CORPORATIONS - Winding up - Liquidators - Grant of leave to distribute a surplus - application of rule in Cherry v Boultbee - order for release of liquidator and deregistration of company.

62. 54 ER 1032 - Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290; [2005] WASCA 106 Texts Cited: Derham, S R, The Law of Set-Off (Oxford University Press, 4th ed, 2010) Category: Principal judgment Parties: Alan John Hayes in his capacity as liquidator of Sirrah Pty Ltd (In Liquidation) (Plaintiff) Harris Health Care Pty Ltd (Receivers and Managers appointed) (In Liquidation) (First Defendant) Gregory Thomas Harris and Monica Mary Brown as Executors of the Estate of the Late Aileen Joyce Harris (Second Defendants) The Bankrupt Estate of William Francis Harris (Third Defendant) Michelle Joy Harris (Fourth Defendant) Representation: Counsel: B F Katekar SC/J R Anderson (Plaintiff) A F Fernon SC/B Nolan (First Defendant) G Carolan (Second Defendant)

Solicitors: Addisons (Plaintiff) Yates Beaggi Lawyers (First Defendant) Lloyd & Lloyd (Second Defendant) File Number(s): 2023/444411

Judgment

1. By Amended Originating Process filed, by leave, at the hearing on 21 June 2024, the Plaintiff, Mr Hayes in his capacity as liquidator of Sirrah Pty Ltd (in liq) ("Sirrah") seeks an order under s 488(2) of the Corporations Act 2001 (Cth) ("Act") that he be granted special leave to distribute a surplus in the winding up of Sirrah to its contributories, other than the First Defendant, Harris Health Care Pty Ltd (recs and mgrs apptd) ("HHC") and the Third Defendant, the Bankrupt Estate of Mr William Harris, and a declaration and direction as to the basis on which that distribution is to be made. That application raises a question whether Mr Hayes may properly rely on the "rule" in Cherry v Boultbee 4 Myl & Cr 442; (1839) 41 ER 171 ("Cherry v Boultbee") in distributing that surplus. Mr Hayes also seeks an order, under s 480(d) of the Act that he should be released as liquidator of Sirrah and that ASIC deregister Sirrah, although he accepts that order should not take effect until after the distribution is complete.
2. The relief sought by Mr Hayes, at least in respect of the basis on which the surplus is to be distributed, is opposed by HHC, by Mr Calabretta, who is the receiver and manager appointed to HHC by a firm of solicitors, Yates Beaggi Lawyers ("Yates Beaggi"). The trustee for the Bankrupt Estate of Mr William Harris filed a submitting appearance. Although Yates Beaggi had filed a notice of appearance for both HHC and the Fourth Defendant, Ms Harris, the latter did not appear at the hearing.

Affidavit and other evidence, background facts and chronology

1. Mr Hayes reads his affidavit dated 7 December 2023 ("Hayes 1"). He there refers to his appointment as provisional liquidator of Sirrah and subsequently as liquidator. He leads evidence as to the shareholders of Sirrah, and I note that HHC owns about 52.5% of shares in Sirrah; the Second Defendant, the Executors of the Estate of the late Aileen Harris ("Estate") owns in excess of 47.2% of shares in Sirrah, and Mr William Harris and Ms Harris each own 1 share in Sirrah. He also sets out the history of proceedings brought by the Estate as a derivative action on behalf of Sirrah, against, relevantly, Mr William Harris, HHC and Ms Harris ("Primary Proceedings"), which were determined by my judgment in Re Sirrah Pty Ltd (in liq) (2021) 152 ACSR 212; [2021] NSWSC 413 ("Primary Judgment"), in which judgment was entered against Mr Harris and HHC, jointly and severally, in an amount exceeding $15.6 million, plus interest, and a further judgment was entered only against Mr Harris. An appeal from that decision was dismissed by the Court of Appeal on 17 December 2021, by its judgment in Harris v Harris [2021] NSWCA 329. Mr Hayes also refers to later, separate proceedings, in Re Sirrah Pty Ltd (in liq) (No 2) [2021] NSWSC 1326, where an order for costs was made against Sirrah in favour of the Defendants on 18 October 2021, which have now been assessed and paid. Other costs payable to Yates Beaggi were the subject of a gross sum costs order made by consent and have also been paid. Mr Hayes also outlines interim distributions which have been made to the Estate, and on one occasion to Ms Harris, pursuant to several judgments of the Court.
2. Mr Hayes also refers to the steps he has taken in the liquidation, including the admission and adjudication of creditors proofs of debt and to the basis on which he proposes to distribute the surplus in Sirrah in large part to the Executors and in a smaller amount to Ms Harris, following the methodology applied by Gleeson JA in Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355; [2018] NSWSC 481 ("Hawden") at [52]-[53], and he updated that calculation in a later affidavit. There is no dispute as to the correctness of Mr Hayes' calculation, adopting that methodology, although HHC (by its receiver) contests the application of that methodology. Mr Hayes also addresses the matters relevant to a release and deregistration of Sirrah under r 7.5(3) of the Supreme Court (Corporations) Rules 1999 (NSW) ("Corporations Rules"). There is no contest that the matters necessary for such a release and consequential deregistration of Sirrah were satisfied, although Mr Hayes rightly accepts that that release and deregistration should be deferred until the distribution of the surplus is completed.

Two procedural matters

1. I should briefly address two procedural matters in respect of the proceedings. First, by consent, I made an order under s 471B of the Act granting leave, nunc pro tunc and to the extent necessary, to the liquidator to begin and proceed with the proceedings against HHC.
2. Second, I am satisfied that no leave is required for Mr Hayes to proceed against the Bankrupt Estate of William Francis Harris, as the Third Defendant. Mr Katekar, with whom Mr Anderson appears for Mr Hayes, points out that s 58(3) of the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act") provides: "Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor: (a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."
3. Mr Katekar submits and I accept that the moratorium in s 58(3) of the Bankruptcy Act is not applicable here. First, Sirrah and not Mr Hayes is "the creditor" with a claim against Mr Harris within the meaning of s 58(3) of the Bankruptcy Act, and these proceedings are brought by Mr Hayes and not Sirrah. That proposition follows from the language of the section, although it is consistent with a tentative observation in Penson v Palmer [2018] FCA 1202 at [18]. Second, Mr Hayes does not here seek to enforce a remedy against Mr Harris, and the proceedings are not in respect of a provable debt of Mr Harris, but are directed to the amount to be distributed to shareholders in HHC, although I recognise that Mr Harris is a shareholder in HHC. I note, for completeness, that Mr Pascoe, the trustee of the Bankrupt Estate of Mr Harris, has filed a submitting appearance, but that would not substitute for the grant of leave, which could only be given by the Federal Court of Australia, if leave was required.

Special leave under s 488(2) of the Act

1. By paragraph 1 of the Amended Originating Process, Mr Hayes seeks special leave to distribute the surplus in the liquidation of Sirrah, although I will address a contest as to the amounts to be distributed below. Pursuant to section 488(2) of the Act, a liquidator may only distribute a surplus in the winding up of a company with the special leave of the Court. I summarised the principles subject to such an application in Re Hillsea Pty Ltd [2021] NSWSC 1593 at [4] as follows: "The applicable principles in respect of the grant of leave to distribute a surplus are well established. Section 488(2) of the [Act] relevantly provides that a liquidator may distribute a surplus only with the Court's special leave. That provision is intended to ensure that there is in reality a surplus, in that creditors' claims have been recognised and met in full and also to ensure that the correct relativities amongst contributories have been observed: CGU Workers Compensation (NSW) Ltd v Ascom Service Automation (Australia) Pty Ltd [2005] NSWSC 747 at [4]; Re Allseal Floor Preparations Pty Ltd (in liq) [2015] NSWSC 1990 at [4]. The phrase "special leave" requires that a special application be made to the Court, as has occurred in this case: Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 at 72; Re HIH Services Pty Ltd (in liq) [2012] NSWSC 1188 at [10]."
2. As Mr Katekar points out, r 7.9(1) of the Corporations Rules requires a supporting affidavit stating how the liquidator intends to distribute the surplus, including the name and address of each person to whom the liquidator intends to distribute any part of the surplus. Mr Hayes' first and second affidavits satisfy that requirement. I am satisfied, on the basis of those affidavits, that creditors' claims have been paid in full. I am also satisfied, subject to the disputed issues of principal that I address below, that the proposed distribution observes the correct relativities among contributories. Mr Hayes there explains the methodology that he has used to arrive at the proposed distribution to shareholders (Hayes 1, [28]ff; Hayes 2, [8]ff) which, as I noted above, adopts the methodology addressed by Gleeson JA in Hawden, and that calculation also brings to account the several interim distributions which were made during the course of the provisional liquidation and liquidation (Hayes 1, [17], [29(f)]). I will, subject to the resolution of these issues of principle below, grant leave to distribute the surplus.

Mr Hayes' reliance on and Mr Calabretta's contentions as to the rule in Cherry v Boultbee

1. Mr Hayes seeks a declaration that he is entitled to apply the rule in Cherry v Boultbee in distributing the surplus in Sirrah and a direction that he would be justified in proceeding on a specified basis in the application of that rule. That was the major issue in dispute in the proceedings, although it was the second issue addressed by Mr Calabretta in opposition to that distribution.
2. I first refer to the applicable case law. Mr Katekar refers to Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) & Ors (2004) 49 ACSR 531; [2004] NSWSC 383 ("Otis Elevator") at [33], [39]-[41] and [44]-[45], where Palmer J summarised the "rule" in Cherry v Boultbee as follows: "Cherry v Boultbee is frequently cited as authority for the proposition "where a person entitled to participate in a fund is also bound to make a contribution in aid of that fund, he cannot be allowed so to participate unless and until he has fulfilled his duty to contribute (to the fund)": Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144, at 150 per Sargant J. But this proposition ought more accurately to be called, if anything, the "rule in Jeffs v Wood" and Cherry v Boultbee should be regarded as a qualification or exception to that rule, as Sargant J himself recognised in Re Peruvian Railway. ... The decision in Cherry v Boultbee may, therefore, be seen to add a qualification to the principle expressed in Jeffs v Wood, so that the "rule in Cherry v Boultbee" might more fully be stated thus: 'A person who is both a claimant on, and a debtor to, a fund cannot obtain payment of his claim out of the fund until he has first paid his debt into the fund PROVIDED THAT if the claimant's estate is being administered in insolvency at the time that his claim against the fund arises, the claimant's insolvent estate cannot obtain payment of the claim out of the fund until it first pays into the fund such dividend on the claimant's debt to the fund as is available from the claimant's insolvent estate.'"
3. Palmer J also referred to Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144 and observed that: "…In that case, a shareholder, who owed the company a large sum, died insolvent in 1908 and his estate was administered in insolvency. In 1914, the company was wound up voluntarily and its surplus assets became distributable to the shareholders. The executors of the shareholder's insolvent estate sought a declaration against the company's liquidator that the liquidator was not entitled to set off against the estate's share of the surplus the debt due from the estate to the company. Sargant J observed (at 151) that the rule in Cherry v Boultbee would extend to prevent a person who was at the commencement of the liquidation both a debtor of the company and a shareholder of the company from receiving a share of the surplus assets without contributing to that surplus by the amount of the debt. His Lordship continued: 'But if the date when the right thus arises is July 15, 1914 [the date of the commencement of the winding up], the persons between whom it arises are the liquidator on the one hand, and the executors of the testator on the other hand. And the amount for which the executors are liable is obviously not the full amount of the ascertained debt, but such dividend on that debt as the executors can pay in a due course of administration. The facts are, indeed, in my judgment precisely analogous to those in Cherry v Boultbee, where it was held that a legacy from a testatrix to a bankrupt debtor of hers could only be retained against his assignee to the extent of the dividends on his debt.'"

Mr Calabretta's contention as to election

1. Mr Calabretta also contended that it was not open to Mr Hayes to distribute the surplus in Sirrah in the manner contemplated by the rule in Cherry v Boultbee because, as Mr Fernon summarised the contention in his opening outline of submissions: "[Mr Hayes'] unequivocal and informed election to enter a proof for the entire judgment Debt in the winding up of [HHC], on which the administration of the insolvent estate has proceeded, precludes [Mr Hayes'] reliance on the equitable principle deriving from the so-called Rule [in Cherry v Boultbee] that [HHC's] right to any distribution from [Sirrah]'s fund upon its winding up is treated as paid, pro tanto, out of the assets of the fund…"
2. Mr Fernon there elaborated this submission as follows: "[Mr Hayes] is denied recourse to the principle in the so-called Rule [in Cherry v Boultbee] because he has elected to prove for the entirety of the judgment Debt in the winding up of [HHC]. This constitutes an election between alternative rights inconsistent with the reliance on the so-called Rule. See the discussion most recently by Kunc J on this exact reasoning in [HBSY] at [143]-[152]. It cannot be sensibly refuted that [Mr Hayes], an experienced liquidator, legally advised and represented, on notice of the Receiver and Manager's opposition to the notice of the intended application of the so-called Rule [in Cherry v Boultbee], was without informed knowledge of the facts, which would give rise to his alternative rights in law (as those rights have to date been interpreted an[d] applied), such that his unequivocal election to prove in the winding up of [HHC] for the full judgment Debt, was inconsistent with his reliance on the so-called Rule. This conduct constitutes an abandonment of the right to invoke the so-called Rule as against [HHC] in administering the fund of [Sirrah]."
3. In oral submissions (T35-36), Mr Fernon put that: "Your Honour asked me whether the proof of debt constituted a final statement of the liquidator's intentions in relation to improving the liquidation of [HHC]. It's not a final statement, your Honour, but it is nevertheless a step that has been taken by the liquidator on behalf of Sirrah, which, when viewed in the course of the conduct, the other conduct undertaken by the liquidator, we say objectively and consistent with what was said by the High Court [in Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 ("Sargent")] which I took you to earlier, that words or conduct ordinarily required to constitute an election must be unequivocal in the sense it is consistent and that's to be viewed objectively. We say, when one looks at the actions taken by the liquidator, firstly, to pursue the insolvency process of issuing a statutory demand applying for the company to be liquidated appointing his own liquidator, issuing the proof of debt, even if only for voting purposes, in the circumstances your Honour would find it was a statement of Mr Hayes's intentions generally in relation to proving in the bankruptcy, at least viewed objectively, by reason of the fact that the issue of the operation of Cherry v Boultbee was an issue that had been raised, it was an issue that was objective, it was an issue that was between the parties had been raised, there'd been no further response to it. The proof of debt was lodged after that exchange of communications and if the proof of debt was only for voting purposes, then one asks the question, rhetorically maybe, then why withdraw it, and in the circumstances in which Mr Hayes had done."

Mr Calabretta's reliance on Stephens v Venables

1. Third, Mr Calabretta relies on the decision in Stephens v Venables (1862) 30 Beav 625; (1862) 54 ER 1032 ("Stephens v Venables") for the proposition that, as summarised in his opening outline of submissions: "[HHC's] debt to [Sirrah] accrued subsequent to notice of a charge on the [HHC's] proprietary interest in the fund being received by [Mr Hayes], and, therefore, [Mr Hayes'] claim under the judgment Debt may not be set-off against [HHC's] share in the fund." [emphasis added]
2. The first obvious error in this submission is that Mr Hayes personally, or as liquidator, has no claim under the judgment debt against HHC, and that claim is Sirrah's claim. Little turns on that error. However, that submission contains a second and much more fundamental error, since it is plain and was common ground in the primary proceedings (in which Mr Fernon and Yates Beaggi acted for HHC and Mr Harris) that the large part of HHC's debt to Sirrah already existed when the proceedings commenced. That was long before any notice of a charge was given to, or received by, Sirrah or Mr Hayes, so there is simply no factual basis for the proposition that I have placed in bold above. While the basis of this claim cannot be established, for that reason alone, and that should have been apparent to Mr Calabretta's legal advisers, I will deal with it at somewhat greater length.
3. Mr Fernon develops an elaborate submission, based on the false premise noted above, which commences with the proposition that the LSA evidenced an agreement for valuable consideration to charge the debt due by HHC to Yates Beaggi, thereby effecting an equitable assignment, and that future property, possibilities, and expectancies (such as the future right of HHC to a distribution from Sirrah) are assignable in equity by agreement for value, which takes effect as a present assignment when the debt or other subject-matter comes into existence. I will assume without deciding the correctness of that proposition. Mr Fernon then submits that the service of Mr Amirbeaggi's affidavit dated 30 April 2021, which annexed the LSA but did not draw attention to the charge contained in it, place Mr Hayes on notice of the charge for the purposes of s 12 of the Conveyancing Act 1919 (NSW) on receipt of the notice. I have doubted the correctness of that proposition in dealing with the chronology above, although it is not necessary to express a final view. Mr Fernon contends, that, in consequence, that notice perfected the assignment of a proprietary interest in Sirrah's fund to Yates Beaggi.

Declaratory relief and directions and the implementation of Mr Hayes' proposed distribution

1. By orders 2 and 3 sought in the Amended Originating Process, Mr Hayes also seeks declaratory relief and a direction under s 90-15 of the Insolvency Practice Schedule (Corporations) in respect of the proposed distribution of the surplus. It is plain from the matters that I addressed above that Mr Hayes has rightly understood that the proposed distribution methodology in respect of the surplus is contentious, although not because it is wrong. The declaratory relief is comparable to the declaratory relief granted in Hawden and I am satisfied that it would be of utility, in providing protection to which Mr Hayes is properly entitled as a Court-appointed liquidator seeking to distribute a company's assets in difficult circumstances. The direction sought is within the scope of s 90-15(1) of the Insolvency Practice Schedule (Corporations) which provides that the Court may make such orders as it thinks fit in relation to the external administration of a company including, without limitation, an order determining any question arising in the external administration of a company, and the application of that section (and its predecessor s 479 of the Act) as described in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]ff and Re Broens Pty Ltd (in liq) [2018] NSWSC 1747 at [38]ff. Mr Katekar submits and I accept that the directions Mr Hayes seeks do not concern mere business or commercial decisions, are advantageous to the external administration of Sirrah and would facilitate the performance of Mr Hayes' functions, in the difficult circumstances to which I referred above.
2. I have addressed the contentious issues of principle as to Mr Hayes' proposed distribution above. As Mr Katekar points out: "That methodology has the result that, on present figures, the current surplus amount of $5,816,007.47 will be distributed in the way Mr Hayes sets out in his evidence. The final reckoning of these numbers will depend primarily on the final amount of Mr Hayes' remaining professional fees and costs to complete the winding up of Sirrah, which is currently estimated as $195,000. … Both of HHC and William Harris entered liquidation and became bankrupt (respectively) after Sirrah's liquidation. It follows, on the application of the rule in Cherry v Boultbee, as explained in Otis Elevator, [Hawden] and [D & D Corak], the result is that any distribution is paid to HHC and William Harris only insofar as there are funds available to do so after payment of distributions to the other shareholders. As there will be nothing left, the whole of the surplus should be distributed as Mr Hayes proposes …".

Dispensation with publication and other formal requirements

1. By orders 4 and 5 sought in the Amended Originating Process, Mr Hayes seeks dispensation from two procedural requirements in respect of the distribution of the surplus, and there was also no contest as to this matter. First, reg 5.6.71(1) of the Corporations Regulations requires that an order of the Court authorising a liquidator to distribute surplus funds have annexed to it a schedule in accordance with Form 551, unless the Court otherwise directs. Mr Hayes seeks an order dispensing with that requirement and I am satisfied that order should be made where there are no matters for adjustment between the contributories, at least beyond the issues determined in this application: Hawden at [63].
2. Second, rr 7.9(2) and (3) of the Corporations Rules requires that, at least 14 days before the date of the hearing of the special leave application, the liquidator must publish notice of the application in accordance with Form 15 in a daily newspaper circulating generally in the Australian state or territory where the company had its principal, or last known, place of business. I am satisfied that, as often occurs, that requirement should be dispensed with here because contributories and ASIC have been given notice of the application: Re Anne Lewis Pty Ltd [2016] NSWSC 1860 at [18]; Hawden at [60]. I will make orders 4 and 5 sought in the Amended Originating Process.

Release of Mr Hayes and deregistration of Sirrah

1. Mr Hayes also seeks an order that he be released under s 480 of the Act although, as I noted above, he rightly does not seek to have it take effect until he has completed the distribution of the surplus in Sirrah and it may also need to be deferred while costs in these proceedings are addressed. There was also no contest as to this application.
2. Section 480 of the Act permits a liquidator to apply for an order that he or she be released where he or she has realised all of the property of a company, or so much of it as can be realised without needlessly protracting the winding up, and where he or she has distributed a final dividend (if any) to creditors and adjusted the rights of contributories. The process for making such an application is set out in r 7.5 of the Corporations Rules. Mr Katekar refers to Re RR Impex Ltd (in liq) [2013] NSWSC 1667 at [3] where I observed, in relation to an order for release and deregistration: "The effect of such an order has been described as to "wipe the slate clean", subject to the limited exceptions set out in s 481(3): Singer v Trustee of the Property of Munro [1981] 3 All ER 215 at 219 (dealing with the corresponding English provisions in respect of a trustee in bankruptcy); Re Wayland as Liquidator of ABC Containerline NV (in liq) [2005] NSWSC 1; (2005) 52 ACSR 750 at [27]. The notification provisions in respect of such an application allow such an application to be the forum at which any claim that the liquidator has been deficient in performing his or her role should be advanced: Deputy Commissioner of Taxation v Tideturn Pty Ltd [2001] NSWSC 217; (2001) 37 ACSR 152; Re ABC Containerline above at [28]. It appears to be implicit in the structure of the sections and those notification requirements that, if the Court is satisfied that the relevant notifications have been given, no creditors have objected to the release of the liquidator or raised any concern as to the performance of his or her duties and the other evidence contemplated by the appropriate rules is placed before the Court, then the Court would ordinarily make an order releasing the liquidator, unless any reason emerges why it should not do so: Re Adellos Pty Limited (in liq) [2013] NSWSC 747 at [2]-[3]. [The liquidator in that case] also seeks an order for deregistration of the Company, consistent with authority that such an order should normally be sought together with any order for the liquidator's release: Re Austral Family Homes Pty Ltd (in liq) (1992) 28 NSWLR 247; (1992) 8 ACSR 322; (1992) 10 ACLC 1125."

Orders

1. For these reasons, I make orders and declarations and give directions in accordance with paragraphs 1-5 of the Amended Originating Process. I will make an order in accordance with paragraph 6 of the Amended Originating Process, likely in Chambers, when the distribution of the surplus and the recovery of costs in these proceedings is complete.
2. Mr Hayes seeks an order that his costs be paid from Sirrah's assets, and I accept that, subject to third party recoveries, that order should be made. My preliminary view is that Mr Calabretta's conduct of these proceedings had the result that, contrary to the usual position, they had an adversarial character and were significantly lengthened and that he should be ordered to pay their costs.

Amendments 08 July 2024 - Correct typographical error to para 39. 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: 08 July 2024