CMC (Australia) Pty Limited v Jim Sarantinos & ors

Item If the third party is ... then ... 1 a secured party in relation to property of the company, and is not otherwise covered by this table the third party cannot enforce the security interest. 2 a secured party in relation to a possessory security interest in the property of the company the third party cannot sell the property, or otherwise enforce the security interest. 3 a lessor of property used or occupied by, or in the possession of, the company, including a secured party (a PPSA secured party) in relation to a PPSA security interest in goods arising out of a lease of the goods the following restrictions apply: (a) distress for rent must not be carried out against the property; (b) the third party cannot take possession of the property or otherwise recover it; (c) if the third party is a PPSA secured party-the third party cannot otherwise enforce the security interest. 4 an owner (other than a lessor) of property used or occupied by, or in the possession of, the company, including a secured party (a PPSA secured party) in relation to a PPSA security interest in the property the following restrictions apply: (a) the third party cannot take possession of the property or otherwise recover it; (b) if the third party is a PPSA secured party-the third party cannot otherwise enforce the security interest.

12Section 442C (When administrator may dispose of encumbered property) provides as follows: (1) The administrator of a company under administration or of a deed of company arrangement must not dispose of: (a) property of the company that is subject to a security interest; or (b) property (other than PPSA retention of title property) that is used or occupied by, or is in the possession of, the company but of which someone else is the owner or lessor. Note: PPSA retention of title property is subject to a PPSA security interest, and so is covered by paragraph (a) (see definition of PPSA retention of title property in section 51F). (2) Subsection (1) does not prevent a disposal: (a) in the ordinary course of the company's business; or (b) with the written consent of the secured party, owner or lessor, as the case may be; or (c) with the leave of the Court. (3) The Court may only give leave under paragraph (2)(c) if satisfied that arrangements have been made to protect adequately the interests of the secured party, owner or lessor, as the case may be. (4) If the administrator proposes to dispose of property of the company under paragraph (2)(a), the Court may, by order, direct the administrator not to carry out that proposal. (5) The Court may only make an order under subsection (4) on the application of: (a) if paragraph (1)(a) applies--the secured party; or (b) if paragraph (1)(b) applies--the owner or lessor, as the case may be. (6) The Court may only make an order under subsection (4) if it is not satisfied that arrangements have been made to protect adequately the interests of the applicant for the order. (7) If: (a) a company is under administration or is subject to a deed of company arrangement; and (b) property of the company is subject to a security interest; and (c) the administrator disposes of the property; the disposal extinguishes the security interest. (8) For the purposes of paragraph (2)(a), if: (a) property is used or occupied by, or is in the possession of, a company; and (b) another person is the owner of the property; and (c) either: (i) the property is PPSA retention of title property; or (ii) the property is subject to a retention of title clause under a contract; and (d) the owner demands the return of the property; a disposal of the property that occurs after the demand is made does not mean that the disposal is not in the ordinary course of the company's business. 13Section 442CC (proceeds of sale of property) relevantly provides as follows: Property subject to a possessory security interest (1) If: (a) a company is under administration; and (b) property of the company is subject to a possessory security interest; and (c) the administrator disposes of the property by way of sale; then: (d) if the net proceeds of sale equals or exceeds the total of the debts secured by: (i) the possessory security interest; and (ii) any other security interest in the property, where the debt secured by the security interest has a priority that is equal to or higher than the priority of the debt secured by the possessory security interest; the administrator must: (iii) set aside so much of the net proceeds as equals the total of those debts; and (iv) apply the amount so set aside in paying those debts; or (e) if the net proceeds of sale fall short of the total of the debts secured by: (i) the possessory security interest; and (ii) any other security interest in the property, where the debt secured by the security interest has a priority that is equal to or higher than the priority of the debt secured by the possessory security interest; then: (iii) the administrator must set aside the net proceeds; and (iv) the administrator must apply the amount so set aside in paying those debts in order of priority, on the basis that if the amount is insufficient to fully pay debts of the same priority, they must be paid proportionately; and (v) if any of those debts is not fully paid-so much of the debt as remains unpaid may be recovered from the company as an unsecured debt. PPSA retention of title property (1A) If the administrator of a company disposes of PPSA retention of title property of the company by way of sale, then the administrator must apply the net proceeds of the sale in the same way as a secured party is required, under section 140 of the Personal Property Securities Act 2009, to apply an amount, personal property or proceeds of collateral received by the secured party as a result of enforcing a security interest in the property. Note: PPSA retention of title property does not include property that is subject to a retention of title clause (see section 9, definitions of PPSA retention of title property and retention of title clause). Subsection (2) deals with property that is subject to a retention of title clause. Property subject to a retention of title clause (2) If: (a) a company is under administration; and (b) property is used or occupied by, or is in the possession of, the company; and (c) another person is the owner of the property; and (d) the property is subject to a retention of title clause under a contract (the original contract); and (e) the administrator disposes of the property by way of sale; then: (f) if the net proceeds of sale equals or exceeds the total of: (i) so much of the purchase price, or other amount, under the original contract as remains unpaid; and (ii) if there are one or more securities over the property-the debts secured by the securities; the administrator must: (iii) set aside so much of the net proceeds as equals that total; and (iv) apply the amount so set aside in paying that total; or (g) if the net proceeds of sale fall short of the total of: (i) so much of the purchase price, or other amount, under the original contract as remains unpaid; and (ii) if there are one or more securities over the property-the debts secured by the securities; then: (iii) the administrator must set aside the net proceeds; and (iv) the administrator must apply the amount so set aside in paying those debts in order of priority, on the basis that if the amount is insufficient to fully pay debts of the same priority, they must be paid proportionately; and (v) if any of those debts is not fully paid-so much of the debt as remains unpaid may be recovered from the company as an unsecured debt. Note: Property that is subject to a retention of title clause does not include PPSA retention of title property (see section 9, definitions of PPSA retention of title property and retention of title clause). Subsection (1A) deals with PPSA retention of title property. 14Prior to instituting the proceedings, the plaintiff's solicitors Holman Webb sought undertakings and other assurances from the defendants in connection with the subject goods. On 10 October 2012, Holman Webb wrote to the administrators and, after referring to the plaintiff's rights under clause 7 of its Standard Conditions of Sale, asked: Please contact us by no later than 12 noon on 11 October 2012 in order to arrange a mutually convenient time for our client to collect the goods. 15On 12 October, in the absence of a response from the administrators, Holman Webb wrote again, stating that the plaintiff was concerned that the administrators might use the goods, and requesting an undertaking that they not be used in any way until they could be collected, and concluding: In the event that the requested undertaking is not received by 5.00 pm on Friday 12 October 2012, we advise that we have instructions to make an urgent Supreme Court application seeking, amongst other things, declarations as to our client's entitlement to the goods and orders for the delivery up of goods. 16Allens Linklaters responded on behalf of the defendants that day at 6.01pm, relevantly as follows: We are instructed that the administrators have not operated the business of the company since their appointment on 5 October 2012 and are unlikely to do so. Having said that, we simply note the administrators' write to dispose of encumbered property including retention of title property, in the ordinary course of business under s 442C(2) of the Corporations Act 2001 (Cth) ("Act"). Given the current trading position of the company and the rights of the administrators under the Act as noted above, and undertaking in the terms sought by CMC is inappropriate and will not be provided by the administrators ... 17Holman Webb responded on 15 October 2012, asking what assurance the administrators could give as to safeguarding the plaintiff's goods, that the response be provided as a matter of urgency "so that our client has an informed basis to determine whether to commence proceedings", and requesting three business days' notice of any intention by the administrators to resume operation of the business. Allens responded on 16 October 2012: In relation to CMC's request for at least three business days' written notice of any intention on the part of the administrators to operate the business, we are instructed that this is not likely to be practical. However, as noted in our earlier letter, we are instructed that the administrators do not have a present intention to operate the business of the company. Although the administrators do not have a present intention to operate the company, you are aware of their right to dispose of encumbered property, including retention of title property, in the ordinary course of business under s 442C(2) of the Corporations Act 2001 (Cth). In the event that CMC commences proceedings in this matter, the administrators will seek costs against CMC and reserve the right to seek indemnity costs. 18Holman Webb replied on 17 October 2012: The purpose of our correspondence has been to attempt to arrive at a commonsense solution to this issue. Our client acknowledges the administrators' rights under s 442C(2) of the Corporations Act in respect of the disposal of property that is subject to a security interest in the ordinary course of the business. However, your clients' rights are subject to court intervention under s 442C(4) of the Corporations Act. Our client cannot possibly seek the intervention of the court to prevent your clients from disposing of its goods if your clients are not prepared to give prior written notice of that intention. Our client has merely sought that it be notified of any intention of your clients to sell or otherwise dispose of our client's goods. Your clients must know in advance if they intend to dispose of our client's goods. Why can't your clients give notice to our client of that intention? 19In the absence of a response, Holman Webb sent a follow up letter on 18 October. Allens replied on 19 October 2012, seeking details of the terms and conditions of sale and concluding: In relation to your letter dated 17 October 2012, we are instructed that it remains the position that providing CMC with three business days' written notice of any intention on the part of the administrators to operate the business is impractical. Having said that, in the event that the administrators elect to sell CMC's goods in the ordinary course of business, we are instructed that the administrators will set aside the funds received from any sale of those goods and will not apply those funds without providing CMC with three business days' notice. 20In those circumstances, the plaintiff instituted the proceedings on the afternoon of 23 October 2012, and served them at about 9.30 am on 24 October 2012. At 5.45 pm on 24 October 2012, Allens conveyed to Holman Webb the following: The administrators hereby give an undertaking to CMC that the administrators will not cause the company to sell or otherwise dispose of consignment stock which CMC alleges it owns, without CMC's consent in writing, ... we are further instructed that a representative from the purchaser has contacted a representative of CMC today with a view to continuation of trade with CMC, including in respect of any consignment stock CMC has supplied to the company, on terms of trade to be agreed between the purchaser and CMC. The administrators encourage your client to finalise those arrangements at the earliest opportunity. 21As already recorded, on 29 October 2012 the administrators gave an undertaking "not to cause the fourth defendant to sell, encumber or otherwise dispose of the consignment of stock which the plaintiff alleges it owns, without the plaintiff's consent in writing". 22The defendants thereafter continued to dispute to some extent the plaintiff's entitlement to the steel, at least for a time. However, by letter of 23 November 2012, Allens' wrote: While the administrators are entitled to retain possession of the goods during the administration over which your client claims a retention of title security interest (see s 440B Corporations Act 2001), the administrators do not wish to be involved in unnecessary and premature litigation in relation to the goods. Without in any way acknowledging the validity of CMC's claim, our clients are willing to make the goods available to CMC immediately and/or for CMC to enter into its own arrangements in relation to the goods with Southern Steel or another third party as it sees fit. 23Subsequently, the plaintiff has collected the goods and sold them. 24The plaintiff contends that the defendants failed to give an appropriate undertaking which would have rendered the proceedings unnecessary. Significance is attached to the circumstance that such an undertaking was proffered, but only after service of the proceedings. The plaintiff submits that the defendants' conduct was unreasonable in the relevant sense, and that the trouble and expense of the litigation could have been entirely avoided had the defendants proffered the undertakings sought before proceedings were instituted. In particular, the plaintiff submits that the administrators unreasonably refused CMC's request to make the goods available for collection, declined to give an undertaking that the goods not be used in any way, repeatedly asserted their purported right to sell the goods, and declined even to indicate when the business might be reactivated, thus triggering the possible sale of the goods. 25However, CMC was not entitled to retake possession of the goods during the administration, other than with the administrators' consent or the leave of the court: Corporations Act s 440B, item 4 of the Table. The administrators were not bound to surrender the goods to the plaintiff for collection, and it cannot have been unreasonable for them to refuse that request. 26Moreover, s 442C(2) provides that the administrator can dispose of property that is in the possession of the company but of which someone else is the lessor "in the ordinary course of the company's business" or with the leave of the court. While under s 442C(4) the court may direct an administrator not to carry out disposal of such property, it may do so only if it is not satisfied that arrangements have been made to protect adequately the interests of the secured party: s 442C(6). Thus the administrators were not obliged to refrain from disposing of the goods and were entitled to refer to their right under s 442C(2) to do so. It was not unreasonable for them to adopt this position. 27The administrators have advanced reasons as to why the need to deal with a proposed sale at short notice might make three days' notice impractical. The administrators also offered to set aside funds received from any such sale and not to apply them without providing three business days notice. It is at least reasonably arguable that the setting aside of the proceeds amounted to "arrangements ... to protect adequately the interests of" CMC for the purposes of s 442C(6). While CMC contends that its interest was the goods themselves and not in the proceeds of their sale by the administrators potentially through a distressed sale, the same could be said of any sale under s 442C(2). The concept is of a sale, with arrangements in place that protect adequately the interests of the chargee, or lessor or owner. It may well be that, at least except where the goods have some special or unique value, an arrangement to preserve the proceeds meets that description. 28It is true that, on the one hand, the proceedings could have been averted by the administrators agreeing to give three days notice of intended sale. While it is difficult to accept that three days' notice could not have been given, their offer to set aside the funds received from any such sale preserved an opportunity to CMC to make a claim to any such proceeds. In my view, it cannot be said that the administrators' conduct prior to the institution of the proceedings was unreasonable in the relevant sense. 29Nonetheless, by instituting the proceedings, CMC secured a significant improvement in its position. The undertakings proffered gave it additional protection and assurance, and in due course enabled it to retake possession of and resell the goods. It would not likely have gained this without instituting the proceedings. Essentially, the defendants ultimately conceded CMC's claim when on 23 November 2012 the defendants acknowledged the plaintiff's right to dispose of the steel as it saw fit. In my view, the plaintiff obtained substantial success, both on an interlocutory basis (when the undertaking was given on 29 October), and on a final basis (when the administrators on 23 November 2012 conceded CMC's entitlement to the goods). 30In my view, the plaintiff's substantial success is of very great significance. It achieved that outcome because it brought the proceedings. The fact that it did not at the outset produce every piece of evidence of its title to the goods is beside the point. Given the position adopted by the administrators in correspondence prior to the institution of proceedings, it cannot be assumed that the plaintiffs would have achieved that success without instituting proceedings. Simply put, the plaintiff had to come to court to procure the result it ultimately achieved, even though it was achieved out of court. I do not accept that the plaintiff acted prematurely or precipitously in doing so: it afforded the defendants ample opportunity to avoid the proceedings by proffering undertakings, which as it transpired they were prepared to proffer once proceedings were commenced. In those circumstances, there is every reason why the plaintiff should not have to pay the defendants' costs. 31It does not follow, however, that the plaintiff should have an order for costs against the defendants. There is a distinction between the position of a defendant who, proceedings having been commenced, concedes the inevitable, and one who makes concessions to the plaintiff in order to avoid further litigation, where it is arguable whether the plaintiff would ultimately have succeeded. To treat a concession of this type as a capitulation would deter parties from making commercially sensible concessions in the interest of resolution of proceedings. 32Allens' letter of 23 November 2012 made asserted that this was of the latter kind. While its characterisation by or on behalf of the person making the concession is far from determinative, in this case examination of the issues shows that couching the concession in this style was appropriate. This was no capitulation, and it was by no means inevitable that CMC would gain the relief that it sought. As I have said, the offer to set aside any proceeds of sale of the goods was arguably an arrangement to protect adequately the interests of CMC for the purposes of Corporations Act s 442C(6), which would have defeated CMC's claim for an order under s 442C(4). Further, the claim for an order under s 440B(2) would depend on the court exercising its discretion to grant leave. In that respect CMC would have borne the burden of showing that the taking of possession would not in any practical way affect the availability of the options which the creditors must consider or the decision on those options, or that the prejudice to CMC from not granting leave would outweigh that to the unsecured creditors from allowing possession to be taken [see, for example, Permanent Trustee Australia Limited v Stout (1999) 32 ACSR 507, 516-7], and it is by no means clear that that would be so, particularly in the light of the proposal to set aside any proceeds. See also Re Atlantic Computer Systems Plc [1992] Ch 505; [1992] 1 All ER 476. 33These considerations bring the case into the territory referred to by McHugh J in Re Minister for Immigration & Ethnic Affairs ex parte Lai Quin (1997) 186 CLR 622, as to the principles to be applied when considering questions of costs in the context of a settlement save as to costs without any hearing on the merits. This has been applied in the context of a discontinuance, in Foukkare v Angreb Pty Limited [2006] NSWCA 335 [67]-[68] and Fordyce v Fordham, [78]-[87]. See also New Cap Reinsurance Limited (in liq) v Dyer [2012] NSWSC 1205, [7]. 34In my view, while the plaintiff obtained practical success as a result of instituting the proceedings, it did so not because the defendants capitulated to the inevitable, but because they made an early commercial decision to take steps to avoid further litigation, ultimately for the benefit of all parties, albeit that they might well have had viable defences. As I have said, it would be a mistake in principle to discourage defendants from taking such a course by treating it as a capitulation, when in truth it was a concession to which it was quite arguable whether the plaintiff was truly entitled. 35Accordingly, I do not accept that the defendants acted unreasonably in declining to give the undertakings sought before commencement of proceedings. However, the fact that the plaintiff achieved ultimate success as a result of instituting the litigation justifies an "otherwise order". The fact that such success was gained by the defendants making a commercially sensible concession to which the plaintiff was far from plainly entitled, in circumstances where there has been no determination on the merits, means that the defendants should not have to pay the plaintiff's costs. The proper result is therefore that there should be no order as to costs. 36So far as can be ascertained, no notice of discontinuance has yet been filed. As it seems to me, the appropriate order is simply that each party bear its own costs. 37Pursuant to UCPR r 42.19(2), I order that notwithstanding the plaintiff's discontinuance, each party bear its own costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 July 2013