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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. - [2024] NSWSC 784 - NSWSC 2024 case summary — Zoe
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.
(1839) 41 ER 171
- Elder's Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd (1941) 65 CLR 603
[1941] HCA 31
- Fused Electrics Pty Ltd (in liq) v Donald [1995] Qd R 7
- Harman v Home Department State Secretary [1983] 1 AC 280
[1982] 1 All ER 532
[1982] 2 WLR 338
- Harris v Harris [2021] NSWCA 329
- HBSY Pty Ltd v Lewis (2022) 108 NSWLR 558
Source
Original judgment source is linked above.
Catchwords
(1839) 41 ER 171
- Elder's Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd (1941) 65 CLR 603[1941] HCA 31
- Fused Electrics Pty Ltd (in liq) v Donald [1995] Qd R 7
- Harman v Home Department State Secretary [1983] 1 AC 280[1982] 1 All ER 532[1982] 2 WLR 338
- Harris v Harris [2021] NSWCA 329
- HBSY Pty Ltd v Lewis (2022) 108 NSWLR 558[2022] NSWSC 841
- Ming Tian Real Property Pty Ltd v SGS Platinum Pty Ltd (2020) 145 ACSR 329[2020] NSWSC 212
- Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) & Ors (2004) 49 ACSR 531[2020] NSWSC 1842
- Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355[1974] HCA 40
- Stephens v Venables (1862) 30 Beav 625(1862) 54 ER 1032
- Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290
Judgment (14 paragraphs)
[1]
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)
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.
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.
[4]
Affidavit and other evidence, background facts and chronology
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.
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.
[5]
Two procedural matters
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.
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."
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.
[6]
Special leave under s 488(2) of the Act
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]."
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.
[7]
Mr Hayes' reliance on and Mr Calabretta's contentions as to the rule in Cherry v Boultbee
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.
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.'"
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.'"
[8]
Mr Calabretta's contention as to election
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…"
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]."
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."
[9]
Mr Calabretta's reliance on Stephens v Venables
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]
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.
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.
[10]
Declaratory relief and directions and the implementation of Mr Hayes' proposed distribution
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.
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 …".
[11]
Dispensation with publication and other formal requirements
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].
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.
[12]
Release of Mr Hayes and deregistration of Sirrah
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.
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."
[13]
Orders
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.
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.
[14]
Amendments
08 July 2024 - Correct typographical error to para 39.
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Decision last updated: 08 July 2024
Parties
Applicant/Plaintiff:
CORPORATIONS - Winding up - Liquidators - Grant of leave to distribute a surplus - application of rule in Cherry
Respondent/Defendant:
Boultbee - order for release of liquidator and deregistration of company.
By a second affidavit dated 7 May 2024 ("Hayes 2"), Mr Hayes updates the position in respect of the adverse costs order to which I referred above and refers to orders made by consent which quantified the amount of the costs payable to Yates Beaggi and to the payment of those costs. Mr Hayes also provides a revised calculation of the surplus available for distribution in the winding up and the basis on which that distribution would be made, consistent with the methodology set out in Hawden. As I noted above, there is no contest as to the correctness of that calculation if a distribution is properly made on that basis.
By a third affidavit dated 18 June 2024 ("Hayes 3"), Mr Hayes leads evidence of service of the proceedings, including upon the Australian Securities and Investments Commission ("ASIC") which has not opposed the orders sought in the proceedings.
By his affidavit dated 14 June 2023, in opposition to the relief sought by Mr Hayes, Mr Calabretta referred to his appointment, on 16 June 2021, by Yates Beaggi as receiver and manager of the property of HHC and Mr Harris and exhibited a legal services agreement and costs disclosure ("LSA") dated 2 June 2020 between Yates Beaggi, HHC, Mr Harris and Ms Harris which I will address below. Mr Calabretta there contended (in evidence read with a limiting order under s 136 of the Evidence Act 1995 (NSW) ("Evidence Act") as submission) that the LSA was notified to Sirrah as early as 30 April 2021 and referred to an affidavit of Mr Amirbeaggi dated 30 April 2021 in the Primary Proceedings which exhibited the LSA. Mr Calabretta also refers to the registration of a financing statement in respect of HHC on the Personal Properties Securities Register ("PPSR") on 26 May 2021.
Mr Calabretta also tendered several documents, some of which relate to a contention that Mr Hayes had elected to pursue a proof of debt in the liquidation of HHC rather than rely on the "rule" in Cherry v Boultbee in distributing the surplus in Sirrah. Mr Calabretta tendered a proof of debt dated 20 April 2022 lodged by Sirrah in the bankruptcy of Mr Harris, although he ultimately did not rely on that proof of debt in submissions and also tendered other correspondence which I address in the chronology set out below.
In reply, Mr Hayes relied on his affidavit dated 20 June 2024. He annexed a copy of Sirrah's articles of association which provided, in clause 7, that:
"Except as required by law, a person shall be recognised by the company as holding any share upon any trust, and the company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or unit of a share or (except only as these regulations or by law otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder".
Mr Hayes also addressed the steps which he had taken to seek to recover the judgment debts owing by HHC and Mr William Harris, without success, and the circumstances in which he had lodged a proof of debt. Mr Hayes' evidence, admitted with a limiting order under s 136 of the Evidence Act as to his state of mind, was that he lodged that proof of debt only for a vote on the remuneration and internal disbursement resolution in respect of the liquidation of HHC. Mr Hayes' evidence was also that he then understood it was never likely that there would be any distribution in the HHC liquidation and, in evidence admitted as limited to his state of mind only, that:
"I did not intend for the HHC POD to be any sort of election to participate in a distribution out of the liquidation of HHC. At the time that I lodged the HHC POD for voting purposes, it was my intention to commence these proceedings."
Mr Hayes also annexed later correspondence with the liquidator of HHC which I address in the chronology below. Mr Hayes was cross-examined. He answered questions fairly and constructively, and there is no issue as to his credit. His cross-examination ultimately did not advance the issues in the proceedings.
I now turn to the background facts and a chronology, and I here reach conclusions as to contested matters to the extent necessary to do so. It is common ground that the Estate holds 350 shares in Sirrah, comprising 47.2334% of its shares; HHC holds 389 shares, comprising 52.4966%, and Mr William Harris and Ms Michelle Harris each hold one share in Sirrah.
Mr Hayes was appointed provisional liquidator of Sirrah on 14 October 2019 (Hayes 1, [5]; Ex AJH-1, Tab 1).
On 2 June 2020, Mr Amirbeaggi, of Yates Beaggi issued to HHC, Mr Harris and Ms Harris the LSA (Ex D1, Tab 2), which was executed by them by 12 June 2020. The LSA included a clause that provided:
"You hereby grant an equitable charge and security interest in favour of [Yates Beaggi] in respect of all your present and after acquired property (with no exceptions or exclusions) and any real property owned by you, to secure payment of any amount that remains unpaid on any tax invoice(s) issued by [Yates Beaggi] to you. You furthermore consent to us registering said interests on the Personal Property Securities Register and to us lodging caveat/s over your real property at any time. You furthermore acknowledge and agree that the non-payment of our invoices as and when they fall due shall be a payment default which will entitle us to exercise a right of enforcement against any security we have obtained from you and such enforcement may include without limitation the appointment of an external controller to realise the security and pay from the proceeds our invoices and all related enforcement costs and expenses on an indemnity basis."
I will adopt Mr Calabretta's definition of this clause as the "charge", without making any finding as to its legal character.
Mr Calabretta contends that, by 6 April 2021, a debt in the sum of $468,566.15 owed to Yates Beaggi remained unpaid and that the proposition that that debt was due and payable was accepted by Williams J in Re Sirrah Pty Limited (in liq) [2021] NSWSC 1274 at [15]. There is no evidence of that matter in this proceeding, but I will assume, without deciding, that a debt remains owing to Yates Beaggi in an unknown amount.
On 23 April 2021, I delivered the Primary Judgment. Importantly, I there noted (at [11]) that:
"Paragraph 45 [of the Amended Statement of Claim filed on 1 June 2020] pleads that, during the period from about 2012 to 2019, Sirrah lent monies to HHC and WH in particularised amounts, totalling over $11 million in respect of HHC and further amounts in respect of W[illiam] H[arris]. Paragraph 46 pleads that W[illiam] H[arris] caused Sirrah to lend those monies to HHC and himself in specified circumstances. Paragraph 46 of the Amended Defence not only admits that the specified loans from Sirrah to HHC and from Sirrah to WH were made in those circumstances, but adds an affirmative defence that:
[T]he making of the Loans, and each of them, resulted in the discharge, forgiveness, extinguishment or other reduction of debts owed to Sirrah by either or both of [WH] and [HHC], in return for debts from either or both of [WH] and [HHC] which were unsecured and undocumented insofar as the terms of the Loans were documented in the financial reports and accounts of Sirrah; and otherwise den[ies] the paragraph.
Paragraph 47 pleads that the loans to HHC and WH have not been repaid, and the corresponding paragraph of the Defence admits that the loans have not been repaid, and otherwise denies the paragraph." [emphasis added]
I pause to note that an application to withdraw those admissions was made but not pressed (as I noted in the Primary Judgment at [49]) when the hearing commenced on 23 March 2021. Also importantly, it was common ground from the date the Amended Defence was filed, and at least from the commencement of the hearing on 23 March 2021, that HHC was then indebted to Sirrah for more than $11 million.
I there held (at Primary Judgment [107]) that Mr William Harris' payment of continuing management fees to HHC amounted to a breach of fiduciary duty; that (at [129]) loans that Mr Harris caused Sirrah to make to him and to HHC breached the no conflict rule and also amounted to a breach of fiduciary duty; and (at [130]) that:
"The loss suffered by Sirrah is the amount of the loans made, where they have not been repaid by either WH or HHC on demand. It is now common ground that … the amount due by HHC in that respect is $11,044,660.24, in each case exclusive of pre-judgment interest."
I also found (at [137]) that the "reimbursement" of expenses to HHC breached the no conflict rule and amounted to a breach of fiduciary duty by Mr Harris. Importantly, I then held (at [155]) of the Primary Judgment that:
"I am satisfied that, here, HHC is liable for the monies it has received on the basis of knowing assistance and knowing receipt principles, and would also be held liable on the basis that it is WH's alter ego and, in the language quoted in Grimaldi, it had full knowledge of all of the facts of WH's breach of duty from which it profited and has a "transmitted fiduciary obligation" as WH's alter ego. I did not understand Mr Fernon to contend to the contrary, if the breaches of duty alleged against WH were established."
I also there set out (at [173]) that the orders that I propose to make, subject to an opportunity for further submissions, included an order for judgment for Sirrah against, inter alia, HHC in the sum of $15,674,735.82 and interest. I directed (at [174]) the parties to make any further submissions within 7 days as to the form of orders and as to costs.
Mr Calabretta contends that:
"On 30 April 2021, [Mr Hayes as] the Provisional Liquidator was notified of the charge granted by [Mr Harris], [HHC] and [Ms Harris] (prior to their insolvencies) to [Yates Beaggi] over their respective assets under the LSA (Notice) by affidavit of their solicitor served in these proceedings under cover of an email from counsel briefed dated 30 April 2021, which annexed the LSA, perfecting the charge."
This submission refers to an email dated 30 April 2021 sent to my Associate and copied to several other persons including the solicitor acting for the Estate and the solicitor acting for Sirrah. That email attached submissions of Mr Harris, HHC and Ms Harris made pursuant to the direction in paragraph 174 of the Primary Judgment, to which I referred above, and an affidavit dated 30 April 2021 of Mr Amirbeaggi. That affidavit in turn referred to the issue of the LSA to HHC, Mr Harris and Ms Harris and to the return of the LSA executed by them, and annexed the executed LSA but did not refer to the provision relating to security which I have quoted above. There is a real question (which it is not necessary to decide) whether (as Mr Calabretta contends) an email sent to a Judge's Associate and copied to Sirrah's solicitors for the purpose of submissions as to orders and costs, which did not specifically refer to the security provision, and an affidavit, which also did not refer to the security provision and was then possibly subject to the rule in Harman v Home Department State Secretary [1983] 1 AC 280; [1982] 1 All ER 532; [1982] 2 WLR 338, could amount to notice to Sirrah or Mr Hayes of an assignment (to which it also did not refer) of any rights of HHC to Yates Beaggi.
On 7 May 2021, I delivered a further judgment in Re Sirrah Pty Ltd (in prov liq) [2021] NSWSC 492 and ordered, inter alia, that Sirrah be wound up on a final basis and that Mr Hayes be appointed as its liquidator; money judgments were entered against HHC and Mr William Harris, jointly and severally, including interest, for $17,098,473.20; and a separate judgment was entered against Mr William Harris, including interest, for $1,124,379.82. As I noted above, an appeal against components of those judgment debts was unsuccessful. Mr Calabretta accepts that, on 7 May 2021, a debt accrued to Sirrah as against Mr Harris and HHC by reason of orders requiring them jointly and severally pay to Sirrah the monetary sums therein. That proposition is true but incomplete, where the judgment debt against HHC was larger than, but included the amount in excess of $11 million that HHC had admitted it owed Sirrah prior to the commencement of the proceedings.
The charge was later registered on the PPSR on 25 May 2021, but nothing turns on that where it is common ground that the judgment had arisen prior to that date. On 16 June 2021, Mr Calabretta was appointed by Yates Beaggi as receiver and manager of the property of HHC and Mr Harris. Mr Harris was subsequently made bankrupt on 3 March 2022.
By letter dated 9 June 2022 from Mr Hayes' solicitors to the shareholders or their legal representatives (Ex D1, Tab 11), Mr Hayes indicated his intent to seek leave to pay surplus funds in the liquidation of Sirrah to the Estate and Ms Harris, consistent with the application now brought, and stated that:
"[G]iven the significant outstanding judgment debts owed to [Sirrah], and having regard for the rule in Cherry v Boultbee, it is not intended that any surplus funds be paid to the other shareholders namely Mr William Harris and [HHC]."
By email dated 22 August 2022 from the solicitor then acting for Mr Calabretta to Mr Hayes' solicitors (Ex D1, Tab 12), they advised that:
"[Mr Hayes] asserts that the Cherry v Boultbee principle applies to the judgment of 7 May 2021 in favour of Sirrah against HHC and Mr Harris. We disagree. Prior to that judgment, HHC charged all of its assets to Yates Beaggi Lawyers ([Yates Beaggi]) in respect of its unpaid fees. That charge was signed by Mr Harris. That charge is still extant as [Yates Beaggi]'s fees remain unpaid. The charge was created prior to [the Company] obtaining the unsecured judgment debt. The assets charged to [Yates Beaggi] include HHC's shares in [the Company], and all rights attached to it. Such rights include the rights to the surplus that is proposed to be paid. In those circumstances, [Yates Beaggi]'s interest as chargee is not subject to rights of set-off under the Cherry v Boultbee principle. Sirrah is not entitled to defeat the rights of a secured creditor. If surplus funds are to be paid they should be paid free on [sic] any claimed set-off."
That email omitted reference to the fact, that was common ground in the Primary Proceedings, that HHC had owed Sirrah more than $11 million before HHC charged any assets to Yates Beaggi. It is not apparent how a distribution of HHC's entitlements, properly calculated, to HHC would amount to the "defeat" of the rights of Yates Beaggi as a secured creditor of HHC, as distinct from the realisation of those rights, such as they are.
HHC was wound up on 1 September 2022. By a notice of liquidation and initial information for creditors dated 30 September 2022 (Hayes 20.6.24, Annexure "D") the liquidator of HHC ("HHC liquidator") sought approval for his remuneration and disbursements to be given without a meeting and also advised creditors that:
"You must also provide information about what [HHC] owes you and evidence to support your claim. Please complete and return POD form via email with your supporting documents."
That document also described the proof of debt form as requiring the creditor "to provide information about what [HHC] owes you, along with supporting documents for your claim (only if you have not previously provided it)." It referred to an indemnity of $30,000 provided by Sirrah toward the HHC liquidator's remuneration and expenses and the attached remuneration report recorded the HHC liquidator's claim for remuneration of $14,665.50 (exclusive of GST) and disbursements of $1,000, less than the amount of that indemnity, and also observed that:
"Based on current information it is unlikely that there will be sufficient recoveries to pay a dividend to ordinary unsecured creditors. However, my investigations are continuing. If a dividend becomes payable, creditors will be notified."
On 5 October 2022, apparently in response to that notice, Mr Hayes lodged a proof of debt in the liquidation of HHC (Ex D1, Tab 13) for the full amount of the judgment debt, which identified particulars of the debt as being the Court's judgment in an amount exceeding $17 million on 7 May 2021, and stated in paragraph 2 (which provided, correctly, at that date, irrespective of any later application of the rule in Cherry v Boultbee) that:
"To my knowledge or belief the creditor has not, nor has any person by the creditor's order, had or received any manner of satisfaction or security for the sum or any part of it except for the following: …".
That proof of debt also responded to a question that was applicable where the form was being used for the purpose of voting at a meeting.
On 7 December 2023, Mr Hayes reported (Ex AJH1, CB 233) to creditors of Sirrah, inter alia, as to the proof of debt (in the sense noted above) lodged in HHC's winding up and the administration of that insolvent estate. That report noted that the HHC liquidator had advised that all of HHC's assets were secured by a registered security interest (presumably, to Yates Beaggi) and that it was unlikely that there would be any recoveries in the liquidation of HHC.
By an email dated 18 June 2024, the solicitors for Mr Hayes advised the HHC liquidator that:
"It has come to our client's attention, in the course of preparing for the hearing before Black J, that Sirrah's lodgement of the POD (albeit one for voting purposes only) may be asserted against our client as an election to prove in the winding up of HHC and not pursue the application of the rule in Cherry v Boultbee (despite our letter of 9 June 2022 and the application before Black J). If that contention is made, it will be rejected; and further, our clear instructions are that our client did not submit the POD in the winding up of HHC with the intention that it would or might affect the application of the rule in Cherry v Boultbee in relation to Sirrah's estate.
In any event we are instructed to hereby withdraw the POD and seek your consent (pursuant to regulation 5.6.56 of the [Corporations Regulations]) to that withdrawal. Please confirm your position by reply as soon as possible before noon tomorrow."
By email also dated 19 June 2024, the HHC liquidator responded referring to his request (in September 2022) that Mr Hayes complete a proof of debt form in order to fix his remuneration by a postal ballot vote and observed that:
"2. The Proof of Debt lodged by [Mr Hayes] was admitted for voting purposes only on proposed resolutions and all resolutions proposed were passed.
3. I have not called for Proofs of Debt in the liquidation for dividend purposes because there have been no funds realised and I do not expect any realisation will be made in the liquidation.
4. No Proofs of Debt lodged with me in the liquidation of HHC have been admitted or rejected for dividend purposes. I have not dealt with them because it has not been necessary to do so other than for the purpose of voting on resolutions without a meeting.
5. I acknowledge that the Proof of Debt lodged by Sirrah dated 05/10/2022 in the liquidation of HHC was withdrawn yesterday by your email below."
That email was admitted with a limiting order under s 136 of the Evidence Act that it was proof of the communication and not proof of the asserted facts. However, that communication amounted, in my view, to the HHC liquidator's consent to the withdrawal of Sirrah's proof of debt in the HHC liquidation under reg 5.6.56 of the Corporations Regulations 2001 (Cth) ("Corporations Regulations"), where the HHC liquidator's acknowledgement that the proof of debt had been withdrawn could only be given on the basis of that consent, and was given.
On 19 June 2024, Mr Amirbeaggi, who did not there indicate that he was then acting for Mr Calabretta and appears to have been acting on his own or his firm's behalf, emailed the HHC liquidator and asked:
"If I fund you [undertake to meet your costs on a solicitor's undertaking/or transfer money to your trust account today] can you adjudicate on the above Proof by Sirrah for me before Friday's hearing?"
By email dated 19 June 2024, the HHC liquidator advised Mr Amirbeaggi, that the proof of debt had been withdrawn on 18 June 2024. That advice again necessarily confirmed the HHC liquidator's consent to that withdrawal, since that proof of debt could not have been withdrawn without that consent.
By a further email dated 19 June 2024, Mr Amirbeaggi then asked the HHC liquidator:
"Please let me know whether you have consented to the Withdrawal (as is required pursuant to Regulation 5.6.56 of the [Corporations Regulations]).
Provision of consent would be contrary to the interests of [HHC]."
The HHC liquidator fairly responded by email also dated 19 June 2024, that:
"I have acknowledged that the Proof of Debt lodged by the liquidator of Sirrah for voting purposes was withdrawn yesterday."
I have referred above to the consent to withdrawal which was necessarily implicit in that position.
Mr Amirbeaggi then emailed the HHC liquidator, in a manner which could only be described as threatening, that:
"If Mr Hayes' position [at the hearing of these proceedings] on Friday is that he has withdrawn the proof, and the Court finds against Mr Calabretta on the basis that it was withdrawn with your consent, we will seek a stay and join you to the proceedings, or by separate suit initiate a proceeding against you for recovery of our loss.
My affidavit of the conversations with you and Mr Mattiussi of yesterday, after which the actions below have ensued, and that of [with you] moments ago will be deposed in an affidavit and filed with the Court in anticipation of Friday's return."
No such affidavit was filed in the proceedings. I will find below why there was no proper basis for Mr Amirbeaggi's criticism of the HHC liquidator, still less for an officer of the Court to be addressed in that manner.
The debts due by Mr William Harris and HHC to Sirrah have not been paid (Hayes 1, [23]; Hayes 2, [12]).
His Honour then observed at [44]-[45] that:
"In my opinion, the rule in Cherry v Boultbee, as explained in Re Peruvian Railway, is applicable to the facts of the present case. Wood Parsons, as a shareholder of Guide Rails, became entitled to participate in the surplus assets of Guide Rails only upon the liquidation of Guide Rails. By that time, however, Wood Parsons itself was in liquidation - it was obliged to pay into the fund of Guide Rails' assets, not the whole of the Wood Parsons Loan, but only such dividend as it could. That dividend was nil.
The result, according to the rule in Cherry v Boultbee, is that if one were to make the calculation for distribution from the surplus assets of Guide Rails which is set out in paragraph 27, one would substitute "zero" for "$1.2M", wherever occurring. Guide Rails is, therefore, required to pay to Wood Parsons 75% of the cash surplus available for distribution, without deduction."
As Mr Katekar pointed out, that conclusion followed where the liquidation of Wood Parsons, the shareholder, occurred before liquidation of Guide Rails, the company which would pay the distribution.
In Re Anglican Development Fund Diocese of Bathurst (recs and mgrs apptd) [2015] NSWSC 440 ("Anglican Development Fund") at [21]ff, Brereton J undertook a detailed review of the rule in Cherry v Boultbee and the circumstances in which it would apply, where statutory set-off under s 553C of the Act was not available, and held (at [39]) that the rule would there apply unless the relevant debts were amenable to set-off.
Mr Katekar also points to Hawden, where Gleeson JA observed (at [45]-[46]) that:
"Where the contributor[y]'s insolvency occurs after the event which precipitated the establishment of the fund, the principle in Cherry v Boultbee prevents a person who was at the commencement of the liquidation, both a debtor to the company and a shareholder of the company, from receiving a rateable proportion of this surplus, without contributing to the assets of the company, the amount of his debt: Peruvian Railway at 151.
However, different considerations apply where the insolvency of the contributor occurs before the event which precipitated the establishment of the fund. If, at the commencement of liquidation, a shareholder is already a bankrupt, the only sum that has to be contributed is the dividend (if any) payable from the insolvent estate: Peruvian Railway at 151-152. The explanation for this qualification in the case of a bankruptcy is that bankruptcy vests the bankrupt's property in the trustee, whose obligation is limited to the payment of a dividend…"
His Honour then observed (at [51]-[52]) that:
"Hawden Property was placed into liquidation on 3 September 2013 and Mr Hawes was declared bankrupt over two years later on 9 November 2015. The liquidator submitted that since Mr Hawes was not a bankrupt at the time of the liquidation of Hawes Property, Mr Hawes and accordingly, the Hawes estate, is not entitled to receive any distribution of the surplus without contributing to the net judgment debt (plus interest to the date of bankruptcy) to the assets of Hawden Property. I accept that submission.
The method of application of the principle in the present case is as follows:
(1) the total notional fund available for distribution to the contributories is to be calculated by first adding to the relevant surplus, the amount of net judgment debt and interest thereon (up to the date of the bankruptcy of Mr Hawes);
(2) the notional fund is then divided by two, in order to determine the 50 percent proportion payable to both contributories, Mr Dean and the Hawes estate;
(3) the distribution is then paid to Mr Dean from the funds available to Hawden Property;
(4) the distribution is then paid to the Hawes estate, but only insofar as there are funds still available to Hawden Property after payment of the distribution to Mr Dean."
I referred to Anglican Development Fund and Hawden in Re Primespace Property Investment Ltd (in liq) [2018] NSWSC 919 ("Primespace") at [27], where I observed that:
"In [Anglican Development Fund], Brereton J also considered the interaction between statutory set-off and the rule in Cherry v Boultbee above, as formulated by Sargant J in Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144, that a person who is entitled to participate in a fund, and also bound to make a contribution in aid of that fund, cannot be allowed to participate unless and until he or she has fulfilled his or her duty to contribute to that fund. His Honour observed (at [34]) that the application of that rule can produce a different result from statutory set-off in the context of insolvency but held (at [37]-[39]) that, whatever the ambit of that rule in the context of insolvent administrations, it only applies where set-off is not available. In [Hawden], Gleeson JA also observed (at [48]) that insolvency set-off and the equitable principle in Cherry v Boultbee above covered different fields and referred, with apparent approval, to the observations of Brereton J in [Anglican Development Fund] at [38]-[39].
I would follow the approach adopted by Brereton J in [Anglican Development Fund], both for consistency in decision-making in respect of matters arising under the [Act], and because I consider that that approach is correct for the reasons that his Honour identifies in that decision."
I did not apply the principle in Cherry v Boultbee in that case, but only on the basis that I held that the liquidators should proceed, at least by analogy, on the basis that statutory set-off was available.
Mr Katekar also refers to Re D & D Corak Investments Pty Limited (in liq) [2020] NSWSC 1197 ("D & D Corak"), where Rees J considered an application by the liquidator of D & D Corak Investments Pty Ltd for special leave to distribute a surplus to contributories, in circumstances where one shareholder, a bankrupt, was also a debtor of that company. As Mr Katekar points out, that company was wound up in December 2017, and the shareholder was subsequently made bankrupt in October 2018. Rees J there referred to Gleeson JA's summary of the applicable principles in Hawden and summarised the applicable principles as follows (at [18]ff):
"The principle in Cherry v Boultbee (1839) 4 My & Cr 442 applies where a shareholder entitled to a share of the surplus is also a debtor of the company. The principle and the historical development of the rule is conveniently summarised by Gleeson JA in [Hawden] at [36]-[50]. Drawing on his Honour's review:
(1) It is not a complex rule, being a simple netting off of monetary obligations: In Re Kaupthing Singer & Friedlander Ltd (In Administration) [2011] UKSC 48; [2012] 1 AC 804 at [8], [13]-[20].
(2) It is a rule in equity whereby if a person entitled to participate in a fund is also bound to contribute to it, the person cannot participate unless and until the person has fulfilled the duty to contribute to it: Re Peruvian Railway at 150 per Sargant J.
(3) It is an illustration of the fundamental principle in equity that a person who seeks equity must first do equity: Gray v Gray [2004] NSWCA 408 per Young CJ in Eq (Sheller and Bryson JJA agreeing) at [90]-[91].
(4) However, it is a rule whereby the court in effect says to the person seeking payment "you have in your own hands that which is applicable to the payment - pay yourself out of that": Re Rhodesia Goldfields Ltd; Partridge v Rhodesia Goldfields Ltd [1910] 1 Ch 239 at 246-247.
(5) The rule is best described as a right to appropriate a particular asset as payment, as opposed to a right of set-off or a right of retainer: Derham on the Law of Set-Off (4th ed, 2010, Oxford University Press), at [14.03], followed in [Hawden] at [43].
(6) Where (as occurred here) the shareholder became bankrupt after the event precipitating the establishment of the fund, the principle in Cherry v Boultbee prevents a person who at the commencement of the liquidation was both a debtor and a shareholder, from receiving a rateable proportion of the surplus without contributing to the assets of the company, the amount of her debt owed to the company: Re Peruvian Railway at 151, followed in [Hawden] at [45].
As Mr Katekar points out, in D & D Corak, the liquidator proposed a regime by which a series of three distributions would be made, with the first and second distributions seeing funds notionally applied to the debt due by the bankrupt. In approving that course, Rees J observed that:
"The proposed method of distribution accords with the rule in Cherry v Boultbee by ensuring that a debtor is not paid prior to discharging a debt which it owes to the company in liquidation. There are probably other ways of adhering to this rule in this case, but the method proposed by Mr Nichols appears sounds and financially responsible as it ensures that Ms Feeney's debt to the company is repaid before her trustee is paid monies otherwise payable to her from the surplus."
In Re Force Corp Pty Ltd (in liq) (2020) 149 ACSR 451; [2020] NSWSC 1842, Gleeson J in turn referred to Anglican Development Fund, Primespace and Hawden and observed (at [116]) that:
"Insolvency set-off under s 553C and the equitable principle in Cherry v Boultbee cover different fields and although the equitable principle continues to apply in liquidations notwithstanding the terms of s 553C, the principle in Cherry v Boultbee only applies where insolvency set-off is not available: [Anglican Development Fund] at [37]-[39]; [Hawden] at [41]-[42]; [PrimeSpace] at [27]."
His Honour then outlined the scope of the rule, largely by reference to Hawden.
In HBSY Pty Ltd v Lewis (2022) 108 NSWLR 558; [2022] NSWSC 841 at [55]ff, Kunc J also addressed the application of the rule in the context of the Bankruptcy Act.
Pausing here, it can hardly be said that there is any novelty, given the longevity of the rule in Cherry v Boultbee and the recent Australia case law, in the application of that rule where a statutory set-off is not available in a winding up. Nonetheless, turning now to the submissions of Mr Fernon, with whom Ms Nolan appears for Mr Calabretta, it initially seemed that Mr Calabretta contended that that rule was inconsistent with Pt 5.4 of the Act and was not part of Australian law. The breadth of that initial position was plain from Mr Fernon's summary of it, as follows:
"… the so-called rule in Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 17 (the so-called Rule) produces an outcome incongruous to the legislative policy of the statutory scheme in Part 5.3 of the [Act] in a manner which offends the principle of coherence in Australian law, and thereby points away from the availability of the so-called Rule's application to a distribution of a surplus upon a winding up ..."
Mr Fernon there referred to appellate authority, including decisions of the High Court, as to the importance of the principle of coherence in the law and, unsurprisingly, Mr Katekar did not contest the importance of that matter. He initially submitted that:
"the recognition of the reciprocal monetary obligations under the so-called Rule [in Cherry v Boultbee] would be antagonistic to the scheme promulgated [by] the [Act] and its purpose, which was to create a comprehensive federal legal regime intended to exhaustively replace the expansive and disparate body of law in respect to corporate insolvency. As such, the principle of coherence in the law means that the equitable principle of the so-called Rule [in Cherry v Boultbee] must not be used or applied in a manner incongruous to the legislative policy of the [Act]."
He also initially submitted that Pt 5.6 of the Act "codifies exhaustively the legal procedures for winding up a company in Australia", apparently to the exclusion of the general law; that Pt 5.6 of the Act "does not purport to adopt the common law relating to set-off and give it the force of a Commonwealth statute"; and that:
"to permit reliance on the so-called Rule [in Cherry v Boultbee] would stultify (that is, contradict by the imposition of a judge made law based on notions of fairness and conscience) the legislative policy evident in Part 5.6 of the [Act]."
Mr Fernon also initially relied on Fused Electrics Pty Ltd (in liq) v Donald [1995] 2 Qd R 7 ("Fused") which he contended "implicitly recognises the principle of coherence in Australian law". By contrast, he contended that Gleeson JA in Hawden "did not consider the issue through the lens of the principle of coherence."
Mr Katekar took issue with these submissions, although I can address his response briefly where Mr Fernon rightly abandoned these contentions, in any general form, in oral submissions. Mr Katekar submitted, and I accept, that Mr Fernon's submissions had largely treated the rule in Cherry v Boultbee as a rule of set-off, which it is not, so as to identify a suggested lack of coherence with the statutory set-off provision in Pt 5.4 of the Act. Mr Katekar also rightly pointed out that the suggested lack of coherence depended on the premise that Pt 5.6 of the Act "codifies exhaustively the legal procedures for winding up a company"; that the rule in Cherry v Boultbee is "directly contrary to … [that] exhaustive scheme"; and that there is no inconsistency where the rule in Cherry v Boultbee operates in specific circumstances and in addition to, but not inconsistently with, Pt 5.6 of the Act.
I should briefly indicate why I would have rejected Mr Calabretta's initial and wider submissions had Mr Fernon not abandoned them. First, there is no lack of coherence between the rule in Cherry v Boultbee and the provisions for proof of debt now contained in Pt 5.4 of the Act, where they have operated in parallel for much of the period that insolvency legislation has applied to companies; in this area, as in many areas, the corporations legislation assumes the operation of the general law, including the rule in Cherry v Boultbee; and the Courts have repeatedly applied the rule in Cherry v Boultbee and the legislature has repeatedly amended the corporations legislation in the form in which it has existed since the mid nineteenth century without taking any step to exclude or override that principle. Second, Mr Calabretta's contention that Pt 5.4 of the Act is a code was rejected by Gleeson JA in Hawden, and it seems to me that it is plainly not correct, where that Part could not operate without drawing on general law principles and does not need to address matters that were adequately addressed by the general law when it, and predecessor legislation, were enacted.
Third, so far as Mr Calabretta initially sought to rely on the decision in Fused as recognising a question whether Pt 5.4 excluded the rule in Cherry v Boultbee, that case does not advance that suggestion for the reasons summarised by Gleeson J in Hawden at [47]ff as follows:
"Mr Stack, counsel for the liquidator, properly drew the Court's attention to an argument which Palmer J did not need to resolve in [Otis Elevator] at [63] that the rule in Cherry v Boultbee has been impliedly ousted, in the context of company liquidations, by the [Act]. The premise of that argument seems to be that the [Act] provides for an exclusive code in respect of insolvency set-off in s 553C and that there is no room for the equitable principle. In addition, the application of the rule in Cherry v Boultbee to company liquidations was doubted in [Fused] at 8. I do not accept the implied ouster argument, nor share the doubt expressed in [Fused].
First, insolvency set-off and the equitable principle in Cherry v Boultbee cover different fields. As Brereton J observed in [Anglican Development Fund] at [38]-[39]:
'[38]…The application of the rule to company liquidations was doubted in [Fused], but Leeds & Hanley Theatres and Peruvian Railway were not referred to, and the preferable explanation of that case is that the rule must yield to statutory provisions for set-off of mutual dealings and priority of debts; indeed it was for that reason that the non-applicability of the statutory set-off provisions was relevant in Leeds & Hanley Theatres and Peruvian Railway.
[39] In each of Leeds & Hanley Theatres and Peruvian Railway, the availability of a set-off was excluded before it was held that the rule in Cherry v Boultbee applied: the debt owed to the company was not one in respect of which the countervailing debt owed by the company could be set-off, because of want of mutuality. This illustrates that the rule in Cherry v Boultbee applies only where set-off is not available. Accordingly, the rule in Cherry v Boultbee will apply in this case, unless the debts are amenable to set-off.'"
Second, the doubt referred to in [Fused] was dismissed, correctly in my view, by the English Court of Appeal in Re SSSL Realisations (2002) Ltd [2006] Ch 610; [2006] EWCA Civ 7. This part of the Court of Appeal's reasons was not subject to any criticism in Re Kaupthing Singer & Friedlander.
In SSSL Realisations, Lord Chadwick (Parker LJ and Etherton J agreeing), explained at [99] that the inter-relation of the equitable principles applicable to the distribution of the fund in the statutory code for administration in insolvency has long been recognised in the authorities, including the observation of Lord Chelmsford in Grissell's case (Re Overend Gurney & Co (1866) LR 1 Ch App 528) to which Wright J referred to in In Re Auriferous Properties Ltd (No 2) [1898] 2 Ch 428 at 431: where there is no set-off under the statute "it necessarily follows in the last place" that the equitable principles must fill the gap."
Fourth, the rule in Cherry v Boultbee has been applied by English and Australian judges many times since that case was decided, and many times by Judges in this Court in recent years in analogous circumstances, including in the decisions to which I have referred above. Consistent decision making in respect of the national scheme of corporations legislation is a matter of great importance, and I should not depart from those decisions unless I consider that they are plainly wrong: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 (dealing with decisions of intermediate appellate courts); Ming Tian Real Property Pty Ltd v SGS Platinum Pty Ltd (2020) 145 ACSR 329; [2020] NSWSC 212 at [38]. I am not satisfied that those decisions are plainly wrong, and they seem to me to be plainly right, and consistent with both equitable principle and the purposes underlying Pt 5.4 of the Act. For these reasons, I would not have accepted the contention that Mr Fernon abandoned, that the rule in Cherry v Boultbee was inconsistent with Pt 5.4 of the Act or undermined the coherence of Australian law.
Mr Fernon instead put a narrower contention, that the application of the rule in Cherry v Boultbee would undermine coherence of the Australian law in the particular circumstances of this case. The narrower scope of that contention emerged in Mr Fernon's oral submissions (T37-38) as follows:
"Your Honour, the circumstances that I identified, which we say constitutes an election, can also be seen in what we say is the first point of our submissions, that in the operation of the Cherry v Boultbee principle, the Court must recognise the need for this application to be coherent with the operation and policy of the [Act] generally, and the issue of coherence, of course, has to be dealt with, and it has been dealt with on a fact by fact basis, on a case by case basis, as to whether facts in any given case give rise to a circumstance to enable, effectively, judge made law to interfere with or cut across the operation of parliamentary statute law, can only occur if such operation would be coherent with the operation of that Parliament made law...
The point that we make, your Honour, is that parliament has in essence determined a scheme which we say provides for parliamentary determines is the fairness or otherwise of how distribution should be made to unsecured creditors on a passive basis. In this case, the liquidator has embraced the liquidation process [in HHC]. He engaged the liquidation process. He sought to vote as the primary unsecured creditor, but there are other unsecured creditors within the estate of [HHC]. That I think was set out briefly at level of other unsecured creditors, your Honour, … as in at least unrelated unsecured creditors of [HHC] having debts of [$]1.75 million and that the Sirrah liquidation unsecured debt [owed by HHC] at [$]17.098, but there are still nevertheless other unsecured creditors who have rights in relation to those matters.
In a case such as this, your Honour, where the parties or at least the liquidator has embraced and effected the liquidation process, sought to take the benefit of a liquidation process including the powers of voting in relation to that, to enable the Cherry v Boultbee principle to apply, we say would cut across in essence the parliamentary prescribed regime for fairness …"
At this point, I sought clarification of the apparent difference in the scope of the submissions being put by Mr Fernon, in his opening written submissions and oral submissions, as follows:
"[BLACK J]: One moment, I need to clarify something here which is quite important. It's not apparent to me whether you are making a general point or you are making a point which depends upon the liquidators conduct in this liquidation. Are you putting a proposition - which is I understood what you were putting in submissions - that generally, Hawden is wrong, the cases that preceded [it] which take the same approach are wrong, the cases that follow it which take the same approach are wrong and for all purposes, the rule against Cherry v Boultbee is not applicable because it is inconsistent with [P]t 5.4, or are you putting as I think you then put what may be an alternate version of your first argument, that because of the way the liquidator has behaved, he is not entitled to invoke Cherry v Boultbee which is a fact based argument?
FERNON: Your Honour, I only put the submission in the circumstances of this case, not as a general principle ...
We're not putting a proposition, your Honour, that all the other cases are wrong, but clearly they didn't consider the issue of coherence and we don't go that far to say that the decision of Gleeson J in Hawden and those matters are incorrect decisions, but there is no reference to the principles of cohesion in relation to it."
Mr Fernon further elaborated the narrower submission that he put, directed to the facts of this case, as follows (T40):
"Your Honour, in this case there are two liquidations involved involving Sirrah and [HHC], and in the facts of this case [Sirrah], through its liquidator, has sought to engage in the liquidation process of [HHC], in fact created the liquidation process of [HHC], engaged in that process where circumstances of the [Act] provides for a strict regime in relation to how unsecured creditor are to be dealt with under the [Act] in circumstances where they've created a liquidation such that all the other unsecured creditors are thereby, by virtue of that fact, bound to only seek to be able to prove in the liquidation and not otherwise.
They've chosen a step which has a significant impact to all other creditors of [HHC] in circumstances where parliament has, as I said, set out a regime for all secured creditors to be dealt with equally ... But having created the circumstance which has an impact on all other unsecured creditors. It would be, we say, in coherent to be able to rely upon the Cherry v Boultbee circumstances having created the circumstances himself to then be able to take the benefit and avoid the cooperation of the [Act] provisions. To rely upon the judge made operation of Cherry v Boultbee in those circumstances would cut across, we say, the [Act] principles in relation to winding up, differing circumstances where it's created by Sirrah.
We say in those circumstances, your Honour, it would be inconsistent and incoherent with that policy to enable the Cherry v Boultbee man made principles, man made law principles, or judge made law principles to operate in those circumstances.
It is not apparent to me that the application of a principle of general application in a particular case could properly be said to undermine the coherence of Australian law, although the different question whether that principle is applicable in that case will often arise. Putting that difficulty aside, the matters on which Mr Fernon relied for that proposition were, first, that Mr Hayes had proved for Sirrah's debt in the liquidation of HHC, which relied on matters which he put in respect of a claim for election, which I address below. I do not accept that this matter gives rise to any incoherence arising from the application of the rule in Cherry v Boultbee to a distribution of the surplus in Sirrah, for the same reasons that I do not accept that an election is established below. I should add that, contrary to the factual basis of Mr Fernon's submission, Mr Hayes' proof of debt in HHC plainly had no impact on other creditors of HHC where it was directed to approval of the HHC liquidator's remuneration, in less than the amount for which he was indemnified by Sirrah; it was withdrawn, as I will note below, before any adjudication of proofs of debt in HHC for distribution purposes; and it did not have any effect on any distribution that might in future be made by HHC to its creditors.
Second, Mr Fernon relied on that fact that Sirrah had sought and obtained the order winding up HHC, and submitted that it would undermine the coherence of Pt 5.4 of the Act if the rule in Cherry v Boultbee were now applied in a distribution of Sirrah's assets. I also do not accept that submission. As Mr Katekar points out, there is no apparent reason why the rule in Cherry v Boultbee should not apply in Sirrah's winding up, simply because Sirrah sought a winding up order in respect of HHC, and sought to have the HHC liquidator investigate any recoveries that may be available in HHC. To the extent that Mr Fernon articulated any such reason, it appeared to repeat, in a weaker form, the wider proposition that the rule in Cherry v Boultbee was sometimes (or only in this case) inconsistent with the application of Pt 5.4 of the Act in respect of Sirrah or HHC. There is, in my view, no inconsistency in the liquidator of Sirrah applying the rule in Cherry v Boultbee in Sirrah's winding up, and Sirrah's previous application for the winding up of HHC does not commit it to prove in the winding up of HHC rather than rely on that principle. I therefore do not accept Mr Calabretta's narrower contention that Mr Hayes proposed application of the rule in Cherry v Boultbee in distributing the surplus in Sirrah would undermine the coherence of Australian law in the particular circumstances of this case.
Mr Fernon there refers to Sargent, where Stephen J (with whom McTiernan J agreed) observed (at 642) that, for the doctrine of election to operate, "there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election as between the two inconsistent rights which he possesses". His Honour pointed to a variance in the authorities as to the nature of the knowledge which the elector must possess, and then observed that:
"An elector must at least know of the facts which give rise to those legal rights, as between which an election must be made."
His Honour also noted that "full knowledge of the material facts" was required, although he also referred (at 617) to Elder's Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd (1941) 65 CLR 603; [1941] HCA 31 as authority that knowledge of circumstances that provide information from which the decisive fact giving rise to the legal right is "a clear if not a necessary inference" would be sufficient. After a comprehensive review of the authorities, his Honour noted that an elector is deemed to know the terms of his or her own contract and the rights it confers, or at least cannot take advantage of his or her own ignorance, and summarised the knowledge requirement (at 645) as follows:
"All that need be established in order for the doctrine of election to apply is knowledge … of the facts giving rise to inconsistent legal rights".
The party alleged to have made the election was taken to know of his or her rights under the contract; and knowledge of the relevant facts giving rise to the requisite right was enough to invoke the doctrine.
Mason J in turn observed (at 658) that:
"If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected."
In Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290; [2005] WASCA 106 at [35]-[39], Steytler P in turn referred to the elements of election as requiring a choice between two inconsistent legal rights, that there be "knowledge on the part of the elector and words or conduct sufficient to amount to the making of the election", with that knowledge being "full knowledge of the material facts", on the basis that a party to a contract is taken to know of the rights that it confers; and that unequivocal conduct is required to establish an election that is not consciously made. I also summarised the applicable principles in Re Computer Room Solutions Pty Ltd [2021] NSWSC 845 at [62]ff on which I have drawn for the summary which appears above.
In Porter v Computer Based Technology Pty Ltd [2004] NSWSC 476 at [68], Palmer J summarised the application of the concept of election, in the context of whether a secured creditor had surrendered its security, as follows:
"In my opinion, the law as to election to surrender a security in an insolvency administration may be summarised in the following propositions:
a) whether or not an election to surrender a security has been made is not subject to rules peculiar to insolvency law; the question is determined according to the principles applicable to election generally;
b) an election to surrender may be shown by proving a conscious decision by the creditor, communicated to the liquidator or bankruptcy trustee, to give up the security and take instead a dividend from the insolvent estate;
c) where a conscious decision by the creditor to surrender has not been shown, a decision to surrender will be imputed to the creditor, regardless of actual intention, if the creditor has acted in a manner which is clearly and unequivocally consistent only with surrender of the security;
d) an election to surrender is not lightly to be imputed from conduct - it is not to be supposed that secured creditors give up their securities without good reason;
e) where an intention to surrender is to be imputed from conduct, lodgement by the creditor of a proof of debt may not, on its own, be sufficient - other surrounding circumstances, both before and after lodgement of the proof of debt, may indicate a contrary intention;
f) on the other hand, lodgement of a proof of debt together with acceptance and retention of a dividend from the insolvent administration will usually give rise to an imputed intention to surrender;
g) if conduct said to imply an election to surrender is equivocal or indicates confusion or that a final course of action has not yet been decided upon by the creditor, no election to surrender will be held to have been made …"
I recognise that a liquidator may lose the right to apply the rule in Cherry v Boultbee if they elect to pursue a different remedy, as a particular application of the wider principle of election. In Otis Elevator at [48], Palmer J observed that:
"It is now established that a fund administrator such as a liquidator, a bankruptcy trustee or an executor of a deceased estate may lose the right to apply the rule in Cherry v Boultbee against an insolvent debtor/claimant of the fund if the fund administrator elects to pursue another remedy for payment of the debtor/claimant's debt to the fund. The most common instance is where the fund administrator proves in the insolvent estate of the debtor/claimant rather than applying the rule in Cherry v Boultbee: see Stammers v Elliott (1868) LR 3 Ch App 195; In re Sewell; White v Sewell [1909] 1 Ch 806; Wood, English and International Set-off (1989) para. 8-131."
That observation was cited, with apparent approval, by Kunc J in HBSY at [59], where his Honour also observed (at [145]ff) that:
"It is clear that the rule in Cherry v Boultbee cannot be relied on where the creditor elects to obtain the debt through other means, most commonly where the creditor proves in the debtor's bankruptcy ([Otis Elevator] at [120(3)] above). It is less apparent whether these restrictions apply to the principles affecting defaulting trustees (Derham at para 14.85 referred to above at [54]).
There is good reason why waiver should not be too strictly applied where the equitable principles operate, particularly with respect to defaulting trustees. The concern of the equitable principles is not so much to compel the debtor to repay but to prevent them from unconscionably obtaining a benefit. Professor Hanbury stated in relation to the rule in Cherry v Boultbee at 46:
'Equity regards the question, not what A can be compelled to do, but what he ought in conscience to do, and will withhold from him the advantages which it is in its power to give him, unless he will purge his conscience by paying what he is morally bound to pay.'
This statement was referred to with approval by the NSW Court of Appeal in Gray v Gray (2004) 12 BPR 22,755; [2004] NSWCA 408 at [98] (Young CJ in Eq; Sheller and Bryson JJA agreeing).
Palmer J in Otis (at [58]) adopted the following statement of Young CJ in Eq in Borda v Burgess (2003) 11 BPR 21,203; [2003] NSWSC 1171 at [70]:
'[70] … fairness dictates that people should not too easily lose important rights by unwitting conduct unless that conduct has been acted upon by another to his or her detriment. Losing a right by conduct which is undertaken in ignorance of its legal consequences should be confined to estoppel. The law should preserve the distinction between election, where no detriment to the other side is required, and estoppel where detriment is required.'
The necessary elements of an election were set out by Palmer J in [Otis Elevator]:
'[51] … The electing party must:
- have two alternative and inconsistent legal rights;
- have knowledge of the facts which give rise to the alternative and inconsistent rights;
- by words or conduct unequivocally communicate to the other party a decision to exercise one of the rights to the exclusion of the other: [Sargent] at 642ff per Stephen J and at 655ff per Mason J.'
The rights as described by Palmer J were those arising out of a contract but are nevertheless of broad application."
In response, Mr Katekar submits that Mr Hayes made no such election; if there was any election, it was not "irrevocable" and was, in any event, revoked; (any election) was not made with the knowledge of the potential legal consequences of proving in the estate of HHC; and, where the judgment against HHC arose "by reason of the conduct of a defaulting trustee", the Court would be slow to find that a waiver or election arose.
Mr Katekar submits that Mr Hayes proof of debt was prepared and submitted for voting purposes only and was not lodged for dividend purposes. He here refers, inter alia, to the proof of debt and its answer to a question applicable "[i]f the form is being used for the purpose of voting at a meeting"; the fact that proofs of debt have not been called for in the liquidation of HHC for dividend purposes and no proofs of debt have been admitted or rejected for dividend purposes; and, importantly, the regulatory structure which recognises, in r 75-130(4)(b) of the Insolvency Practice Rules (Corporations) 2016 (Cth), that a creditor is to be counted as a "responding creditor", for the purposes of computing votes on passing a resolution of creditors without a meeting, if "the external administrator has admitted the proof of debt or claim, including the amount, for the purposes of voting", as distinct from on an adjudication of the debt. I have accepted that the proof of debt was plainly lodged for voting purposes in addressing the chronology above, although I also recognise the proof of debt form potentially had wider application.
Mr Katekar submits that there is no "election" between inconsistent rights by Mr Hayes applying the rule in Cherry v Boultbee on the one hand, and submitting a proof of debt for voting purposes in the liquidation of HHC on the other, and, as I will find below, there is no factual basis for Mr Fernon's submission that "the administration of the insolvent estate" of HHC has proceeded "on the basis of" the alleged election. Mr Katekar submits that Mr Hayes did not appreciate there was a risk that the lodgement of the proof might lead to the risk of loss of the right to rely on the rule in Cherry v Boultbee. I accept that proposition, as matter of fact, but it is not necessary to determine whether that could deprive the conduct of the character of an election given the findings I reach on other grounds below. Mr Katekar also points out that, on learning of Mr Calabretta's reliance on a claim of "election", Mr Hayes took prompt steps to withdraw the proof of debt, and points out that the lodgement of the proof of debt was not irrevocable, where it could be (and I find below, was) withdrawn, with the HHC liquidator's consent, pursuant to reg 5.6.56 of the Corporations Regulations. Finally, he submits that Mr William Harris was found in the Primary Judgment to have breached his duties owed to Sirrah, including in connection with substantial payments to HHC; the debt payable by HHC to Sirrah arises from breaches of duty by Mr William Harris to Sirrah in which HHC was involved; and he relies on Kunc J's observation in HBSY at [146] that "…waiver should not be too strictly applied where the equitable principles operate, particularly with respect to defaulting trustees". I will address the character of the liabilities owed by HHC to Sirrah further below in dealing with Mr Calabretta's third contention.
I am comfortably satisfied that Mr Calabretta has not established an election made by Mr Hayes which would prevent his application of the "rule" in Cherry v Boultbee in a distribution of the surplus in Sirrah. First, where the correspondence and proof of debt at the time of the suggested election were directed to approval of the HHC liquidator's remuneration outside of a meeting, Mr Hayes did not then face any choice of inconsistent alternatives between the application of the rule in Cherry v Boultbee and proving for Sirrah's debt in a winding up of HHC. That choice would not arise until the HHC liquidator called for proofs of debt for the purposes of an adjudication or proceeded with an adjudication. Second, Mr Hayes' completion of the proof of debt at that time was neither a clear nor unequivocal election as to that matter, where the surrounding correspondence and the form of the proof made clear that it was directed to voting on the HHC liquidator's remuneration. Third, contrary to Mr Fernon's submission, the lodgement of that proof of debt had no impact on HHC's assets, where HHC then (and now) had no available assets in a liquidation and the remuneration and disbursements claimed by the HHC liquidator were less than the amount by which he had been indemnified by Mr Hayes. Fourth, Mr Hayes has withdrawn that proof of debt, and I have found above that the HHC liquidator's acknowledgement of that withdrawal necessarily involves consent to it, prior to any adjudication of that proof of debt by the HHC liquidator, the point at which any election would in fact arise. Mr Fernon submits that he has done so in response to Mr Calabretta's claim for election, and I accept that is so, with the qualification that Mr Hayes rightly denies having made an election in the first place and has withdrawn the proof of debt for more abundant caution. The fact that that course is defensive in character, in the context of the proceedings, does not make it any less effective.
For completeness, I should record that there was no proper basis for the threat made by Mr Amirbeaggi to the HHC liquidator, to which I referred in paragraph 35 above. The HHC liquidator acted fairly and properly in acknowledging the withdrawal of the proof of debt in the circumstances, and thereby consenting to its withdrawal, and was likely bound to take that course in accordance with the principle in Re Condon; Ex parte James (1874) LR 9 Ch App 609, which prevents a liquidator taking advantage of his or her strict legal rights so as to unjustly enrich a company in liquidation at the expense of an innocent party, although that principle has now likely been assumed within the Court's wider supervisory jurisdiction over Court-appointed liquidators.
Mr Fernon then submits that:
"Equity will not allow the Plaintiff to diminish the rights of the chargee by subsequently purporting to rely on the so-called rule [in Cherry v Boultbee], which right only arises as at the date of distribution, after becoming aware of the charge. See eg. Stephens v. Venables (1862) 30 Beav 625; 54 ER 1032; and Roxburghe v Cox (1881) 17 Ch D 520 as referred to at fn. 321 of Derham Set Off at [14.66] at 652 and 14.70 at 654 - 655. In both cases mentioned, the effectiveness of a notice of an assignment was considered as precluding the operation of any set off otherwise available." [emphasis added]
The false factual premises of this submission becomes significant here, where Sirrah's right to repayment of the loan, in an amount exceeding $11 million, had arisen long before any notice to Sirrah or Mr Hayes of the charge.
Mr Fernon goes on to submit that, applying the principle in Stephens v Venables to the facts of this case:
"the notice [of the charge] was given prior to the relevant date, on which the relevant debt, the judgment Debt, now proposed to be set off, accrued. The right in equity to apply the so-called rule [in Cherry v Boultbee], which right arises as the date of the distribution, therefore cannot impugn the entitlement of the chargee to receive the proceeds of [Sirrah's]'s distribution pursuant to its rights as a secured creditor in the winding up of [HHC]."
In reply, Mr Katekar responds that Mr Calabretta's submission:
"misapprehends when the relevant liability of HHC arose; second, there was no notice, in the relevant sense, to Sirrah; third, the reliance on Stephen v Venables and related cases is misplaced, including because HHC could give no better interest than what it had itself, because of the underlying conduct which led to the relevant judgment debt coloured whatever prospective rights it might have as against Sirrah. Fourth … there is no set-off here."
Mr Katekar points out that, as I have also noted above, Mr Calabretta's contention that "[HHC's] debt to [Sirrah] accrued subsequent to notice of a charge on [HHC's] proprietary interest in the fund being received by [Sirrah]" depends on an incorrect factual premise, where it was common ground in the Primary Proceedings that, as at 30 September 2019, HHC was indebted to Sirrah as at 30 September 2019 in the amount of $11,044,660.24 and HHC's debt to Sirrah "accrued" prior to 30 April 2021, when it is now contended that notice of Yates Beaggi's charge over HHC's shares in Sirrah was given. Mr Katekar also contends that Sirrah's articles require that it pay no attention to any purported equitable interest in its shares, which the Yates Beaggi charge asserts, although it will not be necessary to determine that matter. Mr Katekar takes issue with Mr Calabretta's claim that notice of Yates Beaggi's charge was given to Sirrah on 30 April 2021. He also submits that Mr Calabretta's reliance on Stephen v Venables is inapt, and points to the very different facts of that case.
In summary, Mr Katekar submits that:
"At the time HHC granted the charge, it was not possible for HHC to confer on [Yates Beaggi] as chargee a better interest in Sirrah's shares than that which HHC had at the time it gave that charge. At that point, HHC had already engaged in the conduct which led to the $17 million judgment debt against it in favour of Sirrah. It did not dispute that it was already indebted to Sirrah for more than $11,000,000. ...
Accordingly, the $17 million debt was not an "equity that arose after" HHC charged its shares in Sirrah to [Yates Beaggi]; it already existed. [Yates Beaggi] therefore took the charge over HHC's 53% shareholding in Sirrah subject to the damage that HHC had already done to its potential right to any distribution from any surplus in Sirrah, in its capacity as a holder of those shares."
I also do not accept Mr Calabretta's submission in this regard. First, despite the subtlety of the discussion of this matter in Derham, there is an open question whether the rule in Cherry v Boultbee is properly qualified by the decision in Stephens v Venables, which turned upon very different facts from the present facts, and my attention was not drawn to authority which has adopted the view expressed in Derham, even in the qualified way in which it is put. Second, the reference to Stephens v Venables in Derham is itself qualified in its application to a defaulting trustee. That qualification was noted by Kunc J in HBSY at [54], and his Honour observed that:
"The author of Derham on the Law of Set-Off (4th ed, 2010, Oxford University Press) ["Derham"] interprets the principle in Morris v Livie [(1842) 1 Y & CCC 380; 62 ER 934] in this way:
"[14.81] … the trustee's breach impugns his or her very entitlement to participate in the trust to the extent of the breach. Strictly, this is not a case of the trustee's interest being impounded. Rather, it is said that, in the event of a breach, the trustee does not have an interest. Since an assignee can only claim what the trustee could claim, the assignee should also take subject to the obligation to remedy the breach, regardless of when the breach may have occurred. …
[14.85] One consequence of both [the [Re Dacre; Whitaker v Dacre [1916] 1 Ch 344] and Morris v Livie] formulations is that, unlike under Cherry v Boultbee, it should not make any difference that the liability to contribute otherwise ceased to exist before the right to participate became due and payable, for example because of a discharge from bankruptcy, or as a result of a composition or scheme of arrangement. The discharge should not be relevant, because the breach would mean that the right to participate has already been impugned (under Morris v Livie), or it has already been satisfied by a notional payment in advance to the defaulting trustee. Similarly, in the case of Morris v Livie, the fact of proving the debt and receiving a dividend in the defaulting trustee's bankruptcy should not constitute a waiver of the right to invoke the principle either before or after discharge, since the trustee's right should still be impugned until such time as the default is remedied in toto. While Re Sewell is authority to the contrary, the point may be made that Parker J did not analyze the case in terms of the defaulting trustee formulations." [Footnotes omitted]
I recognise that HHC is not a trustee of a trust. Nonetheless, it seems to me that the principles noted above arguably extend to a party who was the alter ego of a defaulting company director, so that its "right should still be impugned until such time as the default is remedied in toto", adopting the language that I have quoted above. I found that HHC had that character in the Primary Judgment. If that exception applies, with reference to the case law to which Derham refers, HHC would be subject to a wider obligation to make good its default before sharing in any distribution from Sirrah, and the principle in Stephens v Venables has no application. It is not necessary to reach a final view as to that question, which is likely both novel and complex, since Mr Calabretta's submission here is plainly based on a false factual premise, to which I now turn.
Even if the principle in Stephens v Venables is capable of application here, the factual basis for its application is not established. The existence of large part of HHC's debt to Sirrah was acknowledged in the Primary Proceedings, although the fact that it was created in breach of fiduciary duty was not; and that debt existed before Mr Amirbeaggi referred to the security taken by Yates Beaggi in the affidavit noted above or Yates Beaggi registered that security on the PPSR, although the orders that I made to give effect to the Primary Judgment were not made until after that occurred. The principle in Stephens v Venables has no application on the facts, even if it were otherwise capable of application, where HHC's debt to Sirrah preceded Yates Beaggi's security. Mr Calabretta's reliance on the principle in Stephens v Venables also does not provide a basis not to apply then principle in Cherry v Boultbee in the distribution of the surplus in Sirrah.
Where I have reached these conclusions, it is not necessary to address Mr Hayes' reliance on cl 7 of Sirrah's articles of association or the supplementary submissions which I permitted Mr Fernon to make in that regard. If Mr Hayes is correct in his reading of that clause, it provides a further reason to reach the conclusion that I have reached on other grounds; and, if he is not, that does not undermine that conclusion reached on other grounds.
There was no contest between the parties that the proposed distribution properly applied the rule in Cherry v Boultbee if, as I have found, that principle can properly be applied in the distribution of the surplus of HHC. I will therefore grant leave to distribute the surplus in accordance with order 1 and make the declaration sought in order 2 and give the direction sought by Mr Hayes in order 3 in the Amended Originating Process.
In Re Better Drums Pty Ltd (in liq) [2019] NSWSC 1262 at [6]-[7], I observed that:
"I reviewed the relevant authorities in respect of an application for release as a liquidator in Re RR Impex Pty Ltd (in liq) [2013] NSWSC 1667 , and again in Re One.Tel Ltd (in liq) [2014] NSWSC 1892 . As I noted in Re RR Impex Pty Ltd above at [3], s 480(d) of the Act implies that, once the Court is satisfied that the necessary notifications have been given to interested persons, that no creditors or contributories had objected to a liquidator's release or raised any concern as to the performance of his or her duties, and the other evidence contemplated by the Supreme Court (Corporations) Rules is placed before the Court, then the Court would ordinarily make an order releasing the liquidator unless any reason emerges that it should not do so.
Strictly, an order for release would ordinarily only be made after all steps in the liquidation had been completed. However, there are occasions where the Court has made such an order where remaining steps are of a mechanical character, here, the payment of the relevant amount to [payee] and the dealing with the GST refund received. There would here be no utility in deferring an order for release, where that would incur further costs for the liquidator, at the expense of contributories, of another Court application. In those circumstances, the Court has previously taken, and I will now take, the course of making an order for release which has effect from a specified date."
Mr Katekar submits and I accept that all of the matters set out in r 7.5(3) of the Corporations Rules have been addressed by Mr Hayes (Hayes 1, [34]); appropriate notice of the application has been given to contributories, including a summary of receipts and payments and statement of financial position, as required by r 7.5(6) of the Corporations Rules (Hayes 1, [36]; Hayes 3); notice of the application has been given to ASIC, as required by r 2.8(3) of the Corporations Rules (Hayes 3); and Mr Hayes makes the statements required by r 7.5(4) of the Corporations Rules (Hayes 1, [35]). On that basis, I am satisfied that it is appropriate to make orders under s 480 of the Act for the release of Mr Hayes and the deregistration of Sirrah, deferred as I have note above. I accept that it will likely be appropriate, as Mr Hayes proposes, to make that further order in Chambers upon the filing of an affidavit of Mr Hayes confirming that the necessary steps have been completed.