Coad v Wellness Pursuit Pty Ltd

Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 71 ACSR 250 Corporate Affairs Commission of NSW v Transphere Pty Limited (1988) 15 NSWLR 596 Re Joseph Phillips Ltd [1964] 1 All ER 441 CASES CITED : Shirlaw v Taylor (1991) 31 FCR 222 Territory Insurance Office v Kerin (1986) 84 FLR 1 Vince v Hurley Transport Pty Limited, unreported, Supreme Court of Victoria, 18 December 2008, Master Efthim Weston & Anor v Carling Constructions Pty Ltd (in prov liq) & Anor (2000) 175 ALR 202

Robert Michael Brennan (Applicant) PARTIES : Wings-Aus Holdings Pty Ltd trading as Hooters Restaurants Australia & New Zealand (In Liquidation) (First Respondent) Murray Roderick Godfrey (Second Respondent) National Australia Bank Limited (Third Respondent)

Ms N Tyson (Solicitor for the Applicant) SOLICITORS : First Respondent (No appearance) Second Respondent (No appearance) Third Respondent (Submitting Appearance)

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

1530 OF 2009 WINGS-AUS HOLDINGS PTY LTD TRADING AS HOOTERS RESTAURANTS AUSTRALIA AND NEW ZEALAND (IN LIQUIDATION) JUDGMENT

The Company 1 Establishments known as "Hooters", casual beach-theme restaurants, have been operating throughout the world since 1983 under franchise arrangements with Hooters of America, Inc. In 2005 and 2006 the Wings-Aus Group established four entities in Australia: Wings-Aus Holdings Pty Limited trading as Hooters Restaurants Australia & New Zealand (in liquidation) (the Company) and three subsidiaries; Wings-Aus Parramatta Pty Limited, Wings-Aus Cronulla Pty Limited and Wings-Aus Mermaid Beach Pty Limited. The three subsidiaries operate three Hooters restaurants in Australia. The Company is the administrative centre for operations, training and human resources, marketing and financial control for the Australian Group. 2 After the establishment of the three restaurants in Australia further expansion into New Zealand was planned on the understanding that the major shareholder of the Company would continue to fund and support the Australian operations. In early 2009 that funding was not forthcoming and various creditors of the Group commenced proceedings. A decision was made to appoint an administrator to the Company in March 2009. Administration 3 Robert Michael Brennan (the administrator) was appointed as the administrator of the Company on 10 March 2009. Between that time and 20 April 2009, the administrator together with persons from his office under his supervision, took control of assets and books and records of the Company. Most of the books and records of the Company had been moved to the premises of the Parramatta subsidiary, however the administrator attended the premises of the Company to check what assets were available and collected any available books and records. He also took possession of computers, printers and items that he described as the "Equipment" and various other items and merchandise. The administrator arranged for the valuation of the stock, merchandise and Equipment and other items of plant and equipment of the operating subsidiary companies. He also dealt with the landlord of the premises, disclaimed the lease and dealt with leased equipment. 4 After taking possession of the stock and merchandise he decided that the appropriate market for the stock and merchandise was the Mermaid Beach and Parramatta subsidiaries. He instigated and approved the sale of the stock and merchandise to those subsidiaries. He also continued the employment of two administrative staff for a period of approximately two weeks and the work undertaken by those staff members was essentially to the benefit of the Mermaid Beach and Parramatta subsidiaries. Whilst wage obligations were incurred and paid to those staff members, that cost was expensed to the Mermaid Beach and Parramatta subsidiaries proportionately. Those companies reimbursed the Company for those costs and also paid for the stock/merchandise. The administrator also dealt with employee creditor claims generally. 5 Prior to the administration, the Company operated an account with the National Australia Bank Limited (the Bank). At the Bank's request the administrator closed that account, and transferred the balance of $5,169.30, to a new account opened by the administrator with the Bank in the name of the Company (the Bank Account). The administrator authorised some of the costs incurred by him in the administration to be debited from that account. Credits were also applied to the account, including the payments from the Mermaid Beach and Parramatta subsidiaries in relation to the stock and merchandise and costs of employees. 6 After his appointment, the administrator became aware of a bank guarantee which had been provided by the Company in favour of the Bank in respect of a corporate credit card held by the Company with the Bank. The administrator held various discussions with Bank officers, including in relation to the amount that would be needed to release the Company from the guarantee. Ultimately the guarantee was released to the extent of $13,798.42 which was credited to the Bank Account. 7 Many of the alleged creditors of the Company called the administrator's office during the administration and enquired as to their claims and the administration generally. The administrator dealt with those queries and assessed creditor listings and proofs of debt. The administrator also investigated the possibility of unfair preference claims, insolvent trading claims and other actions which could result if the Company was wound up. He had dealings with the Company's director and reviewed the financial position in books and records. He also conducted other work necessary to report to creditors pursuant to s 439A of the Corporations Act 2001 (the Act). The administrator convened and held the first meeting of creditors and prepared minutes and convened and notified creditors of the second meeting, albeit it was not able to be held due to the appointment of the liquidator. The administrator also dealt with the winding up application which had been filed prior to his appointment. In this regard he sought legal advice and applied to have the application adjourned under s 440A of the Act and instructed solicitors to appear on the matter. 8 The administrator incurred various liabilities and expenses, some of which were paid from the Bank Account. The administrator's evidence was that the "Debts" defined to mean the debts and liabilities incurred by the administrator during the administration, amount to $16,309.84, being for legal fees at $14,427.83, advertising at $1,316.97, postage and photocopying at $224.87, mileage at $108.05, BAS payment to ATO at $145.00, office cleaning and rubbish removal at $55.00 and a company search at $32.12. The "Remuneration" claimed by the administrator is $33,229. Liquidation 9 On 20 April 2009, this Court made an order appointing Murray Roderick Godfrey (the liquidator), as the liquidator of the Company. Although the administrator's appointment came to an end on the liquidator's appointment, in these reasons I will refer to him as "the administrator". The correspondence 10 The administrator, through his solicitors, Addisons, wrote to the liquidator on 22 April 2009 advising that he had forwarded the Report as to Affairs and the Report to Creditors to the liquidator. It is apparent that the liquidator had requested the return of assets of the Company and Addisons responded to this request as follows:

Mr Brennan has a right to an indemnity from those assets in respect of his debts and liabilities, as well as unpaid remuneration. This right arises both under section 443D Corporations Act and in equity.

To satisfy that indemnity, Mr Brennan asserts a lien over the Company's bank account and office equipment (comprising computers, printers, desks, chairs and filing cabinets). This lien is claimed pursuant to sections 443D and 443F Corporations Act, as well as in equity. Mr Brennan is currently calculating the quantum of his lien which, however, is likely to exceed the value of the office equipment and bank account balance.

We will notify you shortly of the quantum of the lien claimed. In the meantime, please note that Mr Brennan will not be releasing any of the office equipment or monies from the bank account while the debts/liabilities/remuneration subject to his indemnity remain outstanding. 11 On 28 April 2009 the Bank notified the administrator that the liquidator had requested that the Bank Account be closed and the closing balance be forwarded to him. On the same day the administrator wrote to the Bank advising that he was claiming a lien over the funds in the account and that the Bank had no authority to transfer any money from the account to any third party. On the same day Addisons requested the Bank to provide an undertaking that it would not allow any withdrawals out of the account without the administrator's consent. That was followed up with a more formal letter on 29 April 2009. The present position is that the Bank has effectively frozen the account pending the outcome of this application.

12 On 1 May 2009 the liquidator wrote to Addisons in the following terms:

With respect to the monies held in the NAB account I acknowledge that in accordance with the Corporations Act the former Administrator has a right of indemnity S 443D and a lien S 443F. I also note that S 556(1)(c) is relevant as to the payment of the Administrators fees and expenses.

I would propose that the fees of the Administrator be put to creditors for approval at the same time as I seek fee approval etc. This will no doubt save costs of an application to Court for fee approval.

With respect to the balance of the bank account this should come under my control and be distributed in accordance with the Act, subject to the Administrators rights under S 443.

Please advise what fees and expenses are to be claimed by the former Administrator. These should be put in a form that can be submitted to creditors. 13 The liquidator then requested Addisons to confirm to the Bank that the administrator had no objection to having the funds released to the liquidator. 14 On 5 May 2009 Addisons wrote to the liquidator noting his acknowledgement of the administrator's right of indemnity and lien and advising that the administrator would be providing details of the fees and liabilities that were the subject of the lien. The solicitors then advised that they did not believe it was appropriate for the Bank Account to come under the liquidator's control, given that the account was subject to the administrator's lien. Rather it was suggested that the administrator's "liabilities" be paid from the monies in the account and his fees approved and then met (where possible) from monies in the account. 15 On 19 May 2009 Addisons wrote to the liquidator in terms that included the following:

We agree it is preferable that Mr Brennan's fees are approved at a meeting of creditors, provided this occur within a reasonable period of time. A report by Mr Brennan complying with section 449E(7) of the Corporations Act (2001) (albeit Mr Brennan is no longer administrator) would need to be annexed to the liquidator's report convening the meeting.

Prior to receiving your suggestion of obtaining fee approval via creditor meeting, we had commenced preparation of an interlocutory process and affidavit to seek approval from the Court. To avoid the necessity of bringing this application, please confirm that a meeting of creditors will be convened within a period of 2 months from the date of this letter, that is, before 11 July 2009.

In the meantime, Mr Brennan has a number of liabilities he proposes to have paid from monies in the Company's bank account and/or through the sale of computer equipment. We note that those liabilities and Mr Brennan's remuneration are the subject of an equitable lien which has priority ahead of claims admissible under section 556 of the Corporations Act ( Weston v Carling Constructions [2000] NSWSC 693). 16 On 21 May 2009 the liquidator wrote to the administrator's solicitors advising that he would be reviewing the administrator's claim with reference to Vince v Hurley Transport Pty Limited, unreported, Supreme Court of Victoria, 18 December 2008, Master Efthim. The liquidator took issue with the administrator dealing with company assets and requested that they be delivered to him. There was further correspondence between the liquidator and Addisons and on 25 May 2009 the liquidator wrote:

I have not contested your Client's claim to a right of indemnity, however I believe that this claim should be dealt with in accordance with Section 556 of the Corporations Act.

So as to keep costs at a minimum in this matter, my preference would be to put the matter for approval in the hands of creditors.

In order to efficiently deal with your Client's claim, I request a detailed copy of his unbilled time and a schedule summarising the liabilities necessarily incurred in administering the matter. If this information confirms that all costs were reasonably incurred I see no reason that this matter cannot be amicably resolved. 17 On 22 June 2009 the liquidator responded to an email from the administrator's solicitors enclosing a draft Amended Interlocutory Process and advised as follows:

This Application was never necessary as your Client always had the opportunity to have his fees approved by creditors at a meeting in due course. This method would have incurred minimal costs for creditors;

I will not to ( sic ) consent to the costs of the Application being recoverable from the assets of the Company;

Mr Brennan's fees have not yet been approved so there is no debt at this point in time for which he can claim a lien; and

The priorities for payment by a Liquidator are set out in the Corporations Act. The conduct of Mr Brennan is unnecessary and to the detriment of creditors.

I believe the avenue your Client is taking is an abuse of the law. 18 The liquidator went on to request that this letter be provided to the Court and that the correspondence between the administrator and the liquidator be brought to the attention of the Court. Unfortunately further correspondence ensued with Addisons writing to the liquidator on 23 June 2009 suggesting that his letter of 22 June 2009 did not answer the questions raised in their earlier letter that distinguished between "liabilities" and "debts" of the administrator. That letter continued:

Mr Brennan does not require approval for his liabilities. Your response that his "fees have not yet been approved" is irrelevant to that part of our application which seeks a lien in respect of the "Debts", being the liabilities of Mr Brennan (not his fees). Further, in respect of his fees, our letter suggested that Mr Brennan retain any additional money in the Bank Account after payment of his liabilities above (for which he does not require approval), pending an order of the Court, the committee or creditors generally.

We agree it would have been preferable for this matter to have been resolved between the parties, if possible. However, despite our request, you have not agreed at any stage to Mr Brennan taking control of the Bank Account to at least pay the liabilities incurred by him as administrator, in accordance with his legal right to do so. We assume from your 22 June 2009 letter that our suggestion as to how the Bank Account should be distributed (as per our 19 June 2009 letter) is also rejected. 19 The solicitors then advised that they were preparing an application to be brought before the Court. Addisons advised the liquidator that the administrator had incurred liabilities of $15,976.52 together with approximately $2,500 in unbilled legal costs. They also advised that the administrator would continue to incur liabilities in proceeding with the application and that the costs of preparing it had been made necessary because of the position adopted by the liquidator. The solicitors requested the liquidator to take a "commercial approach" pursuant to which he: (1) advise the Bank that he agreed to the Bank Account being released to the administrator to enable the debts and other liabilities incurred by the administrator to be paid; (2) and agree that the administrator would be entitled to sell the Equipment and apply for the funds from that sale in payment of his liabilities. The solicitors advised that if the liquidator agreed to that process the administrator would undertake that no further monies would be disbursed from the Bank Account until approval of his remuneration either by the creditors, the Committee or the Court. The Application 20 The administrator filed an Interlocutory Process on 26 May 2009 against the liquidator, the Company and the Bank. An Amended Interlocutory Process was filed on 13 July 2009. The application was heard on that day when Ms N Tyson, solicitor, appeared for the administrator. There was no appearance of the respondents. The Bank filed a submitting appearance. 21 The administrator seeks declarations and/or orders enabling him to have his Debts and Remuneration paid out of the property of the Company before accounting to the liquidator. Ms Tyson submitted that although it is usual for a contradictor to be present when a declaration is sought, this is an appropriate case in which a declaration may be made in the absence of such a contradictor: Territory Insurance Office v Kerin (1986) 84 FLR 1; Corporate Affairs Commission of NSW v Transphere Pty Limited (1988) 15 NSWLR 596. Ms Tyson noted that the respondents to the application have all been served and have either entered a submitting appearance or indicated that they would abide by an order of the Court.

Statutory regime 22 The provisions of the Act relevant to this application are as follows:

443D Right of Indemnity The administrator of a company under administration is entitled to be indemnified out of a company's property for: (a) debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(2); and (aa) any other debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator; and (b) his or her remuneration as fixed under section 449E. 443E Right of Indemnity has Priority Over Other Debts (1) [Right of Indemnity] Subject to section 556, a right of indemnity under section 443D has priority over: (a) all the company's unsecured debts; and (b) subject to sub-section (2), (3) and (4) of this section, debts of the company secured by a floating charge on property of the company.

443F Lien to Secure Indemnity (1) [Lien on Property] To secure a right of indemnity under section 443D, the administrator has a lien on the company's property. (2) [Where Lien has Priority] A lien under sub-section (1) has priority over a charge only insofar as the right of indemnity under section 443D has priority over debts secured by the charge. 23 Section 556 of the Act provides a priority regime for payments of certain claims and debts in the winding up of a company.

24 In Weston & Anor v Carling Constructions Pty Ltd (in prov liq) & Anor (2000) 175 ALR 202 at 208 Austin J analysed the decision in Shirlaw v Taylor (1991) 31 FCR 222 and said at [21]: They noted that provisional liquidation is not always followed by winding up, and it would be anomalous if the provisional liquidator could rely on the equitable lien if there were no winding up, but could not do so if winding up were to occur. They pointed out that where winding up does occur, the same individual may not always be both provisional liquidator and liquidator. Further, the pool of assets controlled by the two forms of administration is not the same. In particular, the liquidator may be able to recover assets not accessible to the provisional liquidator, in consequence of voidable transactions. 25 His Honour held that such reasoning was applicable to the case of an administrator, noting that although voluntary administration is not a curial remedy, it is an important remedy that at times, needs to be secured rapidly. His Honour said that an administrator "must be able to act swiftly and effectively without undue concern about the recoverability of reasonable fees and expenses, otherwise the legislative policy underlying Part 5.3A will be undermined": at [22]. His Honour concluded that the administrator's lien can be asserted against assets in the administrator's hands without diminution by the statutory priority: at [23]. 26 In Shirlaw v Taylor the Court (Sheppard, Burchett and Gummow JJ) said, at 232:

Where the appointment of a provisional liquidator is terminated by dismissal of the winding-up proceedings, he is entitled to satisfy his equitable lien out of the assets of the company in his hands before accounting for the remaining balance to the company. 27 The Court cited Re Joseph Phillips Ltd [1964] 1 All ER 441 in support of that proposition. In that case the Court of Appeal, in remitting a matter to the trial court to fix the reasonable remuneration of the Official Receiver, did so on the basis that the Official Receiver "should be entitled to retain all such fees, costs, charges and expenses, out of the assets of the company in his hands before he should account for those assets to the company"(at 444). 28 In Weston Austin J said at [26]:

Applying the Full Court's reasoning in Shirlaw v Taylor, I conclude that the words "subject to section 556" in s 443E do not diminish the administrator's right to recover, out of the assets of the company realised in the course of the administration, his or her remuneration as well as disbursements and recoupment for debts incurred during the course of the administration. But those words have the effect that if any additional assets are recovered by a subsequently-appointed provisional liquidator or liquidator, the administrator's priority to payment out of those additional assets is governed by s 556. 29 In Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 71 ACSR 250, the Full Court of the Supreme Court of Western Australia (Wheeler, Pullin and Buss JJA), considered whether an administrator's equitable lien over the assets of the company ranked ahead of the respondent's prior fixed charge. Buss JA, with whom Wheeler and Pullin JJA agreed, after an excursion into maritime law and the principle of salvage, analysed Austin J's decision in Weston and without disagreement, concluded that it was not applicable because it was not concerned with the ranking between the administrator's equitable lien and a prior fixed charge. 30 In an ideal world it would have been better if a smooth transition from administration to liquidation could have been achieved. It is unfortunate that the administrator has had to debate the point with the liquidator in the manner outlined above, however I can understand the concern that was caused by the liquidator's responses. It appeared that the liquidator would not brook the administrator satisfying his lien out of the Bank Account or other assets held by the administrator; and it appeared that the liquidator took the view that the administrator's remuneration would have to rank in priority as a deferred expense pursuant to s 556 of the Act.

31 The liquidator referred to dealing with the administrator's "claim" with reference to Vince v Hurley Transport Pty Limited. In that case the Master allowed the legal costs of an administrator incurred post administration in an application for approval of his remuneration. It is not clear what the liquidator meant when he said that he would deal with the administrator's claim with reference to this decision. The other aspect of the liquidator's correspondence that caused concern was that on the one hand he claimed that he did not contest the administrator's claim to a right of indemnity and a lien, but later claimed that there was no lien because the administrator's remuneration had not been approved. He also expressed the opinion that the "claim" should be dealt with in accordance with s 556 of the Act. The liquidator did not address squarely the points raised by Addisons with reference to the above-mentioned authorities, in particular, Austin J's decision in Weston.

32 In some of the correspondence the liquidator appeared to accept that the administrator had a right of indemnity and a lien over the Bank Account but took the view that he should administer the account. This view was probably based on the provisions of s 474 of the Act. The liquidator did not accept that the remuneration of the administrator for the work done during the administration could be paid out of the assets of the Company before the administrator delivered the property of the Company to him. 33 The liquidator seems to suggest that the administrator does not have a right to indemnity or a lien in respect of his remuneration until it is fixed pursuant to s 449E. The observations made by Austin J in Weston in relation to the need for administrators to be able to act promptly without concern in relation to the payment of their remuneration are apt to the consideration of this aspect of the matter. I do not read s 443D(b) as meaning that the administrator's right to indemnity for his remuneration (and his statutory lien in respect thereto) out of the assets of the Company that he holds, does not exist until the remuneration is fixed. Rather I read it as meaning that he has a right to indemnification (and a statutory lien to secure that right pursuant s 443F) for remuneration in respect of the work that he does during the administration, but limited to the amount "as fixed" (as opposed to "when fixed") pursuant to s 449E. The fact that the liquidator's appointment foiled the administrator's attempt to have his remuneration approved by the creditors does not mean that his right to indemnity under s 443D(b) is changed so that it then ranks in priority under s 556(1)(de) in relation to property subsequently got in by the liquidator. 34 I am of the view that although the statement of principle in Shirlaw v Taylor was in relation to a provisional liquidator whose appointment was terminated by the dismissal of a winding-up application, it is applicable to an administrator, whose appointment was terminated by a winding up order and the appointment of a liquidator. In the former situation the directors would have the responsibility to ensure that they were in possession of the company's property so that they could comply with their obligations as directors. In the latter situation the liquidator has obligations, supported by the provisions of s 474 of the Act, to ensure that he is in possession of the Company's property so that he can comply with his obligations as liquidator. Just as in Shirlaw v Taylor where the administrator was entitled to satisfy his equitable lien out of the assets of the company before accounting to the company, in this case, the administrator is entitled to satisfy his equitable lien out of the assets of the Company, before accounting to the liquidator.

35 That conclusion is not inconsistent with s 474 of the Act. The balance of the property of the Company (if any) held by the administrator after he satisfies his lien, will vest in the liquidator. If the property of the Company held by the administrator does not satisfy the whole of the administrator's lien, then the administrator will have to rely on any property got in by the liquidator to satisfy his lien. In that circumstance, s 556 of the Act will apply to the outstanding balance. 36 It is necessary for the administrator to take steps promptly to have his remuneration fixed. It may be that agreement will be reached with the liquidator to proceed promptly in this regard, however if that is not possible, I will grant leave to the administrator to bring an urgent application to this Court to determine his remuneration under s 449E(1)(c) of the Act.

37 I am satisfied that in the circumstances of this case, it is appropriate to make the following declarations and orders in which the term "Bank Account" means the account held by the Company with the third respondent and the term "Equipment" means the computers, printers, filing cabinet, DVD player, chairs and other plant and equipment held by the applicant:

1. DECLARATION that the applicant has a right to be indemnified from the Company's property got in during the course of the administration, including the monies in the Bank Account and the Equipment for:

a. The debts and liabilities incurred by the applicant in the administration of the Company (Debts); and

b. The unpaid remuneration of the applicant as fixed pursuant to s 449E of the Corporations Act 2001 (Remuneration). 2. DECLARATION that the applicant holds a lien over the monies in the Bank Account and over the Equipment, in respect of the Debts and Remuneration. 3. DECLARATION that prior to delivering up the Bank Account and the Equipment to the liquidator, the applicant may pay to himself the Debts incurred during the administration and the Remuneration as fixed pursuant to s 449E of the Act. 4. ORDER that the Bank provide control of the Bank Account to the applicant. 5. ORDER that the applicant is authorised to:

a. Sell and transfer title to the Equipment and apply the proceeds in satisfaction or part satisfaction of the Debts and Remuneration as fixed pursuant to s 449E of the Act; and

b. Draw down on the Bank Account and apply the proceeds in satisfaction of the Debts and Remuneration as fixed pursuant to s 449E of the Act.

6. ORDER that the liquidator pay out of the property of the Company the applicant's costs of this application, as agreed or assessed.

7. The declarations and orders may be taken out forthwith. ***********************************

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