Australian Steel Company v EPS Group [2006] NSWSC 1080 | Case summary

3234/01 THE AUSTRALIAN STEEL CO (OPERATIONS) PTY LTD T/AS WELDED MESH V EPS GROUP PTY LTD JUDGMENT 1 HIS HONOUR: Section 564 of the Corporations Act 2001 (Cth) is as follows: "Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which the creditor has indemnified a liquidator have been recovered; the Court may make such orders as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them." 2 The defendant ("the Company") is in liquidation and its liquidator is Mr David Young. The plaintiff is The Australian Steel Company (Operations) Pty Ltd trading as Welded Mesh ("Welded Mesh"). By a deed dated 23 July 2004 but executed by Welded Mesh later, Welded Mesh indemnified Mr Young in respect of the costs of a preference recovery proceeding brought by Mr Young in this court against Onesteel Reinforcing Pty Ltd ("Onesteel"). Eventually Mr Young settled the proceeding and received payment in settlement in his capacity as liquidator of the Company. By an interlocutory application filed on 24 November 2005, he seeks an order under s 564 authorising and requiring him to distribute an amount to Welded Mesh out of the proceeds of recovery produced by the settlement. He asks the court to determine that amount. 3 Mr Young also brought a preference recovery proceeding in this court against BASF Australia Ltd ("BASF"). By the same interlocutory process, Mr Young seeks a declaration that he has no obligation under the deed of 23 July 2004 to seek orders under s 564 in regard to any amount recovered in that proceeding. 4 For the purposes of the application, the following affidavits have been read and the following exhibits have been tendered: (a) David Gregory Young made on 21 November 2005, with the bundle of exhibits DGY-1; (b) Karen McLean made on 14 March 2001, with the bundle of exhibits KML-1; (c) Mark Stephen Tierney made on 20 March 2006; (d) David Gregory Young made on 20 March 2006; (e) Chanelle Chetcuti made on 9 December 2005. 5 Mr Young sent a report to creditors on about 29 November 2005, informing them that the interlocutory process was returnable on 12 December 2005, so that they might appear and be heard in regard to the appropriateness of the court making an order in favour of the plaintiff. There is no indication in the court's file that any creditor sought to appear on that day or any subsequent day upon which the matter was before the court. 6 However, with the concurrence of the liquidator and Welded Mesh, submissions have been received from the Commonwealth of Australia through the Department of Employment and Workplace Relations ("DEWR"). DEWR administers the General Employee Entitlements Redundancy Scheme ("GEERS"). The Commonwealth is concerned that an order by the court under s 564 in favour of Welded Mesh will prejudice its recovery by way of statutory subrogation to the priority rights of employees whose claims have been met by payments under GEERS. A broadly similar issue arises in respect of the claim by the Australian Taxation Office ("ATO") as a priority creditor in the liquidation, although the ATO was not represented at the hearing. 7 There are essentially three issues to be resolved in this case, namely: (a) did Welded Mesh in fact indemnify the liquidator in relation to the preference recovery proceeding against both BASF, as well as the proceeding against Onesteel? (b) what approach should the court take to the competing claims to priority of Welded Mesh, on the one hand, and the priority creditors (GEERS and the ATO) on the other? (c) in light of the answer to (b), should the court the give Welded Mesh any degree of priority under s 564, and if so, how much? Facts 8 On 8 June 2001 St George Bank Ltd appointed receivers and managers to the assets and undertaking of the Company. On 26 June 2001 the court made an order appointing Mr John Mann as provisional liquidator of the Company, and on 2 August 2001 it made orders for the winding up of the Company and the appointment of Mr Mann as liquidator. The orders were made on the application of Welded Mesh, which is the largest creditor in the winding up. The total amount owed to unsecured creditors exceeds $1.75 million. 9 After his appointment as liquidator, Mr Mann identified some transactions that he considered to be voidable as unfair preferences. On 24 February 2003 he wrote to Onesteel Ltd demanding repayment of $158,488.27 on the ground that Onesteel had received that amount as an unfair preference. On 12 February 2003 he wrote to BASF Australia Ltd demanding repayment of $887,436.52, on the ground that BASF had received that amount as an unfair preference. Neither company complied with the demand made on it. 10 On 8 May 2003 Mr Young was appointed liquidator of the Company in replacement of Mr Mann. He considered taking proceedings against Onesteel and BASF but he did not have sufficient funds. In May or early June 2004 he met with the credit manager of Welded Mesh, Mr David Lee. Mr Lee indicated that Welded Mesh would be willing to provide an indemnity to fund the proposed unfair preference litigation against Onesteel and BASF. In that conversation or around that time, the question was raised whether the indemnity would be subject to a cap and the figure of $50,000 was mentioned. 11 As the expiry of the limitation period for proceedings was fast approaching, Mr Young instructed solicitors to commence proceedings against Onesteel and BASF before concluding the terms of any written contract of indemnity with Welded Mesh. However, Mr Young encountered some difficulties in instructing solicitors to take the proceedings. The solicitors he had been using until that time told him they had a conflict of interest and would be unable to act for him against Onesteel and BASF. On 10 June 2004 Sally Nash & Co, acting for Welded Mesh, wrote to the liquidator of the Company conveying Welded Mesh's instruction that it would indemnify the liquidator in respect of preference recovery proceedings against Onesteel for $158,488, and BASF for $246,641 (an amount substantially less than the amount contained in Mr Mann's letter of demand). The letter invited the liquidator to instruct Sally Nash & Co to commence the proceedings and asked for a draft indemnity and documentation relating to the claims. 12 The amount of $246,641 mentioned in Sally Nash & Co's letter was the amount of the last of a series of payments that had been made by the Company to BASF prior to the commencement of its winding up. In some later correspondence Mr Young expressed the opinion that BASF may have had a good "running account" defence in relation to earlier payments, but he believed that he had a strong case against BASF in relation to the last payment in that amount. He said he had discussed the preference claims with Sally Nash & Co. That appears to explain why Sally Nash & Co mentioned the lower figure in their letter. 13 Mr Young replied to Sally Nash & Co on 11 June, saying that he would instruct them in relation to the proceedings, enclosing his file in relation to the claims and asking them to prepare an indemnity for Welded Mesh's consideration. According to Mr Young's evidence, after carrying out some initial work Sally Nash & Co later informed him that they had a conflict of interest and would be unable to act. Then he instructed his present solicitors, Gordon & Johnstone, who commenced the proceedings on his behalf. 14 The two sets of proceedings (Nos 3520 and 3521 of 2004) were commenced on 21 June 2004. It appears that Mr Young commenced the two recovery actions on the basis that he was to be indemnified for both by Welded Mesh (see the letter from Gordon & Johnstone to McLean & Associates dated 19 July 2005, para 6), though the possibility of a cap was unresolved. 15 On 21 July 2004 Mr Young forwarded a draft deed of indemnity to Welded Mesh, together with a request that Welded Mesh pay fees of Sally Nash & Co amounting to $1722. The draft deed, signed on behalf of Mr Young, was a brief document recording estimates of costs by the liquidator ($15,000 in total, and legal costs of $15,000 for each matter) but not restricting the indemnity to any financial limit. Welded Mesh was to agree to provide funding for the litigation and Mr Young was to agree to make an application under s 564 (wrongly identified as s 588) for priority to be given to Welded Mesh in respect of any recoveries. Clause 2 of the recitals said: "The Liquidator has issued a Letter of Demand on:- (a) Onesteel Reinforcing Pty Ltd; (b) BASF Australia Ltd for recovery of $158,488.27 and $887,436.52 respectively." Clause 3 recited that the liquidator would make an application to this court for recovery of "the amounts in paragraph 2 as inter alia preferences". 16 On about 4 August 2004 Ms Karen McLean was engaged by Welded Mesh to act for it in relation to the preference proceedings. She contacted Ms Trish Needham of Mr Young's office on about 10 August 2004, explaining that she had been engaged by Welded Mesh in relation to the preference actions "because of the indemnity that they have provided". She arranged to inspect the liquidator's documents in relation to the proceedings, and later she inspected the defendants' discovered documents, draft affidavits and a draft solvency report. 17 On 23 August 2004, after receiving some tax invoices from Gordon & Johnstone in relation to the proceedings for the total amount of $6,768, Mr Young wrote again to Welded Mesh asking for return of the signed deed of indemnity and enclosing the tax invoices for payment, and also an invoice for his costs as liquidator of $4350. Welded Mesh did not pay the tax invoices of Gordon & Johnstone or the fees of Sally Nash & Co at that stage or at any subsequent time, although on about 20 October 2004 it paid $4785 in relation to Mr Young's costs as liquidator (apparently the invoice for $4350, plus GST). 18 On 2 November 2004 Ms McLean wrote to Gordon & Johnstone seeking advice on the progress of the preference proceedings. She did not refer to Mr Young's letter of 23 August 2004. 19 Onesteel offered to settle the proceeding against it for $30,000. Mr Young made a counter-offer in the sum of $120,000 early in December 2004, and Mr Tierney of Gordon & Johnstone informed Ms McLean of the counter-offer by e-mail dated 6 December 2004. Welded Mesh was not consulted before the counter-offer was made. 20 Onesteel made a further counter-offer of $75,000 on or shortly before 14 January 2005. On that day Mr Young wrote to Mr Lee informing him that the offer had been received, suggesting a counter-offer of $95,000-100,000 but inviting Mr Lee's opinion as to whether Onesteel's offer should be accepted. Mr Young also asked for payment of the fees of Gordon & Johnstone and Sally Nash & Co, and he said that if Onesteel's offer were to be accepted then Welded Mesh would receive repayment of monies paid under the indemnity to date for the Onesteel matter but the remaining funds would be applied to meet the liquidator's outstanding remuneration and costs. 21 Mr Young's letter to Mr Lee of 14 January 2005 was written even though Welded Mesh had not at that stage signed and returned the deed of indemnity. On 25 January 2005 Mr Young wrote to Mr Lee again, noting that the signed deed of indemnity had not been returned and that he had not received Mr Lee's input on whether to accept Onesteel's offer of settlement at $75,000 or to make a further counter-offer. He said that if he did not receive the signed deed of indemnity and input by 27 January he would be forced to accept the $75,000 offer, remit to Welded Mesh the sum of $4785 paid under the unsigned deed of indemnity, and consider whether to proceed with the claim against BASF. He added: "You will appreciate my position that without the signed indemnity I am at significant risk in respect of costs incurred by Gordon & Johnstone as well as the potential of an adverse costs order". 22 On 27 January 2005 Ms McLean telephoned Ms Needham. According to Ms McLean's evidence, she told Ms Needham that Welded Mesh suggested a counter-offer of no less than $110,000, and that "the indemnity will be signed and sent to you and then we suggest that after this we possibly have a meeting about crystallising the terms of the indemnity for the BASF matter." Her evidence is that she made some criticisms, of a general kind, of the solvency report and said she would not be confident in advising that Welded Mesh to go to court with the evidence the way it was. On the same day she also told Mr Tierney of Gordon & Johnstone that she was concerned to get the evidence right in the BASF matter before going too far. 23 Mr Young said he understood from Ms McLean's telephone conversation with Ms Needham that Welded Mesh might be seeking to renegotiate indemnity arrangements for BASF. That is consistent with Ms McLean's own evidence of the conversation. 24 On 28 January, more than 6 months after his initial request for it to be signed, Mr Young received the executed deed of indemnity. It was dated, by hand, 23 July 2004. It had been amended by striking out the words "(b) BASF Australia Ltd" from clause 2. There was no amendment to the amounts in clause 2 and no amendment to clause 3 or any other clause. There was no covering letter explaining why the amendment had been made. 25 It was later asserted on Mr Young's behalf (Gordon & Johnstone's letter of 19 July 2005) that when he received the executed document, he had to make a choice between rejecting the deed as amended and curtailing both recoveries, or accepting Welded Mesh's indemnity for only the Onesteel case and running the BASF case on his own and at risk as to costs, and that he chose the latter course. The remainder of the evidence is consistent with this assertion, and I accept it. 26 On 28 January Ms Needham wrote to Ms McLean, recording that the signed deed of indemnity had been received "in relation to the Onesteel matter only". She said the liquidator would have to be guided by his own legal advice and that he had decided to make a counter-offer to Onesteel to settle at $110,000. The last paragraph of the e-mail is as follows: "Please telephone me should you wish to discuss the BASF matter including the contents of any indemnity which may be provided by Welded Mesh and any extra information in relation to the claim, as we intend to file and serve the affidavit on BASF in an effort to initiate some negotiation before the directions hearing listed for Thursday 3 February 2005." 27 On 30 January 2005 Ms McLean sent an e-mail to Ms Needham which included the following: "With regard to the indemnity for the BASF matter, we will take our clients [sic] further instructions and let you know of any proposal for amendment. As discussed, it may be that we recommend meeting with you with our client to ensure a thorough understanding of the indemnity together with how the BASF matter may run." 28 On 31 January 2005 Ms McLean wrote to Ms Needham providing some comments on the evidence in the BASF matter. She said she had been engaged to advise Welded Mesh, "the indemnifier of the action". 29 On 9 February 2005 Mr Young wrote to Mr Lee informing him that Onesteel had increased its offer to $95,000, and he said he intended to accept the offer, which he regarded as fair for reasons he gave. He said that when he received the settlement proceeds he would arrange to remit the sum of $4785 that Welded Mesh had paid under the deed of indemnity and that he would arrange to pay the outstanding costs of the liquidation. 30 On 10 February 2005 Mr Young accepted Onesteel's offer to settle the proceeding by payment of $95,000 inclusive of costs and interest. Notwithstanding the contents of Mr Young's letter of 9 February, Ms McLean sent an e-mail to Ms Needham on 11 February asking for an estimate of how much would be available to be paid to Welded Mesh, and for confirmation that an application would be made to the court under s 564. 31 On 18 March 2005 Mr Young wrote to Mr Lee confirming that settlement of the Onesteel matter had occurred, enclosing a cheque for $4785 as anticipated in his earlier letter and saying that there were no funds available to enable a distribution in priority to other creditors. 32 By mid-March 2005 Gordon & Johnstone's total costs and disbursements in relation to both matters amounted to $33,508, and Mr Young had incurred substantial fees on a time basis. On 21 March 2005 he made a report to creditors (which he described as his "Fourth Report to Creditors") in which he identified the settlement and said: "The settlement proceeds have now been received into the liquidation account and used to refund the costs of an indemnity (to fund the proceedings), the legal costs and part payment of the liquidator's remuneration." 33 It appears from later correspondence that the reference in the Fourth Report to using the settlement proceeds "to refund the costs of an indemnity" is a reference to repayment to Welded Mesh of the sum of $4785 that it had paid Mr Young on account of his fees. As I have said, Welded Mesh made no other payments under the indemnity. The balance of the $95,000 was applied by Mr Young, according to his letter to Ms McLean dated 4 April 2005, partly to meet Gordon & Johnstone's total costs in relation to both proceedings ($32,408 was applied for that purpose, leaving a balance of $1100 outstanding), and partly to meet Mr Young's costs and disbursements. In an e-mail to Ms McLean dated 23 March 2005 Ms Needham confirmed that there was no surplus available from the Onesteel settlement. Ms McLean responded, by e-mail dated 28 March, requesting a "full reconciliation in relation to the liquidator's costs and disbursements". 34 Then on 4 April 2005 Ms McLean sent a facsimile letter to Ms Needham in which she: · expressed surprise about the advice in the Fourth Report in relation to the issue of costs; · also expressed surprise that there was no mention of Welded Mesh's "indemnity in relation to the BASF preference action"; · repeated her request for a "breakdown" of liquidator's costs and disbursements; · asserted that Mr Young should make an application under s 564 for Welded Mesh to be given priority in respect of $63,277.90, being the balance of the $95,000 recovered from Onesteel, after deducting no more than $15,000 for legal costs and $15,000 for the liquidator's costs as estimated in the deed of indemnity, and $1722.10 for Sally Nash & Co's costs. 35 In the course of his long reply, also written on 4 April 2005, Mr Young said that: · the BASF proceeding was being conducted without the support of an indemnity from Welded Mesh; · Welded Mesh had breached clause 9 of the deed of indemnity by failing to make payments as requested; · there were no surplus funds because the legal costs of the two proceedings and the liquidator's fees exhausted the amount recovered from Onesteel; · liquidator's fees totalling $134,343.06 had been drawn (including drawings against the amount recovered from Onesteel), and $25,662 remained outstanding. 36 The costs position was clarified in Mr Young's affidavit made 20 March 2006. According to that evidence, the liquidator's remuneration attributable to the Onesteel proceeding was $9,336, and the legal costs incurred with respect to that proceeding amounted to $15,869. After deduction of those amounts from the $95,000 of settlement money received from Onesteel, the net recovery was $69,795. This amount was applied towards the legal costs of the BASF matter and Mr Young's fees as liquidator. 37 Ms McLean gave evidence that after a meeting of creditors held on 8 April 2005, she had a conversation with Mr Young in which she told him that her client was, and had at all times been, willing to provide him with an indemnity in relation to the BASF proceeding. She said that at no time had the indemnity been withdrawn, it was simply the terms that were sought to be crystallised. During that conversation, Mr Young replied by saying that he would have something drafted by his solicitors and sent across to her, and that it may be that funds would be available to be paid to Welded Mesh from the BASF action. 38 Ms McLean wrote an e-mail to Ms Needham in similar terms on 15 April 2005, saying that "it was always my instructions and understanding that our client had at all times provided the indemnity and it was simply the terms of the indemnity which were being sought to be clarified". 39 Shortly after the meeting of creditors held on 8 April 2005, Mr Young received an offer to settle the BASF claim. He wrote again to Ms McLean on 15 April 2005, confirming that he had received no reply to his letter of 4 April and that in the circumstances there was no indemnity in place from Welded Mesh in relation to the BASF claim. He informed Ms McLean than an offer had been received from BASF and said that he had made a counter-offer, though he did not specify the amount. He said that in any application to the court under s 564, the court would take into account the level of risk undertaken by the indemnifying creditor. He contended that the risk to Welded Mesh in relation to Onesteel decreased from the time when Onesteel made an offer for settlement, in mid-January 2005. He said that if Welded Mesh were to provide an indemnity in relation to the BASF claim, the court would take into account that the degree of risk had diminished because of BASF's offer of settlement. Nevertheless he invited Ms McLean to advise whether Welded Mesh intended to provide an indemnity with respect to BASF. 40 Ms McLean replied on 22 April 2005, saying that Welded Mesh would provide an indemnity in relation to the BASF proceeding, but only on terms that the liquidator's costs and legal costs would be capped, on a basis that she outlined in eight conditions set out in her e-mail. Mr Young wrote to Ms McLean on 29 April 2005, explaining the state of negotiations with BASF and saying that there would be little, if any, advantage to the general body of creditors in accepting Welded Mesh's offer of indemnity for the BASF proceeding, which he therefore rejected. 41 On 3 May 2005 Mr Young settled the proceeding against BASF on the basis that BASF would pay $230,000 inclusive of costs and interest and would agree not to prove in the liquidation for an amount it claimed was owing to it by the Company. Mr Young wrote to Ms McLean on the 4 May 2005 confirming that he had accepted BASF's offer to settle for $230,000. 42 Ms McLean wrote a letter to Mr Young dated 6 May 2005, in which she asserted that: · Welded Mesh had understood at all times that an indemnity was to be provided "in this matter" ("the matter" apparently being the Company's actions against both BASF and Onesteel); · an indemnity had originally been given in relation to the proceeding against BASF as well as the proceeding against Onesteel, and each party had conducted themselves on the basis that the indemnity was in place; · her client had struck out the reference to BASF "on the basis not that the indemnity in relation to BASF be withdrawn but that the terms of the indemnity in relation to the BASF be clarified and clearly determined", and that this had been communicated to Mr Young on several occasions. 43 In her letter of 6 May, Ms McLean also asserted that if Welded Mesh had not provided an indemnity in relation to the Onesteel matter, Mr Young would not have been a position to settle the BASF matter. Gordon & Johnstone replied to that assertion in their letter of 19 July 2005, saying that Mr Young acknowledged that the provision of the Onesteel indemnity by Welded Mesh fortified his attitude and enabled him to comfortably adopt a "tougher" stand in concluding negotiations. 44 On 11 May 2005 Mr Young replied to Ms McLean's letter, saying amongst other things: "I confirm your client's admission that the original indemnity struck out the BASF matter. Until the creditors meeting of 8 April 2005 you were unaware of this position. You were to seek further instructions and come back to me with a proposal for a BASF indemnity. The terms of that revised proposal, received on 27 April 2005, were unacceptable and therefore no BASF indemnity was in place." He also informed her that he would be making an application under s 564 in respect of the indemnity given by Welded Mesh in respect of the Onesteel matter. 45 In his Fifth Report to Creditors made on 11 May 2005, Mr Young reported a net cash balance at 6 May 2005 of $897, total estimated realisations (including the settlement amount) of $239,288, and total estimated costs and disbursements of $82,904, leaving a net amount available to unsecured creditors of $156,384. 46 In that report Mr Young identified as priority creditors the Department of Workplace Relations ("DEWR") under GEERS in the sum of $86,930, and the Australian Taxation Office ("ATO") in relation to priority superannuation entitlements in the sum of $49,040. The remaining amount available to unsecured creditors (other than priority creditors) was $20,404. Mr Young explained that the receivers and managers appointed by St George Bank had been funded to the extent of $86,930 by DEWR under the Employee Entitlement Support Scheme in respect of outstanding employee entitlements, and those monies had not been repaid to the Department. As to the ATO, the receivers and managers had paid a first and final dividend of 61 cents in the dollar to the ATO in relation to priority superannuation entitlements and an amount of some $49,040 remained outstanding. 47 On 19 July 2005 Gordon & Johnstone wrote to Ms McLean, seeking Welded Mesh's views with respect to the proposed application under s 564, including the amount in dollars that it contended to be appropriate for the Onesteel matter, and whether it conceded that it should not receive any special distribution in regard to the BASF settlement. No reply was received. 48 The financial position has been revised, in the affidavits of Mr Young and Mr Tierney made on 20 March 2006. According to that evidence, as at that time Mr Young as liquidator held cash at bank in the sum of $169,038, and there were estimated further liquidator's fees of $16,500 and legal fees of $17,600 in respect of the present application, leaving net funds available of $134,938. The total of the amounts claimed by DEWR and the ATO is $135,970. What indemnity did Welded Mesh give? 49 In my opinion the only indemnity given by Welded Mesh to Mr Young at any stage was the indemnity given when the deed was returned to him on 28 January 2005 and he communicated his acceptance of the alterations to it. It was an indemnity in relation to the Onesteel proceeding only. There was no indemnity given in relation to the BASF proceeding. My reasons for this conclusion are as follows. 50 The conversation between Mr Young and Mr Lee in late May or early June 2004 did not itself give rise to a contract of indemnity, because Mr Lee only gave an indication that Welded Mesh would give an indemnity for the proceedings. The letter by Sally Nash & Co on 10 June 2004, upon which counsel for Welded Mesh placed some reliance, was not itself a binding commitment on behalf of Welded Mesh to provide an indemnity, because the letter envisaged the preparation of a draft indemnity document and the figure given in the letter in respect of the BASF proceeding was different from the amount claimed when the proceeding was initiated. Therefore, at the time when he commenced the two proceedings, 21 June 2004, Mr Young did not have the benefit of any indemnity in relation to either matter. 51 His evidence is to the effect that he knew he had no indemnity at that stage but he was expecting that an indemnity would be granted in respect of both matters. That seems to me to be correct. It is reinforced by the fact that, when he replied on 11 June 2004, Mr Young asked Sally Nash & Co to prepare a deed of indemnity for Welded Mesh's "consideration". 52 No event occurred in the period between 21 June 2004 and 27 January 2005 to give rise to a contract of indemnity, when none had existed at the beginning of that period. Various facts tend to reinforce the conclusion that no such contract was in place: · in his letter to Mr Lee of 21 July 2004 Mr Young referred to discussions in relation to "the proposed Deed of Indemnity"; · there had been discussion about placing a financial limit on the indemnity, but the draft deed of indemnity which Mr Young sent to Welded Mesh on 21 July 2004 contained no such provision; · on 23 August 2004 Mr Young requested payment of some legal expenses that Welded Mesh would have been obliged to pay if the indemnity had been in place, but those amounts were never paid, although a smaller amount for Mr Young's fees was paid; · neither Welded Mesh nor Ms McLean on its behalf offered any explanation for non-payment of the legal expenses; · Mr Young did not consult Welded Mesh before making his counter-offer to Onesteel of $120,000 in December 2004, and he proceeded to accept Onesteel's offer of $95,000 without obtaining Welded Mesh's consent (though he had given it an opportunity to express an opinion); · in his letter of 25 January 2005 Mr Young said that in the absence of the signed indemnity he was "at significant risk in respect of costs". 53 There are some facts suggesting that a binding contract arose before 27 January 2005 but in my view, they do not support that conclusion on close analysis, and in any case, they are outweighed by the fact that the signed a deed of indemnity had not been returned, and by the other matters referred to above. Thus: · Ms McLean gave evidence that, in a discussion with Ms Needham on 10 August 2004 she referred to an indemnity that Welded Mesh had provided. In its context (justification for a request for access to documents), that statement should not be regarded as an assertion that a binding contract of indemnity had arisen, but only that an indemnity had been discussed and was intended. · The fact that Ms McLean was given access to documents, draft affidavits and other evidence implies that the parties intended that there would be an indemnity or contemplated that one was in existence, but does not prove that an indemnity had in fact been granted, given that the other evidence shows lack of agreement on the terms of the arrangement. · That is also true of the evidence which indicates that Mr Young and his solicitors informed Ms McLean of the progress of negotiations for settlement of the Onesteel matter. 54 In my opinion a contract of indemnity arose in relation to the Onesteel proceeding on 28 January 2005, when Mr Young received the amended draft deed, executed on behalf of Welded Mesh, and accepted it in relation to Onesteel, communicating his acceptance by Ms Needham's e-mail to Ms McLean on the same date. 55 There had been no contract of indemnity at all, and a fortiori none in relation to the BASF proceeding, prior to 28 January, for the reasons I have given. Was there a contract of indemnity in respect of the BASF proceeding at or after that time? 56 In my view a negative answer must be given to this question. Once again, there was no event on or after 28 January that could be regarded as giving rise to a contract of indemnity with respect to the BASF proceeding, when none was in place prior to that time. The following facts reinforce the conclusion that there was no contract concerning the BASF proceeding: · Ms McLean told Ms Needham on 27 January that the indemnity was to be signed and sent to her and then (that is after finalisation of the indemnity by execution) there should be a meeting crystallising the terms of the indemnity for the BASF matter; · although the amount claimed in the BASF proceeding was stated in clause 2 of the deed and not deleted, and clause 3 obliged the liquidator to make an application for recovery of the amounts in clause 2, the fact that the reference to BASF was deleted from clause 2(b) prima facie implied that Welded Mesh was withdrawing its offer of indemnity in respect of BASF, and the deletion of clause 2(b) was understood by Mr Young in that sense; · Ms Needham's e-mail to Ms McLean of 28 January 2005 clearly conveyed her view (and Mr Young's view, on his behalf) that there was no binding indemnity in relation to the BASF proceeding, and Ms McLean replied on 30 January only by saying that she would take her client's further instructions, without any immediate contradiction of Mr Young's assertion; · no payment was made by Welded Mesh after 28 January of the amounts that had been demanded by Mr Young for legal costs (including costs of the BASF matter) on 23 August 2004; · when, on 4 April 2005, Ms McLean expressed surprise that the Fourth Report made no mention of Welded Mesh's indemnity in relation to the BASF proceeding, Mr Young replied saying that the BASF proceeding was being conducted without the support of an indemnity from Welded Mesh; · in her conversation with Mr Young after the creditors' meeting on 8 April 2005, Ms McLean told Mr Young that her client was "willing to provide him" with an indemnity in relation to the BASF proceeding and he said he would have something drafted up, suggesting that there was no existing agreement; · Ms McLean's e-mail to Ms Needham of 15 April 2005 said it was only the terms of the indemnity which were being sought to be clarified, but she did not specify what the lack of clarity was or identify the source of the agreement that needed to be clarified; · on 15 April 2005 Mr Young wrote to Ms McLean confirming his view that there was no indemnity in place in relation to the BASF proceeding; · Ms McLean's e-mail of 22 April 2005, indicating that an indemnity would be provided subject to eight specified conditions, suggested by implication that there was no indemnity already in place; · Ms McLean's letter of 6 May 2005, in which she purported to explain why her client had struck out the reference to BASF in the deed of indemnity, and claimed that her client's intention had been at all times that an indemnity was to be given in relation to the BASF proceeding, was written well after Mr Young had asserted that there was no binding indemnity in respect of the BASF proceeding, and after Ms McLean had been informed that the BASF proceeding had been settled and consequently there was a surplus fund available from which a priority allocation could be made under s 564. What approach should the court take, under s 564, to competing claims to priority by a funding creditor and creditors with priority under s 556? 57 The Commonwealth through DEWR claims to be a creditor of the Company in the sum of $86,930 by virtue of payments it has made under GEERS. The nature and operation of GEERS has been explained in several recent cases, including Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220, and Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd (2006) 56 ACSR 570. As Barrett J explained in the second case, GEERS reflects a public policy which is concerned with minimising losses to employees in respect of unpaid wages and other entitlements when companies become insolvent. 58 In the Rocklea case, Finkelstein J explained the operation of the scheme as follows (some changes were made to the scheme in November 2005 but they are not applicable in the present case): "[3] … The Commonwealth has established the General Employee Entitlements and Redundancy Scheme, which is commonly referred to by the acronym GEERS. The scheme is not constituted by statute but by an act of the executive government alone. It is administered by the Department of Employment and Workplace Relations. Under the scheme money granted by Parliament is distributed to employees whose employment has been terminated because their employer is insolvent and has insufficient assets to pay their entitlements. The entitlements that are covered by the scheme are unpaid wages, unpaid annual leave, unpaid long service leave, unpaid pay in lieu of notice and up to eight weeks' redundancy pay. An important feature of the scheme is the underlying assumption that, where possible, advances made to employees will be recovered by the Commonwealth out of the realisation of the employer's assets or from other proceedings. "[4] It is necessary to explain how GEERS advances might be recovered when the employer is an insolvent company. If the company is wound up the general rule is that all debts must be paid proportionately: s 555. There are many important exceptions to this rule. Some debts are given priority over others. These are listed in s 556. They include (subject to a cap) wages and superannuation contributions payable to employees (s 556(1)(e)), amounts due to employees under an industrial agreement in respect of leave (s 556(1)(g)), and retrenchment entitlements (s 556(1)(h)). Under s 560, where the company in liquidation has paid such debts out of money advanced for that purpose, that person is entitled to the same priority in respect of the payments as the employee would have had. Those claims are also given priority over the rights of a chargee who holds a floating charge asset: s 433. "[5] Payments under GEARS are made on the basis that in a liquidation the Commonwealth will obtain priority by virtue of s 560. …." 59 I am not able to say which parts of the Commonwealth's payment of $86,930 are attributable to each of the priority provisions in s 556(1)(e), (g) or (h), but the case has been argued on the basis that one or other of these priority provisions applies to the whole amount and I shall assume that to be the case. The ATO's claim for $49,040 appears to be in respect of superannuation contributions of the Company having priority under s 556(1)(e). 60 One of the issues addressed by Barrett J in the TJF EBC case (at [7]-[9]) was whether an order under s 564 is capable of giving the funding creditor a higher position on the scale of priorities in the winding up than a priority creditor in one of the classes identified in s 556(1). His Honour pointed out that the list of priorities in s 556(1) is expressed by that section to be subject to Division 6 of Part 5.6, which includes s 564. Section 564 itself contemplates that the funding creditor may be given "an advantage over others", including, as a matter of construction, the other creditors identified by s 556(1). He concluded that under s 564 the court has a discretion regarding the positioning of the whole or any part of the debt of the funding creditor on the scale of priorities in the winding up (at [9]). I respectfully agree, although I note that the discretion to which his Honour refers is not a totally open discretion but is a power to make such orders as the Court deems just. 61 The onus is on the funding creditor to persuade the court that a disturbance of the priorities accorded under s 556(1) is warranted (citing Jarbin Pty Ltd v Clutha Ltd (2004) 180 FLR 393, at [68] per Campbell J). The Commonwealth's submissions in the present case are designed to emphasise the special status of employee entitlements under s 556(1) and its own special position under GEERS. The Commonwealth's submission identifies legal and policy reasons for giving employees the high priority status which s 556(1) affords them, essentially relating to their status as involuntary creditors whose outstanding entitlements are likely to be their only source of income. According to the Commonwealth's submission: · while s 564 enables the court to make such orders as it thinks just with respect to the funding creditor, the court's decision necessarily must take into account the high priority afforded to the employees' interests; · when a person advances money for the benefit of employees under s 560, as under GEERS, that person stands in the shoes of the employees for the financial purpose of retaining a s 556(1) priority, and should be accorded a particular status when the court is considering a s 564 application which will have a potential impact on that person; · the Commonwealth's status under s 560 is special because it is not a creditor and it volunteers funds to employees for a social purpose; · therefore the Commonwealth's right to priority repayment should be accorded particular consideration by the court when it deals with an application under s 564 made on behalf of a funding creditor (citing the Rocklea case at [35] per Finkelstein J). 62 In the TJF EBC case, Barrett J dealt with a submission by the Commonwealth that a particularly heavy onus is borne by an applicant who seeks, under s 564, to intrude into the order of priorities created by s 556(1), rather than merely being preferred over the general body of unsecured creditors who have no such statutory priority. Barrett J concluded (at [14]) that the court will take into account the relative priorities created and prescribed by s 556(1) when exercising its discretion under s 564, as one of the factors going to the question of what is "just"; but the existence of the scale of priorities did not, in his view, give rise to any special onus on the part of the s 564 applicant. 63 I respectfully agree with Barrett J that it would be wrong to treat the employee entitlements that are given priority under s 556(1)(e), (g) and (h) as having a special status that the other priority classes of creditors lack, and therefore warranting some special treatment under s 564. The legislature has determined the order of priorities under s 556(1), and it is not open to the court to take a discretionary approach that would, in effect, adjust that order of priorities by treating some priority classes as having a greater importance than has been allocated to them. 64 On the other hand, the Commonwealth 's submissions about the employee classes serve as a reminder to the court that the Parliament's allocation of priority to classes of creditors under s 556(1) reflects some carefully balanced and very important legal and social policies. The court is given a discretion to insert the funding creditor into, above or below the priority classes, where it is just to do so. But the court's consideration of the justice of the proposed order must, surely, involve carefully weighing whether there is a strong enough case to interfere with the entitlements of the priority creditors which reflect those policies. 65 Where the entitlements of some classes of priority creditors are asserted, by a form of statutory subjugation under s 560, by another party who has provided funding to meet their claims, the same careful evaluation of the funding creditor's case must be undertaken vis-a-vis the party who stands in the priority creditors' shoes. The fact that the other party is the Commonwealth, acting as a volunteer for the effectuation of a social purpose, tends to reinforce the need for the court to be convinced of the justice of the funding creditor's case. I do not regard Barrett J's observations (especially at [15]) as being inconsistent with my observations on these matters. Should any priority be given to Welded Mesh, and if so, to what degree? 66 Mr Young seeks a declaration that he has no obligation under the deed of 23 July 2004 to apply to a court for orders under s 564 with respect to the settlement amount for the BASF preference proceeding. It would have been open to him, as liquidator, to address the matter by seeking a direction under s 479(3) of the Corporations Act. However, in my view a declaration is an appropriate form of relief in this case. Mr Young is a party to the deed of indemnity. The only other party to the deed, Welded Mesh, is before the court. The question whether an indemnity was given by Welded Mesh in respect of the BASF proceeding has been fully addressed in evidence and submissions. 67 For the reasons I have given, Welded Mesh gave no indemnity in relation to the BASF proceeding at any time. Therefore the settlement money from the BASF proceeding is not, for the purposes of s 564, property that has been recovered under an indemnity for costs of litigation, or expenses in relation to which a creditor has indemnified the liquidator. In those circumstances the court has no jurisdiction to make an order under s 564 with respect to the proceeds of settlement of the BASF proceeding. 68 If, contrary to my finding, Welded Mesh had granted an indemnity in respect of the BASF proceeding, I would nevertheless have been unlikely to make an order under s 564 having the effect of re-ordering creditor priorities under s 556. This is because, in the ways that I have outlined, Mr Young acted on the basis that no such indemnity was in place, and on the whole Welded Mesh did likewise. 69 That leaves me with the question whether to make a priority order under s 564 in respect of the indemnity for the Onesteel proceeding. According to the evidence, the net recovery in the Onesteel matter after deducting the liquidator's fees and legal costs attributable to that matter is $69,795 (it is not contended that Welded Mesh should receive a distribution in priority to the liquidator's costs and expenses attributable to the Onesteel proceeding). The considerations for the court to take into account in deciding whether to "make such orders, as it deems just" with respect to the distribution of that property have been expounded in cases including Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 249 (Brownie J) and State Bank of New South Wales v Brown (2001) 38 ACSR 715 (Court of Appeal of New South Wales) and the TJF EBC case. 70 As those cases point out, s 564 itself draws attention to the risk assumed by the funding creditor. It is therefore necessary to address the extent and nature of the risk that the funded recovery action will fail, and the extent of any consequent risk that the funds made available for the litigation might be irrecoverable. It appears from Spigelman CJ's judgment in the Brown case, at [40]), and Brownie J's observations in the Household Financial Services case (at 296-7), that one has regard to factors including: whether the amounts involved are small; the value recovered; the size of the funding creditor's debt compared with other debts; the proportion that the funding creditor's expenditure bears to the amount recovered; whether the money advanced by the funding creditor has been refunded; whether other unsecured creditors oppose the distribution proposed to the funding creditor; whether other creditors have been given the opportunity to join in the funding and have failed to do so; and the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered. For the reasons given above, in a case where the order under s 564 will have the effect of adjusting the entitlements of priority creditors, the court has regard to the policies underlying the statutory priorities and considers whether the funding creditor's case is sufficiently strong to justify interference. 71 In the present case the following factors indicate that the case for a priority order in favour of Welded Mesh is weak: · the legal costs and the liquidator's fees attributable to the Onesteel proceeding are only about one quarter of the amount recovered; · Welded Mesh did not bind itself to an indemnity in respect of the Onesteel matter until 28 January 2005, less than two weeks before the matter was settled and at a time when it knew Onesteel had offered $75,000 and the liquidator was recommending a counter-offer of $95,000-100,000, and therefore it took no significant risk; · although it paid $4785 on account of Mr Young's fees as liquidator, it did not pay any of the legal fees that Mr Young asked it to pay, some of which were payable under the terms of the indemnity that was eventually signed; · repayment of the amount of $4785 advanced by Welded Mesh has been tendered by the liquidator; · Welded Mesh allowed Mr Young to expect that there would be an indemnity in respect of the BASF proceeding, and to incur costs accordingly, but it deleted the reference to BASF in the draft deed and later offered the indemnity only on restrictive terms that were found by Mr Young to be unacceptable; · at the time when the settlement payment of $95,000 was received from Onesteel, the total amount of the liquidator's legal costs for the two preference proceedings exceeded $33,000 and Mr Young's outstanding fees as liquidator exceeded $60,000; · whether or not the court makes an order under s 564, there will be insufficient assets to permit any distribution to unsecured creditors generally, having regard to the size of the priority claims by DEWR and the ATO, and in those circumstances any priority allocation to Welded Mesh under s 564 will reduce the amount available to those priority creditors; · there is no evidence that an invitation was extended to DEWR or the ATO, or creditors generally, to provide funding under s 564 (in contrast with the TJF EBC case, where the Commonwealth was invited to provide funding for the recovery action but declined); · as far as the public interest in encouraging recovery actions is concerned, Mr Young initiated the proceeding against Onesteel and brought it to the point of negotiations for settlement without the benefit of Welded Mesh's indemnity. 72 On the other hand, Welded Mesh is the largest creditor, no other creditor has offered to fund the litigation, and other creditors (apart from the Commonwealth) have not sought to oppose the present application. Further, Mr Young has acknowledged that Welded Mesh's indemnity in relation to the Onesteel matter fortified his attitude and enabled him to adopt a tougher stand in concluding negotiations. 73 Weighing up these considerations, my view is that the case for a priority order under s 564 is very weak. The only consideration in favour of doing so that has any force, in my opinion, is Mr Young's acknowledgement that Welded Mesh's indemnity in relation to the Onesteel matter assisted him in settlement negotiations. But at the time when the indemnity was granted, there was already an offer from Onesteel for $75,000 and Mr Young had indicated privately to Welded Mesh that he thought a counter-offer of $95,000-100,000 would be appropriate, so the probability of settlement was reasonably high, even apart from the indemnity. 74 As at 20 March 2006 Mr Young held cash at bank of $169,038 and there were outstanding fees and legal expenses of $34,100, leaving a net balance of $134,938. The total amount of the priority claims of DEWR and the ATO is $135,970. Therefore, if no order is made under s 564, only DEWR and the ATO will receive a distribution, and the other unsecured creditors including Welded Mesh will receive nothing. Any amount that I order to be distributed to Welded Mesh under s 564 will reduce the amount distributed to DEWR and the ATO. In this case, therefore, the application requires weighing the justice of the claim of the funding creditor against the claims of the priority creditors, including the substantial claim under GEERS. 75 Counsel for Mr Young submits that the appropriate order in this case is an order giving Welded Mesh priority over unsecured creditors whose claims are provided for in s 556(1)(e) and subparagraphs below that subparagraph, and that the order should be 20% to 30% of the net recovery from Onesteel. But his submissions do not advance any convincing case for ordering a distribution in favour of Welded Mesh at all, let alone a 20% or 30% recovery. On the other hand, the submission made on behalf of the Commonwealth urges the court to preserve the priority that the GEERS payments would have under s 556(1), and not to make an order under s 564 except out of any residual funds after the priority claims have been met. Since there are no such residual funds, in effect the Commonwealth's submission is that there should be no s 564 order at all. 76 Notwithstanding the submission by counsel for Mr Young that a 20% or 30% distribution would be appropriate, I have decided that no order should be made under s 564 with respect to the net proceeds of the Onesteel proceeding. I have explained my reasons for concluding that Welded Mesh's case for an order under s 564 is very weak. It is unlikely that I would have made an order even if there were no priority creditors involved. The case is by no means strong enough to justify any reduction in recovery by the priority creditors. Costs 77 No adequate case has been made out for an order in favour of Welded Mesh under s 564 in respect of the proceeds of the Onesteel proceeding. A substantial part of the evidence and submissions in the case related to the question whether an indemnity had been given in relation to the BASF proceeding, and I have found against Welded Mesh on that issue on the facts. By their letter dated 19 July 2005 Gordon & Johnstone invited Welded Mesh to concede that it should not receive any special distribution under s 564 with respect to funds derived from the BASF recovery action, but Welded Mesh did not respond to that invitation, and it was therefore necessary that the issue be fully contested. 78 However, Mr Young proceeded on the basis that he was obliged to make an application for an order under s 564 in favour of Welded Mesh, presumably because of the terms of the deed of indemnity. That being so, an application would have been inevitable even if Welded Mesh had abandoned its claim to an order in respect of the BASF recovery. The fact that the application in respect of the Onesteel recovery was unsuccessful does not mean that the application was unjustifiable and that Mr Young should be denied access to the Company's funds for his costs. 79 It seems to me that my order for costs should reflect these considerations. I agree with counsel for Mr Young that the appropriate order should be moulded so as to require Welded Mesh to pay Mr Young's costs to the extent that they relate to the BASF recovery, and to provide that otherwise Mr Young's costs should be paid out of the assets of the Company. 80 Doing the best I can to assess the proportion of Mr Young's overall costs relating to the BASF matter, I have reached the conclusions that: · substantially more than 50% of the total work incurred by Mr Young in preparation of the case for hearing and in submissions related to the BASF matter, which was the more contentious part of the evidence; · however, some of that evidence would have been pertinent to the Onesteel matter in any event; · in these circumstances the appropriate order is for Welded Mesh to pay 50% of Mr Young's costs of his application; · the remainder of the liquidator's costs should be paid out of the assets of the Company and treated as an expense of the winding up. 81 In view of the findings that I have made, there is no basis for ordering that any of the costs of Welded Mesh be paid out of the Company's funds. However, the Commonwealth's submissions have been helpful and in my view it is appropriate to order that the Commonwealth 's costs be paid out in the assets of the Company as an expense in the winding up. Conclusions 82 I propose to make the following declaration and orders: (1) Declare that the liquidator of the defendant company has no obligation under the deed executed by him and the plaintiff, bearing date 23 July 2004, to apply to this Court or any other Superior Court to seek orders under section 564 of the Corporations Act 2001 (Cth) in favour of the plaintiff in regard to any amount recovered by bringing, maintaining and settling the proceeding in this Court between the liquidator and the defendant company against BASF Australia Ltd; (2) Order the plaintiff to pay to the liquidator of the defendant company 50% of the liquidator's costs of his application, as agreed or assessed; (3) Order that the liquidator's costs of the application, other than costs recovered under Order (2), and the costs of the Commonwealth's appearance on the application as creditor, each be paid out of the assets of the defendant company as an expense of the winding up; (4) Subject to the above orders, order that the interlocutory process filed on 23 November 2005 be dismissed. **********

Australian Steel Company v EPS Group

At a glance

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Before

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Judgment (12 paragraphs)

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Legislation Cited (1)

Cases Cited (2)

Cited By (2)