Household Financial Services Pty Limited v Chase Medical Centre Pty Limited

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

5162/01 - IN THE MATTER OF: PINNACLE CONSTRUCTION PTY LIMITED (in Liquidation); Re: JOHN EDWARD STAR JUDGMENT - (Ex Tempore - revised 18.3.02) 1 HIS HONOUR: This is an application by a liquidator under s564 of the Corporations Law. It seeks approval for the plaintiff as liquidator to pay to certain creditors who contributed money to a litigation fighting fund, the amount which was recovered through expenditure of that fighting fund. 2 The plaintiff was appointed as the administrator of the company on 5 June 2000. He prepared a report as to the affairs which showed that the company was in a particularly poor financial position. 3 It suggested that assuming no recoveries from the liquidator's investigation, liquidation would result in a "nil to nominal" distribution to ordinary unsecured creditors. It was recommended in that report that the company be wound up. 4 On 30 June 2000 a meeting of creditors of the company was held. That meeting was informed that the company had a possible interest in some land in Victoria known as "Findon Creek Estate". 5 That interest arose under a contract for sale of land which nominated the company "and/or nominee" as purchaser of the land. 6 The purchase price was some $700 000, payable as to $600 000 on 7 July 2000. The company did not have the money to complete the purchase. Also, the company's interest in the land was disputed by a Mr Fraser, a former director of the company, who asserted that it had always been intended that an entity associated with him would be nominated as purchaser. 7 At the creditors' meeting on 30 June 2000 the plaintiff enquired whether creditors were interested in funding an investigation into, and possible protection of, the company's interest in the land. The liquidator told the creditors that he would apply to the Court for preferential treatment of those creditors in relation to the distribution of any amount recovered in respect of the interest in the land. 8 On 4 July a creditors' circular was sent out to all creditors seeking contributions. That circular nominated a very short period of time indeed for creditors to respond, namely, 5 pm that day. The circular set out the specific terms of s564 of the Corporations Law and stated that the liquidator's request for expressions of interest by 5 pm that day was made given the urgency of the time of the settlement of the purchase of the land. 9 Ultimately, contributions were received from some of the creditors. The contributions were for an amount totalling $15 875. The creditors who contributed were something less than 20 per cent in value of the creditors of the company. 10 Ultimately, through some quite complex negotiations, the claim came to be settled. An amount of $143 000, including $13 000 of GST, was received by the plaintiff in connection with the company's claim for the land. Because the input tax credits of the company are not equal to the amount of GST which it has received, about $5 000 of the amount for GST will ultimately be able to be kept by the company. 11 After liquidator's fees and expenses, an amount of approximately $27 000 will be available for distribution amongst the creditors. The first charge on that fund will be repayment of the $15 875 which was lent by the contributing creditors. Thus, it is of the order of $11 000 that will be available for ultimate distribution. 12 Section 564 of the Corporations Law provides that, "Where in any winding up: (a) property ... has been protected or preserved by the payment of money or the giving of indemnity by creditors ... the Court may make such orders as it deems just with respect to the distribution of that property ... with a view to giving those creditors an advantage over others in consideration of the risk assumed by them." 13 In Household Financial Services Pty Limited v Chase Medical Centre Pty Limited (1995) 18 ACSR 294 Brownie J said at 296-297, "The last words of s564 provide for, and the authorities accept the need to assess the risk run by the indemnifying creditors for whose benefit an application is made but the authorities show that it is also appropriate to look into the sum recovered (or the value of the property recovered), the failure of creditors to provide indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered and, generally, the totality of the circumstances, and there has been a tendency in recent times to adopt a more liberal approach in favour of indemnifying creditors." 14 In that case, Brownie J said that it will be an "extremely rare case" that would justify the making of an order that the whole of the money available for distribution be paid in favour of the indemnifying creditors. Notwithstanding that, in the Household Financial Services case, Brownie J made such an order. 15 Looking at the circumstances of the present case, the report as to affairs showed that the company records identified creditors totalling (in round figures) $736 000. The situation was then and I gather still is, that there is unlikely to be any property available for distribution beyond the amount which has been recovered utilising the fighting fund to which the five creditors contributed. 16 Indeed, I am told, there has not been any calling for proofs of debt. 17 It seems to me that the present situation is another case which justifies the distribution of the entirety of the sum which has been recovered amongst those creditors who contributed to the fighting fund. 18 The circumstances on which I rely are: (1) All creditors were invited to contribute but only a small minority chose to do so; (2) The company had no funds to enable it to protect its claim to the estate; (3) The risk of the course which the liquidator embarked on to seek to protect the company's assets was a significant one. The negotiating position of the company, being a purchaser who simply did not have the money to complete the purchase, was clearly a weak one. (4) The recovery of $130 000, plus GST, which was made, was, in the context of the total liabilities of the company, one which was, while not insignificant, not a great one; (5) The amount actually distributable, around $11,000, is comparatively small; (6) If there were to be any requirement that the amount which had been recovered be distributed in part amongst all creditors, there would inevitably be substantial administrative costs involved in calling for proofs of debt and adjudicating upon them, so that the payment could be made. I do not think it is worthwhile having the company spend that money for what would end up being a comparatively small advantage to the other creditors. 19 The five creditors who contributed, contributed in varying proportions. While the net amount which will ultimately be available for distribution to them cannot, at this stage, be ascertained in precise dollar terms, it is appropriate that a Court order should be made which is expressed in terms of allowing a percentage of the net amount distributable to be distributed amongst those five creditors according to the percentage each contributed. Framing the order that way will not result in any creditor receiving more than 100% of the debt it claims. 20 I order that the net amount recovered by the company from the interest it claimed in the contract for the purchase of land known as "Findon Creek Estate" situated in Epping in the State of Victoria, be paid in the following proportions: Austral Brick Co Pty Limited 11.82 per cent; Complete Roofing Pty Limited 34.65 per cent; Waffle Pod People Pty Limited 34.65 per cent; Waikiwi Fencing Pty Limited 9.44 per cent; Warrent Watson Electrical Pty Limited 9.44 per cent. 21 I order that the costs of this application be paid from the assets of the company. 22 I grant liberty to any creditor to apply upon three days' notice to the plaintiff and within two months from today (not including any period of time which falls in the Court vacation) to vary or discharge this order. 23 I make this last order as there was no appearance for any creditor before me today. There was evidence that on 25 October 2001 the liquidator circulated to creditors a document which specifically informed them of the application which he proposed to make and invited any creditor who had queries regarding the application to contact either one named person from the liquidator's office or another named person from the office of the solicitors for the liquidator. 24 There is evidence that no creditor has exercised that opportunity. Nonetheless, I think it is appropriate to reserve to creditors this further opportunity to make submissions on the topic. **********

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