The receivers and managers of the respondent do make provision out of its assets for the payment to Bowesco Pty Ltd (Receiver and Manager Appointed) of:
(a) legal expenses reasonably incurred by it in opposing the winding up application brought by the Australian Securities and Investments Commission in WAD 177 of 2006 to a maximum figure of $50,000, the quantum of such payment to be taxed by a Registrar of the Court if not agreed;
(b) legal expenses reasonably incurred by Bowesco Pty Ltd (Receiver and Manager Appointed), in connection with its application, in these proceedings, for the provision of such funds, to a maximum of $7,500 to be taxed by a Registrar of the Court if not agreed
Upon the filing and service by Bowesco Pty Ltd (Receiver and Manager Appointed) of an application seeking an order pursuant to s 1321 of the Corporations Act 2001 (Cth) appealing against the refusal by the receivers and managers of the respondent to make provision for Bowesco's legal expenses in connection with proceedings relating to an option assigned to Bowesco by Westpoint Corporation Pty Ltd, the receivers and managers of the respondent make provision for the payment of Bowesco's reasonable legal expenses in connection with the prosecution of an application for leave to appeal and any consequent appeal from the decision of this Court in Australian Securities & Investments Commission, In the Matter of Richstar Enterprises Pty Ltd v Carey (No 9) [2006] FCA 1425 to a maximum of $50,000, the sum to be paid to be taxed by a Registrar of the Court if not agreed.
The application filed pursuant to the preceding order shall be allocated to a separate court file and a copy of this order and the reasons for judgment placed on that file.
In complying with the preceding orders the receivers and managers of the respondent may make interim payments out of the funds provided from time to time.
The costs of the application are otherwise reserved.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
[2]
WESTERN AUSTRALIA DISTRICT REGISTRY WAD 177 OF 2006
[3]
IN THE MATTER OF BOWESCO PTY LTD ACN 008 915 357
(Receiver and Manager Appointed)
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
[4]
JUDGE: FRENCH J
DATE OF ORDER: 10 NOVEMBER 2006
[5]
The respondent's application for the provision of funding for its legal expenses by its receivers and managers is dismissed.
The costs of the application are otherwise reserved.
[6]
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
[7]
WESTERN AUSTRALIA DISTRICT REGISTRY WAD 152 OF 2006
[8]
IN THE MATTER OF LANEPOINT ENTERPRISES PTY LTD ACn 110 693 251
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
WESTERN AUSTRALIA DISTRICT REGISTRY WAD 177 OF 2006
[11]
IN THE MATTER OF BOWESCO PTY LTD ACN 008 915 357
(receiver and Manager Appointed)
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
[12]
REASONS FOR JUDGMENT ON APPLICATIONS FOR RELEASE OF FUNDS TO DEFEND WINDING UP PROCEEDINGS AND TO PROSECUTE APPEAL AND FOR OTHER PURPOSES
Introduction
1 On 2 June and 28 June 2006 the Australian Securities and Investments Commissions (ASIC) filed applications in this Court seeking orders for the winding up of Lanepoint Enterprises Pty Ltd (Receiver and Manager Appointed) (Lanepoint) and Bowesco Pty Ltd (Receiver and Manager Appointed) (Bowesco). The companies are associated with the Westpoint Finance and Property Group. Lanepoint is a wholly owned subsidiary of Bowesco. Each of them has had receivers appointed under company charges and mortgages. Those appointments form the basis of ASIC's contention that they should be wound up on the grounds of their insolvency.
2 On 30 August 2006 I made orders in the winding up proceedings that the sole director of Lanepoint and Bowesco, Karen Carey-Hazell, be entitled to defend the applications in the name of the companies. I gave liberty to apply on the question whether any of the companies' assets could be applied to the cost of defending those applications.
3 Pursuant to that liberty, Bowesco and Lanepoint, by their common director, Karen Carey-Hazell, have each applied to the Court for orders directing the receiver to make provisions to enable them to meet various legal expenses including the costs of resisting the winding up applications in proceedings WAD 177 of 2006 (ASIC v Bowesco) and WAD 152 of 2006 (ASIC v Lanepoint). They also apply for funding for legal services in relation to the prosecution of an application by Bowesco for leave to appeal against my decision, made on 14 September 2006, relating to Bowesco's entitlement to an option to purchase certain property, which option had been assigned to it by Westpoint Corporation Pty Ltd: Australian Securities & Investments Commission, In the Matter of Richstar Enterprises Pty Ltd v Carey (No 9) [2006] FCA 1242. Pursuant to an order made by Siopis J on 17 October 2006 a motion for leave to appeal out of time and for leave to appeal that decision was referred to the Full Court in the November sittings. The applications also seek orders for the provision of funding for legal services in relation to certain other matters.
4 The applications, insofar as they relate to the winding up proceedings, are made pursuant to the liberty to apply given on 30 August 2006 in those proceedings. The other directions sought, although brought in these winding up proceedings, should properly be the subject of separate substantive applications. I am prepared, however, because of the urgency of the matters and particularly the pending application by Bowesco for leave to appeal in relation to the option dispute, to deal with the merits of those applications in this judgment on the basis that any substantive application should be filed before the orders sought take effect.
5 The Court is asked to make all of the orders sought as an exercise of the power conferred upon it by s 423(1)(b) of the Corporations Act 2001 (Cth) (the Act). That provision allows for a person to complain to the Court about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller's functions and powers. In such a case the Court may inquire into the matter and, where the Court so inquires, it may take such action as it thinks fit. For reasons given below, I do not consider that s 423(1)(b) is an appropriate basis for the orders sought as an incident of the winding up application. Indeed, it seems to have been put forward by Lanepoint and Bowesco as opening a doorway to a broader inquiry into the conduct of the receiverships.
6 The alternative basis upon which the applications rest is s 1321 of the Act. Lanepoint and Bowesco in effect appeal to this Court against the refusal by their receivers and managers to make available, out of the funds under their control, funding for legal representation in the winding up proceedings and for the other purposes to which reference has been made.
7 For the reasons that follow, in my opinion, provision should be made by the receivers and managers of Lanepoint for Bowesco's reasonable legal costs in defending the winding up application brought against it, in meeting the legal costs of this application and in prosecuting its application for leave to appeal. The orders sought by Lanepoint are not acceded to nor the remaining orders sought by Bowesco.
Background history
8 Lanepoint has two sets of receivers and managers appointed under different charges. John Cronin and Shaun Fraser were appointed by Suncorp-Metway Limited (Suncorp-Metway) on 3 March 2006 under a company charge dated 2 May 2005 and a mortgage dated 28 April 2005. They then took possession and control of the charged and mortgaged property. The property affected was described in the charge as "all the undertaking of [Lanepoint] … relating to the development at 61 Great Eastern Highway, Western Australia and 2, 4 and 6 Armadale Road, Rivervale, Western Australia ….". The development in question was a block of residential apartments known as Regent Apartments. The powers of the receivers were widely defined in the charge and include "… any right, power, authority, benefit or remedy of the Bank" under the charge or under legislation.
9 Brian McMaster and Martin Madden of KordaMentha were appointed to Lanepoint as receivers and managers by Perpetual Nominees Limited (Perpetual) on 9 March 2006 under a fixed and floating charge dated 10 May 2005. The property covered by that charge was described as "All the chargor's interest in all of its property anywhere (real & personal & present and future) including its uncalled capital and its called but unpaid capital & all the present and future rights, property & undertaking of the chargor of whatever kind". The powers of a receiver under the Perpetual charge are widely defined in cl 10.3. They have not taken possession of any of Lanepoint's property because of the prior appointment and current incumbency of the Suncorp-Metway receivers and managers.
10 Messrs. Cronin and Fraser were appointed as receivers and managers over property of Bowesco by Suncorp-Metway on 3 April 2006. That appointment was made pursuant to a company charge and a mortgage each dated 8 October 2004. The property covered by the charge was described in it as "… the undertaking of the company and all of its real and personal property and assets both present and future (in both its personal capacity and as trustee) including (without limitation) all of its goodwill, book debts (present and future) and all of its unissued, unallotted or unsold shares and all its uncalled and called but unpaid capital …". Their powers were the same as those conferred on the Suncorp-Metway receivers over the property of Lanepoint.
11 On 20 April 2006 freezing orders were made against Bowesco in respect of its assets pursuant to s 1323 of the Act: Australian Securities and Investments Commission, In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 3) [2006] FCA 433. Those orders were varied on 30 June 2006 and expressed to permit the Bowesco receivers appointed by Suncorp-Metway to exercise their powers pursuant to their appointment including their powers under s 420 of the Act.
12 On 30 August 2006 I made the orders earlier referred to declaring that the sole director of Lanepoint and Bowesco, Karen Carey-Hazell, was entitled to defend the winding up proceedings in the name of the companies. The practical concern relevant to whether Ms Carey-Hazell could defend the winding up applications was whether her exercise of powers in their names would interfere with the legitimate exercise by the receivers of their powers. As Owen J said in Re Geneva Finance Ltd [1992] 7 WAR 496:
'The real question is whether the directors, wishing to exercise a power which they would otherwise have, can do so without prejudicing the legitimate interests of the receiver and the secured creditor in the realisation of the asset.'
The receivers do not oppose the ASIC winding up applications. There was no actual or apparent conflict between their position and Ms Carey-Hazell's proposed opposition. I said (at [24]):
'Absent Ms Carey-Hazell's participation as proposed, there is no contradictor to the winding up application. She asserts that there is a case to be made against the orders sought by ASIC. Quite apart from the question of her entitlement to bring that contention before the Court, it is in the interests of justice that as a director of the company she has an opportunity to make that case if she does so in accordance with the duties imposed upon her by the Act and not, for example, for some collateral purpose. In so doing, it should not be assumed that Ms Carey-Hazell will have any a priori entitlement to resort to the assets of the company for the purpose of funding legal representation in the winding up proceeding. I will, however, allow liberty to apply at the termination of the proceedings in that respect.'
The orders sought
13 The orders sought by Bowesco and Lanepoint in these applications are in identical terms:
'2. The Receivers and Managers of the Respondent be directed to make provision for the funding of legal costs for the purposes of legal advice and representation relating to solicitor/client costs and expenses for:
a. $50,000 for the defence of action WAD 177 of 2006 ("the Bowesco Proceedings") pursuant to Liberty to Apply;
b. $50,000 for the defence of action WAD 152 of 2006 ("the Lanepoint Proceedings") pursuant to Liberty to Apply;
c. $80,000 for an appeal against the decision of Justice French made 14 September 2006 in the Bowesco Option Dispute proceedings in WAD 83 of 2006 ("the Bowesco Option Dispute");
d. $50,000 for advice in relation to the asset preservation proceedings in WAD 83 of 2006 in relation to Bowesco ("the Asset Preservation Proceedings")' and
e. $15,000 for tax advice in relation to Lanepoint;
f. $10,000 for advice in relation to the costs and conduct of the Receivers and Managers of the Respondent; and
g. $7,500 for the bringing and prosecution of this application.
3. The Receivers and Managers of the Respondent be directed to provide the Respondent with a statement of the current financial position of the Company.
4. The costs of this application, including any reserved costs, be paid by the Receivers and Managers of the Respondent.'
Evidence on the applications
14 Ms Carey-Hazell and the companies' solicitor, Mr John Hammond, have sworn affidavits in the winding up proceedings in support of the directions sought against the receivers. Mr Hammond deposed that the companies have been unable to provide funding for the purpose of legal advice in the winding up proceedings as any requests for funding have been refused by the receivers and managers.
15 Ms Carey-Hazell exhibited to her affidavit of 12 October 2006 a letter that she wrote to Mr Fraser, one of the receivers of Bowesco and Lanepoint, on 22 June 2006 seeking funding of $50,000 to enable Lanepoint to defend the winding up application. That request was refused on 27 June 2006. Mr Fraser wrote:
'I advise that all funds received by the Receivers and Managers from Lanepoint have been utilised to pay for the cost of construction of Regent Apartments. The shortfall on construction costs has been funded by my appointor, Suncorp Metway.'
The reference to construction costs was explained in Mr Fraser's affidavit of 27 October 2006. The principal asset of Lanepoint to which the receivers were appointed was a 40 unit apartment development known as Regent Apartments. Suncorp-Metway advanced $355,000 to enable the development to be completed. That occurred on 30 June 2006.
16 On 13 September 2006 Ms Coulson, a barrister acting for Bowesco and Lanepoint, requested funding totalling $140,000 for legal advice in relation to the winding up applications and what was called the "Bowesco Option Dispute". The latter term referred to the proceedings between Bowesco and receivers appointed to Westpoint Corporation over the entitlement to an option assigned by Westpoint to Bowesco. These are the proceedings the subject of a pending application to the Full Court for leave to appeal.
17 Two further letters were sent to the receivers on 18 September 2006, the first seeking an urgent reply and the second correcting a typographical error in the first. The solicitors for the receivers, Allens Arthur Robinson, replied on 21 September 2006. They said in their letter:
'Your letters seek an amount of $140,000 from our clients to enable Ms Carey-Hazell to defend the winding-up proceedings commenced by the Australian Securities and Investments Commission (ASIC) against the Companies. As our clients have previously indicated, they are not prepared to defend the proceedings nor are they prepared to fund the defence of them. To do so would be a breach of our clients' duties to their appointor, Suncorp-Metway Ltd (Suncorp) and the other debenture holder. Our clients are obliged to protect the interests of Suncorp and the other debenture holder. In circumstances where the Companies remain indebted to Suncorp and the other debenture holder, our clients cannot be required to provide funds to your client in priority to the secured creditors.'
18 On 25 September 2006 Ms Carey-Hazell wrote to the Bowesco receivers claiming that they had for many weeks been in funds in excess of the amounts owed to their client and had not yet repaid them. She also pointed out that any tax liability in relation to Bowesco would be dealt with by its directors after the receivership was "withdrawn". By a further letter dated 26 September 2006 she sought "an itemised statement of the costs and expenses of the receivership in the case of both Lanepoint and Bowesco". The Bowesco receivers responded on 4 October 2006. Mr Fraser observed that Bowesco remained indebted to Suncorp-Metway for approximately $1.5 million plus interest accrued during September 2006 owing as a result of Bowesco's obligations pursuant to a guarantee which it had granted to Suncorp-Metway in relation to Lanepoint's indebtedness to that company. Mr Fraser also said that he intended to account to the Deputy Commissioner of Taxation in relation to the receiver's estimates of the tax payable on profits generated by their realisation of any assets during the receivership. He also relied upon the solicitors' response in relation to the request for legal funding. The sequence of correspondence described in the affidavit of Ms Carey-Hazell was not in dispute.
19 On 6 October 2006 a letter was sent to the Lanepoint receivers on Lanepoint letterhead. It was signed by someone on behalf of Ms Carey-Hazell, advising that LG Accounting Solutions had been appointed Tax Agents for Lanepoint. The letter requested funding of up to $10,000 to enable LG Accounting Solutions to complete and lodge all outstanding Australian Tax Office reporting requirements. This request was also refused by Mr Fraser on behalf of the Lanepoint receivers.
20 By an affidavit sworn on 27 October 2006 Robert Gannon, the manager of Credit-Recovery for Suncorp-Metway, described the history of the grant of facilities to Bowesco and Lanepoint and of their defaults leading to the appointment of the receivers and managers.
21 On 8 October 2004 Suncorp-Metway advanced approximately $1,530,000 to Bowesco to enable it to refinance existing loan facilities with the Adelaide Bank and with Westpoint Corporation. The advance comprised:
An interest only loan for a limit of $1,428,000.
A principal and interest loan for $102,000.
Bowesco provided, by way of security, a real property mortgage over land comprised in two titles and a company charge. Both were dated 8 October 2004. The "Moneys Secured" were defined in each security as "all money which has or may become due, owing or payable" by Bowesco to Suncorp-Metway.
22 On 28 April 2005 Suncorp-Metway granted Lanepoint financial accommodation of $5,875,900. The facility allowed for an initial drawdown of $2,900,000 to assist in the purchase of property on Armadale Road, Rivervale, an advance to a maximum of $2,300,000 for the cost of constructing 40 residential apartments on the property and other advances for contingencies, capitalisation of interest and fees and GST payments. The advances were secured by a mortgage over the property and the company charge. Again the "Moneys Secured" were defined as "all money which has been or may become due, owing or payable" by Lanepoint to Suncorp-Metway.
23 Bowesco provided a guarantee dated 28 April 2005 whereby it guaranteed to Suncorp-Metway the due and punctual payment of the moneys owed by Lanepoint to Suncorp-Metway.
24 On 9 February 2006 Suncorp-Metway gave Lanepoint a notice of default. GST Companion Facility repayments due on 31 December 2005 and 31 January 2006 had not been paid. An agreed Interest Capitalisation Limit had been reached and interest accrued on that limit had not been paid under the terms of the original Letter of Offer to Lanepoint. The amount of interest due was $233,943.47 (including capitalisation). Of that sum $29,943.47 was payable on 31 January 2006 and was not paid. Suncorp-Metway received no reply to its notice of default and appointed the receivers and managers to the property of Lanepoint covered by the mortgage and the charge. As of 27 October 2006 Lanepoint remained indebted to Suncorp-Metway in the sum of $1,578,507.67, according to Mr Gannon. This included interest of $14,759.21 accrued but not yet debited to the Lanepoint facility.
25 On 15 March 2006 Suncorp-Metway sent a notice of demand to Bowesco seeking payment pursuant to its guarantee of $5,298,839.50, the amount then owing by Lanepoint. No payment was made as demanded. Suncorp-Metway appointed its receivers and managers to Bowesco on 3 April 2006 under the Bowesco mortgage and charge. According to Mr Gannon, Bowesco remains indebted to Suncorp-Metway in the amount, also still owing by Lanepoint, of $1,578,507.67. In addition, Bowesco is indebted to Suncorp-Metway in the amount of $50,000 in respect of receivers' fees and expenses incurred by Suncorp-Metway in the receivership of Bowesco. It appears that the original Bowesco debt to Suncorp-Metway has been satisfied out of the sale of the liquor store.
26 Mr Gannon said that Suncorp-Metway does not consent to the assets secured by its mortgages and charges over Lanepoint and Bowesco's property being returned to the companies while they remain indebted to Suncorp-Metway. The documents, including the mortgages, charges and guarantee referred to in his affidavit, were exhibited to it. I accept his account of the history of dealings which was not in dispute. There is no basis in these proceedings to go behind the validity of the appointment of the receivers and managers.
27 Mr Shaun Fraser swore two affidavits, one on 27 October 2006 and the other on 30 October 2006. These were relied upon by the receivers. The first affidavit deposed to the applications to Bowesco and Lanepoint. Mr Fraser listed secured creditors, other than Suncorp-Metway, with claims to the assets of Lanepoint. They were:
[13]
Associate:
Dated: 10 November 2006
Counsel for the Applicant: Mr CM Slater
Solicitor for the Applicant: Australian Securities and Investments Commission
[14]
Counsel for the Receivers: Mr GM Abbott
Solicitor for the Receivers: Allens Arthur Robinson
Counsel for the Respondents: Mr NDC Dillon
Solicitors for the Respondents: Hammond Worthington
Date of Hearing: 30 October 2006
Date of Judgment: 10 November 2006
Parties
Applicant/Plaintiff:
Australian Securities & Investments Commission; In the Matter of Lanepoint Enterprises Pty Ltd ACN 110 693 251
Bowesco on the basis of its claim to be subrogated to the Lanepoint mortgage and charge to the extent of $972,749 applied from its assets in part satisfaction of its liability under the guarantee.
Perpetual, which is a subsequent debenture holder over Lanepoint for a sum estimated, according to Mr Fraser, to be in excess of $6 million. That security was said to be held by Perpetual as custodian for, and agent of, Westpoint Management Ltd (In Liquidation) (Receivers and Managers Appointed) as the responsible entity of the Westpoint Income Fund. Perpetual has appointed Messrs McMaster and Madden as receivers and managers of the assets for Lanepoint secured by the Perpetual debenture. Having regard to the prior appointment of the Suncorp-Metway receivers they have not entered into possession of the property at this time.
I might add on this point that there is a degree of uncertainty and dispute about the extent of the liability to Perpetual. Lanepoint disputes that the debt is in excess of $6 million as suggested by Mr Fraser. However, the best case scenario acknowledged by counsel for Lanepoint and Bowesco was an exposure of $2.2 million. The receivers of Lanepoint propose to remit any surplus funds to the secured creditors of the company.
28 The principal assets of Bowesco were retail premises at Warnbro, previously operated as a liquor store and other property at Forrestfield leased to Woolworths, which operates a petrol station from them.
29 The receivers and managers, with funding assistance of $355,000 from Suncorp-Metway, completed the Lanepoint Regent Apartments development. As at 27 October 2006 they had sold 36 units, realising $9,310,250 less expenses, GST and sales commissions. As at 24 October 2006 they held the sum of $4,902,612.31 in interest bearing deposits. That sum, they said, was to be applied to:
The repayment of $1,578,507.67 to Suncorp-Metway.
Provisions to cover contingent debts arising from the conduct of the receivership being:
(a) legal fees and other costs which may be incurred in relation to litigation threatened against the receivers and managers by Mr Norman Carey - $650,000;
(b) GST payable by the receivers - $45,173;
(c) income tax payable by the receivers - estimated $1,500,000;
(d) other costs arising from the receivership estimated at $260,000.
Any balance would go to the other secured creditors including, no doubt, Bowesco. Mr Fraser said that, based on his experience as an insolvency practitioner and his involvement in proceedings in the Supreme Courts of Western Australia and New South Wales and the Federal Court, his estimate for legal fees and associated costs was reasonable.
30 In relation to Bowesco, the receivers hold the sum of $6,804.78 in interest bearing deposits. Suncorp-Metway is presently owed $50,000 by Bowesco. Other contingencies for which provision is being made comprise legal fees arising out of apprehended threats of action, again in the amount of $650,000, income tax payable by the receivers of $1,200,000 and other receivership costs of $120,000.
31 The property of Lanepoint covered by its charge to Suncorp-Metway was:
'All the undertaking of the Mortgagor relating to the development at 61 Great Eastern Highway, Western Australia and 2, 4 and 6 Armadale Road, Rivervale, Western Australia … including without limitation the project property, building materials and equipment, permits, approvals, architectural drawings, plans and specifications, sale contracts and all other documents, rights and assets used for or in conjunction with such project whether owned at present or acquired in the future for such project.'
32 The powers of Suncorp-Metway under the charge in the event of a default are set out at cl 17.2. It has the power of an "absolute owner of the Mortgaged Property" and may exercise any of a non-exhaustive list of powers specified in that sub-clause. Clause 17.3 states that:
'The intent of this Part 17 is to give the Bank very wide powers and:
(a) to allow the Bank to do anything in respect of the Mortgaged Property that the Bank could lawfully do if it owned the Mortgaged Property that the Bank could lawfully do if it owned the Mortgaged Property or the Mortgagor absolutely; and
(b) exercise any Power at any time after an Event of Default.'
A receiver can, with the consent of the Bank, exercise any of its powers. This appears from cl 18.5 read with the definition of "Powers" in cl 1.
33 Provisions similar to those in the Lanepoint charge appear in the Bowesco charge. That charge covered:
'… the undertaking of the Mortgagor and all of its property, rights and other assets, whether owned at present or acquired in the future, including without limitation the goodwill of its business and its uncalled and called but unpaid capital.'
34 In his affidavit of 30 October 2006, Mr Fraser explained his apprehension of litigation against the receivers by Lanepoint and Bowesco. He relied upon letters written by Clavey Legal, the former solicitors for the companies, sent to his solicitors and to himself. He also deposed to a meeting held on 7 June 2006 at which Mr Norman Carey, the principal of the Westpoint Group and the brother of Karen Carey-Hazell, said it was inevitable that there would be litigation against the receivers in relation to the Lanepoint and Bowesco receiverships. The letter from Clavey Legal dated 13 April 2006 reserved the right of the directors of Lanepoint to claim against its receivers for loss and damages incurred in connection with the sale of the Regent Apartments. A second letter dated 19 April 2006 to the receivers of both Lanepoint and Bowesco expressed concern by the "Boards of Lanepoint and Bowesco" about the conduct of the receivers. It reserved all rights to seek compensation for losses arising from the sale of Regent Apartments.
35 I accept that the receivers had a realistic apprehension that the directors of Lanepoint and/or Bowesco might institute proceedings against them in relation to their conduct of the receivership. Even if meritless, such proceedings would involve them in incurring legal costs which might not be recoverable against the companies or other parties.
36 Ms Carey-Hazell, in her affidavit of 12 October 2006, relied upon earlier affidavits sworn by Mr Raymond Ellis on 4 and 10 August 2006. She claimed that Bowesco was not at any time in default of the Bowesco loan. Indeed, as appears from Mr Gannon's affidavit the notice of default against Bowesco related to its failure to meet a demand under the Lanepoint guarantee rather than a default under its own loan. The moneys owing pursuant to the guarantee demand became moneys secured under the charge having regard to the wide definition of moneys so secured.
37 Ms Carey-Hazell complained that Suncorp-Metway had failed to attend at a settlement of the sale of the Warnbro liquor store. Mr Gannon said that Suncorp-Metway was advised, on 28 March 2006, of a settlement to take place on 3 April 2006. Suncorp-Metway wrote to the settlement agent on 31 March 2006 advising that it would release its securities if provided with a bank cheque for a sum not less than $2,496,230.49. It also sought confirmation that the sale could be completed despite freezing orders applicable to Bowesco's assets. No reply was received to that letter. Nothing would seem to turn on this as the basis upon which Suncorp-Metway appointed its receivers and managers originated in Bowesco's failure to honour its obligations under the guarantee to meet Lanepoint's indebtedness.
38 Ms Carey-Hazell pointed out that Lanepoint still owns land at Rivervale which is Stage 1B and Stage 2 of a proposed development. It wishes to proceed with that development for the benefit of Bowesco. That land is evidently not the subject of the Suncorp-Metway charge. I am in no position to make any judgment about the likelihood of that contention coming to fruition. This land, however, is apparently subject to the Perpetual charge.
Statutory bases for the orders sought
39 In submissions on behalf of Lanepoint and Bowesco reliance was placed on ss 180 and 181 of the Act which set out the general duties of directors and other officers of corporations. It was pointed out that a receiver and manager of the property of a corporation falls within the definition of "officer" in s 9 of the Act and so attracts the duties under ss 180 and 181. Whatever the application of ss 180 and 181 to receivers and managers, it is plain that their primary duty is to the mortgagee under the mortgage or charge in respect of which they have been appointed. Sections 180 and 181 do not mitigate that duty nor lower the threshold at which it might be said that they are in default of a duty of care to the corporation. It does not seem to me, however, that there is evidence of any failure of duty under ss 180 and 181 having regard to the material set out in the receivers' affidavit. That is not to say that the decisions are not otherwise reviewable.
40 Section 423(1)(a) of the Act provides for a process of inquiry by the Court where it appears to the Court that a controller of property of a corporation has not faithfully performed, or is not faithfully performing, the controller's functions. Section 423(2)(b) allows an inquiry upon a complaint by a person to the Court. Either process requires a substantive application. The orders sought, by minute filed at the commencement of this application and of which the receivers had notice, did not in terms seek an inquiry. The s 423 pathway was raised in the course of submissions. It seems to have been advanced by counsel for Lanepoint and Bowesco as an appropriate pathway because it would open the door to an inquiry about the underlying basis for the receivers' refusal to make available the funding requested. In my opinion, however, these proceedings are not the proper vehicle for that process. It is one which should be instituted in the proper way and on proper notice to the receivers. It is not appropriate to what is essentially a summary application. I am not prepared to act under s 423.
41 Section 1321 of the Act provides that:
'A person aggrieved by any act, omission or decision of:
…
(b) a receiver, or a receiver and manager, of property of a corporation; or
…
may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit.'
It seems to me that it is open to treat the present applications as appeals against the refusals by the receivers and managers of Lanepoint and Bowesco to make provision out of the funds of those companies for the purposes sought by Lanepoint and Bowesco. I propose therefore to deal with the applications for orders on that basis.
42 So far as the orders sought go beyond those properly the subject of the liberty to apply given on 30 August 2006, they should be sought under a separate substantive application to this Court by way of appeal against the receivers' decisions refusing funding. In view of the urgency of the appeal matter I will deal with that on its merits here. I would however require, as a condition of any orders in favour of Lanepoint and/or Bowesco in this connection, that a separate application be filed pursuant to s 1321 setting out the orders sought. I am not prepared to entertain in these proceedings any application for the other funding which is mentioned in the minutes which have been filed.
Whether the orders sought should be made
43 There were two elements underpinning the decisions by the receivers and managers to refuse funding that formed the basis of the companies' challenge. In each case the receivers justified their refusal by reference, inter alia, to a need to make provisions against certain contingencies. The companies said these were provisions they were not entitled to make and absent which there could be no proper basis for the receivers and managers to refuse to make funding available to advance the legitimate interests of the companies. That is to say, absent the contingency provisions there would be a notional surplus from which the sums sought could safely be made available to the companies.
44 The provisions in question were:
The sum of $650,000 reserved against the possibility that the receivers and managers would incur legal costs in defending proceedings brought against them by the companies in connection with their administration.
$1.5 million for potential tax liabilities of Lanepoint and $1.2 million against the potential tax liability for Bowesco.
45 In connection with the provision for apprehended legal expenses, I am satisfied that a clear threat of litigation was made in relation to the Lanepoint receivership. It appears to have focussed on the way in which the Regent Apartments were sold. The threat with respect to the Bowesco receivership was of a somewhat vaguer character and perhaps difficult to take seriously.
46 The first objection to the receivers' provision against apprehended legal costs was that such a provision was prohibited by s 199A of the Act. Section 199A(3), read with s 199A(2), prohibits provision to a person, by a corporation, of an indemnity against legal costs incurred in defending proceedings in which that person is found to have a liability owed to the company or a related body corporate. That does not prevent a company from indemnifying a person against legal costs incurred in successfully resisting proceedings brought against that person and arising out of an asserted liability. Nor would it, in my opinion, prevent a company from making provision for such purpose. For that reason alone, I do not think that s 199A assists Lanepoint and Bowesco in this case. There is a separate question about the application of s 199A to receivers' liabilities in any event, but it is unnecessary to decide that here.
47 The general entitlement of a receiver appointed under a charge to deduct and retain, out of the funds realised, costs, charges and expense incurred in the realisation was asserted as a matter of general principle in Moodemere Pty Ltd (In Liq) v Waters [1998] VR 215 at 222 (Murphy J) and 229 (Tadgell J). In Nicobar Pty Ltd v Abrokiss (2003) 48 ACSR 259, Young CJ said (at [60]):
'The general rule is that where a person who is a fiduciary or an officer of the court produces a fund through his own effort, he is entitled to an equitable lien over the fund in respect of defending himself against claims made against him for what he did in producing the fund.'
His Honour, however, was not prepared to accept that an equitable lien might exist in the case of a privately appointed receiver, saying (at [62]):
'Although the scope of equitable liens is wide and the boundaries are flexible, and although a receiver appointed out of court owes fiduciary duties both to his appointor and perhaps also to the mortgagor, I do not consider that the principle applies to receivers appointed out of court. If this were not so, there would be little point in the authorities continuing to emphasise the fact that the receivers in the successful cases of lien were receivers appointed by the court.'
His Honour referred to O'Donnell, Company Receivers & Administrators at [12.109] (Update 40) and Harris & Lewin Pty Ltd (in liq) v Harris & Lewin Agents Pty Ltd (1975-76) CLC 40-216. He further observed that (at [64]):
'The receiver is usually the agent of the mortgagor company and may have a lien against the assets of the company, but this will not normally have force against a secured creditor.'
48 It may therefore be questionable whether a receiver appointed out of court has an equitable lien against the charged funds which can take priority over secured creditors. That does not however exclude the right of the receiver, subject to the terms of the appointment and the relevant charge from claiming an indemnity out of the fund of the company for the costs of unsuccessful actions brought against him by the company. Here, at least in the case of Lanepoint, the company itself has threatened the receivers and managers with proceedings. It can hardly complain that they make provision to meet that threat out of the charged funds at least if such proceedings are instituted and turn out to be unsuccessful. There is no point in speculating on the possibility of professional indemnity insurance as counsel for the companies endeavoured to suggest at one point. That does not go to the entitlement of the receivers and managers to make provisions for expenses incurred by them in connection with their receivership which would extend to the defence of unsuccessful proceedings instituted against them by the company in connection with their conduct of the administration.
49 In my opinion it was within the power of the receivers and managers in this case to retain a provision out of the fund charged against the threatened legal action by Lanepoint and by Bowesco.
50 The nature of the threats gave little indication of the scope of any proceedings that might be brought. It may reasonably be anticipated however, that any such proceedings would involve commercial litigation of some complexity. It is common knowledge that such litigation is very expensive. The sum of $650,000, while it seems high, cannot be faulted on the basis that it reflects some error in principle on the part of the receivers and managers. It was not said by the companies to involve any gross over estimate. There is, however, an element of risk assessment involved in making such a provision. There is also necessarily an element of error in endeavouring to predict the extent of potential exposure. Where the likely error range would easily encompass the quantum of funding sought by the company for a legitimate purpose in its own interests, then a question arises whether the refusal to make such funding available is reasonable. In my opinion, there was sufficient flexibility in the range of a reasonable provision against threatened legal action to accommodate at least part of the amount sought for the cost of defending the winding up proceedings and the reasonable costs of Bowesco in prosecuting the appeal.
51 The second provision objected to was that made against tax liability. It was submitted by Lanepoint and Bowesco that no such provision needed to be made as the receivers were under no duty to make it. Mr Ellis, in an affidavit sworn on 30 October 2006, exhibited a letter of advice from Lanepoint's tax accountant that no tax liability is expected to accrue in relation to the income tax year ended 30 June 2006 and that on present indications there will be no taxable income for the year ended 30 June 2005. However, the relevant concern is that of tax liabilities incurred through the administration of the receivership by the receivers and managers including, in particular, the sale of assets.
52 There was considerable debate about the position of receivers under provisions of the Tax Administration Act 1953 (Cth) and the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). Mr Abbott, for the receivers, referred to s 254 of the ITAA 1936. That section provides, inter alia, that agents and trustees shall be answerable as taxpayers for the doing of things required to be done by virtue of the ITAA 1936 in respect of the income, or any profits or gains of a capital nature, derived by them in their representative capacity or derived by the principal by virtue of the agency and for the payment of tax thereon (s 254(1)(a)). They are authorised and required to retain from time to time out of any money which comes to them in a representative capacity sufficient to pay tax which is or will become due in respect of the income, profits or gains (s 254(1)(d). They are also made "personally liable for the tax payable in respect of the income, profits or gains" to the extent of any amount retained or which should have been retained under par (d).
53 The Lanepoint receivers and managers contended that in the course of their duties they had sold units in the Regent Apartments development. As a result of that they generated income. So far as Bowesco is concerned the same proposition arose because the receivers and managers sold the liquor outlet and derived a capital gain. Their concern was that they would have a personal liability for taxes accrued in the course of their receivership as a result of which they were entitled to make contingency provisions for the payment of those amounts.
54 In response counsel for the companies, in a submission lodged after the hearing, referred to s 260 of Schedule 1 to the Taxation Administration Act and more particularly to s 260-75 entitled "Receiver's obligation". Section 260-75 imposes an obligation on receivers to give written notice of the fact that they have taken possession of the company's assets to the Commissioner. The Commissioner is required then to notify the receiver of the amount that the Commissioner considers is enough to discharge any tax related liabilities that the company has. The receiver must not, without the Commissioner's permission, part with any of the company's assets before receiving the Commissioner's notice.
55 In a subsequent email submission dated 8 November 2006, counsel for the companies attached a copy of Taxation Ruling IT 2544. This ruling relates to the application of ss 254 and 255 of the ITAA 1936. It focussed on s 255 which authorises and requires persons having the receipt, control or disposal of money belonging to a non-resident to retain enough to pay the tax which is or will become due by the non-resident. It also applies to s 254 which is said to cover receivers in their capacity as agents or trustees. Paragraph 13 of the ruling states that the Australian Taxation Office (ATO) will not regard a person as being required to retain moneys for the payment of a non-resident's tax unless the ATO has notified the person to retain a certain amount or percentage of the moneys belonging to the non-resident. Having received such a notice it would be open to the person to seek further advice from the ATO of the amount to be retained.
56 The implication from counsel's reliance upon this ruling seems to be that, absent notice of an amount to be retained, there was no obligation on the receivers to retain any amount. In a letter from Allens Arthur Robinson, on behalf of the receivers in response to those submissions, it was put that Ruling IT 2544 is not a binding tax ruling predating as it does the introduction of Pt IVAAA of the ITAA 1936. It cannot be relied upon for the proposition advanced. It deals principally with s 255 and only incidentally with s 254 and fails to deal with the fact that there is no analogue of s 255(1)(a) in s 254. In any event and irrespective of when an assessment issues, the receivers and managers would be personally liable for the tax payable upon income/gains earned during the period of their appointment. So much is said to flow from s 254(1)(a) and (e).
57 It is not necessary for present purposes to resolve these competing legal contentions. It is sufficient, in my opinion, that the receivers were entitled to take the view that they were obliged to make appropriate provisions against tax liabilities.
58 In the event, it is reasonably clear that the combination of the allowance for legal expenses and the provision for tax liabilities dwarfs the quantum of funding sought by the companies in this case. That and the necessary error in estimating such provisions was, in my opinion, a relevant consideration for the receivers and managers to take into account when considering a request for funding to defend a winding up application in relation to each of the companies and, in the case of Bowesco, to prosecute an appeal about a valuable asset.
59 Notwithstanding the above, the position of the two companies is different and leads to different outcomes. Having regard to the small cash reserve held by the receivers and managers in Bowesco, I do not consider the refusal of the receivers to provide funding out of its assets for the purpose of legal representation and advice unreasonable. By way of positive finding, I consider it a reasonable position to adopt.
60 The position is different with Lanepoint. Having regard to the uncertain extent of its liability to Perpetual, I do not consider that I should make any order for the payment of any funds out of Lanepoint to defend the winding up application or otherwise. On the other hand, Bowesco is a preferred creditor subrogated, by reason of payments made pursuant to its guarantee, to the rights of Suncorp-Metway. That is to the extent of a figure in excess of $900,000. On that basis it can properly claim to be a person aggrieved by the refusal of the Lanepoint receivers to make funds available to it for the purpose of opposing its winding up application and prosecuting its appeal. In my opinion the receivers ought to have allowed Bowesco funding for that purpose out of the assets of Lanepoint having regard to the small quantum of funding sought. The sum of $50,000 to oppose the winding up application and $7,500 for the costs of this application would have been a reasonable allocation. The sum of $80,000 for the cost of prosecuting the appeal seems high. I would allow $50,000 as reasonable for that purpose. The sums allocated would constitute a maximum figure in each case, the final payment to be either agreed or taxed if there is a dispute. In my opinion the receivers would be permitted to make a reasonable interim payment in relation to the prosecution of the appeal and the defence of the winding up application. The costs of Bowesco in prosecuting the present application can hopefully be agreed up to a maximum of $7,500. I propose to make orders accordingly.
I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.