Hill v Esplanade Wollongong Pty Ltd ACN 141 133 708

Solicitors: AR Yates & Co (Plaintiffs) Brown Wright Stein (First, Second and Third defendants) Gilchrist Connell (Fourth - Ninth defendants) File Number(s): 2017/347325

Judgment

1. GLEESON JA: Application is made by the plaintiffs, Mr Stephen John Hill and Mrs Deirdre Gai Hill, for leave under s 444E(3) of the Corporations Act 2001 (Cth) to proceed with a proceeding against Esplanade Wollongong Pty Ltd (ACN 141 133 708) (subject to deed of company arrangement) (Esplanade). On the hearing of the application, counsel for Mr and Mrs Hill indicated orally that leave was ought nunc pro tunc to begin and proceed with the proceeding against Esplanade.
2. The "proceeding" in respect of which leave is sought was commenced by statement of claim filed 16 November 2017. The defendants to that proceeding are Esplanade, Mr Peter Taranto and Mr Alexander Pupavoc, and five solicitors trading under the name, Hansons Lawyers, Mr Kerry Kyriakoudes, Mr Peter Bahlmann, Ms Anna Masri, Ms Hayley Maree Williams, Mr Thomas William Sherley and Mr Jeffrey Robert David.
3. Although given notice of the application, none of the defendants appeared on the hearing. There is evidence that Esplanade, Mr Taranto and Mr Pupavoc neither consent nor oppose the grant of leave. The fourth to ninth defendants consent to the application.

Background

1. Esplanade carried on the business of property development in the Wollongong district. On 30 July 2014, Esplanade entered into and exchanged contracts with Mr and Mrs Hill for the sale of an "off-the-plan" unit located at 72-74 Cliff Road, Wollongong. The purchase price was $1,325,000. Mr and Mrs Hill paid a deposit of $66,500. Unbeknown to Mr and Mrs Hill, on 30 August 2016, Esplanade transferred the unit to Institute Property Association Limited for a stated consideration of $1,725,000. That transfer was executed by Mr Taranto and Mr Pupavoc as directors of Esplanade.
2. On 13 September 2017, Mr Daniel Jean, Civil and Ms Amanda Young were appointed administrators of Esplanade pursuant to s 436A, Corporations Act. Mr and Mrs Hill were unaware of the appointment of the voluntary administrators and were not notified of the first or second meeting of creditors which were held on 25 September 2016 and 19 October 2017 respectively.
3. At the second meeting of creditors of Esplanade, the creditors resolved that Esplanade enter into a deed of company arrangement (DOCA) as proposed by its sole remaining director, Mr Taranto. In their report to creditors, the voluntary administrators estimated that the dividend to unsecured creditors under the DOCA proposal was $0.0568, compared with the estimate of a nil dividend in the event of liquidation.
4. On 27 October 2017, a DOCA was entered into between Mr Taranto, as the director of Esplanade, Mr Civil, as deed administrator, and Esplanade. The definitions of "Claim" and "Creditor" in cl 1 (Dictionary) of Sch 1 to the DOCA are in wide terms and it is not in dispute that the claim by Mr and Mrs Hill against Esplanade is one covered by the DOCA.
5. The material terms of the DOCA include the establishment of a deed fund comprising the amounts of $44,000 currently held by the administrators and a contribution of $210,000 to be paid by Mr Taranto in two instalments (cl 6.3).
6. The DOCA provides that subject to cl 8.2, the day-to-day control and stewardship of the company will revert to the director (Mr Taranto) as at the date of the deed provided always that the deed administrator retains the right and entitlement, in his absolute discretion, to exercise all or any of the powers conferred on the deed administrator by the Deed or the Corporations Act to the exclusion of the powers of the Director (cl 8.1). The qualification stipulated in cl 8.2 is that the deed administrator will have stewardship and control over the sale of the identified property of the company (being unit 11/72 Cliff Road, Wollongong) and retain one-eleventh of the sale price and remit that sum to the Commissioner of Taxation as GST in respect of the supply of unit 11.
7. The DOCA also provides for a bar on any debt or claim (cl 10.7) and an extinguishment of creditors' claims if the deed administrator has paid the participating creditors a dividend, distribution or entitlement under the deed (cl 10.8).

The proceedings

1. In the statement of claim filed 16 November 2017, Mr and Mrs Hill seek the following orders and relief against the defendants, or one or more of them: 1 Order pursuant to s 440D (1) (b) of the Corporations Act 2001 (Cth) for leave to be granted to the Plaintiffs to proceed with these proceedings on such terms, if any, as the Court thinks fit to impose. 2 A declaration that the First Defendant engaged in fraudulent conduct in the sale of the Unit particularised and described as Unit 21 at 72-74 Cliff Road Wollongong depicted in the then unregistered draft Strata Plan being document No 3 forming part of the contract dated 30 July 2014 (between the Plaintiffs and the First Defendant) (the Contract) but on registration of the Strata Plan the subject of the Development was redesignated as Unit 20. (the Unit). 3 A declaration that the Second Defendant engaged in fraudulent conduct in the sale of the Unit. 4 A declaration that the Third Defendant engaged in fraudulent conduct in the sale of the Unit. 5 An order for damages and in the alternative exemplary damages against the Second and Third Defendants. 6 A declaration that the Second and Third Defendants engaged in conduct that constituted conduct that interfered with the contractual relations between the Plaintiffs and the First Defendant. 7 An order for damages against the Second and Third Defendants and in the alternative exemplary damages against the Second and Third Defendants for interfering with the contractual relations between the Plaintiffs and the First Defendant. 8 A declaration that the Second and Third Defendants conspired with each other to procure to repudiate the Contract and perpetrate the fraudulent conduct in relation to the sale of the Unit. 9 An order for damages against the Second and Third Defendants as a result of the Conspiracy. 10 A declaration that the Fourth Defendant has engaged in misleading and deceptive or in the alternative unconscionable conduct within the meaning of ss 18 and 20 of the Australian Consumer Law and at common law. 11 An order for damages pursuant to ss 236 of the Australian Consumer Law and at common law against the Fourth Defendant. 12 A declaration that the First Defendant engaged in misleading and deceptive or in the alternative unconscionable conduct within the meaning of ss 18 and 20 of the Australian Consumer Law and at common law (the contravention). 13 An order for damages pursuant to s 236 of the Australian Consumer Law and at common law against the First Defendant. 14 Further and in the alternative a declaration that the Second, Third and Fourth Defendants: a. aided, abetted, counselled or procured the contravention; b. induced the contravention; c. were either directly or indirectly, or knowingly concerned in, or party to the contravention. d. together conspired to effect the contravention; 15 An order pursuant to s 82 Competition and Consumer Act 2010 (Cth) and/or alternatively ss 4 & 236 of the Australian Consumer Law that the Second, Third and Fourth Defendants pay to the Plaintiffs their loss and damage. 16 Further and in the alternative a declaration that the Fourth, Fifth, Sixth, Seventh, Eighth and Ninth Defendants were, at all material times, agents of the firm trading as Hansons Lawyers (the Firm) and of each other as partners of the Firm, in respect of the wrongful acts and omissions of .the Fourth Defendant, pleaded in the particulars below, which were done in the Firm name and therefore they are jointly and severally liable for those acts within the meaning of ss 5, 6 and 10 of the Partnership Act 1892 (NSW). 17 An order for damages against the Fourth, Fifth, Sixth, Seventh, Eighth and Ninth Defendants arising from the wrongful acts of the Fourth Defendant pleaded in the particulars of claim below. 18 Interest. 19 Costs and interest on costs pursuant to s 101(4) of the Civil Procedure Act 2005 (NSW). 20 Such further or other order.
2. The relief sought in par 1 of the statement of claim is not pressed. At the time the statement of claim was filed, the solicitor for Mr and Mrs Hill was under the impression, based on a search of the records of ASIC, that Esplanade was still in voluntary administration. It is accepted that s 440D(1)(b) of the Corporations Act has no application. The relevant provision is s 444E(3) of the Corporations Act.
3. The claims in respect of which leave is sought are those made in pars 2, 12 and 13 of the statement of claim. Those claims all relate to the asserted failure by Esplanade to complete the contract for sale in respect of the unit.
4. Esplanade has filed a notice of appearance, but no defence. Mr Taranto and Mr Pupavoc have filed a defence which contends that Mr and Mrs Hill and Mr Taranto (on behalf of Esplanade) agreed to rescind the contract in July 2016 upon certain terms, or alternatively that there is a conventional estoppel precluding Mr and Mrs Hill from denying that the contract was to be treated as rescinded. The fourth to ninth defendants have filed a defence which contends that Mr and Mrs Hill and Esplanade reached an "in principle" agreement to rescind the contract. The matters raised in these defences are denied in the reply filed by Mr and Mrs Hill.
5. On 7 December 2017, in response to an invitation by the deed administrator, Mr and Mrs Hill lodged a formal proof of debt claiming an amount of $749,147.45 comprising: $400,000 (being the difference between the purchase price and the transfer price), $260,000 for loss of opportunity to rent the property for four years, $4,213 in respect of incidental legal costs incurred in relation to the original contract, interest from 1 February 2018 amounting to $29,934.45 and legal costs estimated at $55,000.
6. On 15 February 2018, the deed administrator's solicitors informed Mr and Mrs Hill's solicitors that the deed administrator would be adjudicating on all proofs of debt in the course of the next month. That did not occur. On 13 March 2018, Mr and Mrs Hill filed their notice of motion seeking leave to proceed against Esplanade pursuant to s 444E(3) of the Corporations Act.

Relevant principles: leave to proceed pursuant to s 444E(3)

1. Corporations Act, s 444E relevantly provides: 444E Protection of company's property from persons bound by deed (1) Until a deed of company arrangement terminates, this section applies to a person bound by the deed. (2) The person cannot: (a) make an application for an order to wind up the company; or (b) proceed with such an application made before the deed became binding on the person. (3) The person cannot: (a) begin or proceed with a proceeding against the company or in relation to any of its property; or (b) begin or proceed with enforcement process in relation to property of the company; except: (c) with the leave of the Court; and (d) in accordance with such terms (if any) as the Court imposes. ...
2. Leave may be granted under this section nunc pro tunc: Re QMT Constructions Pty Ltd [2000] 1 Qd R 284; [1999] QSC 2; Adelaide Brighton Cement Limited, In the Matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (subject to Deed of Company Arrangement) [2018] FCA 315.
3. The approach to applications for leave under s 444E(3) is similar to that taken in applications for leave to proceed against a company in winding up under s 471B of the Corporations Act, rather than the stricter approach taken in applications for leave to proceed against a company in administration: Meehan v Stockmans Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123 (Meehan) at 125 (Lehane J); Easey v Grosvenor Constructions (NSW) Pty Ltd (2005) 54 ACSR 820 at [4] (Barrett J); [2005] NSWSC 878.
4. The onus lies upon Mr and Mrs Hill as the applicants for leave to establish that the ordinary procedure established by the DOCA should be displaced with the consequence that their claim be determined in the proceeding, rather than by the proof of debt procedure under the DOCA in relation to which an appeal lies to the Court: Meehan at 127; Australian Competition and Consumer Commission v Phoenix Institute of Australia Pty Ltd (subject to Deed of Company Arrangement) [2016] FCA 1246 at [85] (Perry J); Mehan v Arrium Limited (formerly OneSteel Limited) [2016] NSWSC 1680 at [14] (Black J).
5. Following the introduction of the Insolvency Law Reform Act 2016 (Cth), which repealed, among others, Corporations Act, s 1321, the direct successor provision, Corporations Act, s 599, only applies to appeals from decisions of persons administering a compromise or arrangement or scheme or a controller, or managing controller of property of a corporation. It would seem that an appeal to the Court challenging the decision of the deed administrator with respect to a proof of debt is now to be made under s 90-15 of Sch 2 of the Corporations Act - Insolvency Practice Schedule (Corporations), which provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. The expression "external administration" in relation to a company is defined in s 5-15 of Sch 2 to include a company subject to a deed of company arrangement.
6. In Ogilvie-Grant v East (1983) 7 ACLR 669 at 672, McPherson J (Wanstall CJ and Sheehan J agreeing) said in relation to a predecessor provision to s 471B of the Corporations Act, that the question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is reduced largely to one of choosing between alternative forms of procedure. A claimant is required to adopt the course of lodging a proof of debt unless the claimant can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute.
7. McPherson J acknowledged in Ogilvie-Grant v East at 672 that it is not possible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but noted that the following factors were relevant: 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. Those remarks were cited with approval by Lehane J in Meehan at 127.
8. Other factors have been identified in the cases, additional to those mentioned by McPherson J, including the fact that a company in liquidation is indemnified by insurance against a claim on which leave to proceed is sought - this is a factor strongly favouring the grant of leave: Re AJ Benjamin Ltd (1969) 2 NSWLR 374. Leave is likely also to be granted where it is clear that the liquidator will reject the claim so that, if the claimant wishes to press it, and an appeal to the Court is inevitable: Capita Financial Group Ltd v Rothwells Ltd (1989) 15 ACLR 348 at 352.
9. The question of whether leave should be granted involves the exercise of discretion. Each application must turn on its own particular facts and the question cannot be approached as a "shopping list" of factors: ACCC v Phoenix Institute of Australia at [86], referring to Australian Competition and Consumer Commission v ACN 135 183 372 (Administrators Appointed) (formerly known as Energy Watch Pty Ltd) [2012] FCA 586 at [5] (Marshall J); Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207 at 215; [2011] NSWSC 1305 at [40] (Hammerschlag J).
10. Nevertheless, factors identified in the authorities which have particular relevance to the present case include: the amount and seriousness of the plaintiff's claim; the degree of complexity of the legal and factual issues involved; the stage to which the proceedings have progressed; whether it is likely that the deed administrator will reject the proof of debt lodged by the claimants so that, if they wished to press it, an appeal to the Court is inevitable; whether the plaintiffs would suffer disadvantage if refused leave; whether, if leave is granted, the deed administrator would be unreasonably distracted from the performance of his statutory duties or obliged unnecessarily to incur substantial legal costs; and, whether, in the circumstances, there are good reasons for allowing the plaintiffs to continue the proceedings even if the deed administrator does not provide consent: JF Keir Pty Ltd v Priority Management Systems Pty Ltd (Administrators Appointed) [2007] NSWSC 748 at [8] (Rein J); Attard v James Legal Pty Ltd (2010) 80 ACSR 585 at [146]; [2010] NSWCA 311; Mehan v Arrium Limited at [12].
11. In my view, this is an appropriate case for a grant of leave.
12. First, I am satisfied that the claim by Mr and Mrs Hill has a solid foundation and gives rise to a serious dispute in the sense referred to in the authorities: Vagrand Pty Ltd (in liq) v Fielding (1993) 10 ACSR 373, a case involving liquidation. It is not in dispute that Mr and Mrs Hill exchanged the contract for sale in respect of the purchase of the unit. The parties have joined issue on the matters raised in the defence filed by Mr Taranto and Mr Pupavoc: namely, whether there was an agreement between the parties to rescind the contract, or a conventional estoppel based on an alleged mutual assumption of rescission.
13. Second, given the nature of the claim made by Mr and Mrs Hill against Esplanade, which include allegations of fraud and misleading conduct, the claim is not one which can be easily dealt with under the proof of debt procedure provided for by the DOCA.
14. Third, even if the deed administrator rejected the proof lodged by Mr and Mrs Hill, any appeal therefrom would raise the same issues as presently raised in the proceeding against Esplanade. This is not a case in which the proof of debt procedure and any appeal therefrom would be more convenient and involve less delay and expense.
15. Fourth, there is a substantial overlap between Mr and Mrs Hill's claim against Esplanade and the other defendants, Mr Taranto and Mr Pupavoc, and the partners of Hansons Solicitors. It is preferable that all related issues be dealt with in the one proceeding, rather than there be separate proceedings, one relating to any decision or omission by the deed administrator to make a decision with respect to the proof of debt, and the other being the present proceeding.
16. Fifth, as Esplanade is now under the control of the director, it should be the director (Mr Taranto) who will be responsible for the conduct of the company's defence. The deed administrator should not need to be involved and no submission to that effect has been made either by Esplanade or the deed administrator.
17. Sixth, the claim by Mr and Mrs Hill has a degree of factual and also legal complexity, which is a compelling factor in favour of a grant of leave: Meehan at 127, following Ogilvie-Grant v East at 672; see also ACCC v Phoenix Institute of Australia at [108].

Futility

1. One further matter should be mentioned. An issue has arisen in similar cases whether a grant of leave would be futile because of the moratorium and barring provisions in the deed of company arrangement. In some of those cases, the question of leave to proceed arose in the context of tort claims against the company which, under the terms of the deed of company arrangement, had been extinguished by the deed, and were replaced by an equivalent claim against the available property. In other cases, the deed provided that, in respect of creditors who did not prove or whose claims were not pursued in a particular way, their claim was deemed to have been abandoned or barred: see, for example, Wolstenholme v National Express Group Australia (Swanston Trams) Pty Ltd [2003] VSC 476 and Easey v Grosvenor Constructions (NSW) Pty Ltd [2005] NSWSC 878.
2. While consideration must be given to the effect of the particular terms of the relevant deed, I agree with the views expressed by Campbell J in Josia Pty Ltd v Horvat Constructions Pty Ltd [2004] NSWSC 1252 at [8]; (2004) 12 BBR 22,671 and White J in Hoath v Connect Internet Services Pty Ltd [2006] NSWSC 158 at [192]; (2006) 229 ALR 566 at [192], that a DOCA has to be construed in accordance with Pt 5.3A Div 10, which provides for the procedure of a creditor proceeding by action against the company with leave.
3. As White J explained in Hoath v Connect Internet Services at [192]: … If in such a case, the amount of the creditors' debt is established by judgment, the cause of action will merge in the judgment and, subject to any appeal, the deed administrator would be bound to admit the debt for the amount payable under the judgment. The deed could not bar a creditor from 444E(3), as that would be inconsistent with the scheme of the legislation. (Josia Pty Ltd v Horvat Construction Pty Ltd [2004] NSWSC 1252 at [6]-[8]; Easey v Grosvenor Constructions (NSW) Pty Ltd (2005) 54 ACSR 820 at 824 [16]). However, the fact that leave was given pursuant to s 444E(3) does not preclude Com-Cen from contending that the deed bars the claim, and that upon payment by the administrator to the Deed Creditors of the Creditor Entitlements all of the deed creditors' debts are extinguished, including those of Mortgage.
4. In this case, the question of futility has not been raised by either the deed administrator or Esplanade. The claim of Mr and Mrs Hill, if successful, will lead to a judgment in the ordinary course, and subject to any appeal, the deed administrator would be bound to admit that claim under the DOCA. Of course, a grant of leave under s 444E(3) does not preclude Esplanade from contending that the deed bars the claim, and that upon payment by the deed administrator to participating creditors of their entitlement to the payment of a dividend from the deed fund all of the deed creditors' debts are extinguished, including those of Mr and Mrs Hill: Hoath v Connect Internet Services at [192].

Other considerations

1. There has been no delay on the part of Mr and Mrs Hill in seeking leave and no prejudice has been caused to Esplanade or its creditors. Although these proceedings have not progressed beyond the stage of pleadings, the issues have been refined by the pleadings. No real purpose would be served in requiring Mr and Mrs Hill to pursue their claim by challenging the deed administrator's failure to adjudicate upon their proof of debt, or assuming a decision is made by the deed administrator, an appeal therefrom, if dissatisfied with the deed administrator's decision. Further and importantly, there is nothing which suggests that the deed administrator is likely to admit their proof of debt in full, which would render the grant of leave unnecessary.

Conclusion and Orders

1. I am satisfied that this is an appropriate case for the grant of leave under s 444E(3) of the Corporations Act. Accordingly, the Court makes the following orders: 1. Leave is granted to the plaintiffs nunc pro tunc pursuant to s 444E(3)(c) of the Corporations Act 2001 (Cth) to commence and proceed with this proceeding against the first defendant on the condition that the plaintiffs do not seek to enforce any judgment against the first defendant without further leave of the Court. 2. Order that the plaintiffs' costs of the motion be the plaintiffs' costs in the proceedings. 3. Matter be listed for further directions before the Equity Division Registrar on 30 April 2018.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 April 2018