Great Wall Resources Pty Ltd (in Liquidation) v Davidovic Pty Ltd ACN 068 948 167

itors & Barristers File Number(s): 2009/00288977

Judgment 1HIS HONOUR: This is the hearing of a notice of motion filed on 25 March 2011, in which the liquidator of the plaintiff seeks payment out of court of the sum of $43,968.67. The funds were paid into court on 25 August 2010.

Background 2Prior to mid-2009, Lewis & McKinnon Solicitors had acted for the plaintiff in a number of proceedings in the Supreme Court and Federal Court. They had terminated their retainer in or about October 2009, partly due to the plaintiff's failure to pay outstanding fees of $43,968.67. Lewis & McKinnon had refused requests to provide their files to the plaintiff's new solicitors and enforced their solicitors' lien. 3By a notice of motion filed in these proceedings on 15 March 2010, the plaintiff sought delivery of the files of Lewis & McKinnon. 4On 18 March 2010, I ordered Lewis & McKinnon to produce their files to the plaintiff, subject to the plaintiff paying the sum of $43,968.67 into court. I stated in that ex tempore judgment: "In the present case, so far as the Solicitor's Rules are concerned, the relevant rule is 29.4. In this case the evidence shows that the documents are essential to the defence in the Federal Court proceedings of 1998 and 2009, the present proceedings and other proceedings in this Court, being winding up proceedings 291194 of 2009. Given that the documents are essential to the defence under Solicitor's Rule 29.4 there is a requirement to satisfactorily secure the costs. On this aspect and in considering the somewhat wider discretion which is available under the Court's inherent discretion, the following matters I think are important: (a) The plaintiff is solvent and presumably could provide security. (b) That although there has been correspondence with the plaintiff's accountant to verify the accounts owing, which has been inconclusive, no application has been made to have any of the bill taxed. (c) No complaint is maintained in respect of the conduct of the solicitor. (d) The costs agreements are not contingent ones and provide for work to be done with bills to be issued in the course of the matter and to be paid throughout the matter. (e) The present matter may not result in recovery of money if the defendant purchaser does not comply with an order for specific performance. (f) The solicitor so far in various matters has done a substantial amount of work and over $200,000 has been paid. ... In the circumstances I order - and the parties may want to revise the terms of this order - that upon the plaintiff providing security in the sum of $43,968.67 by way of bank guarantee or such other form as the Registrar may accept, the respondents produce to the plaintiffs their files in respect of these proceedings, the Federal Court proceedings 1988/07 and proceedings in the Court 29114/09. Such production is to be subject to the lien of the solicitors and the papers on completion of their use in the relevant proceedings are to be returned to them." 5As I have mentioned, payment in to this court occurred on 25 August 2010. The circumstances in which the funds came to be paid into court by the plaintiff is set out in an affidavit of the sole director and shareholder of the plaintiff, Frank Capocchiano, sworn in these proceeding on 7 September 2010. The relevant parts of his evidence were as follows: "15. I was concerned that Victor Shalala had not succeeded in selling in any of Great Wall's properties when they had been on the market for so long. I engaged Maria Field, a second real-estate agent from First National Coast Side, in Dapto, NSW to sell a property that I and my wife owned personally at 184 Shellharbour Road, Shellharbour ("Shellharbour Property"). Annexed to this affidavit and marked "H" is a copy of the agency agreement between myself and Marie Field dated 14 July 2010. 16. In or about mid August I received notice from my agent that she had found a purchaser showing interest in the Shellharbour Property. There was considerable negotiation in relation to the sale price of Shellharbour Road and Lot 9 as the personal loan with First Mortgage Managed Investments was secured by the Shellharbour Road property and would have to be paid out on its sale. I wanted to ensure that the sale could provide me with some clash-flow to assist Great Wall Resources Pty Ltd. 17. On 25 August 2010 contracts for the Shellharbour Property were exchanged. Annexed to this affidavit and marked "I" is a copy of the front page of the contract dated 25 August 2010. I agreed to a reduced sale price of $272,000.00. However in doing so the purchaser agreed to release a larger deposit of $45,000.00 immediately to me so that I could lend this money to Great Wall and enable it to provide security for Lewis & McKinnon's costs. Annexed to this affidavit and marked "J" is a copy of a letter dated 24 August 2010 from Wollongong Legal to Autore & Associates. 18. The deposit from the sale of the Shellharbour Property was made available to Autore & Associates on the morning of 25 August 2010. I said to Mr Autore: "Use the deposit funds to pay security for Lewis & McKinnon's costs into the Supreme Court so that they will release the Great Wall files so we can give discovery." 6The evidence demonstrates that the purchaser's solicitor forwarded the $45,000 deposit to the vendor's solicitor who then drew his trust account cheque for $43,968.67, which was paid to the court pursuant to my order. 7Federal Court proceedings 1988/07 appear to have been finalised on 30 August 2012: Rafeletos v Great Wall Resources Pty Limited (No 3) [2010] FCA 941. Presumably proceedings 291194/09 in this Court were resolved because on 7 December 2010, less than 4 months after payment into court, the Federal Court ordered that the plaintiff be wound up in insolvency on the petition of the Deputy Commissioner of Taxation and the applicant was appointed official liquidator: Deputy Commissioner of Taxation v Great Wall Resources Pty Limited (Controller Appointed) [2010] FCA 1509. 8In the ordinary course of events, if the liquidation had not occurred, at the conclusion of the relevant proceedings one would expect the files would have been returned to Lewis & McKinnon and Great Wall would have recovered the security paid into court. Following that, the parties could then have pursued a number of options such as negotiation for payment, costs assessment or service of a creditor's statutory demand for the unpaid fees. 9It is not clear from the evidence, but it is most likely, that the plaintiff's solicitors, Autoure & Associates, have not yet returned the documents to Lewis & McKinnon, which they hold subject to Lewis & McKinnon's lien. The security remains in court. 10The evidence before me establishes that between 8 March 2010 and the plaintiff's winding up on 7 December 2010, the plaintiff was insolvent. 11The applicant put his case forward on 2 bases: (1) The funds paid into court were the company's monies as they had been lent to the company by Mr Capocchiano, its sole director and shareholder. (2) The payment into court was an unfair preference in favour of Lewis & McKinnon voidable as against the applicant liquidator. 12The statutory basis of the applicant's second claim was said to be as follows: (a) At all relevant times Lewis & McKinnon was and is a creditor of the plaintiff. (b) Pursuant to s 513A of the Corporations Act 2001 (Cth) ('the Act'), the winding up of the plaintiff commenced on the day the winding up order was made on 27 December 2010. (c) The "relation-back day" for the purposes of s 9 of the Act was the date upon which the application to wind up the plaintiff was filed, being 8 September 2010. Payment into court was made during the period of 6 months prior to the winding up (see s 588FE(2) of the Act). (d) On 25 August 2010, the plaintiff paid $43,000 into court. The fact that this amount was lent to the plaintiff by the plaintiff's director does not reduce the plaintiff's claim to the funds. (e) By paying $43,968.67 into court, the plaintiff appropriated part of its property specifically to answer the full amount of Lewis & McKinnon's claim as a creditor (see s 588FA(1) of the Act). (f) The plaintiff was insolvent by not later than 8 March 2010. There can be no doubt that the plaintiff was insolvent as at the date of payment into court considering the petition to wind-up the plaintiff was presented on 8 September (see s 588FC of the Act). 13I will leave aside for the moment the question of whether the debt may be a secured debt and thus not within the provisions of s 588FA(1)(b) (see Woodings v James (1996) 14 ACLC 1555; Commercial Banking Company of Sydney Ltd v Colonial Financiers of Australia Pty Ltd (1972) 20 FLR 220). 14Both claims are formulated so as to depend upon the proposition that the money paid into court was the company's money. It is plain that the money came from the director and his wife's sale of their own property and prima facie it belonged to them. Lewis & McKinnon contended that there was no sufficient evidence to establish that the funds had become company funds in the course of their payment out of Mr and Mrs Capocchiano's solicitor's trust account. Relevant parts of Mr Capocchiano's evidence are the last sentence of paragraph 16 and third sentence of paragraph 17. 15Given that Mr Capocchiano was the sole director and shareholder of the company, he was the only party required, on the company's part, to agree to the terms of how the company would receive the money. There is no evidence of what Mrs Capocchiano thought, but she has not made any suggestion or claim that she objected to the use of the money. Mrs Capocchiano's solicitor made the payment from the trust account and I infer it was made with her authority. Therefore, the company received the money as a loan. The money became the company's money. 16The applicant say they are therefore entitled to the funds on the first basis they put forward. However, it is not that simple. On their payment into court, the funds were subject to a charge in favour of Lewis & McKinnon to secure their lien over the files and to secure their ultimate payment of costs. 17In my judgment of 18 March 2010 (which was ten days after the company apparently became insolvent), I set out the reasons why I thought the lien and costs should be secured by payment into court. The applicant referred to Commercial Banking Company v Colonial Financiers where a company paid money into court pursuant to conditional leave to defend an action against a company. However, a petition to wind up the company was presented within 6 months of the payment into court. 18The Full Court of the Victorian Supreme Court held that the payment was a preference and the money in court was to be paid to the liquidator. Lush J noted that the payment into court involved an: " ... appropriation by the defendant of part of its property and the setting aside of that part specifically to answer the plaintiff's claim if that claim was made good. I think that such an arrangement may be described as the giving in favour of the plaintiff of a charge on property which at the time of the relevant act was the property of the debtor and which, if not given up by the plaintiff, would augment the property of the defendant in the liquidation." 19This case was, of course, under the old provisions. Under the new provisions, a transaction is defined in section 9, to include the giving of a charge. However, for those provisions to apply to what happened on 18 March and 25 August, it is necessary to see whether for the purpose of s588FA(1)(b) the debt was an unsecured debt within the meaning of those sections. Section 588FA(1)(b) is as follows: "Division 2 - Voidable transactions 588FA Unfair preferences (1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency." The only relevant definition of an unsecured debt is in section 588D, which does not help: "588D Secured debt may become unsecured For the purposes of this Part, a secured debt becomes an unsecured debt to the extent that the creditor proves for the debt as an unsecured creditor." 20The situation as at 8 March was that the Lewis & McKinnon was owed its fees and had a possessory lien over the files. The solicitor's lien is said to be essentially a security interest conferring specific rights in re on the lienee (per E Sykes, The Law of Securities, 3 rd ed (1978) at 23) . That is a right in property as opposed to a right of action (a right in rem) (see Curling v Long (1797) 1 B&P 634). Does this mean that the debt was therefore a secured debt and that the avoidance provisions of the Act do not apply? 21I gave the parties an opportunity to make further submissions on this issue. The submissions they made can be summarised as follows.