Harrington Services Pty. Ltd (In Liquidation) v. Harrington & Anor. [2003] NSWCA 89

Court of Appeal (NSW)|2003-04-07|Before: Hodgson JA, Palmer J

CITATION : Harrington Services Pty. Ltd (In Liquidation) v. Harrington & Anor. [2003] NSWCA 89 HEARING DATE(S) : 7 April 2003 JUDGMENT DATE : 22 April 2003

JUDGMENT OF : Hodgson JA at 1 DECISION : 1. Orders 5 and 6 made by Palmer J on 19 February 2003 stayed until further order. 2. If within 7 days the Directors undertake to the Company not to pursue their cross-appeal if security is not given, order: (a) that the Company and Liquidators give security for the Directors' costs of the appeal and do so by way of the Liquidators undertaking to the Directors to be personally responsible for any costs ordered against the Company (such undertaking not to affect any indemnity of the Liquidators from the Company); (b) that the appeal be stayed until the Liquidators give that undertaking; (c) that the stay in Order 1 be discharged if the Liquidators do not give that undertaking within 7 days after receiving the Directors' undertaking. 3. Costs of both applications to be costs in the appeal. 4. Subject to the effect of Order 2, appeal expedited.

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT ED1261/02 FILE NUMBER(S) : LOWER COURT Palmer J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA40174/03 ED 1261/02

Tuesday 22 April 2003 HARRINGTON SERVICES PTY. LTD (IN LIQUIDATION) & ANOR. V. HARRINGTON & ANOR. Judgment 1 HODGSON JA: On 19 February 2003, Palmer J made orders in proceedings brought by the respondents (the Directors) against the first appellant (the Company) and the second appellant (the Liquidators). By those orders, Palmer J declared that the Directors were entitled to receive the proceeds of sale of fifty places allocated to the Company under the Aged Care Act 1997 (Cwth), and ordered payment to the Directors of the amount of $824,466.00 held in a separate account of the Liquidators together with interest thereon. 2 On 14 March 2003, the Liquidators filed a Notice of Appeal challenging these orders. On 20 March 2003, the Directors filed a Notice of Cross-Appeal, seeking orders to the effect that they were entitled to $2 million plus interest rather than $824,466.00 plus interest; although it is not clear to me if the consequential orders are sought against the liquidators or only against the Company. 3 On 7 April 2003, I heard two Notices of Motion: (1) a Notice of Motion by the Liquidators seeking a stay of Palmer J's orders; and (2) a Notice of Motion by the Directors, seeking an order for security for costs. 4 At the conclusion of the hearing, I gave leave for certain additional material to be provided, and reserved my decision. A stay of the orders up to 7 April 2003 had been in place, and I extended that stay until further order.

CIRCUMSTANCES 5 In 1981, the Directors purchased the property 71 Sydney Street, Willoughby, on which was situated Trentham Nursing Home. From about that time, the business of Trentham Nursing Home was conducted by the Company, of which the Directors were at all material times the only directors. Associated with that business were rights in respect of fifty places allocated under the Aged Care Act, these being saleable assets. 6 From about the year ending 30 June 1999, the Company incurred very substantial losses. In that year, there was an operating loss of just under $600,000.00, and in the year ending 30 June 2000, there was an operating loss of about $55,000.00. 7 The company's receipt of benefits under the Aged Care Act involved the obligation to refund accommodation bonds paid by residents of the nursing home. It appears there were defaults by the Company in this matter, and on 13 June 2000, the Commonwealth gave notice to the company that it suspended the extra service status of the Trentham House Residential Aged Care Facility until 30 November 2000, with the effect that it ceased to receive benefits under the Act. 8 It appears also that the Company did not pay all group tax to the Australian Taxation Office, at least from about 1998. Apparently the Directors borrowed $500,000.00 on the security of their home in December 1999, and these moneys were then paid to the ATO in reduction of amounts owing by the Company. It appears that initially the whole payment was applied in respect of arrears of group tax, but that later $240,000.00 was allocated by the ATO to payment of amounts owing in respect of superannuation surcharge. 9 On 24 August 2000, the ATO issued a demand to the Company for payment of $525,505.80 for outstanding income tax, group tax and interest. 10 On 18 September 2000, the Company appointed the Liquidators to be administrators pursuant to s.436A of the Corporations Law, this being the then applicable provision. 11 On 12 December 2000, the creditors of the Company resolved that the Company enter into a Deed of Company Arrangement, and this Deed was executed on 2 January 2001. However, on 27 March 2001, the creditors of the Company resolved that the Company be wound up, and the Liquidators became liquidators of the Company. 12 The ATO was represented at meetings of creditors, and its Proof of Debt of $685,784.96 was admitted for purposes of voting. The ATO has now commenced proceedings against the Directors in the District Court claiming $371,246.36 in respect of unpaid group tax of the Company. The Directors claim to have a defence as to at least $240,000.00 of this amount, by reason of the payment of $500,000.00 made in December 1999. 13 After the resolution for winding up, the Liquidators continued to conduct the business of the Nursing Home. The Directors claimed ownership of the allocated places, but consented to their sale by the Liquidators on condition that the net proceeds be separately retained pending resolution of the question of ownership. 14 The Liquidator sold the allocated places for $2 million, this sale being completed on 21 December 2001. From this sum various amounts were deducted, including just under $1 million as owing to bond holders and about $180,000.00 representing GST on the sale, these deductions giving rise to the figure of $824,466.00 mentioned above. 15 These proceedings were commenced by the Directors early in 2002, and were heard between 5 and 7 August 2002. The main judgment in the proceedings was given on 20 September 2002, and there were further judgments given on 4 October 2002 and 11 February 2003. 16 Meanwhile, on 30 April 2002, the Directors completed the sale of the property 71 Sydney Street, Willoughby, receiving proceeds of about $373,500.00. Of these proceeds, $213,520.00 was used in payment of legal costs and disbursements owing at that date, and $100,000.00 was used to pay an amount on account of future costs and disbursements. $50,000.00 was used in repayment of a loan guaranteed by the Directors. 17 On 13 September 2002, the Company and the Liquidators commenced proceedings against the Directors for money lent to the Directors, for insolvent trading, and for enforcement of an equitable lien over the $824,466.00 the subject of the present proceedings. It seems that the Directors in substance concede that they owe the Company about $573,000.00 on loan accounts, but claim set-offs, inter alia arising from liability of the Company to them for rent for 71 Sydney Street from September 2000 to November 2001 ($291,200.00) and for amounts paid for the Company's tax (including the $500,000.00 paid in December 1999). 18 There is no dispute that if the Company's appeal fails, the Company does not have assets to pay any costs ordered to be paid to the Directors. 19 The Directors claim to have assets of $3,435,662.00 and liabilities of $1,770,175.00. However, the assets include the $824,466.00 subject to these proceedings, and also $993,716.00 being the amount paid out of the $2 million proceeds of sale to the bond holders; and the liabilities include $130,000.00 owing to the ATO, not the full amount claimed by the ATO. If the Liquidators' appeal succeeds, it would seem that there is a very substantial excess of liabilities over assets. In addition, the Directors will be incurring the costs of the appeal (which they estimate at over $70,000.00), costs in the Liquidators' new proceedings (which they estimate will eventually amount to about $180,000.00) and costs of the ATO proceedings. Furthermore, their living expenses and other outgoings at present substantially exceed their income. 20 The Liquidators claim that liabilities of over $1 million have been incurred in carrying on the business of the Nursing Home, of which about $567,000.00 is owing to the ATO for group tax, about $70,000.00 is owing for payroll tax, about $175,00.00 for employee entitlements, and about $124,000.00 for workers compensation insurance; and also that the Company is liable to them for professional fees of over $580,000.00 and disbursements of over $320,000.00 including legal fees of about $308,000.00. It appears that, apart from the money the subject of these proceedings, the only assets available to the Liquidators are a bank account containing $57,483.76.

SUBMISSIONS 21 Mr. Wheelhouse for the Liquidators submitted that, if no stay is granted, the amount in issue is likely to be wholly dissipated and that the Liquidators' and Company's appeal rights will be rendered nugatory. The remedy for the Directors' need for money was expedition. 22 Mr. Monotti for the Directors submitted that the Liquidators and the Company had not shown there was a reasonable prospect of the appeal succeeding, and that there was therefore no basis for granting a stay of proceedings. If a stay was granted, the Directors were likely to lose their home and to be without funds to conduct any of the legal proceedings brought against them. At worst, there should be a stay limited to part of the amount in dispute. Mr. Monotti proffered an undertaking on behalf of the Directors and their solicitors to the effect that, in the event that the appeal were to succeed, the solicitors would repay to the solicitors for the Liquidators and the Company in payment or part payment of their costs any amounts which the solicitor for the Directors may have been paid by the Directors in legal costs, including disbursements including Counsel's fees, in relation to these proceedings and the insolvent trading proceedings, out of the amount in dispute in these proceedings. 23 In relation to security for costs, Mr. Minotti submitted that, if the appeal was unsuccessful and costs were ordered against the Company, there was no chance that the Directors would recover their costs against the Company; and security for costs should be ordered. 24 Mr. Wheelhouse submitted, in relation to security for costs, that the Company was in substance a defendant, the appeal being of the nature of a continuance of that defence, and in any event was facing a cross-appeal, there being no undertaking to withdraw the cross-appeal should the appeal not proceed. Mr. Wheelhouse submitted that, on the evidence, an order for security for costs in the amount sought would stultify the appeal. Furthermore, he submitted, the Directors were the cause of the Company's impecuniosity, this being shown by the losses for at least two years prior to 2001, the Directors' responsibility for the Company not paying group tax, the Directors' responsibility for the Company losing its status under the Health Care Act, and the Directors' inability to give effect to the Deed of Arrangement so as to persuade the creditors not to wind up the Company. Mr. Wheelhouse submitted that, under Pt.51 r.16, security for costs would be ordered only in special circumstances (see Uptown Sydney Development Corporation Pty. Ltd. v. Bank of New Zealand (No.1) (1993) 11 ACSR 300 per Kirby P).

DECISION 25 Dealing first with the stay application, in my opinion a reading of the judgment of the primary judge and the Notice of Appeal is sufficient to show that the appeal has substance. It is not necessary to find that it is likely to succeed. 26 In my opinion, unless a stay is granted, the appeal is likely to be rendered nugatory. The stay will cause hardship to the Directors, but that hardship would not be greatly alleviated unless the Directors have access to a very substantial part at least of the amount in dispute and are able to apply that part in satisfaction or partial satisfaction of some of their liabilities. The proffered undertaking in relation to money paid to the lawyers does not greatly affect the situation that the probability is that much of the amount in dispute would be irrecoverable if the appeal succeeded. 27 Accordingly, subject to what I say in relation to security for costs, in my opinion a case is made out for a stay. The best that can be done to alleviate hardship is to order expedition. This is sought by the Directors, and not opposed by the Liquidators. 28 Turning to the question of security for costs, it is first convenient to consider this leaving out of account the circumstance that the Liquidators are appellants. They were initially joined in the proceedings substantially because the disputed money was in their names. They could have been made respondents to the appeal. 29 Part 51 r.16 of the Supreme Court Rules is in the following terms: (1) Where a notice of appeal with appointment has been filed under rule 6, the Court of Appeal may, in special circumstances, order that such security as the Court of Appeal thinks fit be given for the costs of the appeal. (2) Subject to subrule (1), no security for the costs of an appeal to the Court of Appeal shall be required. (3) Subrules (1) and (2) do not affect the powers of the Court under Part 53 Division 1 (which relates to security for costs). 30 Section 1335 of the Corporations Act 2001 (Cth) provides as follows: 1335(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. (2) The costs of any proceeding before a court under this Act is to be borne by such party to the proceeding as the court, in its discretion, directs. 31 Although in Uptown, Kirby P doubted that the moving party in the Court of Appeal would be treated as a plaintiff for the purposes of s.1335 of the Corporations Law (as it then was), he did not decide that this was so; and in my opinion, as decided by Registrar Irwin in Strata Consolidated (Australia) Pty. Ltd. v. Bradshaw [2000] NSWCA 114, the contrary view in J. & M. O'Brien Enterprises Pty. Ltd. v Shell Company of Australia (1983) 7 ACLR 790 and Chris Poulsen Insurance Agencies Pty. Ltd. v. National Mutual Life Association, Supreme Court of Tasmania, 17/7/98, is to be preferred. In those circumstances, I do not think "special circumstances" is a mandatory requirement. 32 I do not think it fair to regard the appeal brought by the Company as merely a continuation of a defence to claims brought against it. The case is really one of competing claims to a fund, and the Company is pursuing its own claim. In this case, if there were no cross-appeal, I would require some security from the Company, if only to the extent of an undertaking by the Liquidators to be responsible for costs ordered against the Company. 33 However, there is a cross-appeal, which could have significant consequences. It appears that the Directors owe the Company about $570,000.00; and if they were to establish that the Company has committed a breach of trust concerning about $1 million treated as owing to bond holders, then even if the Company has no other assets this could greatly impact on their debt to the Company. In my opinion, an order for security for costs and associated stay orders against the Company should be conditional upon the Directors undertaking not to pursue their cross-appeal if security is not provided. 34 Does it make a difference that the Liquidators are appellants in the proceedings? It appears that they have some personal interest in the outcome, though the extent of that interest is far from clear. The general rule in relation to transactions entered into by a liquidator on behalf of a company is that the transactions bind the company and not the liquidator personally. However, the question whether this applies in relation to the debts in question to the ATO and to employees has not been debated before me. In so far as the Liquidators claim fees approaching $600,000.00, the extent of their interest is unclear because, even if the appeal succeeds, there may be no hope of obtaining those funds. However, on the material before me, I think it appropriate to proceed on the basis that the Liquidators do have some personal interest in the outcome. In those circumstances, it is possible that the Liquidators could in any event be made subject to an adverse order for costs, which they would be liable for personally: this could be so even if the Liquidators were not parties Knight v. S.P. Special Assets Ltd. (1991) 174 CLR 178 and Mahaffey v. Belar Pty. Ltd., Queensland Court of Appeal, 16/3/99. 35 In my opinion, the appropriate order in relation to security is that, if the Directors undertake not to pursue the cross-appeal if security is not given, the Company and Liquidators give security and do so by way of the Liquidators undertaking to be personally responsible for any costs ordered against the Company. 36 I make the following orders: 1. Orders 5 and 6 made by Palmer J on 19 February 2003 stayed until further order. 2. If within 7 days the Directors undertake to the Company not to pursue their cross-appeal if security is not given, order: (a) that the Company and Liquidators give security for the Directors' costs of the appeal and do so by way of the Liquidators undertaking to the Directors to be personally responsible for any costs ordered against the Company (such undertaking not to affect any indemnity of the Liquidators from the Company); (b) that the appeal be stayed until the Liquidators give that undertaking; (c) that the stay in Order 1 be discharged if the Liquidators do not give that undertaking within 7 days after receiving the Directors' undertaking. 3. Costs of both applications to be costs in the appeal. 4. Subject to the effect of Order 2, appeal expedited. 37 If either party sees any problem with the detail of these orders, agreed alternative orders may be submitted within 7 days, or the parties may within 7 days arrange with my Associate for the matter to be listed before me. **********

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