Deangrove Pty Ltd (Rec & Mgrs Aptd) v Commonwealth Bank of Australia

factual background 12 On about 6 January 2000, Messrs Buckby and Dennis of Ernst & Young, chartered accountants, were appointed as joint and several receivers and managers of Deangrove. The appointment was made pursuant to an equitable mortgage dated 12 June 1998, given by Deangrove to CBA, which was registered under the Corporations Law. The equitable mortgage provides for the appointment of a receiver in what might be described as the usual terms. The receivers' powers include the following: "(a) to take possession of collect and get in the whole or any part of the mortgaged property; … (c) to carry on or concur in carrying on the business of the Mortgagor…; … (l) to bring or defend any action suit or legal proceedings in the name of the Mortgagor or otherwise for all or any of the purposes aforesaid; … (n) to do all such other acts and things without limitation as the receiver shall think expedient in the interests of the Mortgagee…". 13 The deed appointing the receivers provided that they had, jointly and severally: "[a]ll and every power discretion and authority conferred upon a joint and several receiver and manager either by and set forth in the Equitable Mortgage…under any Act of Parliament or otherwise by law". The reference to "any Act of Parliament" is to s 420 of the Corporations Law, which confers additional powers on the receiver of property of a corporation. 14 On 13 March 2000, the applicants commenced the earlier proceedings, seeking the relief to which I have already referred. At the first directions hearing, on 19 April 2000, Hely J ordered the applicants to file and serve a statement of claim on or before 10 May 2000. The applicants failed to comply with that direction. On 17 May 2000, Hely J extended the time for the applicants to file and serve a statement of claim until 24 May 2000. The applicants also failed to comply with that direction. 15 On 14 June 2000, Hely J made orders by consent extending the time for the applicants to file and serve a statement of claim until 4 pm on 19 June 2000. As I have noted, his Honour ordered that, in the event of further default by the applicants, the proceedings should be dismissed with costs. The applicants did default and the orders dismissing the proceedings were entered on 3 July 2000. 16 As already noted, the applicants commenced the current proceedings on 26 October 2000. This step was taken on Deangrove's behalf without the consent of the receivers. 17 CBA filed its motion on 1 December 2000. On 11 December 2000, the applicants' solicitor wrote to the receivers, asking whether they consented to the proceedings continuing in Deangrove's name and for its benefit. The receivers apparently have not replied to that letter. 18 On 19 February 2001, Mr Jeans applied to the Supreme Court of New South Wales, seeking leave pursuant to s 237 of the Corporations Law to commence and maintain the proceedings in this Court on behalf of Deangrove. Section 236 of the Corporations Law creates a new statutory derivative action. It permits a shareholder, among others, to bring proceedings on behalf of the corporation if the shareholder is granted leave pursuant to s 237. The Court is obliged to grant the application if satisfied of certain matters. One such matter is that "it is probable that the company itself will not bring the proceedings, or properly take responsibility for them, or for the steps in them" (s 237(2)(a)). 19 Mr Jeans' application was heard by Santow J on 23 February 2001. His Honour granted leave to CBA to appear in opposition to the application. In the result, his Honour delivered an ex tempore judgment dismissing the application. His Honour held that, on Mr Jeans' own case, he could not satisfy s 237(2)(a), since he asserted that Deangrove could properly take responsibility for the proceedings in this Court. In effect, Mr Jeans had conceded non-fulfilment of an essential element that had to be satisfied for the Court to grant leave for the commencement of a derivative action pursuant to ss 236 and 237 of the Corporations Law. 20 For present purposes, the main significance of the proceedings in the Supreme Court is that CBA's representatives learned, for the first time, of the matters to which I have referred in [9] above.

the ABUSE OF PROCESS ARGUMENT 21 Mr Bell relied on a line of English authority in holding that it is an abuse of process for a litigant to commence fresh proceedings founded on the same cause of action as previous proceedings, where the previous proceedings have been terminated in consequence of the litigant's failure to comply with self-executing orders (which are known as "unless orders" in England). Mr Bell relied particularly on Janov v Morris [1981] 3 All ER 780. In that case, an action for damages for breach of contract was dismissed in consequence of an order that, unless the plaintiff issued and served a summons for directions by a particular date, the action would be dismissed for want of prosecution. Three months later, the plaintiff brought a second action against the defendant founded on the same cause of action. The master struck out the second action as an abuse of process but, on appeal, a judge in chambers allowed the appeal and rescinded the master's order. 22 A further appeal to the Court of Appeal was allowed. Dunn LJ, with whom Watkins LJ agreed, said this (at 785): "The court then has to consider whether, in the exercise of its discretion under Ord 18, r 19, [the] second action should be struck out. In my view, the court should be cautious in allowing the second action to continue and should have due regard to the necessity of maintaining the principle that orders are made to be complied with and not to be ignored…. I regard it as a matter of discretion to be exercised having regard to the circumstances of the particular case. In this case there had, from first to last, been no explanation whatever by the plaintiff why there was the 10-month delay before the application to strike out the first action…. There was no explanation at all why he failed to comply with the 'unless' order [that is, the self-executing order], and there has been no indication in this present action that he intends to comply with the orders of the court any more than he did in the first action. Indeed, he is still in contempt of court." 23 An important factor in the reasoning of the Court of Appeal in Janov v Morris was the absence of any explanation for the failure to comply with the self-executing order. A similar approach has been taken in later English cases. In Re Jokai Tea Holdings Ltd [1993] 1 All ER 630, Browne-Wilkinson V-C observed (at 637) that the basis of the decision in Janov v Morris "was that the failure to comply with the peremptory order was contumacious…. It is clear that the court, in reaching the conclusion that the conduct was contumacious, placed much reliance on the fact that no explanation or excuse being given by the plaintiff for his disobedience to the order. In my judgment, in cases in which the court has to decide what are the consequences of a failure to comply with an 'unless' order, the relevant question is whether such failure is intentional and contumelious. The court should not be astute to find excuses for such failure since obedience to orders of the court is the foundation on which its authority is founded. But, if a party can clearly demonstrate that there was no intention to ignore or flout the order and that the failure to obey was due to extraneous circumstances, such failure to obey is not to be treated as contumelious and therefore does not disentitle the litigant to rights which he would otherwise have enjoyed." See also Grand Metropolitan Nominee (No 2) Co Ltd v Evans [1993] 1 All ER 642 (CA). 24 There may be a question as to whether the English authorities should be applied in this Court. In Andrew v Baradom Holdings Pty Ltd (1995) 36 NSWLR 700, at 704-705, Bryson J expressed reservations about the reasoning of Browne-Wilkinson V-C in Re Jokai Holdings, on the ground that his Lordship treated failure to comply with a self-executing order rather too readily as an indicator of contumacious behaviour. Andrew v Baradom Holdings did not, however, involve a self-executing order (see at 705). Moreover, Bryson J's reasoning was influenced by the provisions of Part 40 r 8 of the Supreme Court Rules ("SCR"), which deals with the consequences of orders made in that Court dismissing proceedings. There is no equivalent of SCR Part 40 r 8 in the Federal Court Rules. 25 It is, however, unnecessary to consider the question further. While the applicants failed to provide any explanation for their failure to comply with the self-executing orders made by Hely J until the eve of the hearing of CBA's motion, they ultimately did explain their conduct. Uncontradicted evidence was given by Mr Butler, a solicitor, that senior and junior counsel had given oral advice to Deangrove and Mr Jeans on 18 June 2000 that "the company's cause of action in respect of which [the earlier proceedings] had been commenced in March 2000, was not then complete and that accordingly a statement of claim should not be filed with the consequence that the self-fulfilling order made by Justice Hely on 14 June 2000 in those proceedings would take effect." Mr Butler deposed that the applicants had accepted counsel's advice. 26 Mr Butler did not elaborate on why counsel took the view that the earlier proceedings had been instituted prematurely. Nor was he cross-examined. The absence of that information does not detract, in my opinion, from the fact that counsel advised that the earlier proceedings were not properly constituted and, indeed, apparently suggested that it was in order simply to allow the self-executing orders to take effect. The evidence strongly indicates that the failure to comply with Hely J's self-executing orders was not the product of contumacious ("wilfully and obstinately disobedient to authority") behaviour, but a decision based on counsel's advice that the proceedings should not be pursued. It is true, as Mr Bell suggested, that the decision not to comply with the orders made by Hely J was deliberate, in the sense that the applicants, appreciating that the orders had been made, consciously decided not to file a statement of claim by the specified date. But in view of counsel's advice, it cannot be said that the failure to comply reflected wilful disobedience to the orders made by the Court. 27 This is not to say that the applicants' apparently careless disregard for the directions given by Hely J, prior to the making of the self-executing orders, is to be condoned. Nor is it to commend the decision simply to ignore (so far as CBA and the Court were concerned) the deadline of 19 June 2000. It may have been wiser for the applicants' representatives at least to have explained in writing to CBA's representatives the course that the applicants proposed to adopt. The point is, however, that this is not a case where the applicants simply disregarded the Court's directions in the earlier proceedings and, for that reason, can be expected to flout directions given by the Court in the present proceedings. 28 In my opinion, having regard to the explanation given for the failure to comply with the self-executing orders, the institution of the current proceedings did not constitute an abuse of the process of the Court. CBA's first contention should be rejected.

the proceedings in deangrove's name 29 It is not uncommon, where a company defaults under an equitable charge and the chargee appoints receivers and managers to the company, that the directors wish to bring legal proceedings challenging the validity of the receivership or to claim damages against the chargee or receiver. The question then arises whether the directors have the power or authority to bring proceedings in the name of the company, or whether the power and authority to institute and maintain legal proceedings is vested exclusively in the receivers. The question presents difficult issues: see L A Badham, "Directors Versus Receivers: Control of Litigation on Behalf of Companies in Receivership" (1998) 16 C&SLJ 508. 30 The general principle, at least so far as the usual form of debenture or charge is concerned, is that the appointment of receivers does not entirely displace the powers and authority of the directors. The principle was explained by Street J, in a frequently cited passage (Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 92 WN (NSW) 199, at 209): "Receivership and management may well dominate exclusively a company's affairs in its dealings and relations with the outside world. But it does not permeate the company's internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company's own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management." 31 Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 1 QB 814, on which the applicants relied, is an illustration of the principle. In that case, the bank, exercising powers under a debenture, appointed receivers to a company with which it had entered into arrangements to finance property developments. The directors of the company instituted proceedings against the bank claiming damages for breach of contract. The directors provided an indemnity to the company against any liability on its part for costs. The bank applied to set aside the writ on the ground that it had been issued without the knowledge or consent of the receivers. The Court of Appeal held that the bank's motion should fail. 32 Shaw LJ, with whom Stephenson LJ agreed, said this (at 819): "One has got to see what the function of the receiver is. It is not, of course, to wind up the company. It is perhaps interesting to note in passing that when a liquidator is appointed, certainly in a winding up by the court, the powers of the directors immediately cease by statutory provision. There is no such provision in relation to the appointment of a receiver, whose duty it is to protect the interests of the mortgagee or debenture holders, as the case may be. In so far as it is requisite and necessary for him, in the course of his dealing with the assets of the company, bringing them in and realising them, and so on, to bring actions as well, he is empowered to do so by the debenture trust deed in the name of the company. That makes it possible for him to institute such proceedings without exposing himself to the risk of a liability for costs if those proceedings should fail. But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name of the company. It does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge." 33 After setting out an extract from Kerr on Receivers (14th ed, 1972), at 301, which suggested that upon the appointment of receivers the powers of the directors to deal with the company's property were "paralysed", Shaw LJ made these observations (at 821): "If that means that nobody else can take any step in regard to the assets of the company which does not amount to dealing with, or disposing of, the assets, it would appear to me to be too wide and not supported by any authority which has been cited to us. What, of course, the directors cannot do, and to this extent their powers are inhibited, is to dispose of the assets within the debenture charge without the assent or concurrence of the receiver, for it is his function to deal with the assets in the first place so as to provide the means of paying off the debenture holders' claims. But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the rights or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board … from seeking to enforce the claim, however ill-founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders." 34 Mr Rein SC, who appeared with Mr Johnson for the applicants, submitted that Newhart Developments was precisely in point and should be followed. Mr Bell conceded that the facts of Newhart Developments were indistinguishable from those of the present case, but submitted that it should not be followed. He relied on the criticisms of Newhart Developments made by Browne-Wilkinson V-C in Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53. 35 In Tudor Grange,Browne-Wilkinson V-C distinguished Newhart Developments on the ground that the proceedings that had been instituted in Tudor Grange on behalf of the companies in receivership directly impinged on the companies' property, in that no indemnity against costs had been offered by the directors. His Lordship, however, expressed (at 63) "substantial doubts" about the correctness of Newhart Developments: "The decision seems to ignore the difficulty which arises if two different sets of people, the directors and the receivers, who may have widely differing views and interests, both have power to bring proceedings on the same cause of action. The position is exacerbated where, as here, the persons who have been sued by the directors bring a counterclaim against the company. Who is to have the conduct of that counterclaim which directly attacks the property of the company? Further, the Court of Appeal in the Newhart case does not seem to have had its attention drawn to the fact that the embarrassment of the receiver in deciding whether or not to sue can be met by an application to the court for directions as to what course should be taken, an application now envisaged in section 35 of the Insolvency Act 1986." 36 Newhart Developments has been followed in a number of jurisdictions, both before and after Tudor Grange. Paramount Acceptance Co Ltd v Souster [1981] 2 NZLR 38, involved a claim by a company in receivership that the debenture under which the receiver was appointed was invalid. The New Zealand Court of Appeal considered (at 43) that Newhart Developments stood for the proposition that, after receivership: "the directors still retain residual powers, and if the receiver does not wish to cause the company to bring an action then the directors may do so without his consent so long as the company is indemnified against any liability for costs." See also Edwards v Singh (1990) 5 NZCLC 96-426; Brooklands Motor Co Ltd (in rec) v Bridge Wholesale Acceptance Corp (Aust) Ltd (1993) 6 NZCLC 96-597; Blanchard and Gedye, The Law of Company Receiverships in Australia and New Zealand (2nd ed, 1994), at [10.02]. 37 In Re Geneva Finance Ltd; Quigley v Cook (1992) 7 WAR 496, the question was whether the directors of a company to which a receiver had been appointed were entitled to access to certain of the company's records. Owen J, in the course of a detailed review of the authorities, said that he did not share the reservations about Newhart Developments expressed by Brown-Wilkinson V-C in Tudor Grange. His Honour considered (at 510-511) that: "The task is to look at the effect which the exercise of the power will have on the receiver's functions rather than to concentrate on the identification and delineation of the residual duties reposed in the directors…. It is a question of fact to be decided in each case whether the purported exercise of power by the directors is detrimental to the functions of the receiver. If it is, the directors must defer to the receiver. If it is not, it does not offend the principle which Newhart enunciates". 38 Owen J's analysis was endorsed by Blanchard J in Brooklands Motor Co Ltd (In rec) v Bridge Wholesale Acceptance Corp (Australia) Ltd (1994) 7 NZCLC 96-631, at 260,457. It was also followed by French J in Sun-Life Properties Pty Ltd v Chellaston Pty Ltd (1993) 10 ACSR 476 (Fed Ct), at 480-481, although the facts of that case were somewhat different than those in the present case. 39 Other authorities have proceeded on the basis that the reasoning in Newhart Developments is correct. Thus, in Bank of New Zealand v Essington Developments Pty Ltd (1991) 9 ACLC 1039 (SCt NSW), McLelland J observed (at 1041-1042) that "the power conferred as a receiver of property of a corporation [by s 420(2)(u) of the Corporations Law] is exercisable in the name of the corporation, and not otherwise. It follows that if a receiver having power under s 420(2)(u) to defend in the corporation's name a winding up application exercises that power, the authority of the directors to do so is suspended, although, in my opinion, the mere existence of the power does not affect the authority of the directors prior to the actual exercise of the power by the receiver (cf Newhart Developments…)". (Emphasis added.) See also NEC Information Systems Australia Pty Ltd v Lockhart (SCt NSW, Brownie J, 8 June 1990, unreported); Charmae Investments Pty Ltd v Australia and New Zealand Banking Group Ltd (1991) ATPR 41-063 (Fed Ct, Northrop J); cf Phillips Oysters Pty Ltd v National Australia Bank Ltd (Fed Ct, Lockhart J, 13 November 1992, unreported); Broadtree Finance Pty Ltd (Rec & Mgrs Aptd) v Classic Trading Pty Ltd (SCt Vic, Hayne J, 1 November 1993, unreported). 40 In my view, the authorities clearly support the proposition that, where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder, qua debenture holder, are not prejudiced: O'Donovan, Company Receivers and Administrators (2nd ed, 1992), at [8.30]. The entitlement of the directors reflects the fact that, as Street J observed in Hawkesbury Development, at 210, it borders on the absurd to contemplate that a receiver would institute proceedings in the name of the company challenging the very debenture to which he or she owes office. It is almost as absurd to contemplate the receiver instituting proceedings against the debenture holder or chargee claiming damages for misleading and deceptive conduct or breach of duty. In any event, an action conducted by the receiver against his or her appointor is likely to encounter a variety of practical difficulties: Kerr on Receivers (2nd Cum Supp to 17th ed, 1997), at 77. 41 I do not think that the proposition of law identified is affected by provisions such as s 424(1) of the Corporations Law (permitting a "controller" of a company to apply to the Court for directions) or s 1321 of the Corporations Law (permitting a "person aggrieved" by an act or omission of a receiver to appeal to the Court). There is nothing in the language of these provisions which suggests that they displace the residual powers of directors surviving the appointment of receivers to a company. The authorities which have followed or approved Newhart Developments have not seen equivalent provisions as inconsistent with the principle that directors of a company have authority, in certain circumstances, to institute proceedings in the name of the company, notwithstanding that the company is in receivership. 42 In the present case, the receivers have not replied to the letter of 11 December 2000 seeking approval to the institution of proceedings against CBA. It is a fair inference from this and from the role they have played in the litigation that, understandably enough, they do not intend to initiate or continue proceedings in the name of the company against CBA. An indemnity has been offered to Deangrove by the sole shareholder of Deangrove, Mr Jeans. Mr Bell did not suggest that anything turns on the fact that the indemnity was proffered by the sole shareholder of Deangrove, rather than by the sole director. (If it is relevant, I would infer that the indemnity has been proffered with the knowledge and approval of Deangrove's sole director.) . Assuming the indemnity to be satisfactory (an issue to which I shall return), in my view the director of Deangrove has power and authority to give instructions for proceedings to be instituted by the company against CBA. 43 It is unnecessary to consider in what other circumstances, if any, the directors of a company in receivership are entitled to commence and maintain proceedings in the name of the company. Nor is it necessary for present purposes to determine how conflicts between the directors and receivers in the conduct of litigation might be resolved (a question to which ss 424 and 1321 of the Corporations Law might be relevant). It is enough to hold that the present case is covered by Newhart Developments:see Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed, 1992), at [2851].

the indemnity 44 Mr Jeans has offered an indemnity in the following terms: "John Anthony Jeans undertakes for the benefit of the First Applicant that: (a) he will satisfy and indemnify the First Applicant in respect of legal costs and expenses incurred on behalf of or in the name of the First Applicant for the purposes of the conduct of the Federal Court Proceedings No: N1142 of 2000 between Deangrove Pty Limited (receivers and Managers appointed) and himself as Applicants and Commonwealth Bank of Australia as Respondent; (b) he indemnifies the First Applicant, such indemnity being for the benefit of the First Applicant and the Commonwealth Bank of Australia, in respect of any order for costs, which may be made against the First Applicant in the said Federal Court proceedings hereafter." 45 Mr Speakman informed the Court that, subject to the question of security, the receivers consider that an indemnity in this form was suitable. Mr Speakman submitted, however, that if Deangrove were to be permitted to continue the proceedings, Mr Jeans should provide security to support the indemnity. 46 As Mr Speakman pointed out, orders have been made in some cases restraining directors of companies in receivership from conducting proceedings in the name of the company without first indemnifying the company and providing security for that indemnity: Charmae Investments v ANZ Bank, at 52,003-52,004; NEC Information Oysters v Lockhart. In Phillips Oysters v NAB, Lockhart J dismissed the proceedings because the corporation was "hopelessly insolvent" and neither director had any assets to meet an indemnity against costs. 47 In my view, the governing principle is that those giving instructions on behalf of Deangrove, in order to continue the proceedings, must demonstrate that "nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders" (Newhart Developments, at 821). Had there been evidence that Mr Jeans has sufficient resources to satisfy an indemnity, it might not be necessary for any security to be provided in support of the indemnity. But no such evidence has been adduced. Nor is there evidence as to Deangrove's financial position. In these circumstances, it seems to me that Mr Jeans should provide appropriate security to support his indemnity to Deangrove if the company is to pursue its claim against CBA. 48 CBA does not seek an injunction to restrain Mr Jeans or Ms Rupe from conducting the proceedings on Deangrove's behalf. It is therefore inappropriate (and I was not asked) to make an order similar to that made in Charmae Investments v ANZ Bank and NEC Information Systems v Lockhart. The appropriate course is to stand the matter over for several weeks. If by the next hearing Mr Jeans has provided or offered appropriate security to support his indemnity, I shall dismiss CBA's motion. If such security has not been provided or offered, I shall entertain at that time submissions as to the appropriate orders.

costs 49 If the motion is ultimately dismissed, I think the appropriate course is that there be no orders as to costs in relation to the motion. The applicants failed to comply with the directions of the Court to file affidavits in advance of the hearing and Mr Jeans' offer of indemnity was not made until the eve of the hearing. Had they acted in a timely fashion, CBA's approach to its motion might well have been different. 50 Ordinarily, I would not make an order for costs in favour of the receivers as the submissions could have been made on their behalf by CBA. I think, however, that their attendance and separate representation at the hearing was warranted because the applicants waited until almost the last minute to address critical issues, including the form of indemnity offered by Mr Jeans. Thus, even if the motion is dismissed, Mr Jeans should pay the receivers' costs of appearing at the hearing of the motion.

CONCLUSION 51 The proceedings should stand over until 29 March 2001. If at that time Mr Jeans has provided or offered appropriate security to support the indemnity the motion will be dismissed, with the costs consequences referred to in [49] and [50] above. If appropriate security is not provided or offered, I shall hear submissions on that date as to the appropriate orders. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice SACKVILLE.

Associate: Dated: 6 March 2001 Counsel for the Applicants: Mr N Rein SC and Mr J T Johnson