Duke & Ors v Rain Bow Pty Ltd & Anderson [2011] VSC 599

Supreme Court of Victoria|2011-08-16|Before: Efthim AsJ

CORPORATIONS - Section 471B Corporations Act 2001 - Proof of debt not appropriate mechanism - Plaintiff claims proprietary interest.

1 The plaintiffs, Lazo Duke, Freda Duke, Peter Christopher Duke, Elena Louise Mantelos and Paul David Duke seek an order that pursuant to s 471B of the ["the Act"] the plaintiffs have leave now and for then to commence and continue the proceeding against the first defendant, Rain Bow Pty Ltd (in liq) ("the company"). The application is opposed by the second defendant, Peter McKenzie Anderson, the liquidator of the first defendant.

2 In this proceeding the plaintiffs have filed and served an Amended Statement of Claim in which they allege that on 22 August 2007 the first and second plaintiffs lent the sum of $50,000 to the company pursuant to a loan agreement dated 22 August 2007 ("the First Loan Agreement").

3 That loan agreement in clause 1(1) contained a definition of the security as follows:

Lot 599 Riordan Crescent, Mernda Villages, Mernda 3754 and being Certificate of Title Volume 11012 Folio 389 and any mortgage, pledge, lien, hypothecation, security interest or any other encumbrance or change now or in the future given by the borrower or any guarantor in favour of the lender to secure the obligations of the borrower under this agreement and includes any guarantee executed by any guarantor.

4 On 11 October 2007, the first and second plaintiff lent a further sum of $70,000 to the company upon the terms and conditions contained in the loan agreement dated 11 October 2007 ("the Second Loan Agreement"). That agreement provided a definition of security identical to that contained in the first loan agreement.

5 On 15 March 2008, the plaintiffs entered into a contract of sale of real estate with the company to purchase the property at Riordan Crescent, Mernda Village, Mernda. The company agreed to treat the advances made under the first and second loan agreements as part payment of the purchase price of the sale of the property.

6 The terms of the contract provided a sale price of $288,000, with a deposit of $120,000. The balance of the purchase funds was to be paid at the expiration of 14 days from the date upon which the vendor's solicitors notified the purchase or its solicitors of the issue of an occupancy permit for the property on 6 March 2009 or whatever was the latter.

7 On 1 December 2009, the first and second plaintiff lent the further sum of $120,000 to the company upon terms and conditions contained in the loan agreement dated 1 December 2009 ("the Third Loan Agreement"). The definition of security in that third loan agreement was the same as that contained in the first and second loan agreements.

8 On or about 1 February 2010, the plaintiffs and the company agreed to set off the amount of $120,000 advanced under the Third Loan Agreement against the purchase price under the contract. By reason of that set off agreement, it is alleged that the amount payable under the contract is $48,000.

9 It is further alleged that the defendants have failed or refused to perform the contract or to effect settlement which was due on or after 8 November. The plaintiffs therefore seek the following relief:

- a declaration that the sum due under the contract is $48,000

- specific performance of the contract

- in the alternative, declarations that the property is charged with payment to the first and second plaintiffs of $50,000 pursuant to the first charging clause, $70,000 pursuant to the second charging clause, and $120,000 pursuant to the third charging clause

- in the alternative a declaration that the property subject to a trust, charge or lien in favour of the plaintiffs to secure payment of the amounts lent under the three contracts

- that the Prothonotary execute all necessary documents to give effect to the orders of the Court in as far as it is necessary

- damages pursuant to s 38 of the Supreme Court Act, in addition to or in substitution for specific performance.

10 The plaintiffs in support of their application rely on two affidavits of the first plaintiff, Lazo Duke, and an affidavit of Paul Johnston, director of the Company.

11 Lazo Duke in his affidavit confirms the matters contained in the statement of claim. In addition, he deposes that he was aware that the company was wound up and a liquidator was appointed by virtue of an order of this Court made 21 April 2010. On 24 May 2010, the plaintiffs lodged a caveat over the property as purchasers under the contract. On 27 May 2010, the liquidator wrote enquiring as to the details of the lease of the property. In May and June 2010 he provided the liquidator's office with a copy of the contract and made enquiries as to whether or not there would be a settlement of the property. Since June 2010, the defendants have been receiving rental income in respect of the property. On 5 October 2010 he became aware that the defendants proposed to auction the property.

12 The liquidator has filed an affidavit in opposition. He deposes that he was appointed official liquidator of the first defendant on 21 April 2010. No bank statements of the company have been provided to him by the directors and the liquidator was unable to verify whether the initial deposit of $120,000 and/or the additional $120,000 was received by the Company from the plaintiffs.

13 He was concerned to ensure that any realisation of the property was not at an undervalue and that the sale price was in accordance with the market value. He engaged Aaron Jones, licensed real estate agent, to act to sell the property. Mr Jones provided the liquidator with a market opinion as to the current market value of the property which was in the vicinity of $350,000. On 25 January 2011 he received a valuation and rates notice from the City of Whittlesea in relation to the property which stated that the capital improved value of the property was $351,000.

14 The property was scheduled to be auctioned on 30 October 2010. On 26 October 2010 he undertook not to sell the property and the auction was postponed.

15 He made enquiries of the plaintiff's failure to complete the contract of sale prior to the liquidation. From documents received by the liquidator it appears that on 24 November 2009, Kiatos and Co, on behalf of the company, sent a default notice to the plaintiffs in relation to the property. On 2 December 2009, emails were exchanged by the parties solicitors confirming that settlement was to take place on 3 December. A statement of adjustments was sent by the first and second plaintiffs' solicitors which provided the balance owing on the contract of sale was $168,105.22 (purchase price $288,000, less deposit paid $120,000, plus adjustments $105.22). After the provision of the statement of adjustments a letter was sent by the first and second plaintiffs' solicitors to the company's solicitors advising that they had an agreement with the vendor that they were not required to settle on 3 December 2010 but would do so in approximately ten days' time. The reason for that was that the plaintiff's paid an additional sum of $120,000 direct to the vendor.

16 On 6 April 2010, the first and second plaintiffs' solicitors wrote to the company's solicitors requesting that the matter be finalised as soon as possible and asked that the company's solicitor arrange discharge of the mortgage with the bank and let them know when they are ready to settle.

17 The liquidator does not have access to any further documents to inform him of the advance after 6 April 2010.

18 Section 471B of the Corporations Act 2001 (Cth) provides:

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:

(a) a procedure in a court against the company or in relation to property of the company; or

(b) enforcement process in relation to such property; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

19 On considering the operation of s 230(3) of the Companies Act 1961 (Qld), the equivalent to s 471B, McPherson J in OgilvieGrant v East,[1] said:

It, of course, follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced may have progressed.

20 In Re Gordon v Grant Pty Ltd (in liq),[2] Master Lee QC (as he then was), after consideration of numerous authorities, summarised the principles to be applied in a leave to proceed application.

An application for leave nunc pro tunc to commence any action or to continue any action which was commenced without obtaining leave may be given if good cause is shown on the merits: Australian Company Law and Practice (Wallace and Young) p. 654.
Section 230(3) ensures that assets of the company in liquidation will be administered in accordance with the Act, and that no person obtains an advantage to which, under the Act, he is not properly entitled. It enables the Court effectively to supervise all claims brought against the company: Re Sydney Formworks Pty Ltd (in liq) (supra).
There must be no prejudice to the creditors or to the orderly windingup of the company if the action is allowed to proceed: Re Sydney Formworks Pty Ltd (supra); Re A.J. Benjamin Ltd (in liq) and The Companies Act (supra).
The applicant's claim must be of a type which should proceed by action to judgment, rather than one which is capable of being dealt with in an ordinary way by proof of windingup: Century Mercantile Co v Auckland Provincial Fruitgrowers Society (1929) NZLR 272; Batterson v Miella Constructions Pty Ltd [1967] VicRp 40; (1967) VR 349.
Leave is more likely to be granted where there is an insurance company standing behind the company to pay any judgment which the plaintiff might obtain against it. If successful, such an action is unlikely to prejudice the creditors or the company: Re Sydney Formworks Pty Ltd (in liq) (supra); Re A.J. Benjamin (in liq) (supra); the section is not designed to protect an insurer.
A condition is often imposed that the plaintiff will not enforce any judgment against the company without the leave of the Court. This ensures that the Court retains ultimate control: Re Sydney Formworks Pty Ltd (in liq) (supra) and Re A.J. Benjamin Ltd (in liq) (supra).
Mere delay itself in applying for leave will not prevent leave being granted. Leave is not to be withheld simply and solely as a punishment: Re A.J. Benjamin Ltd (in liq) (supra).
Leave may be granted after the expiry of the relevant period of limitation, to continue an action commenced within the limitation period without the leave of the Court.

21 In Vagrand Pty Ltd (in liq) v Fielding and ors,[3] the Full Court of the Federal Court expressed the test to be applied in determining whether leave to proceed should be given. Willcox, Burchett and Beazley JJ stated:

Upon a close reading of the relevant authorities, it is apparent to us that the courts have not in fact required applicants for leave to demonstrate a prima facie case against the company in liquidation, in the technical sense of that term. They have required to be affirmatively satisfied that the claim has a solid foundation and gives rise to a serious dispute. Having regard to the course actually taken by the courts, the term "prima facie case" is misleading. Perhaps it should be avoided in the future.

The test which has actually been applied is akin to that now used in considering whether interlocutory relief should be granted: "a serious question to be tried". See Castlemaine Tooheys Ltd v South Australia (1986) 1611 CLR 148 at 153, where Mason ACJ made it clear, with reference to the very same question which arose in the context of an interlocutory debate, that the test of "a serious question to be tried" is generally to be preferred to that of "a prima facie case". It is appropriate that the same standard of proof of the merits should be required for each of these forms of relief. In a particular case an applicant may need both orders. We would think it anomalous if an applicant had to meet a higher requirement merely to commence an action than that necessary to obtain an order potentially imposing a substantial burden on the respondent.

22 Mr Walker of Counsel submits that the evidence supports a conclusion that the contract of sale is not enforceable having regard to its rescission for failure to remedy the fault pursuant to the notice of 24 September 2009 and therefore leave should not be given to commence a proceeding against the liquidator.

23 That notice specified that unless the default was remedied within 14 days of service of the notice the contract would be rescinded pursuant to general condition 6(2) of Table A of the seventh schedule of the Transfer of Land Act. That general condition was incorporated into the contract by reference to clause 9.1 of the contract.

24 In Nund v McWaters,[4] Brooking J on considering an equivalent condition to this condition as follows:

The effect of this is that upon the expiration of the time allowed by the notice the contract is discharged. No further notice from, or other act on the part of, the vendor is required. This is the plain consequence of the language used in the condition. ...

25 It is arguable that on the evidence that the rescission notice has been waived. Ms Godkin, solicitor for the first and second plaintiffs, wrote an email at 2.49pm on 2 December 2010 to Mr Gaulthauss which stated that:

I've been just advised by Mr Duke that they have an agreement with 'Paul' the vendor that they are not required to settle tomorrow but will do so in approximately ten days' time when his superannuation money comes through. This is the reason they paid an additional sum of $120,000 direct to the vendor.

26 Mr Duke deposes that the third loan was paid on 1 December 2009 to the company by way of a bank cheque drawn on Westpac Banking Corporation, Chirnside Park branch and he exhibited to his affidavit a copy of the customer record of the bank cheque paid by the first and second plaintiffs to the company dated 1 December 2009. He also deposes that on or about 1 February 2010 he, the second plaintiff and the company agreed to set off the amount of $120,000 under the loan against the contract.

27 The statement of claim pleads the loan on 1 December 2010 and the set off on 1 February 2010. However, in a second affidavit sworn by Mr Duke he states that immediately prior to the third advance (the $120,000) it was agreed between the company, himself and his wife that the amount of the third advance would be credited to the balance of the purchase moneys required under the contract for the sale of the purchase of the property. That is inconsistent with what has been said in the first affidavit and statement of claim which has not been explained.

28 For summary judgment to be entered the Court must be satisfied that there is no real prospect of success. In my view there are issues raised by the email and in the affidavits that merit investigation and, if found in favour of the plaintiffs, they do have a real prospect of success even though there is the inconsistency in the evidence. I note that the plaintiffs have not pleaded a waiver or estoppel, but I would not have expected to have been pleading until such time as the plaintiffs file a reply. The sum of $120,000 was paid after the notice of rescission was served and was accepted by the company. On that issue alone the question of whether the rescission notice has been waived needs to be litigated.

29 Mr Walker submits that the third loan agreement, the payment of $120,000, does not give rise to a valid security interest enforceable by the first and second plaintiffs against the liquidator.

30 In the third loan agreement, pursuant to clause 13(1), the company granted a security interest to the first and second plaintiffs in the property and thereby charged the property to the first and second plaintiffs to secure the payment of the loan to the company. In clause 1.1 of the third loan agreement, secured interests is defined to mean any mortgage, charge, lien, pledge, hypothecation, bill of sale, title retention agreement, trust or power, which is or has the effect of a security for the payment of a debt or other monetary obligation or the compliance with any other obligation.

31 Mr Walker submits that to the extent that the loan agreement creates a fixed and floating charge over the property, rights and undertakings of the property, it is unregistered but a registrable charge and accordingly is void as against the liquidator pursuant to s 266 of the Act.

32 Pursuant to s 262(2) of the Act the provisions relating to the charges do not apply to a charge or lien of a property, and pursuant to s 262(8) of the Act the provisions relating to a charge do not apply to a charge on land.

33 The plaintiffs do not claim the charge against the liquidator. They claim that the property is charged pursuant to the charging clause. The charge is an unregistered charge. The question remains, as was submitted by Mr Fary for the plaintiffs, whether the third loan creates an equitable interest. I would not grant summary judgment in relation to the facts of this proceeding. This is another issue which would need to go to trial.

34 Mr Walker submits that the plaintiffs' evidence is unreliable and is inconsistent with the contemporaneous record.

35 I repeat, in the first affidavit of Mr Duke he deposes that the agreement to set off the amount of $120,000 was made on 1 February 2010 between himself, the second plaintiff and the company. In the amened statement of claim the plaintiffs plead that the agreement was made on 1 February 2010, but between the first plaintiff (Mr Duke) and Mr Johnson, a director of the company. In the second affidavit sworn by Mr Duke he alleges that the agreement was made between the company, himself and his wife, and that the agreement was made prior to "the third advance". That sum of $120,000 was advanced on 1 December 2010.

36 There is an inconsistency in the evidence but that on its own does not mean that the rest of the evidence presented by the first plaintiff is unreliable. These are matters that need to be tested at a trial, after there has been discovery and after crossexamination. An application for summary judgment by the liquidator would not succeed on this evidence.

37 Mr Walker submits that the sale of land by the company met the description of an unreasonable director related transaction under s 588FDA of the Companies Act. The property was sold by the company to a sister of the director of the company for a sum of $288,000.

38 'The liquidator, Mr Anderson, has sworn that he was not in a position to verify the legitimacy of the alleged contract of sale in relation to the property and he was concerned to ensure that any realisation of the property was not of an undervalue and that the sale price was in accordance with the market value. He arranged Darren Jones, licensed real estate agent, to act on his behalf to sell the property. He was provided with a market opinion as to the current market value of the property which was in the vicinity of $350,000. Further, on 25 February 2011, he received a valuation and rates notice from the City of Whittlesea in relation to the property which states that the "Capital Improved Value" of the property is $351,000.

39 The contract of sale was entered into on 15 March 2008 and the valuation was at 3 February 2010. The difference between the valuation and the contract price is $52,000. The question of whether this is unreasonable director-related transaction is a question that cannot be answered on the evidence before the Court on this application.

40 Mr Walker submits that the plaintiffs' plea for an order for specific performance is a sham. He states that the claim for specific performance has only been brought by the plaintiffs for the purpose of attempting to circumvent the statutory scheme of liquidation as specified performance is one of the remedies a court will consider giving leave for. It said that specific performance of this contract is not possible because the contract of sale requires a company to provide unencumbered title to the plaintiffs at settlement which the company is incapable of providing as it does not have sufficient assets to discharge the debt owing to the first registered mortgage over the property.

41 Mr Walker further states if specific performance was not available then the declaration that the alleged loan agreements give rise to an equitable charge is a matter which can be determined by the liquidator by way of proof of debt.

42 There are three remedies that the plaintiffs seek; specific performance; a declaration that the property is charged with three payments and that the first and second plaintiffs are entitled to payment on the amounts referred to in those charges, and a declaration that the property is subject to a trust, charge or lien in favour of the plaintiffs to secure the payments made under or in respect of the contract. These claims are proprietary claims in which leave to proceed would normally be given.[5]

43 I do not accept that specific performance will not be a remedy which is available to the plaintiff. It is a remedy which can arguably be allowed based on these facts. This remedy has been applied where special performance has been sought against a company in liquidation.[6]

44 In Re Hughson and Douglas Pty Ltd (in liq),[7] Derrington J held that an application for leave to commence proceedings against a company which is in liquidation in order to enforce a lien claim pursuant to the Sub-contractors Charges Act 1974 (Qld) is a typical case in which leave is usually granted. Here the plaintiffs are also seeking to enforce a lien.

45 Mr Walker submits that to allow the application would cause prejudice to the creditors. He states he holds cash at bank of approximately $26,000. The company has a secured creditor, the National Australia Bank and the residual amount owing to the National Australia Bank pursuant to its first ranking mortgage is $89,903.26. The liquidator has sworn that the claims of the unsecured creditors, not including the plaintiffs, is in excess of $650,000. His costs and expenses, including legal fees, are in excess of $109,980.53. Mr Walker states that his is estimated to be approximately $120,000 by the date of liquidation in the event that the Court process does not proceed.

46 In Meehan v Stockmans Australian Café,[8] Lehane J dismissed an application seeking leave pursuant to s 444E(3) of the Corporations Act against a company which was in administration. Proceedings had commenced against the respondent company claiming damages for a breach of s 52 of the Trade Practices Act. After the action had commenced, an administrator had been appointed to the first respondent and a deed of company arrangement had been entered into. Lehane J took into account the relatively modest amount likely to be available to secured creditors under the deed. In his view, it was not appropriate to expose that sum to a substantial depletion by the cost of a five day trial. Meehan v Stockmans Australian Café, was an application seeking damages under the Trade Practices Act. Here the plaintiffs are asserting that they have a proprietary interest over land.

47 To refuse the plaintiffs leave and to require them to provide a proof of debt is not an appropriate mechanism. The plaintiffs have a prima facie case seeking equitable relief. If the application for leave was refused and the plaintiffs were required to file a proof of debt it is highly likely that the proof of debt would be rejected and that there would be an appeal against the liquidator's decision. This is a factor that is taken into account in these types of applications. Creditors will be prejudiced if this application proceeds[9] and they will also be prejudiced if there is proof of debt and the plaintiffs file an appeal pursuant to s 1321 of the Act.

48 It is appropriate that the issues that this litigation will raise should be determined by a court and not the liquidator at the first instance.

[5] See Re Elastomeres Pty Ltd v Motor Pty Ltd (in liq) per Young J [2006] FCA 1497.

[6] See Commonwealth of Australia v Davis Samuel Pty Ltd (No 5) (2008) 68 ACSR 336.

[9] See The Elastomeres Pty Ltd v Motor Pty Ltd (supra).

Companies Act 1961(Qld)

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