Edenden v Bignell [2008] NSWSC 666 | Case summary

(The reference here to "Bignell" is, according to a definition, a reference to AJB). 8 The claim for this relief is preceded by this: "This application is made under section 588T(2) of the Corporations Act 2001". 9 It is thus sufficiently clear that the plaintiffs seek leave under s 588T to commence proceedings under s 588M(3) to recover an amount of $57,917.51 referable to a debt of that amount incurred by AJB in circumstances said to entail contravention by Mr Bignell and Mrs Bignell of s 588G(2). 10 The significance and operation of ss 588G(2), 588M(3) and 588T(2) were discussed at paragraphs [28] and following of the 10 October 2007 judgment. It is not necessary to go into details again. It is sufficient to say that it was there decided that the court's jurisdiction to grant leave under s 588T(2)(b) was enlivened in respect of a debt of $57,917.51. At that stage, however, the plaintiffs had not made application for that leave. That application is now advanced by the new originating process. 11 If the leave sought by the new originating process is granted, it will be open to the plaintiffs to proceed under s 588M(3) with a claim to recover an amount of $57,917.51 as a debt due to them, if, as I assume they contend, $57,917.51 is the loss or damage suffered by them in relation to the debt of that amount because of AJB's insolvency. 12 There is little in the case law to indicate the approach the court should take upon application for leave under s 588T(2)(b). At the same time, however, the purpose of the requirement that leave be sought and granted as a precursor to action by a creditor under s 588M(3) is, I think, clear. The legislation proceeds on the footing that actions against directors who allow their company to incur debts while insolvent will, in the ordinary course, be taken by the company's liquidator so that recoveries become part of the fund applicable in the winding up for the benefit of creditors generally. The idea that an individual creditor may, for the creditor's own separate benefit, recover from directors because of insolvent trading runs counter to that general expectation. It is for that reason that a creditor intending to proceed in that way must either obtain the consent of the liquidator under s 588R(1) (indicating, in effect, that the particular recovery opportunity is one that the liquidator has not seen fit to pursue in the interests of creditors generally) or negotiate the two hurdles created by s 588T(2). 13 The first of these hurdles (created by s 588T(2)(a)) entails the creditor's giving, under s 588S, notice to the liquidator of the creditor's intention of initiating recovery proceedings, followed by absence of consent by the liquidator to the creditor's taking that course. The second (created by s 588T(2)(b)) is the grant by the court of leave for the creditor to proceed (with the application for that leave being initiated after the expiration of the time within which the liquidator may give consent). The requirements are cumulative. 14 Given that context, the general impression is that the function of the court upon an application for leave under s 588T(2)(b) is to satisfy itself that the creditor seeking leave, being the intending plaintiff under s 588M(3), has a good arguable case against the directors and that there are no countervailing reasons why the ultimate relief should not be granted. This impression is confirmed by the fact that, in Re Origin Internet Solutions Pty Ltd (No 2) [2004] FCA 1354; (2001) 51 ACSR 163, Finkelstein J expressed the function in those terms. It was suggested by the Court of Appeal in passing in Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113 at [136] that unconscionability might be a countervailing reason for these purposes. 15 In the light of the function of the court, thus understood, the essential elements of the creditor's cause of action under s 588M(3) - which, of necessity, include the elements essential to a finding of contravention of s 588G(2) - must be evident to the court, at least at a prima facie level, when leave under s 588T(2)(b) is sought. The court will not, at that point, make ultimate findings on those matters. But it must see that there is an arguable case that the director's conduct was of the relevant quality and other necessary matters are established. 16 It is therefore appropriate, in the first instance, to identify the elements made essential by s 588G(2) and 588M(3). They are: (a) that the company incurred a debt; (b) that the person against whom recovery is sought was a director of the company when it incurred the debt (s 588G(1)(a)); (c) that the company was insolvent at that time or became insolvent by incurring the debt (or debts including the debt) (s 588G(1)(b)); (d) that, at the time the debt was incurred, there were reasonable grounds for suspecting that the company was insolvent or would become so insolvent (s 588G(1)(c)); (e) that the person against whom recovery is sought failed to prevent the company from incurring the debt; (f) that (i) the person against whom recovery is sought was, at the time the debt was incurred, aware that there were grounds for so suspecting (s 588G(2)(a); or (ii) a reasonable person in a like position in a company in the company's circumstances would have been so aware (s 588G(2)(b)); (g) that the debt was owed to the person by whom recovery is sought (s 588M(1)(a)); (h) that the person by whom recovery is sought has suffered loss or damage in relation to the debt because of the company's insolvency (also s 588M(1)(a)); (i) that the debt was wholly or partly unsecured when the loss or damage was suffered; and (j) that the company is being wound up. 17 Central to this, clearly enough, is a need to identify the act, omission or circumstance amounting to the incurring of the debt by the company and the time at which the debt was incurred by the company. 18 The notice given by the plaintiffs to the liquidator, as contemplated by s 588S, is dated 30 November 2004 and is in these terms: "1. Stephen Gary Edenden and Paula Anne Edenden intend to bring proceedings under Section 588M against Mark Bignell and Kathryn Margaret Bignell in relation to the incurring by the company of the debt owed to Stephen Gary Edenden and Paula Anne Edenden in the sum of $57,917.51. 2. Steven Nicols, the liquadator [sic], is asked to give to the solicitor of Stephen Gary Edenden and Paula Anne Edenden within three months after receiving this Notice: (a) a written consent to the creditor to begin the proceedings; or (a) a written statement to the reasons why you think that the proceedings under Section 588M in relation to the incurring of that debt should not be begun." 19 This notice did not specify the date on which the debt was incurred. It really did no more than state the amount. However, a document apparently prepared by or for the liquidator and dated 15 April 2005 refers to an agreement by the liquidator in about August 2004 that certain costs in proceedings to which Mr Bignell and Mrs Bignell were parties had been "agreed on a consent basis with myself as liquidator" and to those costs having been "estimated at approximately $57,917.51". It may therefore be inferred that the notice given in November 2004 referring to that sum was meaningful to the liquidator and understood by him. 20 The claim of the plaintiffs for leave under s 588T is advanced in the new originating process in the following discursive way: "(1) The Plaintiffs Stephen Gary Edenden and Paula Anne Edenden are trading as Everdry Waterproofing NSW Department of Fair Trading Number Q7711545 ('Everdry'). (2) The Defendants were directors of A J Bignell Pty Ltd ('Bignell') until the appointment of a Liquidators Steven Nicols 22 April 2004. (3) The defendants were actively involved in the operation of Bignell. (4) Mark Alexander Bignell entered into contracts on behalf of Bignell and acted as the 'managing director' in that he; (a) operated bank accounts (b) signed contracts on behalf of Bignell (c) made payments to suppliers and contractors (d) was licensed under the home building Act as Bignell's supervisor (e) gave instructions to solicitors on behalf of Bignell (f) employed people and (g) instructed the preparation of financial records and compliance documents for ASIC. (h) During all of 2002 and up to the date of appointment of an administrator 22 April 2004 they were directors of Bignell. (5) Bignell caused Everdry to be joined to proceedings in the Consumer Trader & Tenancy Tribunal of NSW in 2002. (6) Pursuant to S 53 of the Consumer Trader & Tenancy Tribunal Act 2001 NSW ('CTTT Act') the Member made an award of costs in favour of Everdry in March 2002. (6.1) The order of the tribunal (the order) was made pursuant to S 53 of the Consumer Trader and Tenancy Tribunal Act 2001 (CTTT Act). The Plaintiff pleads S 53 as pleaded here in full. (6.2) The order became a contingent debt of Bignell to the plaintiffs that would be due and payable after the time for appeal had expired pursuant to S 67 CTTT Act (28 days) or at a time to be determined by the Supreme Court of NSW as a result of an appeal. (6.3) By reason of the cost order referred to above the Defendants and Bignell became aware of the existence of the contingent debt and failed to make provision for the payment of the debt when it became payable or at all. (7) This order was made and was due and payable either upon agreement between the parties or upon assessment. (8) Bignell did not require Everdry to have its costs assessed pursuant to the Legal Profession Act within the time stipulated or at all. (9) Bignell agreed to the quantum of costs. (10) Bignell did not and has not paid the costs. (11) The Liquidator of Bignell has not declared a dividend or otherwise paid these costs. (12) Pursuant to S 67 CTTT Act Bignell appealed to the Supreme Court of NSW. (12.1) Bignell made application for appeal within time to do so and accordingly the contingent debt referred to at (6.1) became payable upon an order of the court at the conclusion of the appeal in the Supreme Court unless otherwise ordered. (12.2) The Cost order referred to at (6.3) remained a contingent debt of Bignell during the appeal proceedings. (13) On or about 24 February 2003 Bignell sought and was granted leave to amend its summons for relief against Everdry. The court made a cost order in favour of Everdry. (13.1) This application was brought by separate motion and although Bignell was partially successful the Court exercised its discretion in favour of Edenden and made a cost order (the second cost order). (13.2) The second cost order became a further contingent debt of Bignell to the plaintiffs that would be due and payable at a time to be determined by the Supreme Court of NSW as a result of the appeal. (13.3) By reason of the second cost order the Defendants and Bignell became aware of the existence of the further contingent debt and failed to make provision for the payment of the debt when it became payable or at all. (13.4) The debt referred to at (13.1) became payable upon an order of the court at the conclusion of the appeal in the Supreme Court unless otherwise ordered. (14) This order was made and was due and payable either upon agreement between the parties or upon assessment. (15) Bignell did not require Everdry to have its costs assessed pursuant to the Legal Profession Act within the time stipulated or at all. (16) Bignell agreed to the quantum of costs. (17) Bignell did not and has not paid the costs. (18) The Liquidator of Bignell has not declared a dividend or otherwise paid these costs. (19) On or about 18 March 2004 the summons for appeal was dismissed and a cost order in favour of Everdry was made. (20) This order was made and was due and payable either upon agreement between the parties or upon assessment. (20.1) The costs were a contingent debt of Bignell which became due on the date of judgment. (18 March 2004). (20.2) The earlier contingent debts incurred by Bignell as pleaded in paragraph (6.1) and (13.1) became due and payable as at the date of judgment (18 March 2004). (20.3) The debts remained uncertain as to quantum alone as the debts were required to be assessed. (20.4) By reason of the cost orders the Defendants and Bignell became aware of the existence of the debts and failed to make provision for the payment of the debt when it became payable or at all. (21) Bignell did not require Everdry to have its costs assessed pursuant to the Legal Profession Act within the time stipulated or at all. (22) Bignell agreed to the quantum of costs. (23) Bignell did not and has not paid the costs. (24) The Liquidator of Bignell has not declared a dividend or otherwise paid these costs. (25) The defendants as directors gave instructions to Solicitors to commence and continue proceedings in circumstances where: (a) Bignell was unable to pay the costs orders in respect of the CTTT proceedings (b) Bignell was unable to pay the cost orders in respect of the interlocutory Supreme Court proceedings as and when they fell due (c) Bignell was unable to pay the cost orders in respect of the interlocutory Supreme Court proceedings as and when they fell due. (d) Bignell was insolvent in that it paid loans to directors of $260,000 during the six months prior to the relation back day (e) Bignell was insolvent in that it paid dividends of $120,000 to directors during the six months prior to the relation back day. (f) These payments were 'voidable transactions' within the meaning of S588FE Corporations Law 2001 Cth. (26) The defendant as directors knew or reasonably ought to have known that the payments referred to in (d) and (e) above would leave the company with insufficient funds to meet the three cost orders referred to in (6) (13) and (18) above. (26.1) On 22 April 2004 Administrators were appointed to Bignell the defendants ceased to be directors at or about that time. (27) The conduct of the Defendant as Directors of Bignell as pleaded above is a contravention of S588G(2) of the Corporations Act 2001. (28) The Plaintiff claim an amount of $57,917.51 as set out in the letter Lindsay Brien to Steven Nicols dated 30 November 2004. (29) The Supreme Court of NSW made an order for costs on or about 18 March 2004. (30) This order was made and was due and payable either upon agreement between the parties or upon assessment. (31) The plaintiffs had an itemized bills of costs prepared by Pattison Hardman (PH) Legal Costs Consultants in 2004. (32) The accounts as assessed by PH were presented to the liquidator in 2004. (33) The Liquidator consented to the costs of $57,915.51 [sic] on the 14th September 2004. (34) On 21 September 2004 a Consent Judgment was entered in favour of the Plaintiffs against Bignell in the amount of $57,915.51 [sic]. (35) Bignell has not paid the costs. (36) The Plaintiffs claim Costs of these proceedings. (37) Pursuant to S 100 Civil Procedure Act 2005 the Plaintiff seeks interest from the date of judgment in the Supreme Court (18 March 2004) at the Supreme Court Rate." 21 The central matters appearing from the narrative seem to be: (a) that the Consumer Trader and Tenancy Tribunal made an award of costs in favour of the plaintiffs (referred to as "Everdry") - and presumably against AJB - in March 2002; (b) that the costs order was made pursuant to s 53 of the Consumer Trader and Tenancy Tribunal Act 2001; (c) that the order "became a contingent debt of" AJB to the plaintiffs that would become due and payable at one of the two alternative times mentioned in paragraph (6.2) of the narrative; (d) that the "order" - which may mean a debt - was due and payable upon one of the events mentioned in paragraph (7) of the narrative; (e) that AJB "agreed to the quantum of costs" at a time not specified; (f) that AJB appealed to the Supreme Court; (g) that the Supreme Court made a costs order against AJB and in favour of the plaintiffs upon an amendment application (paragraph (13)); (h) that the Supreme Court made another costs order against AJB and in favour of the plaintiffs (paragraph (13.1)); (i) that AJB agreed the quantum of the costs mentioned in paragraph (13.1) (paragraph (16)); (j) that a further costs order was made by the Supreme Court against AJB and in favour of the plaintiffs upon dismissal of "the summons for appeal" (paragraph (19)); (k) that AJB agreed the quantum of the last-mentioned costs (paragraph (22)); (l) that the Supreme Court made a costs order - presumably against AJB and in favour of the plaintiffs - on or about 18 March 2004 (paragraph (29)) although whether this was one of the several orders of the court previously mentioned does not appear; (m) that the amount of the costs was to be as agreed or assessed (paragraph (30)); (n) that the liquidator of AJB - presumably acting in such a way as to bind AJB - agreed the costs the subject of the order of 18 March 2004 in the sum of $57,917.51 (paragraph (33)); and (o) that judgment for that sum was entered by consent on 21 September 2004 (paragraph (34)). 22 This narrative does not identify any alleged debt of $57,917.51 except in the parts referred to at (l) to (o) above. All of the preceding content (or, at all events, most of it) - and, in particular, all of the earlier alleged debts - must be regarded as superfluous and irrelevant. 23 If the intention is to plead that a debt was incurred by AJB when the costs order of 18 March 2004 was made - or when the quantum was subsequently agreed, or when the consent judgment of 21 September 2001 was ordered - then this should be said. Several possible incurrings might be pleaded in the alternative. I am assuming here - and this is really a matter for the plaintiffs - that events after the appointment of the liquidator might conceivably constitute relevant incurring. That is an assumption that would require careful scrutiny in the light of the "failing to prevent" aspect of s 588G(2) and the provisions of s 471A. At all events, it is for the plaintiffs to identify the incurring on which they seek to rely and they must do so in such a way as to make clear their contention as to the time at which the incurring happened. 24 The case sought to be advanced by the plaintiffs also fails to deal with at least two other matters made essential by s 588M(3) to any proceeding brought by a creditor. The creditor must prove that the company was insolvent when the relevant debt was incurred or that it became insolvent by incurring that debt (or debts including that debt): see item (c) at paragraph [16] above. The creditor must also prove that, at the time the debt was incurred, there were reasonable grounds for suspecting that the company was insolvent or would become so insolvent: see item (d) at paragraph [16] above. 25 The narrative refers to the appointment of "administrators" on 22 April 2004: see paragraph (26.1). At paragraph (2), however, it is said that "liquidators" were appointed on that date. Both cannot be correct and, in this respect, the pleading is clearly embarrassing and cannot be allowed to stand. 26 However, if it is said that either administrators or liquidators were appointed on 22 April 2004, that allegation alone is an insufficient basis on which to advance an allegation that AJB was insolvent at that date. When administrators are appointed under Part 5.3A by a company itself, it may be inferred that the company's directors, or some of them, had formed an opinion that the company either was insolvent or was "likely to become insolvent at some future time": s 436A(1)(a). If the situation is one of creditors voluntary winding up without antecedent voluntary administration, the mere fact that such a winding up has commenced can imply no more than that, before the giving of the notice convening the necessary meeting of members, the directors did not, as contemplated by s 494(1), form an opinion that the company would be able to pay its debts in full within one year after the commencement of the winding up. 27 The new originating process does not plead facts making a case of insolvency and grounds to suspect insolvency with sufficient particularity to enable it to be understood. And since the time of the alleged incurring is not stated, there is nothing by way of allegation that insolvency or grounds for suspicion existed at the time of the incurring. 28 This brings to the fore another point. I have said that the function of the court upon a s 588T(2)(b) application is to satisfy itself that the creditor seeking leave, being the intending plaintiff under s 588M(3), has a good arguable case against the directors. It is therefore necessary not only that the creditor clearly and concisely articulate that case (the matter to which the foregoing observations are directed) but also that the court be presented with evidence which supports that case sufficiently to warrant the conclusion that it is a good arguable case. 29 The evidence filed by the plaintiffs to date (consisting of two affidavits of its solicitor) may be found deficient if and when the s 588T(2)(b) application comes to be considered on its merits. But that question does not arise directly upon the present application of Mr Bignell and Mrs Bignell to have the originating process dismissed or struck out. I therefore say no more about it. 30 In relation to the application of Mr Bignell and Mrs Bignell now before me, it is sufficient to say that the new originating process is, as to the whole of the pleaded case it contains, embarrassing for the reasons I have outlined: in essence, that it pleads a large number of apparently superfluous matters, that it fails to identify with the necessary precision the act, omission or event (either alone, or in the alternative) constituting the incurring of the debt of $57,917.51, that it therefore does not identify the time of the alleged incurring and that it fails to advance allegations going to the necessary findings concerning insolvency (and reasonable grounds for suspecting insolvency) at the time of the alleged incurring. 31 I have proceeded to this point on the implied footing that the present application should be approached as one would approach a challenge to a pleading said not to identify sufficiently the elements of a cause of action. My conclusion, on that approach, is that the whole should be struck out. 32 In the particular context, however, this approach is not, strictly speaking, the correct approach. In accordance with rule 2.2(1)(a) of the Supreme Court (Corporations) Rules 1999, an application for leave under s 588T(2)(b) must be made by originating process. According to rule 2.2(3), the originating process must be in accordance with Form 2 and must state each provision of the corporations legislation under which the proceeding is brought and the relief that is sought. Practice Note SCEq 4 states, at paragraph 43, that an originating process is not itself the appropriate vehicle for pleading a plaintiff's case. If pleadings are required, there should be a specific order that the matter proceed on pleadings. 33 The plaintiffs have nevertheless seen fit to incorporate a pleaded case into the new originating process and its predecessors. Mr Bignell and Mrs Bignell have, as previously, taken the originating process as they have found it. They cannot be criticised for that. In these circumstances and bearing in mind the very clear deficiencies in that pleaded case, I consider the appropriate course to be to grant the plaintiffs leave to file the new originating process, but with the omission of the whole of the pleaded case and the other parts referring to it (thereby leaving, consistently with rule 2.2(3), only the reference to the section under which relief is sought and the statement of the relief sought), to make formal provision for pleadings and to provide that the proceedings shall stand dismissed unless a re-pleaded case is filed and served within 28 days. 34 The orders of the court will therefore be as follows: 1. Order that the plaintiffs have leave to file a second further amended originating process in the form of the document marked "New further amended originating process the subject of submissions made on 26 May 2008" signed by me for identification and placed in the court file, but with the following omitted therefrom: (a) the words "As pleaded below" and all subsequent words down to but not including the date of the originating process; and (b) the words "Pleadings and" where they appear immediately before "affidavit(s)". 2. Order that the proceedings proceed on pleadings. 3. Order that the plaintiffs have leave to file a statement of claim within 28 days. 4. Order that, if the plaintiffs do not file and serve a statement of claim within 28 days, the proceedings shall stand dismissed. 35 There will be directions about submissions on costs.

Edenden v Bignell

At a glance

Court

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Before

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Judgment (13 paragraphs)

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Legislation Cited (1)

Cases Cited (4)

Cited By (3)