Campbells Cash & Carry Pty Ltd v Fostif Pty Limited

Judgment 1This is an application brought by the first defendant, Belinda International Pty Ltd, to stay or dismiss an originating process filed by the plaintiff, Mr Devin. By his originating process, Mr Devin seeks an order under s 445D of the Corporations Act 2001 (Cth) ( the Act ) that a deed of company arrangement ( DOCA ) entered into by Belinda on 26 September 2011 be terminated or, alternatively, an order pursuant to s 445G of the Act that the DOCA be declared void. 2Belinda is a retailer of high end women's clothing which operates a number of stores in Sydney. On 23 August 2011, it went into voluntary administration. Mr Devin worked for Belinda and lent it $300,000.00, of which $284,740.06 remains outstanding. The loan was apparently a substantial part of Mr Devin's life savings. 3On 9 September 2011, Mr Devin entered into an agreement with AR Management Pty Limited ( ARM ). ARM, through one of its subsidiaries known as mycatwalk.com, is a competitor of Belinda. Under the terms of the agreement: (a) Mr Devin agreed to appoint ARM to act as his authorised representative and to vote on his behalf in its absolute discretion at any meeting of creditors of Belinda; (b) Mr Devin agreed not to attend or vote at any meeting of creditors of Belinda or to exercise any other right attached to the debt owed to him except at the written request or direction of ARM; (c) in return, ARM agreed to pay Mr Devin amounts referred to in the agreement as the "Price". The "Price" was defined to mean the sum of $14,237.00 (which was 5 percent of the debt owed to Mr Devin) together with an amount described as a "Success Fee". The Success Fee was defined to be the amount of $35,763.00 and was payable if ARM acquired all or the majority of the business assets of Belinda within 12 months of the date of the agreement; (d) Mr Devin was required to pay to ARM all distributions received in respect of his debt up to an amount of $14,237.00. He was entitled to keep any sum that he recovered above that amount for himself; (e) ARM agreed to employ Mr Devin as a consultant at the rate of $2,500 per day for 4 days or, if ARM acquired all the business assets of Belinda, for 20 days. 4On 13 September 2011, the administrators advertised the businesses conducted by Belinda for sale. The administrators also prepared an information package for prospective purchasers. The information package requested interested parties to lodge a signed contract with the administrators by 10.00 am on 19 September 2011 together with a 10 percent deposit. The information package made it clear that the administrators had complete discretion whether to accept or reject an offer. 5On 13 September 2011, the administrators circulated a report to creditors pursuant to s 439A of the Act. That report made reference to the fact that the business had been advertised for sale and that offers for the business were to be lodged by 19 September 2011. The report noted that it may be appropriate that the meeting of creditors be adjourned to consider any offers that were made. 6On 19 September 2011, ARM lodged an expression of interest for Belinda's assets with the administrators. The offer to acquire the business was for $2,170,230.00 and the expression of interest was accompanied by a bank cheque for $217,023.00. The offer was subject to due diligence and legal documentation. 7On 20 September 2011, ARM made a second offer. The offer was no longer expressed to be subject to due diligence and the offer price was increased to $2,353,895.00. 8The meeting of creditors was held on 21 September 2011. The chairperson of the meeting recommended that the meeting be adjourned in order to permit further consideration to be given to ARM's offer and time for the administrators to prepare a supplementary report to creditors concerning that offer. However, that resolution failed and a majority of the creditors voted in favour of accepting the DOCA. 9The creditors of the company have been divided into two pools. Under the terms of the DOCA, creditors falling within Pool A are expected to receive 100 cents in the dollar and creditors falling within Pool B are expected to receive 5 cents in the dollar. Management of the company has been returned to the existing management and the company continues to trade. Under the terms of the offer made by ARM, Pool A creditors would have received 100 cents in the dollar and Pool B creditors would have received 15 cents in the dollar. 10On 28 September 2011, Mr Devin commenced these proceedings. He seeks to set aside the DOCA on various grounds which have been identified in points of claim. It is sufficient to observe for present purposes that it is not suggested that these grounds are so weak that the proceedings should be struck out or dismissed for that reason. ARM has agreed to indemnify Mr Devin against any costs he incurs in the proceedings including any adverse costs order. 11Mr Rosenblatt, who appeared for Belinda, submits that the proceedings are an abuse for two reasons. First, he submits that they are being brought for an ulterior purpose - that is, for the purpose of assisting ARM to acquire Belinda's assets. Second, Mr Rosenblatt submits that they are contrary to public policy because they are being funded and are controlled by ARM, which has no real interest in the proceedings. In particular, Mr Rosenblatt points to the following features of the proceedings in support of this submission: (a) absolute control of the proceedings is vested in ARM which is not a party; (b) ARM has no liability for the first defendant's costs; (c) there is a disproportionality of value between the rights the subject of the action and "subsisting rights independent of the litigation"; (d) ARM does not have a genuine commercial interest in the proceedings, but only a "mere hope" that it will be able to acquire the assets if the DOCA is set aside. In making these submissions, Mr Rosenblatt relies on the decision in Project 28 Pty Ltd (Formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240. 12In my opinion, Mr Rosenblatt's first reason confuses motive and purpose: see News Ltd v South Sydney District Rugby League Club Limited [2003] HCA 45; 215 CLR 563 at 573 per Gleeson CJ. There is no question that Mr Devin (and ARM) seek to set aside the DOCA on the grounds identified in the points of claim. That is the purpose for which the proceedings are brought. The fact that, if the proceedings succeed, ARM will derive a collateral benefit from that result may say something about the motive underlying the proceedings. However, it does not alter the fact that the proceedings are brought for the purpose of setting aside the DOCA on the grounds relied on. In those circumstances, the proceedings are not brought for a collateral purpose and cannot be stayed or dismissed for that reason: see Williams v Spautz [1992] HCA 34; 174 CLR 509 at 526. 13Nor do I accept Mr Rosenblatt's second reason. In this case, ARM is funding the litigation both for its own benefit and for the benefit of Mr Devin. It is doing so in circumstances where the likelihood is that Mr Devin could not afford to fund the litigation himself. Mr Devin stands to benefit directly from the litigation because, if the DOCA is set aside and the assets are sold to ARM, Mr Devin will receive a higher dividend. The additional amount that Mr Devin is likely to receive may not be substantial compared to the value of the assets that ARM seeks to acquire, but it is substantial from Mr Devin's point of view. There can be no public policy reason for denying Mr Devin the right to seek to set aside the DOCA in the hope or expectation that he can do better in that event. Nor can there be any public policy reason in Mr Devin obtaining funding from ARM in order to do so, anymore than there was a public policy reason in Campbells Cash & Carry Pty Ltd v Fostif Pty Limited [2006] HCA 41; 229 CLR 386 preventing a litigation funder from funding a representative action. It is not entirely clear whether ARM has complete control of the litigation. Certainly, I do not think that it is given complete control of the litigation by the agreement dated 9 September 2011. That agreement is concerned with the proof of Mr Devin's debt rather than any subsequent litigation. In any event, even if ARM does have complete control of the litigation, I do not think that that alone is sufficient to establish that the proceedings are an abuse. 14In addition, in my opinion, ARM's interest in the litigation itself goes beyond a mere hope or expectation. It made an offer in response to an invitation from the administrators and paid a deposit. The administrator chairing the creditors' meeting recommended that the meeting be adjourned to consider that offer. However, a majority of creditors resolved to continue the meeting and approve the DOCA. ARM has a genuine commercial interest in proceedings challenging that resolution. For that reason also, there is no abuse in it funding the proceedings brought in Mr Devin's name. 15The first defendant's interlocutory process dated 27 October 2011 should be dismissed with costs.