceedings rather than proceed by a proof of debt lodged in the administration is nonetheless the exception rather than the rule. Second, the fact that the Local Court proceedings, the Proof of Debt lodged with the administrators and the Review Proceedings raise the same issues, and particularly the status of Mr Poat as an employee, highlights the risk of duplication and possible inconsistency of result which arises from taking those steps in parallel. While one means to address that risk is, as Mr Poat contends, to transfer the Local Court proceedings to this Court so that they may be heard with the Review Proceedings, another is to decline leave to continue the Local Court proceedings so that all issues affecting the Company can be determined by the process of proofs of debt in the administration and, if Mr Poat and Petminco consider it necessary, amending the Review Proceedings to address all issues raised by the administrators' decision. 13Mr Poat contends that the Administrators have relied on the Company's Defence in the Local Court to reject his claim and the Proof of Debt and have not given reasons for rejecting the continuance of the matter in the Local Court. The first proposition is, at best, open to question since it seems that the primary basis of the Administrator's rejection of Mr Poat's Proof of Debt is that the relevant dealings were between the Company and corporate entities (including Petminco) rather than between the Company and Mr Poat personally, and that inference could readily be drawn from the fact that the corporate entities invoiced the Company throughout the period without relying on any matter raised in the Local Court proceedings. Mr Poat's affidavit also outlines his criticisms of the Administrator's decision to reject the Proof of Debt, which are matters which will need to be considered in the Review Proceedings in due course. 14Mr Poat's evidence is that the amount claimed in the Local Court proceedings is $93,511, which he indicates was "compromised" to be beneath the jurisdictional limit of the Local Court, and he estimates the total claim (but for that reduction) to be about $125,000. Mr Poat's affidavit indicates that the substance of the claim in the Local Court is for unpaid commissions. The Amended Statement of Claim filed by Mr Poat and Petminco in the Local Court proceedings is also in evidence. They claim payment of monies due on invoices provided to the Company and IFNP that have not been paid, other monies, a determination that commission payable is at the rate of 10% and a determination that the relationship between Mr Poat and the Company is that of employer/employee and that all monies claimed are due to Mr Poat. The amount of the claim is quantified as $93,511 and interest as $5,000, for a total claim of $98,935 including the filing fee. It will be noted that the issue whether Mr Poat and the Company are employer and employee is also raised in the Proof of Debt and in the Review Proceedings. Other evidence 15The Administrators rely on evidence of their solicitor, Mr Philip Stern, who is an experienced practitioner in commercial litigation including insolvency matters. Mr Stern notes that claims are made by Mr Poat and Petminco in the Local Court proceedings against defendants other than the Company, namely Mr Awadallah and IFNP, and expresses the view, based on his substantial experience as a solicitor, that the joinder of those parties in these proceedings would extend the length of the hearing in respect of the Review Proceedings and increase the costs incurred in that application. 16The Interested Parties rely on the affidavit of their solicitor, Mr Glenn Coyne, dated 7 February 2013. Mr Coyne gives evidence of his view that the issues in the Local Court proceedings involve a money claim against the Company for work done, a claim on a guarantee by Mr Awadallah and a separate money claim for work done by the Plaintiffs for IFNP. Mr Coyne expresses the view that the introduction of the different and wider issues in the Local Court proceedings in the Review Proceedings would unduly delay those proceedings, increase their costs and would not, in his submission, be in the interests of justice. Application for leave to continue the Local Court proceedings 17It is convenient first to address the question whether the Court should grant leave to continue the Local Court proceedings against the Company under s 444E(3) of the Corporations Act. If no such leave is granted, and the only parties against whom the Local Court proceedings are continuing are Mr Awadallah and IFNP in respect of the claims against them, then there would be no obvious reason to transfer the balance of those proceedings to this Court to be joined with the Review Proceedings. In that situation, Mr Poat or Petminco would be free, as the Administrators' Counsel has confirmed, to lodge a further proof of debt in respect of their claims brought against the Company for Court proceedings in the administration (to the extent that those claims have not already been raised in the Proof of Debt) and, if those claims were rejected, to seek to have any application for review of that rejection heard at the same time as the Review Proceedings. The claims against the Company would then be determined solely by proof of debt process and any review of the Administrators' decision, including the Review Proceedings, and the claims against Mr Awadallah and IFNP solely by the Local Court proceedings. 18Section 444E(3) of the Corporations Act relevantly provides that a person bound by a deed of company arrangement cannot proceed with a proceeding against a company except with the Court's leave and in accordance with any terms which the Court imposes. It was common ground in the proceedings before me that Mr Poat and Petminco are persons bound by the DOCA. They have proceeded on that basis in lodging their respective proofs of debt with the Administrators, and the Administrators have proceeded on that basis in their rejection of Mr Poat's proof of debt on the basis that Petminco and not Mr Poat is the proper claimant. 19In Meehan v Stockmans Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123, Lehane J considered an application for such leave where proceedings had been commenced before a company was placed in administration and a deed of company arrangement was then executed which bound its creditors. His Honour noted that the applicable principles were those applied by a Court in considering an application for leave to proceed against a company in winding up under s 471B of the Corporations Act, and his Honour referred to the summary of those principles in Ogilvie-Grant v East (1983) 7 ACLR 669 at 672; (1983) 1 ACLC 742. His Honour there held that it was not appropriate to expose the creditors of the company to depletion of the deed fund by a lengthy 5 day trial, where only a modest amount was likely to be available to creditors under the Deed. His Honour summarised the position (at 128) by observing that claims for unliquidated damages for breach of contract are admissible to proof (as, I note, are claims for contraventions of the statutory prohibitions on misleading and deceptive conduct); that such claims commonly involve disputed questions of fact and may involve disputed questions of law and questions relating to the assessment of damages, but that does not mean that such claims fall within an exception such that leave may be granted. 20In JF Keir Pty Ltd v Priority Management Systems Pty Ltd (admin apptd) [2007] NSWSC 748 at [8], Rein AJ (as his Honour then was) summarised the relevant factors as including whether the claim has a solid foundation and gives rise to a genuine dispute; whether the company is insured against the relevant liability; who appointed the administrator; whether the applicant will suffer any disadvantage if leave is not granted; and "whether there are good reasons for allowing a creditor to depart from the general intention of Pt 5.3A, which is that a creditor ought not to be able to take action against a company in such circumstances". 21These decisions were referred to and the factors relevant to the grant of leave under s 444E(3) of the Corporations Act were considered by the Court of Appeal in Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585. Tobias JA noted (at [147]) that a further relevant factor was the funds available to the Company to defend against the litigation. 22Subject to one matter that I will address below, the factors supporting a grant of leave in this case seem to me to be weak. While the Local Court proceedings were commenced prior to the administration and the entry into the DOCA, this is a common situation. The Local Court proceedings involve money claims which are not out of the ordinary in nature and there is no suggestion that the Company is insured against them. To the extent that the claims are brought against Mr Awadallah as a guarantor, their factual basis can be established without joining the Company as party or seeking relief against it. The claims against IFNP appear to be distinct from those against the Company. 23I should note one qualification to that matter, namely that the Company has apparently brought a cross-claim against Mr Poat and Petminco in the Local Court proceedings. I would have been inclined to grant leave for the Local Court proceedings to continue against the Company, unless I was assured that the cross-claim would not be pressed if leave was not granted for Mr Poat and Petminco's claims against the Company to continue. I would have taken that course for the reason identified by Hasluck J in Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 268 at [84]-[85], that the corresponding provision applicable to a company in administration was not: "intended to confer special procedural advantages on a party to litigation which would be the case if a company in administration was able to press a counter-claim against a third party while sheltering behind the temporary immunity afforded to it by a stay of the third party's claim pursuant to s 440D." 24Counsel for the Administrators and Counsel for the Company (now returned to the control of its director) have each offered undertakings on their respective clients' behalf that the cross-claims brought by the Company against Mr Poat and Petminco in the Local Court proceedings will not be continued if leave is not granted to Mr Poat and Petminco to continue those claims in those proceedings. Counsel for the Administrators has not ruled out the possibility of a claim brought against Mr Poat and Petminco in any other forum, but it is not necessary for me to address such a claim, other than to note that the bringing of such a claim may in turn support a future grant of leave for Mr Poat and Petminco to bring a cross-claim against the Company by reference to the reasoning in Mead Corporation v Carbonless Papers (Australia) Pty Ltd to which I have referred above. 25On the other hand, the matters tending against the grant of leave to continue the Local Court proceedings against the Company seem to me to be compelling. I will assume, without deciding, that the Local Court proceedings have a solid foundation, although the evidence before me is not sufficient to establish that matter. Although the extent of any overlap between the monies claimed in the Local Court proceedings and those claimed in the Proof of Debt is unclear, there is no reason why the monies claimed in the Local Court proceedings could not have been the subject of a proof of debt lodged by Mr Poat or Petminco in the administration. While it may be convenient for Mr Poat and Petminco to bring the claim in the Local Court, so far as it overlaps with the claim against Mr Awadallah, that convenience needs to be balanced against the detriment to the Company and its creditors arising from that course. 26Petminco initially, and Mr Poat subsequently, invoked the proof of debt procedures and now bring the Review Proceedings to seek to reverse the Administrators' decision. The conduct of both the Review Proceedings and the Local Court proceedings will expose the Company and its creditors to duplication of costs, and potentially inconsistent outcomes, unless the Court is satisfied that proceedings which would ordinarily be heard in the Local Court should be transferred to this Court to avoid that result. The continuance of the Local Court proceedings will necessarily impose additional costs on the Company and its creditors of being represented in those proceedings while the claims against Mr Awadallah and IFNP are heard. Mr Stern's evidence is that even if the Court were to accede to the application for transfer of the Local Court proceedings to this Court, the additional costs imposed on the Company would be in the order of $10,000 - $15,000. That seems to me a conservative estimate. The deed fund is modest, with the administrators currently holding about $52,500, and it is undesirable that it should be exposed to the costs of duplication arising from the Review Proceedings and the Local Court proceedings. 27On the other hand, if Mr Poat and Petminco are left to lodge a proof of debt in respect of the claims brought against the Company in the Local Court proceedings, the Review Proceedings could readily be case managed to permit any review of a disallowance of that proof of debt to be heard together with the existing Review Proceedings. 28In these circumstances, and on the undertaking of the Administrators and the Company that they will not pursue any cross-claim against Mr Poat or Petminco in the Local Court, I am not satisfied that the Court should grant leave to Mr Poat or Petminco to continue the Local Court Proceedings against the Company. This result will not, of course, prevent Mr Poat and Petminco continuing such proceedings against Mr Awadallah and IFNP in the Local Court. Application for transfer of Local Court proceedings 29In these circumstances, I would not grant the application for transfer of the Local Court proceedings to this Court. There is no advantage in such a transfer, where Petminco has withdrawn its earlier proof of debt; the validity of Mr Poat's Proof of Debt will be determined by the Review Proceedings; Mr Poat and Petminco's claim against Mr Awadallah and IFNP will be determined in the Local Court; and the matters which were previously raised by Mr Poat and Petminco against the Company in the Local Court proceedings may be determined by a further proof of debt, and a review of the Administrators' decision in that regard if necessary. 30I should add that, even if I had granted leave for Mr Poat and Petminco to continue the Local Court proceedings against the Company, I do not consider that the basis for the transfer of those proceedings to this Court under s 140 of the Civil Procedure Act would have been established. That section relevantly provides that: "The Supreme Court may, of its own motion or on an application by a party to proceedings before the District Court or a Local Court, order that the proceedings, including any cross-claim in the proceedings, be transferred to the Supreme Court." 31In Harbourside Catering Pty Ltd v TMG Developments Pty Ltd [2006] NSWSC 631 at [17], Campbell J noted that section was not materially different to former s 145 of the District Court Act 1973 (NSW), and referred to, and agreed with, Bryson J's observation in Sanderson Motors Pty Ltd v Kirby [2000] NSWSC 924 at [4] that: "When asked to exercise this power the Court should, in my opinion, appraise the facts and circumstances of the case before it and consider whether the applicant has shown something which, within the framework of the purposes for which the power exists, is a sound ground or a good reason why an order ought now to be made." 32In the present case, the Local Court proceedings are within its jurisdictional limit, where Mr Poat and Petminco have apparently deliberately reduced the amount of the claim to achieve that result; the proceedings involve a claim that is well short of this Court's jurisdictional limit and do not involve novel issues of principle or law; and the transfer of the Local Court proceedings to this Court would, as I have noted above, impose additional costs on Mr Awadallah and IFNP if they were joined with the Review Proceedings, in which those parties have no legal interest. To the extent that there is a common issue as to whether Mr Poat was an employee or contractor, that issue is better resolved by alternatives other than the transfer of the proceedings to this Court. Orders 33I will hear the parties as to whether Mr Poat and/or Petminco propose to lodge a further proof of debt in the administration and, if so, whether the preferable course is to defer a hearing of the balance of the Review Proceedings so that any application for a rejection of a further proof of debt can be heard together with the Review Proceedings. This application seems to raise discrete issues from any other aspect of the Review Proceedings and, in the ordinary course, costs will follow the event. 34Accordingly, I order that: 1 On the undertakings of (1) Ozem Kassem and Bruno Secatore in their capacity as administrators of Pool & Spa Builders (Aust) Pty Limited ("Company") and (2) the Company that each of them will not pursue any cross-claim against Mr Poat or Petminco Pty Limited ("Petminco") in proceedings 2011/003356856 in the Local Court at Picton ("Local Court Proceedings"), the application under s 444E(3) of the Corporations Act 2001 (Cth) for leave for Mr Poat and Petminco to continue the Local Court Proceedings against the Company be dismissed. 2 The application in paragraph 6 of the Amended Originating Process dated 21 November 2012 for an order that the Local Court Proceedings be transferred to this Court and the Plaintiffs' Interlocutory Application dated 25 January 2013 each be dismissed. 3 Mr Poat and Petminco pay the costs of and incidental to this application. 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: 27 March 2013