Australian Broadcasting Corporation v XIVTH Commonwealth Games Ltd

REASONS FOR JUDGMENT This proceeding began in the quite inappropriate form of an application for directions under s 424 of the Corporations Law. It is now conceded to be one in which this court has jurisdiction by virtue of cross-vesting legislation. The application was, during the hearing, amended both to reflect this as also to change the substantial character of the application itself. The proceeding has been prosecuted without pleadings. The consequence has been that the issues raised have gone through a number of mutations. Questions have been raised or flirted with only to be abandoned. It was necessary to insist upon written submissions after the hearing that identified precisely the claims made. The entire process has been an unsatisfactory one responsibility for which must lie primarily with the applicant and his advisers. I would add that not all of the issues raised in the application have been pursued before me. One discrete issue at least will remain for resolution. I am by no means satisfied that it may not cut across the matters I will deal with in these reasons. But if such is the case, it would merely compound the unsatisfactory character of the process so far pursued by the applicant. The Application For present purposes I can describe the central question raised before me as being whether the applicant, Paul A Pattison, had as receiver and manager of the third respondent, Quicknit Pty Ltd ("Quicknit"), a lien or charge over its assets for his remuneration, costs and expenses that had priority over a debenture held by the second respondent, Standby Force Pty Ltd ("Standby Force"). The matter of complication in this is that Standby Force's debenture has priority over that of Sumikin Bussan International (Australia) Pty Ltd ("Sumikin") under which Mr Pattison was appointed and Standby Force thus asserts that Mr Pattison's lien has no priority over its rights to be paid out of Quicknit's assets. Standby Force later appointed its own receiver and manager, the first respondent, David N Lockwood. The Companies, the Charges, and the Receivers The Companies (a) Quicknit carries on business as a knitting mill converting yarn into woven fabric. Its sole director and majority shareholder is Alexander Simos. (b) Standby Force is an investment company. Its sole shareholder and director is Maria Simos, the wife of Alexander Simos. (c) Sumikin was a supplier to, and a trade creditor of, Quicknit. The Charges (i) On 28 November 1989, Quicknit executed a debenture in favour of the National Mutual Royal Bank Ltd ("the NMR Bank") by way of fixed and floating charges over its undertaking and assets. That debenture contained an express crystallisation clause (cl 3(5)) crystallising events (among others) being inability to pay its debts or else the appointment of a receiver (cl 3(1)(f)). It likewise contained a clause restricting the creation of subsequent charges (cl 6) that was notified in the particulars filed with the, then, National Companies and Securities Commission when the debenture was registered. The debenture devolved onto the Australia and New Zealand Banking Group Ltd, as successor to the NMR Bank. It assigned the debenture and the debt it secured to Mrs Simos' company, Standby Force, on 13 November 1996. (ii) On 24 August 1993, Quicknit executed a debenture in favour of Sumikin apparently with the consent of the NMR Bank. The debenture, by way of floating charge, charged the assets and undertaking of Quicknit to secure present and future indebtedness to Sumikin. The charge was registered with the Australian Securities Commission. The Receivers and Managers (a) From at least the middle of 1996 Quicknit had experienced debt problems with Sumikin. Negotiations to resolve its liability with Sumikin having failed, and Quicknit being in default, in a sum in the order of $1.1 million, on 7 March 1997 Sumikin appointed Mr Pattison as receiver and manager of "the whole of the assets and undertaking" of Quicknit. I would note in passing that the effect of the above was that, to the extent the charge held by Standby Force was a floating charge, it became a fixed one on or by 7 March by virtue of its crystallisation provisions. (b) Mr Pattison acted as receiver and manager until 11 August. The basis of his so acting is, as will be seen, at the core of the present dispute. On 11 August Standby Force appointed Mr Lockwood as receiver and manager of Quicknit's assets and undertaking. On 25 August, on the respondents giving various undertakings to the court, Mr Pattison gave Mr Lockwood possession of the assets of the company. It is conceded by the respondents that an effect of the undertakings given to the court was that such lien or charge as Mr Pattison had over Quicknit's assets was not terminated by his giving up possession thereof. A Preliminary Matter Though an issue ventilated at the hearing, it is now conceded as I understand it that the charges held by Standby Force have priority over Sumikin's. I would have to say that, whatever faint argument that may have been available at common law to the contrary, the provisions of the Corporations Law (s 279 and s 280) leave no room for doubt on this matter. Notwithstanding this priority, the initial appointment of a receiver and manager (ie Mr Pattison's) was made by the subsequent chargee, Sumikin. It clearly was the case that Sumikin's so doing did not oust Standby Force's right to make its own appointment. What is surprising, though, is that there has been no particular contest between the parties in submissions as to the scope of the powers possessed by Mr Pattison in virtue of his appointment given Standby Force's priority: cf eg s 420B of the Corporations Law. The respondents have contended that Mr Pattison was entitled to conduct Quicknit's business and sell its assets without the consent of Standby Force, though he would have to pay out the amounts secured by Standby Force's charge. This contention seems clearly wrong: see s 420B of the Corporations Law. The applicant, while disputing he had power to sell without Standby Force's consent, has submitted, in my view quite surprisingly, that "this is not a matter that has any effect on the applicant's contentions". I say no more on this other than merely to note that, as the provisions of s 420B of the Corporations Law suggest, a rather fundamental issue has not been agitated in this matter apparently as a matter of deliberate choice on the applicant's part. Mr Pattison's Appointment and its Aftermath It is necessary to set out these events in some detail. (a) On the day and the day after that of his appointment (7 March 1997) Mr Pattison had discussions with Mr Simos. He (i) was informed that Standby Force now held the prior charge and that that company was controlled by Mrs Simos; (ii) requested that his receivership not be terminated by Standby Force making an appointment; (iii) indicated that he proposed to continue to conduct Quicknit's business, that he was prepared to employ Mr Simos to manage it during the receivership and that Sumikin intended to introduce customers to the business; and (iv) proposed that, given the company's need for working capital, of the cash held by the company ($100,000), $50,000 could be provided to Mrs Simos and the balance retained as working capital. (b) On 13 March, solicitors for Mrs Simos and for Standby Force wrote to Mr Pattison in the following terms (omitting formal parts): "We advise having been instructed by Standby Force that it will consider consenting to your proposal for the continuing conduct of the business of Quicknit and will not appoint its own Receiver, subject to and conditional upon the following terms: 1. Standby Force reserves all its rights on the question of the regularity or otherwise of the appointment of you as the Receivers and Managers of Quicknit. Our clients do not concede that you have been properly appointed and nothing contained in this letter or arising from any further discussions or consents given by our clients should be deemed a waiver or qualification of our clients' position; 2. Sumikin conducts the business of Quicknit and enters into agreements and advances funds entirely at its own risk; 3. (a) A written and open acknowledgment that the secured debt of Standby Force which is calculated at present to be in the order of $280,000.00 is to be collected/received from the assets of Quicknit and will be held by you in trust in a fiduciary capacity for and on behalf of Standby Force and accounted first to Standby Force before any distribution to or on behalf of Sumikin. Particularly, an amount of at least $50,000.00 should be paid to Standby Force immediately from the funds held on deposit by Quicknit with the ANZ Bank; (b) Interest on the balance outstanding and owed by Quicknit to Standby Force to be paid monthly to Standby Force at the rate of 12.5%. The costs of Standby Force should also be reimbursed; 4. None of the substantial assets of Quicknit being principally the plant and equipment of Quicknit will be sold in any form or to any party without Standby Force's consent; 5. Standby Force receives regular (we suggest weekly) written reports from you as to the progress of the business of Quicknit; 6. (a) The basis of charging your and Sumikin's legal, accounting and insolvency costs be at a reasonably agreed level, but in no event on Scale (whether Solicitors' Remuneration Order or Court basis); (b) You are to receive independent legal advice as agent of Quicknit separate to that of Sumikin; 7. A written undertaking that no steps will be taken to act under the alleged guarantees of Messrs Alex Simos and Peter Varagiannis, or on the basis of any alleged breaches of the Corporations Law, without the consent of Standby Force during the agreed term and any extension; 8. A contract of employment be established, upon agreed terms, to retain the employment of Mr Alex Simos at Quicknit for the duration of the term of this agreement; 9. The term of this agreement be for a period of six (6) months from the date upon which an understanding is reached and mutual written consents have been exchanged (subject to our clients' reservations as described in 1). This term might be extended upon mutually agreeable terms; 10. Sumikin will use its best endeavours to introduce profitable business and provide raw materials at commercial rates to Quicknit to enable it to discharge its debt to Sumikin. The raw materials and production is to be funded by Sumikin also at commercial rates; 11. Sumikin will quantify and set out in detail its understanding of the quantum of the debt of Quicknit currently owed to Sumikin and how it is computed, within 14 days of the date of this letter. We are instructed to request your affirmative response to the above matters by 12:00 noon on Friday 14 March 1997." (c) Mr Pattison's reply of 18 March was, relevantly, as follows: "I refer to your facsimile dated 13 March 1997 and our telephone conversation of even date. [The substance of the latter is not in evidence.] For purposes of clarification the Standby Force Pty Ltd amount ("Standby Force amount") shall mean $280,000 plus interest at 12.5% per annum from the date this agreement is deemed to come into force and effect together with your offices reasonable and proper legal costs. Using your paragraph numbering, I comment as follows: 1. Noted. However, in order for any agreement to be reached it is my view that Standby Force Pty Ltd should immediately confirm that my appointment as Receiver and Manager is valid or alternatively immediately raise any issues of concern to me by return facsimile. 2. It will be the Receiver and manager who will be conducting the business of Quicknit and entering into agreements etc in accordance with the powers given to him in the Debenture Charge and appointment documents. 3.(a) Agreed, subject to your client's substantiation of the existence of a valid and enforceable charge in favour of Standby Force Pty Ltd that ranks in priority to Sumikin Bussan (Australia) Pty Ltd. Please forward to me by return facsimile a copy of your clients security documents. 3.(b) Agreed, subject to the inclusion of the words "reasonable and proper" to be inserted before the word costs (line 3). 4. Disagree. Reliance should be placed on the usual practices and duties imposed on a Receiver and Manager by statute and case law. 5. Agreed. 6.(a) It should be limited to the terms of the Debenture Charge. Furthermore the contractual relationships between the parties should not be of a concern to Standby Force Pty Ltd on the assumption that it will receive its monies in full. 6.(b) Please explain any known conflicts. 7. Your request is not unreasonable in the circumstances, subject to the guarantors giving the usual undertakings not to dispose, transfer or deal with any personal assets being divisible property pursuant to the Bankruptcy Act 1966 without the consent of Sumikin which should not be unreasonably withheld. In regard to breaches of the Corporations Law (if any) I cannot be contracted to neglect my duties as required by Section 422 of the Corporations Law. 8. Agreed, subject to Mr Simos satisfying me of his ability to assist in preserving, securing, adding value to and realisation of the assets and to assist in profitable trading all of which to be primarily to the benefit of the secured creditors. An Employment Contract with Mr Simos will be for a period not exceeding three monthly intervals. 9. Agreed, although I would include a clause subject to the early payment of the Standby Force amount prior to the six month period then this agreement is at an end and Mr Simos' future employment renegotiated. 10. Agreed, subject to operations being profitable and the business continuing to be viable. The raw materials (if any) and production where funded by Sumikin are to be at commercial rates. 11. Agreed." (d) On 20 March the solicitors for Mrs Simos and Standby Force replied in turn. "We refer to your letter 18 March 1997. We respond to your paragraph numbering as follows: 1. Solely for the purpose of entering into an agreement with Sumikin and for the duration for which any such agreement may exist, we accept the validity of your appointment as receiver and manager; 2. Your response is noted. 3.(a) We enclose [with the "hard copy" of this letter] a copy of the Deed of Assignment of the security previously held by ANZ, as requested; 3.(b) Agreed; 4. Your response is noted; 5. Agreed; 6.(a) Your response is noted; 6.(b) We understand from Mr Lurie that he recollects you having accepted that you were in a position of conflict during the meeting held on 14 March 1997; 7. Our clients are not able to give any undertakings for the guarantors; 8-11. Agreed. We are instructed to request your affirmative response to the above matters by 4.00pm on Friday 21 March 1997." (e) By letter of 27 March 1997 Mr Pattison responded: "Reference is made to your letter dated 20 March 1997 and our subsequent telephone conversation. [The substance of the latter is not in evidence.] Please accept my apology for my delay in formally responding to you in writing. The contents of your letter are noted. I believe there are some issues which require clarification. In doing so, I use the same numbering pursuant to your letter. Clause 6(b) (A) At the meeting which I attended with representatives of Jarard & Stuk, Solicitors, and representatives of Sumikin Bussan (Australia) Pty Ltd, I did raise the issue of using the same solicitors as those acting for the secured creditors and informed the meeting that were a conflict of interest arose then alternative solicitors would be used. To date, I am not aware of any conflict of interest and as such have the view that if necessary, Coltmans Price Brent, as are any other solicitors, are available to me to use in the course of this administration. If your client has any proper reason to object to me using Messrs Coltmans Price Brent, please advise by return facsimile. Clause 7 (B) I am surprised to receive your response, particularly as it was your office and/or your client who requested Sumikin not to take action under the guarantees against Messrs Simos and Varagiannis. I am advised that if the requested undertakings cannot be given by the guarantors then Sumikin Bussan (Australia) Pty Ltd will not be in a position to give the written undertaking sought by you and advised to me in your facsimile to me of 13 March 1997. As your client is unavailable to give the undertaking for the guarantee as requested then I consider it appropriate that any implied agreement between me and your client should be at the exclusion of your clause 7. (C) In considering your clients claim as a secured creditor, on my reconciliation the amount is $259,976.41 and not $280,000. Please confirm. Please confirm that the above is acceptable. Upon receipt of your written acceptance the necessary process can be implemented to formalise the agreement sought." (f) On 7 April 1997, the Standby Force solicitors replied: "Thank you for your letter 27 March 1997 to which we are instructed to respond as follows: (a) our clients note your assurance that, at this time, you are not aware of any conflict of interest; (b) our clients firmly believe (and we agree with them) that, if any of the guarantees are acted upon, (putting aside the question of their validity or continued existence) this would not only be counter-productive to the conduct of the business but would also work in a negative way in terms of our clients' attitudes, such as to have them regard their responsibilities as being discharged if for any reason the guarantees are acted upon within the agreed 6 month period. You will appreciate the effect of such an act upon the personal circumstances of Mrs Simos. Whilst our clients cannot give undertakings on behalf of others, it is understood that you have in your possession a statement of assets and liabilities regarding Mr Simos which shows negligible assets; (c) we are instructed that the debt, inclusive or interest to the date of this letter is as follows: $259,976.41 at 12.5% per annum, 13.11.96 to 7.4.97, 146 days = $12,998.82. Total to date: $272,975.23." (g) The same solicitors wrote again on 10 April 1997. "We note that we are awaiting your reply, to our letter 7 April. We further note that no payment has yet been effected, and, therefore, the same letter is to be treated as a formal demand for that payment to be made forthwith. We await your most urgent advices, regarding the above." (h) Sometime after receipt of that letter Mr Pattison arranged for $50,000 to be sent to Standby Force and, as far as he was concerned, he "considered that the payment finalised the arrangement between Standby Force and me". (i) Mr Pattison provided Standby Force with a report of his administration to date on 28 May 1997. It is noteworthy for the following. First, in outlining the estimated security position of Standby Force and Sumikin, it provided for the payment of Mr Pattison's costs before payment of Standby Force's debt. Secondly, on the bases both of a sale of Quicknit's business as a going concern and of a forced sale, it projected surpluses (albeit greatly different in size) would be available to pay part of Sumikin's debt. Thirdly, it concluded with the observations: "It is clear at the current production capacity of the company (65) the company is unable to generate sufficient profits to service the debt on monies owing to the first charge holder, Standby Force and on current estimates it is likely that interest will not be serviced in the foreseeable future. It is my view that it is necessary to put in place a mechanism which may result in Standby Force being paid in full and Sumikin receiving a dividend in partial payment of its exposure. I believe that the business should immediately be advertised for sale as a going concern or at worst for asset value on an insitu basis. Clearly for a sale to occur I need your consent as the first chargeholder. I have already discussed with Mr Alex Simos (director) existing options available eg immediately offering the business for sale or seeking equity participation or a joint venture arrangement with major customers." (j) On 8 July 1997 Mr Pattison provided a further report to Quicknit's solicitors. It marked a significant deterioration in Quicknit's position; canvassed six options for Quicknit; and recommended a sale as a going concern. This report was provided as well to Standby Force. (k) A meeting was held on 31 July involving (inter alia) representatives of Quicknit, Sumikin and Standby Force. Some range of options were canvassed to secure a resolution of the matter. Standby Force indicated that if this did not happen that day then it would appoint a receiver. (l) Negotiations continued between the parties until 11 August 1997 when Mr Lockwood's appointment was made. The following day Mr Lockwood was notified by facsimile letter from Mr Pattison that the latter put Mr Lockwood on notice that: "as a consequence of you being appointed as Receiver and Manager over Quicknit by Standby Force, I am exercising a lien over all of the assets of Quicknit to pay the liabilities incurred by me whilst acting as Receiver and Manager of that company since 7 March 1997. Those liabilities include various payments required to be paid by me under Section 433 of the Corporations Law to priority creditors, Receivership creditors and my own fees and expenses." The letter went on to assert that: "Standby Force has in prior correspondence and communications:- (a) accepted the validity of my appointment as Receiver and Manager over Quicknit; (b) accepted my entitlement to charge my legal, accounting and insolvency costs in accordance with the relevant clauses referred to in the Debenture Charge executed by Quicknit in favour of Sumkin; (c) accepted that I would be conducting the business of Quicknit and entering into agreements etc in accordance with the powers given to me in the Debenture Charge and Appointment document; (d) been kept fully informed about the progress of the Receivership, eg Reports dated 28 May 1997, 8 July 1997 and through Alex Simos as the husband of one of the Directors of Standby Force, Maria Simos and also discussions with Messrs Lurie; Romer and Adams." (m) The above evoked a response from Mr Lockwood on 13 August that (inter alia): "We are instructed that at all relevant times, Standby Force Pty Ltd: