Carpenter v Pioneer Park Pty Ltd

Judgment (ex tempore) 1HIS HONOUR: By the third amended interlocutory process filed in court by leave today, which amended a process originally filed on 22 May 2012, the Liquidator of SCW Pty Limited (in liquidation) claims the following advice from the court: 1. An order pursuant to s 479(3) [of the (Cth) Corporations Act 2001] that the Liquidator would be justified in not engaging in further discussions with the First and Second Plaintiffs about the proposal referred to in the letter from King & Wood Mallesons dated 5 April 2012 and/or the revised proposal referred to in the letter from King & Wood Mallesons dated 27 June 2012. 1A. An order pursuant to s 479(3) of the Act that the Liquidator would be justified in not assigning the claims the subject of the proposal and the revised proposal to the Plaintiffs. 2. Alternatively to order 1, an order pursuant to s 479(3) of the Act that the Liquidator would be justified in engaging in further discussions with the First and Second Plaintiffs about the proposal referred to in the letter from King & Wood Mallesons date 5 April 2012 and/or the revised proposal referred to in the letter from King & Wood Mallesons dated 27 June 2012 but only on the basis that the Liquidator is not required to keep those discussion confidential 2A. Alternatively to order 1A: (a) an order pursuant to s 479(3) of the Act that the Liquidator would be justified in entering into a deed in the form annexed hereto and marked "A" (Deed) with the plaintiffs. (b) an order pursuant to s 477(2B) of the Act approving the entry by the Liquidator into the deed. Essentially, because of its inclusion by a late amendment, I have indicated that I will not today deal with the claim for relief in paragraph 2A, although that is not to say that the existence of the proposal referred to in it is irrelevant to the consideration of the other claims for relief. 2SCW is a company in liquidation, having been wound up on the just and equitable ground in circumstances where it is manifestly solvent, but was deadlocked. It had two directors - Mr Schirato and Ms Cantarella - who each represented equal shareholding interests of themselves and companies controlled by them and which, for the purposes of this judgment, are sufficiently described as the Cantarella interests and the Schirato interests. 3Mr Schirato contends that the company has causes of action against Ms Cantarella for breaches of her duties owed to it as a director of SCW. The Liquidator has caused those allegations to be investigated and, for that purpose, obtained a comprehensive advice from his solicitors, Piper Alderman, to the effect that there was no breach of duty to exercise the requisite degree of care and diligence such as to constitute a breach of the (Cth) Corporations Act 2001, s 180; that further information was required to determine whether there were breaches of the duties of good faith and proper purpose under s 181 and s 182; and that Piper Alderman should be instructed to interview Mr Schirato, Ms Winton (as Ms Cantarella was then known), Mr Wannan and Mr Elliott. 4Piper Alderman duly interviewed Mr Schirato, Mr Wannan, and Ms Cantarella and subsequently provided a further comprehensive advice to the effect that there was no breach of the duties of good faith and proper purpose, and that it would not be an appropriate use of the company's funds to commence an action against Ms Cantarella. On 5 April 2012, Mr Schirato's solicitors put a proposal to the Liquidator, through the Liquidator's solicitors, to acquire all claims the companies had against Ms Cantarella or any other person involved in a breach of duty, for a fee to be determined and the negotiations to remain confidential. As I have recorded, on 22 May 2012, the Liquidator filed his interlocutory process claiming advice to the effect that he would be entitled not to enter into further discussions in respect of that proposal. On 27 June 2012, the Schirato interests put a revised proposal to the Liquidator, which differed from the original proposal the first in that it omitted one aspect of it, which had involved the conferring on the Schirato interests of an option to prosecute claims against Ms Cantarella in the name of the company, but otherwise did not affect its essential features. 5The Schirato interests obtained an opinion from Mr Newlinds of Senior Counsel who, while agreeing with the advices that had been provided by Piper Alderman to the Liquidator in many respects, did not do so in respect of three discrete potential causes of action. Mr Newlinds concluded in respect of one of them that there was a reasonably arguable cause of action, and in respect of another two that there were at least reasonably arguable cases of breach, but that questions of causation and damage required further investigation. The Liquidator asked Piper Alderman to consider Mr Newlinds' opinion and they, in turn, on 30 July 2012, advised that their view was unaffected by Mr Newlinds' opinion and they remained of the opinion that none of the three causes of action identified by him were reasonably arguable. 6On 13 November 2012, the Schirato interests asked the Liquidator to reconsider the revised proposal and on this occasion, for the first time indicated the amount that they were prepared to pay, to the extent that it was indicated that their offer was not less than $100,000. 7Thereafter, there were further negotiations between the Liquidator and the Schirato interests, in the course of which the Liquidator put to the Schirato interests a proposal by which the company would assign only the three specific causes of action identified in Mr Newlinds' opinion, and on the basis that the net proceeds would be held equally for the two shareholders. That proposal forms the basis of the deed referred to in paragraph 2A of the interlocutory process. Although the Schirato interests have indicated agreement in principle to the Liquidator's proposal, other than the limited form of claims to be assigned, it remains the case that there is, at least at this stage, no concluded agreement in that respect, and that is another reason why it is inappropriate to consider the claim in paragraph 2A at this stage. 8It is in that context that the Liquidator seeks advice, essentially, to the effect that he would be justified in disregarding the proposal, or the revised proposal, made by the Schirato interests. 9It is important to observe at this stage that in proceedings of this kind it is neither possible nor appropriate to determine whether in fact the causes of action identified by Mr Newlinds SC are viable or hopeless. This form of proceeding is not one in which such a conclusion can be made. Nor did the Liquidator suggest that it was open to me in these proceedings to reach such a conclusion. To the contrary, the Liquidator acknowledged that while, on what appeared to be sound and well-reasoned advice, the Liquidator had formed a view about Mr Newlinds' advice, there might arguably be another view. Secondly, the advice being sought is not advice as to whether the Liquidator would be justified in not commencing proceedings on these potential causes of action, but whether he would be justified in disregarding an offer to acquire them. Given the advice that the Liquidator has received and acted upon from his own lawyers and notwithstanding the existence of contrary advice from Mr Newlinds, it might very well be that the Liquidator would be justified in not commencing proceedings; but, as I have said, that is not the advice which is sought. Rather, the issue is whether the Liquidator, having decided not to commence proceedings, is justified in disregarding an offer of $100,000 or more for a cause of action, or causes of action, which would otherwise generate nothing for the company. 10Next, it is important to remember that, in considering what the Liquidator is and is not justified in doing, one approaches the matter from the interests not of one or other, or even both, of the individual shareholding interests, but from the perspective of the company as a whole. 11A number of arguments were identified by the Liquidator, and some further reasons elaborated on behalf of the Cantarella interests, as to why the advice sought should be given, and why the Liquidator would be justified in effectively disregarding the proposal and the revised proposal. I do not take them in any particular order, and nor do I pretend that the manner in which I will address them precisely reflects the way in which counsel put them in their various submissions, but I think that the approach I take does cover, directly or indirectly, each of the matters advanced by counsel. 12First, it was said that for the Liquidator to accept the proposal, or the revised proposal, would deprive the Cantarella interests of their rights as a shareholder to participate in the proceeds of realisation of the asset in question, namely, the potential causes of action. That submission is wrong. It will not deprive them of their share of the proceeds of realisation at all. If the causes of action are realised for $100,000, then they will benefit to the extent of half of the price for which they are realised. It is not to the point that, ultimately, the causes of action might turn out to generate more for the assignee than the value struck for the purposes of their assignment. Liquidators frequently compromise claims against third parties and against directors for the benefit of achieving an expeditious winding up. On the current state of the evidence, moreover, particularly having regard to the position advanced by the Liquidator and the Cantarella interests, $100,000 would be a very considerable overvalue rather than undervalue of the causes of action. And, if so minded, the Cantarella interests could always offer more than the Schirato interests, should they think that they are being assigned at an undervalue. 13Secondly, it was put that the claims are so widely defined as to include claims that may be hopeless, or have already been determined to be hopeless. In my view, so long as what is assigned includes claims that cannot be said to be clearly hopeless, it is no objection that the proposed assignment is very wide. Indeed, it is usually desirable that it be wide. As was pointed out by the Full Court of the Federal Court of Australia in Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667, difficulties would arise if an assignment were made by a trustee of less than the whole of the rights of the bankrupt against the proposed defendant. See also Stein v Blake (1996) 1 AP 243; Re Park Gate Wagon Works Company (1891) 17 CD 234; and Cotterill v Bank of Singapore (Australia) (1995) 37 NSWLR 238. This is all the more so where otherwise no value at all would be generated by the claims in question. 14Thirdly, it was said that the proposal would involve the assignment of claims, including claims against third parties that had not been investigated or valued. As was also pointed out in Citicorp Australia v Official Trustee in Bankruptcy, the power of sale of a trustee in bankruptcy or a Liquidator is not circumscribed by a duty to first ascertain that the claim is one with a reasonable prospect of success, and to require the trustee to investigate the prospects would be inconsistent with the position that the trustee might decide to sell what was the estate without funds or to hasten the winding up of the insolvency. See also Seear v Lawson (1880) 15 CD 426; Stein v Blake supra; and Ramsay v Hartley (1997) 1 WLR 686. Again, the fact that the Liquidator is not able to and has not valued the claims in question is, it seems to me, quite beside the point in the context that those claims will, if not assigned under the proposal, otherwise generate no value at all for the company in liquidation. 15Fourthly, it was said that the claims proposed to be assigned have been accepted by the Liquidator to be worthless and without prospect of success and such as not to be an appropriate application of the company's funds and that they, therefore, ought not be assigned. As Citicorp v Official Trustee establishes, there are cases in which, even if the proposed assignee offers a sum of money, a claim ought not be assigned by a Liquidator or trustee, and that is where the claim is frivolous or vexatious. However, as was also pointed out in Citicorp, where a creditor or intervening party contends that an assignment should not be authorised because the proposed claim has no prospects of success, it is for that party to demonstrate the absence of any prospect of success. As I understand it, no party has undertaken that task on the present application, all accepting that this is not an appropriate forum or process in which to do so. Had the Liquidator formed the view that the claims ought not be assigned, on the basis of an opinion that their assignment was being sought by the Schirato interests without any genuine belief that they were valid claims and purely for the purpose of positioning the Schirato interests to harass the Cantarella interests further, the position might have been otherwise. But the Liquidator eschewed any such submission. On the basis of the revised proposal, no use of company assets would be involved in investigating or prosecuting the claim. This is a case in which there is at least the prospect of there being valid claims, as borne out by Mr Newlinds' advice. I cannot conclude that the proposed claims are so clearly frivolous or vexatious that their assignment would be improper and ought not be permitted. 16Fifthly, it was put that the proposal, or revised proposal, would delay the winding up. It may be that the original proposal would have done so - indeed, it probably would have done so. But the revised proposal would not have that consequence. It enables the cause of action to be assigned and the winding up to proceed unhindered by the pendency of any litigation to which the company would be a party. A derivative action would more likely delay the completion of the winding up than the assignment of the cause of action. 17Sixthly, it was put that, the Liquidator having concluded that the claims had no reasonable prospects of success, it would be inappropriate to allow the company's names and funds to be lent to the litigation. The short answer to that proposition is that that will not happen under an assignment of the cause of action. 18Seventhly, it was put that there were alternative remedies available to the Schirato interests; namely, a derivative action, and/or review of the Liquidator's decision. I must concede that, at first, this argument struck me as a powerful one. However, on closer examination, it, too, must be rejected. As to a derivative action, I accept that, notwithstanding the decision of the Court of Appeal in Chahwan v Euphoric Pty Ltd, the ability of a shareholder to bring a derivative action in the name of and on behalf of the company survives liquidation, though not under the statutory provisions of the Corporations Act, s 237, but rather at general law [see Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577; Ragless v IPA Holdings (In Liq) (2008) 65 ASCR 700; Syndicate Mortgage Solutions Pty Ltd v El-Sayad [2010] NSWSC 348 at [10] - [11]]. I accept that Mr Schirato and his interests have an alternative remedy in this way, but that remedy would be essentially for their benefit, and of dubious benefit yto the company. The question is not of of avoiding detriment to the interests of an individual shareholder, but of the greatest benefit to the company as a whole. I cannot see how, viewed from the perspective of the company as a whole, the survival of a derivative action for the Schirato interests is not inferior to the receipt of a substantial lump sum of consideration for the assignment of a cause of action that the Liquidator believes is worth very little. The proposal results in an immediate benefit for both shareholders, far greater than that that the Liquidator (and, for that matter, the Cantarella interests) apparently believes is realistically achievable otherwise. 19So far as appeal or review of the Liquidator's decision not to institute proceedings in respect of the potential causes of action is concerned, that is a completely different question from the present. It may very well be that the Liquidator's decision, informed as it was by comprehensive advice from Piper Alderman, that it would be an inappropriate use of the company's funds to pursue those causes of action, was an entirely reasonable and proper one that could not be questioned on review. It is quite a different matter to consider whether, having made that decision so that otherwise those causes of action would generate nothing, a proposal whereby $100,000 or more might be generated from those causes of action should be disregarded. The existence of a remedy by way of review simply does not inform whether it is appropriate to disregard an offer of substantial funds for something that would otherwise generate nothing. 20For all of those reasons, in my view, the Liquidator's reasons for wishing to disregard the proposal and the revised proposal are not such as to make that a course that ought to be sanctioned by the Court and I will not give the advice sought in paragraphs 1 and 1A of the interlocutory application. 21So far as concerns paragraph 2, the essential question is whether the proviso in respect of confidentiality should or should not stand. As it seems to me, all the relevant parties know of the terms of the proposal and of the revised proposal, they having been aired in the evidence and in open court in the course of the hearing. Nothing would be achieved by requiring them to be kept confidential. 22As I understand the position advanced on behalf of the Schirato interests, it is not so much that the terms of the offers should not be disclosed to the Cantarella interests, but that it ought not be mandatory that negotiations take place with both parties present. It seems to me that it is, or ought to be, a matter for the Liquidator as to the extent to which it is commercially desirable to maintain confidentiality about the offer, bearing in mind that it appears to be accepted on all sides that before entering into a formal assignment the Liquidator would return to the Court for further advice in respect of which the Cantarella interests would have an opportunity to be heard. 23On the other hand, there is, it seems to me, every prospect that if the terms of any offer or any further offer that the Schirato interests might make were advised to the Cantarella interests, then there might be some incentive for the Cantarella interests to offer a still greater amount which would plainly be in the interests of the company as a whole. In those circumstances, it seems to me that the proper position is that the Liquidator ought not be obliged to keep the terms of the offers and the negotiations confidential. That is not by any means to say that the Liquidator is obliged to disclose them to the Cantarella interests. It is a matter for the Liquidator's commercial judgment as to how the interests of the company will best be served in that situation. 24In doing so, I should observe, because of some of the arguments that have been advanced, that I do not accept that dealing fairly between the shareholders in the liquidation necessarily obliges the Liquidator to disclose to the Cantarella interests, Ms Cantarella being the potential defendant, the terms of offers made to acquire the causes of action against her. As I have said, perhaps too many times, that is a matter for the careful commercial judgment of the Liquidator. 25In order to make the position quite clear, I will advise the liquidator in the negative of the advice sought in paragraph 1 of the interlocutory process 26I will make order 1 in the interlocutory process, inserting the word "not" after the word "would" and before the words "be justified". 27I will make order 2 in the interlocutory process, deleting the words "alternatively to order 1" and substituting in the last line for the word "required", the word "obliged". 28I will make order 3 in the interlocutory process, in respect of costs. 29My orders therefore are: 1. Order pursuant to s 479(3) [of the (Cth) Corporations Act 2001] that the Liquidator would not be justified in not engaging in further discussions with the First and Second Plaintiffs about the proposal referred to in the letter from King & Wood Mallesons dated 5 April 2012 and/or the revised proposal referred to in the letter from King & Wood Mallesons dated 27 June 2012. 2. Order pursuant to s 479(3) of the Act that the Liquidator would be justified in engaging in further discussions with the First and Second Plaintiffs about the proposal referred to in the letter from King & Wood Mallesons date 5 April 2012 and/or the revised proposal referred to in the letter from King & Wood Mallesons dated 27 June 2012 but only on the basis that the Liquidator is not obliged to keep those discussions confidential. 3. An order that the Liquidator's cost of and incidental to this application be costs in the liquidation of the First Defendant.