Cosmoluce v Tsagaris

CATCHWORDS : CORPORATIONS - liquidators - where defendants gave undertakings to indemnify first plaintiff against risk of failure in previous litigation - where first plaintiff sought to enforce undertaking - where compromise reached - where defendants agreed to pay substantial sum of money to first plaintiff's liquidator - notice of motion by plaintiffs for court approval of compromise pursuant to Corporations Act s 477(2A) or direction of court pursuant to Corporations Act s 479(3) - whether s 477(2A) applies - whether a claim for indemnity in respect of a sum fixed by outcome of litigation is a claim for a debt - whether approval should be granted - CORPORATIONS ACT 2001 (CTH) ss 477, 479.

Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No. 6) (2007) 160 FCR 423 CASES CITED : QBE Workers' Compensation (NSW) Pty Ltd v GJ Formwork Pty Ltd (2006) Re Spedley Securities Ltd (In Liquidation) (1992) 9 ACSR 83

Cosmoluce Pty Limited (Receivers and Managers Appointed) (in liquidation) (First Plaintiff / Sixth Cross-Defendant) Brian Silvia (as Liquidator of Cosmoluce Pty Limited) (Second Plaintiff) George Tsagaris (First Defendant/First Cross-Claimant) Vicki Tsagaris (Second Defendant/Second Cross-Claimant) PARTIES : Stephen Simon Rubner (First Cross-Defendant) Tino Gerry Farlanga (Second Cross-Defendant) Shirley Anne Botting (Third Cross-Defendant) Cosvette Pty Ltd in its capacity as trustee for the Saab Trust (Fourth Cross-Defendant) Cosvette Pty Ltd in its capacity as trustee for Parkway Trust (Fifth Cross-Defendant)

M J Leeming SC / C G Arnott (Plaintiffs) COUNSEL : N A Cotman SC / K G Odgers (First and Second Defendants) L V Gyles SC / D A Lloyd (First to Fifth Cross-Defendants)

Corrs Chambers Westgarth (Plaintiffs) SOLICITORS : Breene & Breene Solicitors (First and Second Defendants) Kennedys (First to Fifth Cross-Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

20 September 2010 (ex tempore - revised 20 September 2010)

2009/298716 COSMOLUCE PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS v GEORGE TSAGARIS & ORS JUDGMENT

1 HIS HONOUR: In these proceedings, the first plaintiff (Cosmoluce) sues the defendants (Mr and Mrs Tsagaris) to enforce what it says were undertakings given by them to provide financial support. The undertakings relied upon were given in the context of litigation by a company, Chint Australia Pty Ltd (Chint) which was then (that is to say, at the time the undertakings relied upon were first given) set down for hearing in the near future. Since then, that litigation has concluded in favour of Chint (which recovered a judgment in excess of $5.3 million) and there has been no appeal. 2 The hearing of these proceedings commenced on Wednesday last, 15 September 2010. It has run three days so far, and will probably have another three days of life. Cosmoluce and Mr and Mrs Tsagaris reached an enforceable compromise of the matters in dispute between them on the evening of Friday last, 17 September 2010. The effect of that compromise is that Mr and Mrs Tsagaris have agreed to pay a substantial sum of money to the second plaintiff, the liquidator of Cosmoluce. The payment is to be made in two instalments. There is an agreement for the grant of a mortgage to secure the obligations of Mr and Mrs Tsagaris, and other machinery provisions. 3 The compromise is subject to either the approval of the Court pursuant to s 477(2A) of the Corporations Act or the direction of the Court pursuant to s 479(3) of the Corporations Act. By notice of motion filed in court this morning, Cosmoluce and its liquidator seek orders accordingly. 4 Sections 477 and 479 read, so far as they are relevant, as follows: 477 Powers of liquidator

(1) Subject to this section, a liquidator of a company may:

(a) carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business; and (b) subject to the provisions of section 556, pay any class of creditors in full; and (c) make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or whereby the company may be rendered liable; and (d) compromise any calls, liabilities to calls, debts, liabilities capable of resulting in debts and any claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the property or the winding up of the company, on such terms as are agreed, and take any security for the discharge of, and give a complete discharge in respect of, any such call, debt, liability or claim. (2) Subject to this section, a liquidator of a company may:

(a) bring or defend any legal proceeding in the name and on behalf of the company; and (b) appoint a solicitor to assist him or her in his or her duties; and (c) sell or otherwise dispose of, in any manner, all or any part of the property of the company; and (ca) exercise the Court's powers under subsection 483(3) (except paragraph 483(3)(b)) in relation to calls on contributories; and (d) do all acts and execute in the name and on behalf of the company all deeds, receipts and other documents and for that purpose use when necessary a seal of the company; and (e) subject to the Bankruptcy Act 1966 , prove in the bankruptcy of any contributory or debtor of the company or under any deed executed under that Act; and (f) draw, accept, make and indorse any bill of exchange or promissory note in the name and on behalf of the company; and (g) obtain credit, whether on the security of the property of the company or otherwise; and (h) take out letters of administration of the estate of a deceased contributory or debtor, and do any other act necessary for obtaining payment of any money due from a contributory or debtor, or his or her estate, that cannot be conveniently done in the name of the company; and (k) appoint an agent to do any business that the liquidator is unable to do, or that it is unreasonable to expect the liquidator to do, in person; and (m) do all such other things as are necessary for winding up the affairs of the company and distributing its property.

(2A) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than:

(a) if an amount greater than $20,000 is prescribed - the prescribed amount; or (b) otherwise - $20,000. …

(1) Subject to this Part, the liquidator must, in the administration of the property of the company and in the distribution of the property among its creditors, have regard to any directions given by resolution of the creditors or contributories at any general meeting or by the committee of inspection, and, in case of conflict, any directions so given by the creditors or contributories override any directions given by the committee of inspection.

(2) The liquidator may convene general meetings of the creditors or contributories for the purpose of ascertaining their wishes, and he or she must convene meetings at such times as the creditors or contributories by resolution direct or whenever requested in writing to do so by at least one-tenth in value of the creditors or contributories.

(3) The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.

(4) Subject to this Part, the liquidator must use his or her own discretion in the management of affairs and property of the company and the distribution of its property. 5 It is suggested that s 477(2A) may be engaged because the settlement involves the compromise of a debt due to Cosmoluce in excess of $20,000. If that is not correct then, as I have said, reliance is placed in the alternative on the more general power of the Court to give directions to liquidators pursuant to s 479(3). 6 There has been no definitive analysis of the expression "debt to the company" appearing in s 477(2A). Barrett J looked at the matter in QBE Workers' Compensation (NSW) Pty Ltd v GJ Formwork Pty Ltd (2006) 56 ACSR 687. Lindgren J considered it, in more detail, in Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No. 6) (2007) 160 FCR 423. In the former case, Barrett J pointed out at 588[4] that there was "a threshold question whether s 477(2A) applies, in that it is concerned only with the compromise of a debt". His Honour said that, in case of doubt, the Court should err on the side of granting approval under s 477(2A). 7 The rationale for that approach must be that there is no power to compromise, in the case where the compromise involves a debt to the company of more than $20,000, except with the approval of the Court. If the Court were to consider, for example, that there were no such debt, and thus to withhold its approval, a later determination that there was in fact a debt would mean that there was no compromise that was binding on the company or the other party. 8 The observations of Barrett J were referred to with approval by Lindgren J in Elderslie Finance at 427-428[20] and again at 429[26]. 9 In the present case, the claim that Cosmoluce brings is pursuant to what it says was an enforceable undertaking given by Mr and Mrs Tsagaris to indemnify it at least against the risk of failure in the Chint litigation. That undertaking was necessary because, according to the evidence that I have heard to date, Cosmoluce's auditor, Mr Rubner, was not prepared to sign off on the accounts of Cosmoluce, without qualification, unless he were satisfied that they could properly be presented on the going concern basis. Given that if the amount claimed by Chint were payable, it would have effectively wiped out Cosmoluce, Mr Rubner required some sort of financial support to be given to Cosmoluce by its directors, Mr and Mrs Tsagaris. That support was given, in the form of a written undertaking, and the accounts reflected that. 10 In those circumstances, the promise being one to indemnify, it seems to me that prima facie there is a claim for a debt. That is because the obligation which, according to Cosmoluce, was undertaken, being one of indemnity, was for a liquidated amount. Quantification of the amount would, of course, depend on the outcome of the Chint litigation, but it was only on the successful outcome of that litigation - from the perspective of Chint - that there would be anything to which the indemnity could attach. 11 Lindgren J pointed out in Elderslie Finance at 430[38] that it was neither necessary nor desirable to attempt to define what was meant by "a debt to the company". I agree with his Honour's approach. However, simply taking the words according to their ordinary English meaning, it is in my view strongly arguable that a claim for indemnity in respect of a sum which, by hypothesis, has been fixed by the outcome of litigation is a claim for a debt. 12 Equally, I agree with the approach taken by Barrett J in QBE Workers' Compensation and endorsed by Lindgren J in Elderslie Finance that, in the case of doubt, one should err on the side of treating the claim as a debt where the consequences of a mistaken withholding of approval are those that I have pointed out earlier. 13 In case I were incorrect in thinking that s 477(2A) applies, I would add simply that the alternative course, of directing the liquidator that he is justified in entering into and performing the agreement for compromise, is one that on any view is in principle available. 14 The compromise that has been agreed goes well beyond simply compromising the claim pursuant to the undertakings. However, because that is an element of the claim, and because the promises given by each party to the compromise are in consideration for all the promises given by the other, it is clear that approval under s 477(2A) extends to the whole of the compromise and not just to so much of it that involves the compromise of the debt. 15 In considering whether or not to grant approval, or to give directions, the Court does not attempt to second guess the liquidator. It pays appropriate respect to the commercial judgment of the liquidator, without going so far as rubber stamping it. As Giles J said in Re Spedley Securities Ltd (In Liquidation) (1992) 9 ACSR 83 at 85-86, the Court respects the liquidator's decision, and generally will not interfere unless there is some apparent want of good faith (I say straight away that there can be no suggestion of that in this case) or some error of law or principle apparent on the face of the material, or some real ground of doubt as to the prudence of the settlement. The Court does, as his Honour made clear, undertake some assessment, on a legal basis, of the merits of the claim, and it expects a liquidator to obtain advice from the lawyers that he or she has retained. 16 In QBE Workers' Compensation, Barrett J pointed out, at 689[8] that the compromise had been negotiated with the assistance of solicitors and counsel, and that their advice had been taken. His Honour referred also to "practical funding limitations" - a limitation which is not, I think, of great significance in the present case. 17 In this case, Cosmoluce and the liquidator have taken the advice of senior and junior counsel retained in the proceedings. The advice, which I have read (it is a confidential exhibit) sets out, in an appropriate way, the issues in the proceedings; the background leading up to the proceedings; and what is presently happening in the liquidation of Cosmoluce. It discusses the elements of the settlement and points out advantages which may accrue if the settlement proceeds, and looks at the various elements involved. It is plain, looking at the advice, that the liquidator has chosen to act on the advice that he was given. There is nothing in the advice that strikes me as being obviously inappropriate, or to reveal some defect in the understanding and application of the relevant principles. On the face of things, it is an appropriate basis for the liquidators's decision. 18 The way that the settlement is structured, there is a benefit to unsecured creditors that is in effect greater than the amount that is to be paid. That is because secured creditors related to Mr and Mrs Tsagaris, and other people and entities related to them, have agreed not to prove for any claim, whether secured or unsecured, that they may have against Cosmoluce. The effect of that aspect of the settlement is to take out of the total pool of creditors an amount of about $3.7 million. It follows that so much of the proposed settlement as is available for distribution to unsecured creditors can be distributed on a basis that does not require the liquidator to take into account, let alone (if relevant) to pay in priority, the claims in question. 19 The plaintiffs have had the benefit of litigation funding. Under the funding agreement, the funder is to receive the costs paid by it, and a fee of 25 per cent of those costs, and has in effect a success commission. The amounts payable to the funder pursuant to those arrangements will be substantial, but it is expected that, nonetheless, there will be left for distribution to creditors a little under half of the amount payable by way of compromise. 20 The best estimate of the liquidator (who at present does not have precise details of the claims of unsecured creditors) is that if the settlement is approved and performed, and the funder is paid its entitlements, unsecured creditors will receive between 26 and 34 cents in the dollar on their claims. That is 26 to 34 cents more than they will receive if the settlement is not approved and the litigation fails, or fails to produce monetary fruits. 21 It is correct to say, as the advice of counsel points out, that there are other transactions that might be investigated that might produce a return to creditors. If the settlement is approved and performed, those transactions will not be investigated, because appropriate releases are given. But those claims are uncertain, both in a legal sense and in a practical sense. Further, their prosecution would be expensive, and there is a strong public policy in favour of enabling the insolvent administration of companies to be compromised as quickly and efficiently as the nature of the particular insolvent administration admits. 22 Further in this case, there is the very practical significance of steps taken to date by Mr and Mrs Tsagaris which could be seen as attempts by them to evade their responsibilities. If the compromise is not approved, there is every reason to think that they will continue to behave in the way that they have, and that recovery of whatever judgment may be retained could be frustrated. In this context, it is not without significance that freezing orders were granted ex parte and continued after a contested interlocutory hearing. The basis for the grant of the orders included that there was a real risk that Mr and Mrs Tsagaris were trying to put their assets beyond the reach of Cosmoluce. 23 There is nothing in any of the material put before me to suggest that the proposed settlement is imprudent, or lacking in commercial justification. Nor is there anything put to me to indicate that it involves some misconception of principle either as to the relevant functions of the liquidator or as to what is at stake in the proceedings that are to be compromised. On the contrary, it seems to me, there is a very clear basis for saying, as by implication the liquidator does, that the compromise is in the interests of unsecured creditors as a whole. By far the largest of the those unsecured creditors is Chint. I am informed by affidavit evidence that Chint's representatives have been present at Court for the whole of the hearing to date, have seen how the hearing has progressed, and have indicated that Chint approves the settlement. Whilst Chint cannot bind all creditors, its views are undoubtedly entitled to respect. 24 For those reasons, it is appropriate to grant the relief the liquidator seeks. I make orders in accordance with paragraphs 2-4 of the notice of motion filed in court today.

22/10/2010 - Coversheet - Paragraph(s) Coversheet parties

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