Buzzle v Apple Computer

LEGISLATION CITED : Corporations Act 2001 (Cth) Bankruptcy Act 1966 (Cth)

Gye v Davies (1995) 37 NSWLR 421 Health Insurance Commission v Trustee In Bankruptcy of the Estate of Ioakim Alekozoglou [2003] FCA 848 Vale v TMH Haulage Pty Ltd (1993) 31 NSWLR 702 Gaffney v Commissioner of Taxation (1998) 81 FCR 574 Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 CASES CITED : Lustre Hosiery Ltd v York (1935) 54 CLR 134 Burke v LFOT Pty Ltd (2002) 209 CLR 282 Dering v Earl of Winshelsea (1787) 1 Cox 318 Wilson v Official Trustee in Bankruptcy (2000) 97 FCR 196 Lofthouse v Commissioner of Taxation (2001) 164 FLR 106 Lyford v Carey (1985) 3 ACLC 515 Re Hide; ex parte Llynvi Coal & Iron Co (1871) 7 Ch App 28

PARTIES : Buzzle Operations Pty Ltd (in liquidation) & Anor Apple Computer Australia Pty Ltd

COUNSEL : T.E.F. Hughes QC with S. M. Golledge (Applicant/Sixth Cross-Defendant) C.R.C. Newlinds SC with A.P. Coleman (Respondents/Cross-Claimants)

SOLICITORS : Websters (Applicant/Sixth Cross-Defendant) Clayton Utz (Respondents/Cross-Claimants)

• 12 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

6768/2004 BUZZLE OPERATIONS PTY LTD (IN LIQ) AND ANOR V APPLE COMPUTER AUSTRALIA PTY LTD

JUDGMENT Introduction and background 1 HIS HONOUR: Proceedings by statement of claim were commenced by the plaintiff company ("Buzzle") and its liquidator against the first defendant company ("Apple") on the basis that Apple was a director of Buzzle within the definition of "director" in s 9 of the Corporations Act 2001 (Cth) and is liable to compensate Buzzle, under the provisions of ss 588G and 588M of that Act, for insolvent trading. Buzzle was placed under a winding up order on 15 February 2002. 2 Similar claims are brought against other directors including Mr James Likidis. Mr Wing Nin Liu was a director at the relevant time but no claim is made against him. 3 Apple and Mr Likidis have, in turn, cross-claimed against Mr Liu, as sixth cross-defendant, for equitable contribution, in the event they are liable as alleged. 4

The cross-claim is pleaded as follows: "… 7. For the purposes of this Cross-Claim only, and without making any admission whatsoever in respect thereof, the Cross Claimants refer to and repeat as against each of the Cross Defendants, the allegations in the Further Amended Statement of Claim dated 26 June 2006. The Cross Claimants deny any liability to the Plaintiffs and deny that either of the Cross Claimants were at any time a director of Buzzle within the definition of "director" contained in section 9 of the Corporations Act 2001 (Cth). In the event the Court finds any liability against the Cross Claimants, the Cross Claimants seek contribution or indemnity from the Cross Defendants because the Cross Claimants and each of the Cross Defendants had, as directors, common obligations towards the Plaintiffs in respect of the alleged loss and damage suffered by the Plaintiffs in the same nature and to the same extent and have a coordinate liability with one another to the Plaintiffs. 8. If, which is denied, the Cross Claimants are found by the Court to be directors of Buzzle as alleged in the Further Amended Statement of Claim, as persons with coordinate liability to the Plaintiffs the Cross Claimants are entitled to equitable or alternatively, legal contribution for or alternatively, an order pursuant to the Corporations Act 2001 (Cth) for contribution or indemnity against each of the Cross Defendants in respect of any judgment and orders in respect of entered against the Cross Claimants in these proceedings." 5 The alternative bases of "legal contribution" or "an order pursuant to the Corporations Act 2001 (Cth)" pleaded in the cross-claim were abandoned. In submissions it was made clear that the claim for contribution is put only in equity. 6 Mr Liu was bankrupted by sequestration order on 12 December 2003, and is undischarged. I will refer to him as "the bankrupt".

Section 58(3)(b) of the Bankruptcy Act 1966 (Cth) provides as follows: "Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: (a) …. (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."

8 Section 82(1) of the Bankruptcy Act provides as follows : "Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his is or her bankruptcy".

9 It is common cause that leave of the Court (in this case the Federal Court of Australia or the Federal Magistrates Court) under s 58(3)(b) of the Bankruptcy Act has not been obtained to promote the cross-claim.

10 It is put on behalf of the bankrupt that a claim for equitable contribution from him in respect of what is pleaded to be a coordinate liability with other directors of Buzzle is a debt provable in his bankruptcy, and, the requisite leave of the Court not having been obtained, the cross-claim should be stayed. By Amended Interlocutory Process dated 30 April 2007 he moves for a stay. The issue 11 The issue is whether a cross-claim by a director against a co-director for equitable contribution to the former's exposure to liability under ss 588G and 588M of the Corporations Act, is a debt or liability which falls within the ambit of s 82(1) of the Bankruptcy Act, and therefore a provable debt under s 58(3)(b). 12 In order to be such a debt or liability the bankrupt must have been subject to it at the date of the bankruptcy or it must be one to which he may become subject before his discharge by reason of an obligation incurred before the date of bankruptcy.

Consideration 13 It is not necessary to set out in full ss 588G and 588M of the Corporations Act. 14 Those sections provide that if a person is a director of a company which incurs a debt when it is insolvent, or becomes insolvent by incurring that debt, and at the time there are reasonable grounds for suspecting the company is, or would become, insolvent, and that director is aware that there are grounds for suspecting insolvency, or if a reasonable person in a like position would be so aware, the liquidator of the company may recover from that director "as a debt due to the company" the amount of the loss or damage suffered by the creditor in relation to the debt. 15 Ordinarily, the damage suffered by the creditor represents the amount of the debt owed by the company to him or her which remains unsatisfied because of the company's inability to pay it. 16 Mr T E F Hughes QC with whom Mr S Golledge of counsel appeared for the bankrupt put the bankrupt's case as follows: s 82(1) of the Bankruptcy Act applies to a contingent future liability of a bankrupt if the circumstances creative of that liability existed at the date of bankruptcy even though at that time the liability had not matured into an obligation enforceable against the bankrupt; it follows that a liability may be a provable debt even if at the date of bankruptcy it had not crystallised into a cause of action: Gye v Davies (1995) 37 NSWLR 421; a claim for equitable contribution satisfies those requirements even though it depends on the claimant establishing payment or exposure to payment of more than his or her fair share of a liability which is coordinate with the liability of another or others; accordingly the cross-claim for equitable contribution is in respect of a provable debt.

17 Mr C R C Newlinds SC with whom Mr A P Coleman of counsel appeared initially emphasised that the cross-claim was not a claim by Buzzle directly against the bankrupt as director but was once removed by the additional necessity for there to be a liability by the bankrupt to the cross-claimants for equitable contribution. 18 He then put that the cross-claim for equitable contribution was no more than "some amorphous vulnerability to a possible debt" and did not meet the criterion for a contingent obligation, namely that "an obligation must be a recognisable one created by law": see Health Insurance Commission v Trustee In Bankruptcy of the Estate of Ioakim Alekozoglou [2003] FCA 848 at 11 [51] per Marshall J; Vale v TMH Haulage Pty Ltd (1993) 31 NSWLR 702 at 709 and following per Priestley JA; Gaffney v Federal Commissioner of Taxation (1998) 81 FCR 574 at 578 per Mansfield J. Hence, he put, there was no liability "certain or contingent" or "obligation incurred before the date of bankruptcy" within s 82(1) of the Bankruptcy Act and therefore no provable debt. 19 He submitted that this was so for two reasons. 20 Firstly, at the relevant date there had been no suggestion by any person that Apple was a director of Buzzle or any assertion by Apple that the bankrupt had any liability to pay any money contingently or otherwise, no person had contemplated such a claim, and the bankrupt's trustee had filed a submitting appearance in the proceedings acknowledging that in his view the claim was not provable in the bankrupt estate. Thus, he put, on any objective assessment of the known facts there was no real or realistic possibility of a claim by Apple against the bankrupt at the relevant date. In support of this proposition he put that in order for the Bankruptcy Act to be workable, creditors must have some ability to know of the existence of a claim they may have against the bankrupt so that they can exercise their right to participate in the available pool of funds. 21 Secondly, before any judgment could be entered against the bankrupt there would need to be consideration of complicated and contested evidence and the exercise by the Court of a discretion. Without the exercise of a discretion in favour of the cross-claimants, there was no liability, not even one which could be described as being contingent. It was put that the so-called "right" to contribution is an equity which will be declared and ordered by a court when circumstances dictate, and that it is not a right which exists absent any order of the court but involves "a quintessential exercise of discretion by a court of equity". 22 In combination therefore, it was put that for the cross-claim to succeed the following chain of events had to occur: the liquidator had to commence proceedings against Apple; the Court had to determine Apple's liability to pay; and the Court had then to find a liability on the part of the bankrupt to contribute to that liability. None of these events had happened before the sequestration of the bankrupt. 23 Reliance was placed on the decision of Giles J in Spika Trading Pty Ltd v Harrison (1990) 19 NSWLR 211 where his Honour held at 214 that: [t]he right to contribution arises at law where one of several persons has paid more than his proper share towards discharging a common obligation, and it arises in equity when a liability of one of several persons to pay more than his share has been ascertained. 24 Mr Newlinds, however, conceded (without any prompting from the Court) that a claim for insolvent trading compensation by a liquidator against a bankrupt arising out of circumstances which occurred before the date of the bankruptcy would be subject to s 82(1) of the Bankruptcy Act.

25 So much seems to be established by authority which binds me: see Vale v TMH Haulage Pty Ltd at 710. 26 The first difficulty for the cross-claimants is that once one accepts that a direct claim for insolvent trading is within s 82(1) of the Bankruptcy Act, the contention that the factors which make that liability contingent move the claim into the category of an "amorphous vulnerability to a possible liability", becomes untenable. The submission to that effect cannot stand together with the concession. 27 The second difficulty with the submission with respect to factors which occurred before the bankruptcy, is that it does not approach the matter by reference to whether the necessary circumstances had then arisen to give rise to a contingent liability, but directs itself rather to the difficulties in facilitating proof of them. 28 Knowledge or ignorance of a creditor of underlying facts which give rise to an obligation on the part of a bankrupt does not touch upon the existence or otherwise of that obligation. 29 The third difficulty with the submission is that the conduct of the trustee in filing a submitting appearance is of no assistance in elucidating any principle. The motivation for his course is unknown. Positions (including making admissions) are taken in proceedings for various reasons. An admission, as with the trustee's submitting appearance may "indicate a state of mind varying from a firm belief based on a thorough investigation…to a wavering preference for one of two or more possible hypotheses none of which have been tested or determined": per Rich, Dixon, Evatt and McTiernan JJ in Lustre Hosiery Ltd v York (1935) 54 CLR 134 at 138-139. In any event, the trustee's conduct cannot determine the law. 30 The distinguishing feature between an insolvent trading claim directly against a director and this claim is the interposition of what is required for an obligation to make equitable contribution.

31 The real question, it seems to me, is whether the engrafting onto the insolvent trading claim of the requirements for an equitable contribution liability of a coordinate obligor takes the claim outside the ambit of s 82(1) of the Bankruptcy Act. 32 This involves a consideration of the nature and requirements for equitable contribution liability, in particular whether it truly is a discretionary remedy and, if so, what the nature is of that discretion. 33 The doctrine of equitable contribution was considered by the High Court in Burke v LFOT Pty Ltd (2002) 209 CLR 282. Gaudron A-CJ and Hayne J at 292 held that in general terms the principle of equitable contribution requires that those who are jointly or severally liable in respect of the same loss or damage should contribute to the compensation payable in respect of that loss or damage either equally where they are liable in the same amount or proportionately where the amount of their liability differs. The doctrine of equitable contribution applies both at common law and at equity and is usually expressed in terms requiring contribution between parties who share coordinate liabilities or a common obligation to make good the one loss. Their Honours referred to Dering v Earl of Winchelsea (1787) 1 Cox 318 at 322 [29 ER 1184 at 1186] as support for the notion that coordinate liability is one that depends on common interest and common burden. 34 The circumstances in which a court will order contribution are not closed: Burke v LFOT at 303 per McHugh J. 35 The doctrine stems from the equitable precept that equality is equity. However this maxim is not to be interpreted literally and it is not necessary to demonstrate that each of the co-obligors owes exactly the same duty founded on exactly the same legal source in precisely the same amount to the identical obligee: Burke v LFOT at 318 per Kirby J. 36 It seems to me that directors of the same company who are liable to the liquidator in respect of the insolvent trading of that entity where the liquidator could recover from each of them as a debt due to the company the amount of the loss or damage suffered by a creditor, have coordinate liability attracting the doctrine of equitable contribution. 37 Indeed, the cross-claim depends for its existence on such a coordinate liability. If such a liability did not exist, on the facts pleaded, the cross-claim would be liable to be struck out on that basis alone. 38 It may be accepted that a claim for equitable contribution could be met by defences generally available to meet equitable claims, such as unclean hands, laches and acquiescence. Culpability on the part of the claimant is a factor bearing on the right to equitable contribution. Also, contribution cannot be obtained from a person who is entitled to indemnity from the claimant: Burke v LFOT at 293 per Gaudron A-CJ and Heydon J. 39 It does not seem to me that it can properly be said, however, that the right to contribution in equity depends on the exercise by the Court of a discretion at large. A right to such contribution exists in equity if there is coordinate liability. The nature and extent of contribution may depend on relative culpability and the availability of any equitable defence. However that is the same in the case of almost any equitable claim. Liability for contribution arises from objective circumstances not from the exercise of discretion. 40 Neither the fact that there must be initial direct liability on the claimant, nor the fact that the circumstances which pertained at the relevant time may affect the extent of the liability of the respondent to the claim (which circumstances must be examined by the Court if they are raised), makes the liability to contribute any less a liability which has arisen by reason of obligations incurred before the bankruptcy. 41 There is nothing in the language of s 82(1) of the Bankruptcy Act that restricts the term "debts and liabilities" to debts due only in law and not in equity: Wilson v Official Trustee in Bankruptcy (2000) 97 FCR 196 at 202 per Emmett J. 42 The coordinate liability asserted existed as much as the director's several liability as at the date of the bankruptcy. As pleaded, there was an existing obligation upon each of the directors as at the date of the bankruptcy to pay as a debt due to the company the loss suffered by the relevant creditors as a consequence of the insolvent trading and an obligation on each of those directors inter se to bear their equitable contribution to it which obligation would arise in a future event namely, that one of them became liable to pay more than his just share: cf Lofthouse v Commissioner of Taxation (2001) 164 FLR 106 at 118 per Warren J; Lyford v Carey (1985) 3 ACLC 515. 43 There does not seem to be any good reason in principle or logic why a claim by the liquidator of Buzzle against the bankrupt would be met by s 82(1) of the Bankruptcy Act because the necessary circumstances arose before the sequestration, but a claim for contribution by another director arising from the same circumstances against the bankrupt would not. 44 The entirety of the acts and omissions of both Apple and the bankrupt which gives rise to their respective liability occurred before the bankruptcy. 45 The broad policy of the bankruptcy law was referred to by James LJ in In Re Hide; ex parte Llynvi Coal & Iron Co (1871) LR 7 Ch App 28 at 31-32 as follows: "Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy…The broad purview of this Act is, that the bankrupt is to be a freed man." 46 It seems to me that an outcome that a direct claim against the bankrupt would be provable, but a claim for contribution against him by a co-director in respect of a coordinate liability arising out of the same circumstances would not be provable would be contrary to that broad policy.

Conclusion 47 In my view, the claims sought to be promoted in the cross-claim fall within the ambit of s 82(1) of the Bankruptcy Act and require leave of the Court to be proceeded with and, in the absence of that leave, must be stayed. 48 I order that the cross-claim brought by the first and second cross-claimants against the sixth cross-defendant be stayed. Those cross-claimants have liberty to apply on three days notice. 49 I provisionally order the cross-claimants to pay the costs of the application. Should they seek to displace it they may serve and file (by delivery to my Associate) a brief written submission by 3 September 2007. Any reply may be filed and served (in like fashion) by no later than 4 September 2007. Absent submissions by the cross-claimants as specified, the provisional order shall solidify. If submissions are received I will determine costs at a later date. **********

05/09/2007 - Replace words "as regards" with words "with respect" - Paragraph(s) 27

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