Brown v DML Resources [2002] NSWSC 162 | Case summary

3830/00 MARTIN RUSSELL BROWN & ANOR V DML RESOURCES PTY LIMITED (IN LIQUIDATION) & ANOR (NO.7) JUDGMENT 1 HIS HONOUR: In this proceeding the plaintiffs seek an order under s 588FF (3) (b) of the Corporations Act, extending the three year period within which they may make an application to challenge transactions between the companies in liquidation and BP Australia Ltd ("BP") under s 588FF (1). Section 588FF (3) (b) permits the Court to extend the three year period if an application to do so is made by the liquidator within those three years. By a process of reasoning set out in my judgments in Brown v DML Resources (No 2) (2001) 39 ACSR 219; [2001] NSWSC 590 (17 July 2001), Brown v DML Resources (No 3) [2001] NSWSC 719 (29 August 2001), Brown v DML Resources (No 4) [2001] NSWSC 947 (24 October 2001), and Brown v DML Resources (No 5) [2001] NSWSC 973 (31 October 2001), I reached the conclusion that the plaintiffs' application with respect to transactions between the companies and BP would not be made until BP was joined as a defendant in the proceeding, and that joinder would necessarily occur outside the three year period. In Brown v DML Resources (No 6) [2002] NSWSC 6 (23 January 2002), I decided to make an order under s 1322 (4) (d) extending the period within which an application for extension of time under s 588FF (3) (b) may be made until after BP had been joined as a defendant in the proceeding. Orders were accordingly made on 13 February 2002. 2 As a result of those orders, there is now before the Court a timely application by the plaintiffs under s 588FF (3) (b) for an extension of the three year period to permit them to challenge certain transactions between the companies in liquidation and BP. The final step in the present proceeding is for me to decide whether the order for extension of time should be made. The plaintiffs have already filed an originating process to commence a proceeding under s 588FF (1), contending that the relevant transactions are voidable transactions, essentially because they are unfair preferences within s 588FA. The order now sought will, if made, authorise the commencement of that proceeding outside the three year period. 3 In Brown v DML Resources (No 6), having decided that s 1322 (4) (d) authorises the Court to make an order permitting an application under s 588FF (3) (b) to be made outside the three year period, I considered whether I ought to make an order under s 1322 (4) (d) in the exercise of my discretion. I noted (at paragraph 84) that the matters relevant to the exercise of the Court's discretion under s 1322 (4) (d) were indistinguishable from the matters relevant to the exercise of the Court's discretion under s 588FF (3) (b). However, BP had reserved its position as to whether, in the event that I were to hold that an order could and should be made under s 1322 contrary to its submissions, it would seek to adduce further evidence with respect to the ultimate application under s 588FF (3) (b). I decided (paragraph 85) that it would be unfair on BP for me to make findings dealing with the merits of the ultimate application before that company completed its evidentiary case. 4 Consequently I decided that I ought to make an order under s 1322 (4) (d), without making any findings with respect to the merits of the plaintiffs' case for an extension of time (except to the extent required by s 1322 (6) (c)), so as to preserve, for determination after the final hearing, questions going to the merits of extending time (paragraph 86). I found that the plaintiffs' case with respect to voidable transactions was not hopeless and had some probability of success, and that it would be unjust to the unsecured creditors of the companies to deprive them of the opportunity of having the plaintiffs' case tested by litigation, unless there was a clear and valid reason for doing so (paragraph 87). I found that there was a plausible and reasonable explanation for the plaintiffs' application, first made on 4 September 2000, having miscarried in the way that it did (paragraph 89). I found (paragraph 92-95) that no substantial injustice had been or was likely to be caused to any persons, for the purposes of s 1322 (6) (c). 5 I expressly did not make any finding as to whether there was a reasonable explanation for the plaintiffs not making an immediate application under s 588FF (1) in about September 2000, to set aside specific voidable transactions between the companies and BP, nor as to whether it was reasonable for them to proceed by seeking a general extension of time, as they did on 4 September 2000 (paragraph 88 and 91). I regarded these as questions for determination after the final hearing. 6 After I had published my reasons for judgment in Brown v DML Resources (No 6), I gave BP the opportunity to adduce further evidence, but it decided not to do so. By way of final hearing, I then heard submissions from the plaintiffs and BP on the remaining question. That question, the one I now must answer, is whether I ought, in the exercise of my discretion, to make an order under section 588FF (3) (b) extending the three year period so as to permit the plaintiffs to bring a proceeding under s 588FF (1) alleging that the companies entered into voidable transactions with BP. 7 BP says that the merits of the plaintiffs' application for an extension of time, first made on 4 September 2000, are effectively being determined by the present judgment. The plaintiffs disagree. They say that, there being no relevant distinction between the discretion conferred by s 1322 (4) (d) and the discretion conferred by s 588FF (3) (b), my decision in Brown v DML Resources (No 6) should be treated as addressing matters going to the merits of the plaintiff's application. I agree with the plaintiffs that my previous decision addressed some matters going to the merits, but it did so only to the extent necessary for a decision under s 1322, expressly reserving some matters for later determination. I agree with BP that until now, I have not made a comprehensive determination upon the merits of the plaintiffs' application for an extension of time. The correct approach to the exercise of the discretion under s 588FF (3) (b) 8 There are differences between the parties concerning the correct approach to the exercise of the discretion. The plaintiffs say that the issue is a very broad one, namely whether in all of the discretionary circumstances it is appropriate for an extension to be granted. They say that this issue requires the Court to consider the matters left unresolved by Brown v DML Resources (No 6), and other relevant factors including, in particular, the fact that BP could not in any way be prejudiced as a result of an order being made. 9 BP says that the Court should not make an order unless it decides two things: that an extension of time was actually needed on 4 September 2000 (or that the liquidator had a proper purpose in seeking the extension), and that the plaintiffs had a reasonable explanation for their delay (that is, for not being a position to make an immediate application under s 588FF (1) at that time). In BP's submission, the question whether it has been prejudiced only arises if the plaintiffs can persuade the Court of those two matters. 10 In my opinion, the correct approach to the exercise of the discretion is the one articulated by the plaintiffs. The approach taken by BP would impose an unjustified and restrictive gloss on the statutory language. Moreover, such an approach is not supported by the case law. 11 It is clear from the judgment of Finn J in Taylor v Woden Constructions Pty Ltd [1998] 1228 FCA (23 September 1998) that one of the discretionary factors for the Court to consider is whether there is an adequate explanation why proceedings have not been brought within the three year period. His Honour looked to the liquidator to provide such an explanation. It is also relevant, in his Honour's view, to consider whether the liquidator's case as to voidable transactions is so devoid of prospects that it would be unfair to allow the liquidator an extension, or to expose the other party to the continuing prospect of suit. However, a merits inquiry, even of a preliminary character, may not always be necessary. Further, it is appropriate to bear in mind the purpose and objects of the provisions of the Corporations Act with respect to voidable transactions, namely to prevent the depletion of a company's assets. Additionally, it is relevant to consider the likelihood of actual prejudice resulting from the grant of an extension. 12 Finn J's approach is inconsistent with BP's submissions in two respects. First, while his Honour looked for an adequate explanation for the liquidator's delay, and considered the reasonableness of the liquidator's conduct as a whole, he did not regard it as necessary to decide that, at the time of the application, the liquidator needed to seek an extension or had a proper purpose in doing so. Further, Finn J regarded the question of prejudice as one of the discretionary factors to be taken into account, rather than as a "second order" inquiry once other threshold questions have been answered. 13 Counsel for BP relied on some observations of mine in Green v Chiswell Furniture Pty Ltd [1999] NSWSC 608 (23 June 1999), where I described the history and purpose of the three year period as follows (at paragraph 14): "The three year limitation period (with the proviso for an extension of time) was first introduced by the Corporate Law Reform Act 1992, effective 23 June 1993, following the recommendation of the Harmer Report (see Australian Law Reform Commission, Report of the General Solvency Inquiry (Report No 45), paragraph 688). It is apparent from the Harmer Report that the purpose of shortening the limitation period (which previously was six years) was to place liquidators under more rigorous time limitations for taking action to recover in respect of voidable transactions. The justification for the amendment appears to have been complaints concerning inordinate delays in commencing proceedings in respect of voidable transactions, and judicial observations critical of general delays associated with winding up of insolvent companies (see A R Keay, Avoidance Provisions in Insolvency Law (1997), at 286, and the authorities referred to in note 127)." 14 These observations do not imply that the Court should place any special barriers in the path of the liquidator who seeks an extension of time. The purpose of the 1993 amendments was to impose more rigorous time limits on liquidators, subject to the Court's discretion to grant an extension of time. The history and legislative policy do not require the Court to approach the exercise of its discretion with any predisposition. I also referred to the legislative policy in Brown v DML Resources (No 6), paragraph 34, where I said: "The legislative policy is to discourage liquidators from delaying or deferring action with respect to voidable transactions until the their other tasks have been carried out. It is not a policy of setting up an inescapable time limit regardless of individual circumstances. It is not incompatible with the policy to allow the Court to extend the time for the liquidator to make an application to challenge a voidable transaction." 15 In the present case there is evidence that the plaintiffs could have commenced a proceeding under s 588FF (1) within the original three year period, but they decided on legal advice that it would be better to seek an extension of time and to conduct examinations under Part 5.9 before commencing the proceeding. There were no comparable facts in the earlier cases that have been cited to the Court. 16 In Taylor v Woden Constructions the grounds for the extension related to the complexity of the affairs of the companies, gross deficiencies in records, lack of financial resources to fund investigations within the three year period and consequently the need to obtain financial backing, the need for further legal advice, the existence of other proceedings that had already been brought, and the fact that the liquidator was undertaking a s 596A examination for the purpose of obtaining further evidence. There appears to have been no contention that the liquidator could have commenced a proceeding under s 588FF (1) within the three year period. In Green v Chiswell Furniture Pty Ltd there had been a voluntary administration and a deed of company arrangement, prior to orders for provisional liquidation and a court-ordered winding up. The effect of the definitions in s 513B was that the three year period commenced to run at the commencement of the voluntary administration, and consequently the liquidator had just over three months after assuming that office to commence proceedings or apply for an extension. There was no suggestion that the liquidator was in a position to commence any proceeding within the three years. In Re Richard Walter Pty Ltd [1999] NSWSC 1179 (Santow J, 2 December 1999) the liquidator sought an extension so as to allow time for the handing down of a decision by the Full Federal Court, which he wished to analyse before deciding whether to commence a proceeding to challenge voidable transactions. 17 Therefore it was not necessary for the courts in those cases to decide whether the liquidator must establish that an extension of time was needed at the time it was sought, or that the liquidator was acting for a proper purpose in doing so. In my opinion, however, the general approach by the courts in those cases to the exercise of their discretion is inconsistent with any such requirement. The courts considered whether it was reasonable to allow the liquidator to commence proceedings outside the three year period (see Green v Chiswell Furniture at paragraph 13). Consistently with those cases, the proper approach, when the liquidator is in a position to commence a proceeding under s 588FF (1), is to ask whether the liquidator behaved reasonably in choosing to seek an extension of time rather than making an immediate application. Explanation for delay 18 It is unnecessary, for present purposes, to set out a full chronology of the insolvent administration of the DML companies. I have touched upon aspects of the history in earlier judgments. Suffice it to say that the administration of the companies has been complex, involving tasks in New South Wales, Western Australia and New Zealand, including dealings with a secured creditor as well as investigation of many large and smaller transactions. It has also been necessary for the plaintiffs to arrange litigation funding for the proposed unfair preference proceedings. 19 That is the context within which BP identifies a series of specific matters, upon the basis of which it submits that there were serious and inadequately explained delays during the first three years of the winding up of the companies. BP's submissions are as follows: (1) By March 1998 the plaintiffs had formed the view that the DML companies had been insolvent for at least six months prior to the appointment of the administrators on 24 October 1997. (2) By May 1998 the preference investigation was complete and the plaintiffs had formed the view that BP had obtained preference payments when it was aware that the DML companies were insolvent. (3) Mr Cuming, who gave oral evidence, was unable to explain the delay between the plaintiffs forming their view of these preference payments in May 1998 and instructing their solicitors, Kemp Strang, to send letters of demand in July 1998. (4) By 16 July 1998 the plaintiff had instructed Kemp Strang to write to BP (and the other recipients of the alleged preference payments) demanding repayment and advising that legal proceedings would be immediately commenced if payment was not made within 14 days. (5) The only reason a proceeding was not commenced against BP in July 1998 was lack of funds. (6) The plaintiffs did not approach the creditors for funding. (7) No action was taken to recover preference payments between July 1998 and December 1998, when an approach for funding was made to Bradstock GIS. (8) Apart from obtaining the refusal of the application by Bradstock GIS, no other step was taken to progress the recovery of the preference payments during the period December 1998 to May 1999. (9) The plaintiffs only made one application for funding at a time because Mr Cuming considered that the prospective financier would not appreciate competition. (10) An application for funding was made to Litigation Lending Services ("LLS") on 21 May 1999 and the plaintiffs were advised shortly after that date that this financier required a report as to solvency and a legal advice. (11) The documents relied on by the plaintiffs to produce the report as to solvency were documents available to their firm since March 1998. (12) During the period May to July 1999 the plaintiffs were negotiating the cost of the report, which could have been negotiated with the two weeks. (13) On 12 August 1999 the plaintiffs wrote to LLS advising them that the report as to solvency would cost $8,000 and take two weeks to produce. The production of the report as to solvency took nine months to produce but it could have been produced in three months. (14) The plaintiffs claim that the delay in producing the report as to solvency was due to the demands on Mr Cuming's time by other administrations. (15) During the period October 1997 to December 1999 the administration was conducted almost entirely for the benefit of the secured creditor. (16) The advice from Kemp Strang took about three months to produce, but was delayed by the failure to negotiate the cost of this report until the insolvency report was created. This was the second advice that Kemp Strang had produced on this issue. (17) The entire process of applying for funding, producing the necessary reports and advices and conducting examination summonses could have been completed within 12 months if proper resources have been allocated to the task. (18) The plaintiffs claim that it was not done within this time because of personal time constraints upon Mr Cuming, although he had adduced no evidence of those constraints. (19) At all material times Mr Cuming was aware of the time constraints for the recovery of the preference payments and the reasons for them. (20) The proceeding could have been commenced against BP without any extension of time being obtained. (21) The reason for the extension was to make the claim against BP "cast iron" or to induce a settlement. (22) The only explanation proffered for why the extension was sought at all was because the plaintiffs' solicitors had said it would be preferable, and a belated claim (of which there was no evidence in Mr Cuming's affidavit) that the examinations may otherwise be limited in their scope. 20 In my opinion the factual assertions in paragraphs (1) to (20) inclusive are supported by the evidence and are correct. The question of legal advice, raised by paragraphs (21) and (22), requires fuller treatment. The plaintiffs' legal advice 21 The principal legal advice upon which the plaintiffs relied was an 18 page letter from Kemp Strang dated 10 May 2000. The purpose of the letter of advice was to consider the strength of preference claims that had already been identified, for the purpose of the plaintiffs considering the provision of funding and the basis upon which it might be provided. The letter included transactions between the companies and BP, while extending to transactions between the companies and various other creditors as well. 22 The letter raised the question whether examinations should be conducted to ensure that there was no basis for a creditor to argue that the companies were solvent at the relevant time. The solicitors took the view that it would be difficult for a creditor to establish solvency even without examinations. Therefore, no recommendation was made to delay the commencement of s 588FF (1) proceedings until such examinations took place, the matter being left to the plaintiffs for decision. 23 In the case of BP, however, the letter contained a recommendation that examinations be conducted in view of the complex nature of the transactions, to explore an issue relating to security by way of bank guarantee obtained by BP, and also to explore the possibility of a running accounts defence. The advice on this point continued: "Further, it appears from correspondence from lawyers acting for BP that BP will defend any claim vigorously. It is more likely that a resolution of the claim would be reached if an examination were conducted initially." 24 On the question of cost, the letter recommended that funding be obtained for limited examinations and then proceedings against specifically named creditors. The letter noted that if examinations could not be concluded before August 2000, an application to extend time would be necessary. However, it was also noted that s 588FF (1) proceedings could be commenced even if the examination process was incomplete. 25 BP submits that in light of this letter, and the subsequent funding approval given by LLS, the plaintiffs did not need the extension of time that they sought on 4 September 2000, and could easily have commenced a s 588FF (1) proceeding against BP at that stage. I accept that the plaintiffs could have filed an originating process in September 2000 to challenge transactions between the companies and BP as voidable transactions under s 588FF (1). It follows that they did not strictly need an extension of time. As I have said, the question is not whether an extension of time was needed, but whether the liquidator's behaved reasonably in the circumstances. 26 Kemp Strang's letter of advice had set out a full and thoughtful strategy for the litigation against BP. Although an originating process could have been filed before the commencement of the examinations or while they were continuing, the solicitors preferred the strategy of conducting the examinations first, partly to clarify the availability of defences (and by implication, to avoid the cost of commencing and then discontinuing a proceeding if it became evident that a defence was available), and partly because they believed that the examination process might bring BP to the negotiating table. It is not an abuse of process simply to take into account that the use of a legal procedure justified on other grounds may encourage settlement of the dispute. 27 In my opinion, therefore, it was not unreasonable for the plaintiffs to decide, in light of Kemp Strang's advice and their subsequent receipt of litigation funding, that they should seek a general extension of time and pursue examinations before filing any originating process. The adequacy of the plaintiffs' explanation for delay 28 The summary of facts contained in the 22 paragraphs of BP's submission exposes some delays in the preparation of the plaintiffs' case against BP. Essentially the plaintiffs' explanation, given on their behalf by Mr Cuming, is that: (i) they were, for a large part of the administration, self-funding the process; (ii) it was reasonable for them to direct their time to dealing with the secured creditor, because it was reasonable to hope that this may also assist the unsecured creditors; (iii) it was reasonable for the plaintiffs to apply to no more than one funding institution at a time; and (iv) the delay did not prejudice BP, which was well aware that the plaintiffs were contemplating an unfair preference proceeding against it (this is correct, at least from July 1998 onwards). 29 These submissions do not explain all the gaps between the various stages of administration summarised in BP's submissions. For example, although letters of demand had been written in July 1998, there was no application for funding until December 1998. Nor is there any explanation for the fact that the plaintiffs did not attempt to raise funds from creditors. 30 Nevertheless, it appears to me, on balance, that the plaintiffs were acting reasonably in their conduct of the administration of the companies. It is not necessary, for the purpose of persuading the Court to exercise its discretion to grant an extension of time, to show that the particular administration in question has been given absolute priority over every other administration in the hands of the insolvency practitioners in question; nor that the pursuit of unfair preferences was given absolute or very high priority over other tasks in the administration. The Court must be careful not to replace the liquidator's judgment on the commercial management of the administration with its own opinion. To the extent, therefore, that delay was explained by reference to the plaintiffs' judgment that it was in the interests of all creditors that attention be paid to the secured creditor, and that there were good commercial reasons for approaching one litigation financier at a time rather than playing them off against one another, and in the absence of anything to show that such judgments were unreasonable, the Court should accept the explanation. It may be, as Mr Cuming conceded, that the insolvent administration of these companies could have been completed within 12 months if there were adequate funding and therefore sufficient personnel and resources, but the Court should not require that the administration be completed within the quickest possible time, provided that the liquidator's allocation of resources to the administration has been reasonable in all the circumstances. 31 BP submits that the fact that the administration was largely self-funded is an irrelevancy, because most of the work had been completed by July 1998 and by that time, the plaintiffs knew they had good prospects for recovering preferential payments from particular recipients. I do not agree with this submission. By July 1998 the plaintiffs had been able to reach some conclusions, no doubt provisional, about insolvency and the prospects of recovering preference payments, sufficient to justify letters of demand, but it does not follow that they were in a position to commence recovery proceedings at that stage without further substantial expenditure. In fact the proposed litigation financier thought it necessary to require a solvency report and a detailed legal advice. A prudent liquidator in the shoes of the plaintiffs may have thought it appropriate to obtain advice of this kind even if a litigation financier were not involved, especially given the complexity of the transactions involving BP. 32 BP submits that the plaintiffs' explanation for their delay is fatally flawed, because the explanation is given by only one of them. There is no evidence by Mr Brown to indicate what he has done, or not done, in the insolvent administration of the companies. In my opinion it is not appropriate to draw any inference from the fact that Mr Brown did not give evidence in this case. Mr Cuming was able to give evidence of relevant matters concerning the insolvent administration, for which he had substantial responsibility. The question before the Court relates to the exercise of its discretion. It is not necessary for the plaintiffs to prove every aspect of their administration in the manner that would be necessary, for example, to establish a cause of action and entitlement to relief at the final hearing of civil proceedings for damages. 33 The adequacy of the plaintiffs' explanation for delay is not an independent criterion, but rather it is a factor to be weighed up with all other relevant factors in the exercise of the discretion. The degree of delay in the present case would not necessarily be acceptable in a case where failure to take proceedings has caused prejudice to the prospective defendants, or in a case where the insolvent administration is uncomplicated and fully funded. On the other hand, a greater degree of delay might be acceptable in a case where, for example, there is an indubitable entitlement to recover an unfair preference of a very large amount for the benefit of unsecured creditors, and no prejudice to the potential defendant other than the prejudice of repaying money which he was not entitled to receive. Other considerations 34 I agree with the plaintiffs that there is no prejudice to BP in the present case, other than exposure to the s 588FF (1) proceeding. BP did not seek to identify any prejudice in its submissions, arguing instead, unsuccessfully in my view, that the plaintiffs had failed to establish matters which needed to be established before the question of prejudice would become relevant. The substance of the plaintiffs' claim was notified to the BP companies in July 1998 and there was subsequent correspondence, the terms of which made it clear that a s 588FF (1) proceeding was under serious consideration. 35 BP says that the case for an extension of time present proceeding is not as strong as in the three earlier cases to which I have referred. I neither agree nor disagree with this submission. This case is weaker than the others to the extent that the explanation for delay in this case does not fully explain all periods of delay from 1997 to September 2000. On the other hand, there is detailed evidence in this case concerning the prospects of success of the s 588FF (1) proceeding, particularly in Kemp Strang's letter of 10 May 2000. As Finn J explained in Taylor v Woden Constructions, it is unnecessary for the Court to deal in any detail with the merits of the proposed proceeding for the purpose of considering a s 588FF (3) (b) application, and even a preliminary merits inquiry may not always be necessary. Nevertheless a preliminary view of the merits of the proposed proceeding is relevant to the exercise of the Court's discretion. The evidence before me indicates that the plaintiffs have a good prospect of success in their proceeding under s 588FF (1) against BP. 36 It is also relevant that by a making an order under s 588FF (3) (b), I shall be giving the unsecured creditors a real prospect of recovery which would otherwise be denied to them, thus preserving the prospect that the policy underlying s 588FF - to prevent depletion of the company's assets (Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535, 548) - will be vindicated as regards these companies. Conclusions 37 I have decided to make an order under s 588FF (3) (b) extending the period within which an application may be made by the plaintiffs against BP under s 588FF (1) until an appropriate date. At the hearing on 5 March 2002 the plaintiffs handed up a draft amended originating process for my consideration. I shall grant them leave to file it. I shall make orders in terms of paragraphs 2A and 2B, except that the extension of time will be to Friday 15 March 2002. 38 The plaintiffs have succeeded and BP has failed with respect to the application under s 1322 with which I dealt in Brown v DML Resources (No 6), and with respect to the application for an order for extension of time under s 588FF (3) (b), dealt with in the present reasons for judgment. I see no reason, in either case, for departing from the rule that costs should follow the event. I shall therefore order BP to pay the plaintiffs' costs with respect to those two matters.

Brown v DML Resources

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Judgment (7 paragraphs)

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Cases Cited (7)

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