Commonwealth v Byrnes

Orders to give effect to the Priority Judgment

1. On 7 December 2018, I delivered judgment ([2018] NSWSC 1885) ("Priority Judgment") dealing with relief sought by the Plaintiffs, Mr Spring and Ms Young ("Receivers") as receivers and managers of three companies ("Companies") trading as KNF Group (a firm) ("Partnership"), and by IFG Network Australia Pty Ltd ("IFG"). In particular, the Receivers and IFG sought a declaration that the priority regime prescribed by ss 433, 556 and 560 of the Corporations Act 2001 (Cth) did not apply to payment of debts and liabilities of the Partnership from the Partnership assets. I will refer to this application as the "Priority Application". The parties have now made submissions as to the orders to be made to give effect to the Priority Judgment, including as to costs, and I will address that matter in this judgment.
2. I will first deal with those orders that are not in dispute in respect of the Priority Judgment. The Receivers and IFG propose that, first, the Court should declare that the priority regime prescribed pursuant to ss 556 and 561 of the Corporations Act does not apply to payment of debts and liabilities of the Partnership from the Partnership assets. The First Defendant, Mr Sallway, and the Second Defendant, Mr White ("Liquidators") and the Commonwealth do not resist this order, which gives effect to the findings that I had reached in the Priority Judgment.
3. The Receivers and IFG seek an order that the Commonwealth's Interlocutory Process dated 14 November 2017 is dismissed. The Commonwealth consents to this order, which is consequential on the Priority Judgment and should be made. The Receivers and IFG also seek an order that the Liquidators' Interlocutory Process dated 28 November 2017 be dismissed "without determination and with no order as to costs". The Liquidators agree that their Interlocutory Application should be dismissed but submit that the Commonwealth should pay the costs of that application. The Commonwealth neither consents to nor opposes the order for dismissal of this Interlocutory Process and opposes an order for costs against it. This order should provide only for the dismissal of that Interlocutory Process. I address the question of costs below.
4. There is a dispute between the parties as to whether an order or declaration should be made, following the Priority Judgment, in relation to the application of s 440B of the Corporations Act. The Receivers and IFG propose that a declaration should be made that s 440B of the Corporations Act does not apply to the appointment of the Receivers by IFG as receivers and managers of the Partnership assets on 11 April 2017. The Receivers and IFG acknowledge that the parties previously agreed to defer the question of a declaration as to that issue but submit that, in the light of submissions made to the Court at the earlier hearing on 1 September 2017 and the findings in the Priority Judgment, the Court could now make that declaration without hearing further argument. The Liquidators respond that this order or declaration should not be made where the issue was deferred. They submit that it is not necessary that that issue be decided and that a declaration could not be made unless the Court was affirmatively satisfied that it was appropriate. They also indicate that, if the Court was minded to consider making such a declaration, they do not oppose it being made. The Commonwealth neither consents to nor opposes such a declaration. I should not make a declaration as to that matter where the parties had agreed to defer that issue and it was not determined in the Priority Judgment.

Costs of the Priority Application

1. The parties are also in dispute as to the costs orders that should be made following the Priority Judgment. In the Priority Judgment (at [75]-[76]), I observed that the Partnership presently has limited assets, and that the prospect of further recoveries does not seem to have been further advanced in the significant period that the proceedings have been on foot. I noted that the Receivers may have felt bound to seek a direction as to the way in which they dealt with assets, but the manner in which the hearing has proceeded seemed to be disproportionate to the amount of the Partnership's assets presently in issue; that the Commonwealth had chosen to intervene in the proceedings, and it was not apparent that that intervention was likely to have any practical benefit, so far as the Partnership's assets presently stood, and that that intervention had resulted in significant costs for all parties; and I expressed a preliminary view that the Commonwealth should not have its costs of its intervention as costs of the liquidation and should pay other parties' costs since its intervention. I indicated that I would hear the parties as to that preliminary view if they sought to be heard. All parties made further submissions as to that matter.
2. The Receivers and IFG submit that the Liquidators should pay their costs up to and including 1 September 2017 of and incidental to their Originating Process dated 4 May 2017 as amended by a Second Further Amended Originating Process dated 28 November 2017 ("Plaintiffs' Application"). The Receivers and IFG refer to correspondence between the Receivers and the Liquidators prior to the commencement of the proceedings as to the process by which the Partnership should be dissolved. They point to an issue that originally arose as to control of the Partnership assets and as to the validity of the Receivers' appointment, and to the fact that the Receivers subsequently resigned their first appointment and IFG then reappointed them as Receivers. The Receivers and IFG point to the circumstances in which the Commonwealth was not notified of the first hearing in the application on 1 September 2017, although it had become a creditor of the Companies after making payments to employees, after the initial notification of the application had been given to employee creditors.
3. The Receivers and IFG submit that the position they initially took as to the distribution of the Partnership assets and the lack of application of the specified provisions of the Corporations Act was vindicated in the proceedings and that the position initially taken by the Liquidators (and subsequently taken by the Commonwealth) was not. The Receivers acknowledge that, where an application involves a complex area of law or novel issues, the costs of all necessary parties can be ordered to be costs in the liquidation. However, they submit that the Commonwealth was not a necessary party to the Priority Application and acted in its own interests and, surprisingly, also submit that the issue was not a complex one.
4. The Liquidators resist an order that they pay the Receivers' and IFG's costs up to and including 1 September 2017 and submit that they did not cause the Receivers and IFG to commence the proceedings. They submit that it was necessary for the Receivers and IFG to seek directions about the priority regime that applied to the Partnership assets in any event. They also point to the resolution, as between the Receivers and the Liquidators, of an issue as to a lien claimed by the Liquidators in respect of the realisation of Partnership assets. The Liquidators in turn submit that the Receivers' and IFG's costs, and the Liquidators' and the Companies' costs of the application, except the costs of and incidental to the hearing on 1 September 2017, should be paid from the Partnership's assets in equal priority. They submit that the starting point as to costs, for the period prior to the Commonwealth's intervention in the Priority Application, is that the Plaintiffs and the First-Fifth Defendants' costs should be paid from the Partnership's assets, on the basis that it was appropriate for the Receivers to seek directions concerning those assets and the First-Fifth Defendants were necessary parties who assisted the Court as to that issue before the lack of recovery of assets by the Receivers was known. They also submit that the Receivers and IFG should pay the costs of and incidental to the wasted hearing on 1 September 2017, on the basis that they caused that waste by failing to notify the Commonwealth of their application.
5. I do not propose to make orders that the Liquidators pay the Receivers' and IFG's costs up to and including 1 September 2017 or that the Receivers pay the Liquidators' and Companies' costs of the hearing on 1 September 2017 or that those costs be paid from the Partnership's assets. It does not seem to me that an order for costs should be made in favour of the Receivers or the Liquidators in respect of the period prior to 1 September 2017, where the steps taken in respect of the Priority Application up to that date and the hearing on that date were largely wasted by reason of their common failure to give notice of the application to the Commonwealth, the interests of which were plainly affected by the application from the date on which it had paid out employees of the Partnership. In those circumstances, it seems to me that the proper order is that there be no order as to the costs of the application prior to that date.
6. The Receivers and IFG submit that the Commonwealth should pay their costs of the Plaintiffs' Application and the Commonwealth's Interlocutory Process dated 14 November 2017 ("Commonwealth's Application") from 27 October 2017. They submit that the Commonwealth should also pay the Liquidators' and the Companies' costs of and incidental to the Plaintiffs' Application incurred from 27 October 2017, other than the costs of and incidental to the hearing on 11 October 2018.
7. The Receivers and IFG point out that, at least from the hearing on 1 September 2017, the Liquidators accepted that the priority regime under ss 433, 556 and 561 of the Corporations Act did not apply to the winding up of the Partnership and distribution of the proceeds from the Partnership's assets to creditors of the Partnership. The question of the validity of the Receivers' first appointment, having regard to s 440B of the Corporations Act, was then in issue, but that issue was not subsequently resolved since both the Receivers and the Liquidators have agreed to defer it. The Receivers and IFG also submit that, after a report as to the Partnership's current asset position was made to the Commonwealth on about 4 September 2018, the Commonwealth continued to press for a hearing of the Priority Application. I pause to note that the Receivers also pressed for determination of that application after that date. The Receivers and IFG submit that they had little choice to bring the application, where IFG's security was only registered over the Partnership assets and, if the Receivers and IFG had accepted the position of the Liquidators (not pressed after 1 September 2017) and the Commonwealth, then IFG could not have enforced its security over the Partnership assets. No doubt, that provides an explanation of why the commencement of the proceedings was, in one sense, in IFG's commercial interests, but it does not address the difficulties in its conduct or its likely costs relative to the assets at stake.
8. The Liquidators join with the Receivers in submitting that the Commonwealth should pay the Plaintiffs' and the First-Fifth Defendants' costs from the date the Commonwealth intervened in the proceedings, on 27 October 2017. They submit that those costs should include not only the costs of the Plaintiffs' application (except the Liquidators' Interlocutory Process filed on 15 August 2018 seeking approval of remuneration) but also the costs of the Commonwealth's Application, which sought competing relief, and the Liquidators' Application, which followed from the relief sought in the Commonwealth's Application. They submit, consistent with the preliminary view that I had expressed in the Priority Judgment, that the Commonwealth should pay the costs of the other parties where it insisted on a determination of the issues, despite the apparent lack of practical utility in that determination given the limited recoveries made by the Receivers. The Liquidators also submit that the Commonwealth failed in the position that it advanced and costs should follow the event. They submit that the costs of the Liquidators' Application should be included in the costs order against the Commonwealth, where that application sought relief if the Commonwealth's Application succeeded and did not need to be determined where the Commonwealth's Application failed.
9. The Commonwealth submits that the appropriate order is that each party pay its own costs of the issue of the Priority Application. It did not seek to be heard as to whether the Receivers' and Liquidators' costs should be paid out of the Partnership assets. The Commonwealth pointed to the general position that, where directions, judicial advice or similar relief are sought by a liquidator or receiver concerning the administration of an insolvent estate, and the issue involved is complex or involves a relatively novel proposition of law, then the costs of all necessary parties should be paid from the estate's assets as costs in the liquidation or receivership: Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426; Re Langdon, Forge Group Ltd (recs and mgrs apptd) (in liq) (2017) 118 ACSR 434 at [160]; Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) (No 2) [2017] VSC 169 ("Amerind") at [16]-[24]. While there is no controversy as to that general principle, it does not seem to me to have the consequence that a party should necessarily be allowed the costs of its involvement, in their entirety or at all, where that involvement could not have had any practical advantage in the relevant circumstances. The Commonwealth indicated that, in the light of the Priority Judgment, it did not seek its costs of the proceedings, but submitted that the general principles to which it referred had the consequence that it should not be ordered to pay the other parties' costs of the proceedings.
10. The Commonwealth submitted that the continuance of the proceedings after November 2017 was not the result only of its pursuit of its Interlocutory Application, but also of the Receivers' determination to have their application resolved; any issue as to whether the hearing was disproportionate to the amount of assets in issue was not solely the Commonwealth's responsibility, where the Receivers pressed the application despite their knowledge of the Partnership's asset position; that the Commonwealth intervened on the basis that it was a proper contradictor to aspects of the Receivers' application, which was directed to questions in respect of employee entitlements; that the application was justified by the complexities of the relevant legal issues; that the Commonwealth's lengthy written submissions were directed to providing assistance as to those complexities, although an issue as to the application of the decision at first instance in Amerind fell away when the appeal in that case was determined in Commonwealth v Byrnes [2018] VSCA 41; (2018) 124 ACSR 246; that the duplication of costs between the two hearings on 1 September 2017 and 15 November 2018 was not caused by the Commonwealth, where it resulted from the Receivers' failure to notify the Commonwealth of the first hearing; and that the Liquidators have not incurred any substantial costs as a result of the Commonwealth's intervention, where they did not play any substantial further role in the proceedings after the Commonwealth intervened.
11. With some hesitation, I have concluded that there should be no order as to the costs of the application after 1 September 2017. I accept the Commonwealth's submissions that the legal issues raised by this application were complex. The position taken by the Commonwealth did not require any action by the Liquidators after that date and the Liquidators took no substantive position in opposition to that adopted by the Commonwealth. There is substantial force in the Commonwealth's submission that the Commonwealth was not the only party responsible for the apparent disproportion between the time spent and costs incurred in this application and the amounts at issue in it. As the Commonwealth points out, the Receivers and IFG commenced the applications and continued them despite the limited assets recovered by the Partnership. While the position advanced by the Receivers and IFG was ultimately sustained, the difficulties with the position adopted by the Commonwealth in submissions are sufficiently addressed by not making an order for costs in its favour, which would otherwise be made where it was a proper contradictor to the Receivers' and IFG's application. Accordingly, there should be no orders as to the costs of the Priority Application in respect of any parties.
12. The Receivers and IFG also seek an order that, to the extent that their costs of and incidental to the Commonwealth's Application and Plaintiffs' Application are not recovered pursuant to the costs orders above, those costs are to be paid out of the proceeds of the Partnership assets on an indemnity basis. The Receivers and IFG did not establish a basis for that order and I will not make it. The Receivers may properly be left to such indemnity as they have against IFG and IFG may properly be left to such security as it has over the Partnership assets.

Liberty to apply

1. The Receivers and IFG seek liberty to apply in relation to paragraphs 6, 7, and 8 of the Plaintiffs' Application and the Liquidators' Application. The Commonwealth consents to the reservation of leave. I will grant that leave in respect of the relevant paragraphs of the Plaintiffs' Application but not the Liquidators' Application, which the parties have agreed should be dismissed.

Rocky Neill Application

1. By my judgment delivered on 14 December 2018 ([2018] NSWSC 1958), I dealt with an application by the Receivers ("Rocky Neill Application") for a declaration that the amount of $224,409 ("OzForex Monies") received from OzForex Limited ("OzForex") by the liquidators of Rocky Neill Construction Pty Ltd ("RNC") was a Partnership asset secured by a security in favour of IFG and that certain transfers of funds from the Partnership's bank accounts to RNC were voidable under s 37A of the Conveyancing Act 1919 (NSW) and were traceable into the OzForex Monies. The Commonwealth Bank of Australia ("CBA") was joined as a Seventh Defendant in that application. On the hearing of the Rocky Neill Application, the Liquidators submitted to orders of the Court, except as to costs.
2. First, the Receivers seek a declaration that the OzForex Monies are held by the Liquidators (as liquidators of RNC) on trust for the Partnership. The Receivers submit that CBA's security interest, by way of its security in the Partnership's ADI Account, is not automatically engaged where the OzForex Monies are held on constructive trust for the benefit of the Partnership, and that a declaration or order is required. The Liquidators submit that that order should be amended to refer to funds recovered both as administrators and liquidators of RNC and that amendment is appropriate.
3. The Receivers also submit that a declaration should be made that the security interest of CBA in the OzForex Monies, by way of its security interest in the Partnership's ADI Account from where the OzForex Monies originated, has priority over IFG's security interest in the Partnership's assets. The Liquidators submit that that order should be limited to refer to priority over IFG's security interest in the OzForex Monies only, not the Partnership's assets generally. CBA also submits that there is no utility in making a declaration that CBA's security interest has priority over IFG's security interest because the OzForex Monies will not discharge the secured debt owing to CBA, and the preferable declaration is that the Liquidators hold the relevant amount on trust for the Partnership, subject to the charge granted to CBA. I am satisfied that an order should be made in the form proposed by CBA, where that will reflect the issue determined in the Rocky Neill Application.
4. The Receivers accept that their application made by Further Amended Interlocutory Process filed 30 October 2018 should otherwise be dismissed, and that order should be made.
5. The Receivers submit that the appropriate costs orders are that the Liquidators' reasonable remuneration and costs in recovering and preserving the OzForex Monies are to be paid from the OzForex Monies; the Receivers' costs of this application be paid by the Liquidators from the OzForex Monies; and the Liquidators are to pay the balance of those monies, following payment of those costs, to CBA. The Receivers point out that the application was brought only by them and not by IFG and submit that it was properly brought to resolve a novel and complex issue facing the Receivers and the Liquidators in relation to the OzForex Monies.
6. The Receivers submit that, prior to filing the Rocky Neill Application, they had contended in correspondence that the OzForex Monies were an asset of the Partnership and should be returned to the Partnership and the Liquidators had contended that the OzForex Monies were an asset of RNC. The Receivers also pointed to the sequence of events which led to CBA's joinder in the proceedings, after the Liquidators had pointed to CBA's security interest in the assets of RNC. The Receivers also point out that, when the Rocky Neill Application was ultimately heard on 15 November 2018, CBA was the only defendant to participate. The Receivers submit that the Court accepted their position that a trust exists, and the balance of their application sought directions as to how to properly deal with trust funds, and that their costs should therefore be paid from the trust fund, being the OzForex Monies. The Receivers also submit that their application did not wholly fail, where I accepted their submission that the OzForex Monies were an asset of the Partnership, although CBA ultimately prevailed in respect of the priority of its security in that respect.
7. The Liquidators respond that no order should be made that the Receivers' costs in respect of the Rocky Neill Application be paid from the OzForex Monies; that the Receivers' application in respect of those monies was not analogous to their seeking directions from the Court as to the payment of those monies; and that the Receivers' purpose of that application was adversarial in nature. The Liquidators also criticise the conduct of the Rocky Neill Application, which did not proceed to hearing on 11 October 2018, when it was originally fixed for hearing, when it was then recognised that CBA had an interest in that application and had not been notified of it.
8. The Liquidators submit that their costs of the Rocky Neill Application should be paid from the OzForex Monies up to and including 29 October 2018, the date on which CBA was joined to the Rocky Neill Application, and submit that their approach to the Rocky Neill Application was analogous to the position if they had applied for directions in respect of the OzForex Monies, which they would have had to have done as they were holding the relevant funds. The Liquidators also submit that they put relevant evidence before the Court without taking an adversarial position in respect of the relevant issues. I accept those submissions, which support an order that the Liquidators' reasonable costs of the Rocky Neill Application up to and including 29 October 2018 be paid from the OzForex Monies.
9. Alternatively, the Liquidators submit that the Receivers should pay their costs of the Rocky Neill Application up to and including 29 October 2018, the date on which CBA was joined, on the basis that those costs would have been avoided if the Receivers had joined CBA as party to the proceedings from the beginning. I am not persuaded that the Receivers should be required to pay the Liquidators' costs of the application, where the nature of CBA's interest In the OzForex Monies was by no means obvious and the Receivers were in no better position to give notice of the application to CBA than the Liquidators.
10. CBA seeks an order that the Receivers pay its costs in relation to the Further Amended Interlocutory Process filed 30 October 2018 as agreed or as assessed. CBA submits that the issue in the Rocky Neill Application, at least after CBA's joinder, was whether CBA had priority over IFG's security interest and that issue was resolved in favour of CBA. It seems to me that, in substance, the Receivers did not merely seek a direction as to the treatment of the relevant funds, but adopted an adversarial position aligned with that of their appointor, IFG, in respect of the Rocky Neill Application. They were unsuccessful in sustaining that position and CBA was successful in sustaining the contrary position. The Receivers should therefore pay CBA's costs of the application. I am not satisfied that an order should be made that the Receivers' costs should be paid from the OzForex Monies, for the same reasons. As I noted above, I am satisfied that the Liquidators' costs of the application should be paid from those monies up to the date that CBA was joined to the proceedings.
11. CBA accepts that the Liquidators are entitled to their reasonable remuneration and costs in recovering and preserving the OzForex Monies in accordance with the principle reflected in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, as applied in Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307, and accepts that orders should be made in accordance with paragraph 4 of the Receivers' short minutes of order and paragraph 4 of CBA's short minutes of order.

Orders

1. Accordingly, I make orders that: Priority Application 1 The Court declares that the priority regime prescribed by the Corporations Act 2001 (Cth) (the Act), pursuant to sections 556 and 561 of the Act, does not apply to payment of debts and liabilities of the partnership previously operated by the Third, Fourth and Fifth defendants known as the KNF Group (the Partnership) from the Partnership assets. 2 The Interlocutory Process of the Sixth Defendant filed on 14 November 2017 ("Commonwealth's Application") is dismissed. 3 The Interlocutory Process of the First and Second Defendants filed 28 November 2017 ("Liquidators' Application") is dismissed. 4 There be no order as to the costs of the Plaintiffs' Originating Process dated 4 May 2017 (as amended by the Second Further Amended Originating Process dated 28 November 2017) ("Plaintiffs' Application"), the Commonwealth's Application and the Liquidators' Application. 5 Liberty to apply in relation to paragraphs 6, 7, and 8 of the Plaintiffs' Application. Rocky Neill Application 6 Declare that the liquidators of the Fifth Defendant hold the sum of $224,409 transferred to them by OzForex Ltd ("OzForex Monies") on constructive trust for the Third, Fourth and Fifth Defendants as partners in the Partnership subject to the charge granted to the Seventh Defendant ("CBA") by the Deed of General Security Interest between the Third, Fourth and Fifth Defendants (as grantors) and CBA (as the secured party) made 13 September 2013. 7 The Further Amended Interlocutory Process filed 30 October 2018 be dismissed. 8 The First and Second Plaintiffs pay CBA's costs of and incidental to the Further Amended Interlocutory Process filed 30 October 2018 as agreed or assessed. 9 The reasonable remuneration and costs of the liquidators for the Third, Fourth and Fifth Defendants in recovering and preserving the OzForex Monies, and their reasonable costs of this application up to and including 29 October 2019, as agreed or as assessed, be paid from the OzForex Monies. 10 After the payment of the amount payable under order 9, the liquidators for the Third, Fourth and Fifth Defendants pay the balance of the OzForex Monies to CBA.

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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: 27 February 2019