Great Australian Operations Pty Limited (Recs and Mgrs Apptd) v Washington H Soul Pattinson and Company Limited

Judgment - EX TEMPORE Right of appearance 1In proceedings 2012/216263, the plaintiff, Windlock Pty Limited ("Windlock") applies under s 459P of the Corporations Act 2001 (Cth) for an order that V & M Davidovic Pty Limited (Receiver and Manager Appointed) ("Company") be wound up in insolvency, relying on an alleged failure by the company to comply with a statutory demand. 2Mr Golledge seeks to appear for the company on the instructions of its directors, or one of them, to oppose the winding up application. The receivers and managers appointed to the company have not appeared in opposition to the application, nor have they appeared to consent to the application. It appears that, so far as Mr Golledge may appear on the instructions of the directors to oppose the winding up application, a further application will then be made to adjourn that application, which will need to be determined at that point. Mr Golledge has been instructed, and Windlock by its counsel has properly accepted for the purposes of this application, that each of the two directors of the Company have authorised the opposition to the winding up application. 3The question raised is therefore whether the appointment of receivers and managers to the Company has displaced the directors' authority to instruct solicitors and counsel to appear for the company in opposition to a winding up application, notwithstanding the absence of any active role of the receivers in that application. While the appointment of receivers and managers may displace or limit directors' powers, the question of the extent to which it does so depends, first, on the statutory framework and terms of the instrument of their appointment and, second, on the extent to which any particular action taken by the directors would adversely affect the receiver's performance of their role. 4Section 420(1) of the Corporations Act provides that a receiver of property of a corporation has power to do, relevantly, all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed. Section 420(2)(u) in turn confers a specific power on a receiver, which has not been exercised in this case, to defend an application for the winding up of the corporation. That conferral of power is not, in terms, exclusive of any residual powers of the directors in that regard. 5In the present case, the charge under which Windlock appointed receivers and managers provides for the appointment of a receiver and manager of the company's business, undertaking, assets and property and clause 8(i) allows that receiver and manager the power to make any arrangement or compromise which it shall think expedient in the interest of the supplier. There is, however, no evidence that the receiver has in fact made any such arrangement or compromise in respect of the winding up application. Clause 8(o) in turn confers such further powers and discretions on the receiver as the lender or any officer of the lender, here Windlock, deems expedient. That power seems, on its face, sufficiently wide to permit the conferral of a power to conduct the defence of the winding up application, or choose not to do so, on the receivers and managers, in a manner which would in fact exclude the residual power of directors to do so. However, there is no evidence that Windlock has in fact exercised that power in order to confer such a power on the receivers and managers in this case. 6A similar question was considered by the Federal Court of Australia in ASIC; in the matter of Lanepoint Enterprises Pty Limited [2006] FCA 1163; (2006) 60 ACSR 217 where French J referred to the scope of the receiver's powers under s 420 of the Corporations Act and to the residual powers of directors at general law. In particular, his Honour referred to the observation in Hawkesbury Development Co Limited v Landmark Finance Pty Limited [1969] 2 NSWR 782 at 790 that the power of a company's internal organs to function, during the receivership, bears a direct inverse relationship to the validity and scope of the receivership. His Honour also referred to the decision in Re Geneva Finance Limited (1992) 7 WAR 496 at 510; 7 ACSR 415 for the observation that directors are not generally prevented from taking steps they reasonably believe are in the company's interests unless that would prejudice the proper administration of the receivership. French J there noted that there was no necessary inconsistency between a receiver's inaction in the case of a winding up and the director's defence of a winding up application. His Honour held, in that case, that the director was entitled to continue to instruct legal representatives to defend the winding up application in the name of the companies. The question of the scope of directors' continuing powers, after the appointment of a receiver, has also been considered at some length by Slattery J in Great Australian Operations Pty Limited (Recs and Mgrs Apptd) v Washington H Soul Pattinson and Company Limited [2012] NSWSC 1134 at [98]ff, in a manner which is consistent with the approach adopted in the earlier cases. 7Given the evidence which is before me as to the scope of the receivership, and particularly the absence of any expansion of the receivership to deal with the conduct of the winding up application, the authorities to which I have referred, and the fact that the receiver's position in respect of the winding up application appears to be one of not actively opposing it, I am satisfied that the directors of the Company may presently continue to instruct legal representatives for the purpose of defending the winding up, or at least seeking the foreshadowed adjournment, in the name of the company. Application for adjournment 8Windlock's application for the winding up of the Company in insolvency is based on an alleged non-compliance with a statutory demand dated 8 November 2011 ("Demand") for the amount of $8,250,296.98, initially comprised of $6.5 million referable to two advances made on 23 November 2009 and claimed interest and charges to 1 November 2011 of $1,750,296.98. Windlock has read, in this application, an affidavit of its managing director, Mr Tom Folino-Gallo, dated 11 December 2012 stating that the amount of $4,520,734.30 remains due and payable. Mr McGrath, who appears for Windlock, contends that the reduction reflects concessions made for the purposes of the application to set aside the Demand, but I will not treat that submission from the bar table as evidence of that matter as a matter of fact. 9Mr Golledge, who appears for the Company on the instructions of its directors, seeks an adjournment of the winding up application to a date in early 2013. That application was filed on 12 July 2012, now nearly five months ago and, on 15 October 2012, Brereton J fixed the application for hearing today. The adjournment application is supported by an affidavit of Mr Velibor Davidovic, a director of the Company, dated 11 December 2012. 10Mr Davidovic's evidence is that the Company is trustee of the Davidovic Family Trust that owns real property, namely two properties at Unanderra, New South Wales; has no other assets; its only other liabilities relate to ownership of the properties; and its assets are presently under the control of receivers and managers appointed by Windlock. Mr Davidovic refers to two debts of the Company, to Windlock of approximately $4.5 million and to National Australia Bank of $23,000. Mr Davidovic does not say that either of these debts are not presently due and payable. Mr Davidovic also refers to a cross-claim which was asserted, but ultimately did not proceed for reasons which do not need to be addressed here, in an earlier application to set aside the Demand. 11Mr Davidovic refers to his having taken steps to gather evidence needed to demonstrate that the Company is solvent. First, he refers to two valuations of two the properties that have been tendered. One valuation is dated November 2011 and values one property at in excess of $9.4 million. The other is apparently undated, refers to a valuation of the other property at $9.6 million, but is apparently subject to an assumption as to a 20 year lease of that property, with a further 20 year option, on the basis that the Company would construct a large industrial building on the property. There is no evidence as to whether that lease proceeded or that building was constructed. 12Mr Davidovic also refers to what he describes as finance "approval" that would enable the Company to pay its debt to Windlock, including the fees of the receiverships. The relevant document is headed "Indicative Offer" and is dated 11 December 2011. It refers, apparently incorrectly, to the refinancing of facilities conducted with the Commonwealth Bank of Australia and to a proposed advance of up to $4.5 million on a loan to value ratio of up to 60%, subject to securities over the Company and any other entities and trusts that the lender requires and unlimited directors' guarantees. It requires a payment of $25,000 in order to progress the application further and is subject to several conditions and proof of several matters. It also states: "This document is not intended to provide an approved facility structure but more a point on which we can continue discussions to formalise suitable loan structure." 13It will be noted that, even if that indicative offer were ultimately converted to a binding offer, the amount of up to $4.5 million offered would not, in terms, be sufficient to pay both the debt claimed by Windlock, as deposed in its managing director's affidavit sworn 11 December, and the Company's debt owed to National Australia Bank. 14Mr Davidovic's evidence is that an adjournment is sought to allow the Company and its directors to obtain evidence capable of proving that the Company is solvent, by way of access to loan funds from a third party financier subject to enable the Company's debts to be paid, and secure loan offers, which would result in funds being available to pay the debt. Mr Golledge, in his able submissions for the Company, rightly points out that the question before me is not a question of whether it is established that the Company is solvent, but instead a question of whether an adjournment should be provided in order to allow it an opportunity to lead further evidence directed to establishing that matter. It might nonetheless be noted that the process which the Company seeks to adopt is not, on one view, to seek to prove its solvency as of today, but instead to seek to put itself in a position where it would be solvent at the date of a future adjourned winding up application, by bringing about a change of circumstances such that loan facilities which are not presently available to it would then be available to it. It might also be noted that it is now some 12 months since the Demand was served and some five months since the winding up application was commenced, and the loan facilities which are now to be sought have not been obtained in either of those periods. 15Mr Golledge submits that there are unusual features in this adjournment application, in particular because the Company's assets are under the control of receivers and managers and, he submits, there is no real risk of dissipation of its assets or risk to third party creditors or of it incurring further debts or other liabilities so as to prejudice Windlock. He contends that there is no prejudice to Windlock to the adjournment sought. That proposition requires both a narrower and a wider qualification. The narrower qualification is that the costs of today would be wasted by an adjournment and Windlock's ability to recover them from the Company or its directors is uncertain. The wider qualification relates to matters that I will address below. 16In dealing with the adjournment application, I must exercise my discretion on the basis of s56 of the Civil Procedure Act 2005 (NSW) which provides that the overriding purpose of the Act and the rules of Court, in their application to a civil dispute or civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the dispute or proceedings. The Court is required to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of Court. Section 58 provides that the Court, in deciding whether to make any order or direction for the management proceedings, including any order granting an adjournment of proceedings, must seek to act in accordance with the dictates of justice. For the purpose of determining what are the dictates of justice in a particular case, the Court must have regard to the provisions of ss 56 and 57 and may have regard to specified matters, including the degree of expedition with which the respective parties have approached the proceedings; the degree to which they have been timely in their interlocutory activities; the use of which any party has made, or could have made, of any opportunity available to it in the courts in the course of the proceedings; and the degree of injustice that will be suffered by the respective parties as a consequence of any order or direction. Section 57 in turn requires the Court to have regard to specified matters, including the just determination of the proceedings, the efficient disposal of the Court's business, the efficient use of available judicial and administrative resources, and the timely disposal of the proceedings and all other proceedings in the Court at a cost affordable by the respective parties. 17I pause here to note that the purpose of these provisions must be born firmly in mind. As Allsop P observed in Hans Pet Constructions Pty Limited v Cassar [2009] NSWCA 230 at [37]: "The Civil Procedure Act ss 56 to 61 brings about a new statutory balance among various factors in litigation including court and timely efficiency and the delivery of individual justice. Delay and case backlog are not merely factors affecting the public cost in delivery of justice, they corrode the ability of the courts to provide individual justice...the reforms that have taken place under the Civil Procedure Act and the evident attempt...to ensure efficiency of service for the public can just be seen not merely to reflect worthy governmental and judicial efforts for efficiency, but also to be vital for the provision of timely individual justice. To these salutary ends the significant powers of case management have been placed in the hands of judicial officers which, if exercised, can often be seen to have sharp, and sometimes detrimental effects on the claims of parties." At the same time, Allsop P emphasised at [47] that the terms and importance of ss 56-58 of the Civil Procedure Act should be borne in mind when exercising the case management powers. 18Notwithstanding Mr Golledge's submissions as to the significance of the appointment of a receiver and manager, it is also relevant to have regard to s 459R(1) of the Corporations Act which provides that an application for a company to be wound up in insolvency is to be determined within six months after it is made. The Court has a discretionary power to extend that period under s 459R(2) of the Corporations Act. As Mr Golledge recognised, the policy underlying that section is plainly that an application for winding up should be determined within a short time, and in the ordinary course within six months. This is not surprising where, in the ordinary course, the continuance of trading by a potentially insolvent Company exposes to the community, including persons with whom it may be dealing, to continue risk. The purpose of s 459R of the Corporations Act must still be recognised even if in this particular case, the risk to other creditors is mitigated by the appointment of receivers and managers. 19With this background, the Company points to the prejudice that it will undoubtedly suffer if the proceedings are heard, and I accept that prejudice may be real, in that it may be deprived of evidence upon which it seeks to rely, assuming that it were in fact able to convert the indicative offer which it now has into a binding offer within the adjournment period of which it seeks, and assuming also that solvency at a future point in time would be relevant to the result of the winding up application. However, having regard to the matters specified in ss 56-58 of the Civil Procedure Act, it is also relevant to note that the lack of present evidence of solvency is ultimately a matter within the Company's control. 20Accepting that there is prejudice to the Company if the proceedings are not adjourned, there is also a wider prejudice to Windlock and the community if the proceedings are adjourned. The prejudice to Windlock is that it is deprived of its expectation of a prompt hearing of these matters, in circumstances that the winding up application has already been on foot for some five months. The second prejudice to Windlock is that it is compensated, possibly, for that deprivation by an order for costs that might ultimately be unenforceable in practical terms. The prejudice to the community is that the services of the Court, which would have been available to another litigant to determine another matter today, at a very busy time of the year for the courts and the community in the legal system, will be lost, and a scarce hearing date will need to be allocated to the matter in the new term. 21In these circumstances, having regard to the terms of ss 56-58 of the Civil Procedure Act and the factors identified in them, the appellant authority by which I am bound in respect of the purposes served by those sections, and the expectation of a prompt determination of a winding up application reflected in s 459R of the Corporations Act, I am comfortably satisfied that the proceedings should not be further adjourned. 22Accordingly, I decline to accede to the Company's application for a further adjournment. Determination of winding up application 23As I noted above, Windlock 's application for an order under s 459P of the Corporations Act 2001 for the winding up of the Company on the grounds of insolvency is founded on the Company's failure to comply with the Demand. The application is supported by several affidavits both substantive and as to the process adopted. Mr McGrath, who appears for Windlock, has provided a helpful checklist in his submissions of the matters required to be established in a winding up and of the evidence available to establish those matters. Mr Golledge, who appears for the Company on the instructions of its directors, does not make any submission that the matters required to establish a winding up order are not established on the evidence before me. 24In particular, it is established Windlock has standing as a creditor of the company. There has been a failure to comply with the Demand. That Demand was posted on 10 November 2011; the company subsequently issued proceedings to set aside the Demand; those proceedings were dismissed in June 2012, and the company failed to pay the amount required by the Demand within the required time, seven days, of that dismissal. The proceedings were commenced approximately one month after the failure to comply with the Demand, well within the three month period specified in s 459C(2) of the Corporations Act. There is evidence of service of Demand, both on the Company and upon its directors. lodgement of the required notice of the winding up application with the Australian Securities and Investment Commission and the winding up application was advertised in accordance with the Rules. A consent of liquidator has been obtained and has been tendered in evidence before me. The hearing of the winding up application has been advertised and there is in evidence an affidavit deposing that the amount of $4,520,734.30 remains due and payable immediately prior to this hearing. The winding up application has been determined within the six months period after that application was filed, in accordance with s 459R of the Corporations Act. 25In these circumstances a presumption of insolvency arises from the service of the Demand and the failure to comply with it, and that presumption of insolvency has not been rebutted. 26I therefore make the following orders: