Hugh Charles Thomas as liquidator of Anne Lewis Pty Ltd (in liq) v Arthur Hughes Pty Ltd

Calculation of amounts owed by Second-Sixth Defendants

1. The first and second issues, as to whether the liquidator had properly calculated amounts owed by the Second-Sixth Defendants pursuant to the orders of White J, by reference to the inclusion of amounts of $132,481 and $84,785 in that calculation, were resolved between the parties on the basis that those amounts were properly included.

Treatment of interest in equitable compensation ordered against Mrs Lewis

1. The third issue was identified, in respect of a shortfall of repayment by the Second-Sixth Defendants, as to the rate at which interest should be calculated pursuant to order 9 of the orders made by White J, the period for which it should be payable and the amount of that interest. That question does not need to be determined, since the liquidator does not seek further orders as against the Second-Sixth Defendants in this aspect of the proceedings, and instead pursued a claim for equitable compensation on a basis including interest as against the Seventh Defendant, Mrs Lewis, which was reflected in the fourth issue for determination. That further issue will however raise some of those issues.
2. Mr Golledge contended, in submissions, that compensation should be ordered against Mrs Lewis on the same basis as interest was payable by the Second-Fifth Defendants in respect of dividends, namely at the rates prescribed under s 100 of the Civil Procedure Act, and in circumstances that there was no evidence to support the application of the alternative basis for calculation referred to in the order made by White J. Mr McDonald submitted that an order for equitable compensation made against Mrs Lewis should be made in a form which restored the Company to its position but for Mrs Lewis' conduct in breach of duty, and referred to the restorative purpose of such an order. In oral submissions, Mr McDonald criticised the logic of order 9 made by White J. That criticism does not seem to me to be well-founded, where that order applied the default provision for interest under s 100 of the Civil Procedure Act, with a qualification that would, in practice, operate to the advantage of the Second-Fifth Defendants so far as they led evidence that they had derived lower returns on moneys deposited with a financial institution. In any event, it seems to me that that criticism is not material for present purposes, not least because that order was made long ago and remains in force.
3. Mr McDonald and Mr David Lewis also submitted that the compensation ordered against Mrs Lewis should reflect interest at a rate of 1% per annum, which they submitted was the interest rate received by the Company on money held by it during the liquidation, rather than at the higher rates of interest specified in s 100 of the Civil Procedure Act, which were applied in the order made by White J in respect of the Second-Fifth Defendants. The evidence on which the Defendants relied to establish the figure of a 1% return seemed, on its face, to have a somewhat fragile character, since it was derived from the amount of interest recorded on moneys deposited to one account of the Company in one month in August 2016 (Thomas 26.9.16, p 14). However, in the event, the liquidator has not contested the evidence that that was a proper reflection of the return received on moneys held by the Company during the liquidation.
4. It seems to me that the amount recoverable by the Company, by way of equitable compensation, is in principle that which would put it in a position that it would have been but for the breach. In the present case, the Company was in liquidation throughout the whole of the proceedings, so that the rate of return made on moneys held by the liquidator during the liquidation is a proper measure of the amount which the Company would have derived on those funds, had it had those funds in its possession, at least in the absence of any evidence that, but for the liquidation, it could have distributed those funds more quickly to creditors or contributories, in which circumstance they, rather than it, would have had the benefit of earnings on the funds. It does not seem to me that the amount of equitable compensation for loss suffered by the Company that is recoverable against Mrs Lewis can be calculated on the basis of interest rates applied under s 100 of the Civil Procedure Act, in respect of the orders made against the Second-Fifth Defendants. Such interest rates can be imposed, as they were here, where a party has had the use of the money, which support an order for interest against it, whereas it has not been shown that Mrs Lewis had use of moneys received by the Second-Fifth Defendants. The effect of the application of the higher interest rates under s 100 of the Civil Procedure Act in respect of an order for equitable compensation against Mrs Lewis, would also be to allow the Company a higher return than the return which, on the evidence, it would have achieved had it had the moneys in its hand. Accordingly, the amount of equitable compensation ordered against Mrs Lewis should be calculated, where there was no contest as to this figure, on the basis that the Company would have earned interest of 1% per annum on the moneys deposited with it, for the period for which it was deprived of those moneys.
5. In making that last observation, I have foreshadowed the result of my determination of the other issue raised in respect of interest. Mr David Lewis submitted that interest should only be allowed to 15 December 2015, on the basis that the liquidator had committed to completing the liquidation of the company 90 days after the orders made by White J. The evidence does not establish an unqualified commitment to complete the liquidation within that time. Mr Lewis relies on a letter dated 24 November 2014 (Ex DL12) by which the liquidator's solicitor advised merely that the liquidator "estimate[d]" that an administration could be completed within that time, subject to clearances from the Australian Taxation Office and compliance with statutory requirements. That was an estimate, not a commitment; Mr Lewis has not established that the conditions of clearance by the Australian Taxation Office or compliance with the statutory requirements were satisfied, or when that occurred; and, more fundamentally, that letter plainly could not be read as a commitment to complete the liquidation, regardless of the fact that, as it appears, the Defendants had not complied with the judgment of White J in full. In any event, it seems to me that the Company is entitled to recover compensation for the loss that it has in fact suffered, which extends to the loss of earnings that it has in fact been deprived of, for the full period of which it has in fact been deprived of them, and none of that is answered by a proposition that, if events had developed differently, the liquidation might have concluded earlier. I therefore do not accept that interest should be limited for the shorter period for which Mr Lewis contends.

Costs of the proceedings

1. A fifth issue, which addressed the question of the Plaintiffs' recoverable costs of the proceedings up to the date of orders made by White J, was not pressed. It appears the liquidator proposed to have those costs assessed, and he elected not to proceed with any application to have costs assessed on a lump sum basis in this application, where that likely would have required the discount that is usually applied in such an assessment.

Recovery of liquidator's remuneration

1. The sixth issue was whether the Plaintiffs were entitled to recover, as equitable compensation against Mrs Lewis, any amount on account of the liquidator's remuneration and, if so, what part of the liquidator's remuneration was recoverable on that basis. That issue raised issues of considerable complexity and, it appears, of some novelty. That issue was raised, properly, on an assumption that the amount of remuneration due to the liquidator would be determined by the Court, in a separate application under s 473 of the Corporations Act, whether by me in this application or by reference to a registrar. A claim that legal costs of proceedings could be recovered on that basis, also as part of compensation ordered against Mrs Lewis, was not pressed.
2. Mr Golledge supported this claim by reference to the proposition that the object of equitable compensation was to restore the victim of a breach of fiduciary duty (relevantly, the Company) to the position in which it would have been but for the breach of that duty; that such an order is restorative; and that the assessment of the loss suffered is not confined by strict requirements of foreseeability or remoteness that would apply in common law damages, although Mr Golledge properly accepted that considerations of causation are applicable. I accept that that submission accurately recorded the relevant principles, but it does not seem to me to assist the liquidator in this aspect of the application for reasons that I will note below.
3. Mr Golledge submits that, but for Mrs Lewis' breach of duty, these proceedings would not have had to be brought and the winding up would not have involved the liquidator incurring work in bringing the proceedings or associated remuneration, and that to restore the Company to the position it would have been, but for the breach, requires that the remuneration payable to the liquidator be reimbursed by Mrs Lewis.
4. Mr Golledge submits that the liquidator's remuneration in this respect is indistinguishable from the costs that were characterised as management or administration expenses in the decision of the United Kingdom Court of Appeal in Blue Circle Industries Plc v Ministry of Defence [1999] Ch 289 at 310-311. That decision was made in the somewhat different factual context of damage to land, as a result of an overflowing pond containing radioactive material. However, the passage on which Mr Golledge relied addressed, as special damages, the costs incurred by solicitors who acted for the plaintiff prior to the commencement of the proceedings, which the trial judge indicated related to work which was "not so much legal advice or drafting, but of the nature of management work". On appeal, Aldous LJ referred to authority that solicitors' costs could not be claimed as damages, but distinguished that position where the relevant costs were not costs of the proceedings. I accept that that decision indicates that, in principle, costs that are not in the nature of legal costs of proceedings may be recoverable, in a proper case, in a claim for damages at law or for equitable compensation. That decision is not, however, directed to the recovery of liquidators' remuneration in the particular context of a winding up, which raises particular complexities which I will address below.
5. Mr Golledge also relied on the decision of McDougall J in Resources Equities Ltd (subject to deed of Company Arrangement) v Garrett [2009] NSWSC 1385, where a company recovered, in a claim against its directors, both money that was paid out by settlement of claim by an administrator who had been wrongfully appointed (at [305]-[310]) and certain costs of the administrator that was subsequently appointed in place of the former administrator. That decision seems to me to be distinguishable from the present case. The claim for recovery of costs that were wrongfully expended, where the administrator was wrongfully appointed, was a straightforward claim for money paid out as a result of breach of duty, and could equally have been ordered in respect of any other money paid out by way of an improper expenditure. There is no suggestion here, and could be no suggestion here, that Mr Thomas was appointed in breach of duty or that any remuneration paid to him, within the winding up, will be improper expenditure that is recoverable in that manner. The costs incurred in respect of the second administrator were recoverable in circumstances that the company was continuing as a going concern, albeit subject to a deed of company arrangement, and where it, rather than its creditors or contributories, had the primary claim over its assets. The position differs here, as I will note below, where the Company is in liquidation and its assets are to be distributed in accordance with s 556 of the Corporations Act.
6. Mr McDonald in turn relied, in opposing this aspect of the claim, on the decision in Berry v British Transport Commission [1962] 1 QB 306 at 328 for the proposition that a party cannot recover loss which consists of "expenditure on litigation" in a claim for damages. Although that phrase is used in that case, it does not seem to me to stand for that proposition, but instead recognises a principle that costs that are not recoverable by an order for costs in a first proceeding ordinarily cannot be recovered in a subsequent claim for damages in other proceedings, with limited exceptions. A principle in that form was recognised, for example, by the Full Court of the Federal Court in Grey v Sirtex Medical Ltd [2011] FCAFC 40; (2011) 193 FCR 1 at [15], where the Court noted an exception for a claim against a third party in separate proceedings. The principle derived from Berry v British Transport Commission reflects the need to preserve the court's discretion in making an order as to the costs of litigation, and recognises that it would be inappropriate that that discretion could be frustrated by a subsequent claim for costs recharacterised as damages in subsequent proceedings. The principle in that case was not directed to the recovery of liquidators' remuneration, nor can the exception to it apply where Mrs Lewis was party to the proceedings and not a third party.
7. Mr McDonald also referred to an observation of Demack J (dissenting) in a decision whether to permit the amendment of a statement of claim to seek recovery of litigation finance costs and other costs in Landoro (Qld) Pty Ltd (admin apptd) v Jensen International Pty Ltd [1999] QCA 318. His Honour referred (at [22]) to the proposition that a litigant cannot "recover compensation for the loss of time spent in the preparation and conduct of the case", citing Cachia v Hanes [1994] HCA 14; (1994) 179 CLR 403, and also that a party cannot recover loss which consists of "expenditure on litigation", citing Berry v British Transport Commission above. His Honour's first observation, referable to Cachia v Hanes above, reflects the proposition that costs are ordinarily awarded by indemnity or partial indemnity for professional legal costs actually incurred, and are not intended to be a comprehensive compensation for any loss, including losses other than such legal costs, suffered by a litigant, including the litigant's potential loss of time. That proposition is ordinarily applied in respect of claims for costs by self-represented litigants, and has not been extended, so far as authority was drawn to my attention, to liquidators' remuneration, which is arguably more analogous to the management costs addressed in Blue Circle Industries Plc v Ministry of Defence above. The decision in Berry v British Transport Commission above seems to me to stand for the narrower proposition to which I referred above. In any event, Demack J dissented in Landoro [Qld] Pty Ltd (admin apptd) v Jensen International Pty Ltd above; the majority allowed the claim to litigation finance costs, which his Honour would not have permitted to proceed, while reserving the question of its merits. All members of the Court, including Demack J, also allowed a claim for administration costs, including the costs of oversight of proceedings, to be brought as a claim for damages for breach of contract, and that claim is potentially a closer analogy to the claim sought to be brought by the liquidator here.
8. Nonetheless, I am not persuaded that liquidator's remuneration, in respect of the conduct of these proceedings, as and when approved by the Court, is properly recoverable as an element of the equitable compensation claimed against Mrs Lewis. The claim is, in every sense, a novel claim. Notwithstanding the very many cases in which liquidators have brought claims for equitable compensation, Mr Golledge was not able to identify any case in which a liquidator's remuneration referable to the proceedings was treated as recoverable as part of the equitable compensation claim, although the proposition advanced here, that the litigation was the consequence of the breach, would seem to be available in every such claim. Novelty is not, of course, necessarily a reason that a claim should fail. It is, of course, possible that the liquidator has here identified a properly available claim that has escaped the notice of many liquidators, many legal advisers and many courts over many years. However, the absence of such claims, over that lengthy period, must give reason to be at least cautious as to the logic of the claim.
9. It seems to me that there is, in fact, a fundamental structural reason why the liquidator's claim is not available, and why there have not in fact been previous claims of this kind. It will be recalled that the plaintiffs in the proceedings before White J were the liquidator and the Company, although his Honour rightly recognised that only the Company had a claim for breach of directors' duties against Mrs Lewis, on which it succeeded. The Company's creditors and contributories were not plaintiffs in the proceedings, and could not have been plaintiffs in the proceedings, although the defendants in those proceedings were interests associated with some of the contributories.
10. The Company was in winding up before the claim was brought by Mr Thomas as its liquidator. The nature of a winding up involves, of course, collecting in a company's assets, realising them and reducing them to money, dealing with proofs of debt, and distributing the net proceeds, after providing for costs and expenses, to the persons entitled to them: Re Crusts N Crumb Bakers (Wholesale) Pty Ltd [1992] 2 Qd R 76 at 78; (1991) 5 ACSR 70 at 72. Section 556 of the Corporations Act in turn applied, throughout the period of the proceedings, because the Company was in liquidation. That section provides for the order in which debts and claims should be paid in the liquidation, identifying certain debts and claims that are to be paid in priority to other debts, and unsecured debts and claims. A measure of priority is to be given, under s 556(1)(de) to deferred expenses, which include remuneration or fees for services payable to, relevantly, the liquidator.
11. I accept, of course, that a company may suffer loss while it is in liquidation. So, for example, if a company held assets for distribution to priority creditors, unsecured creditors and contributories, and those assets were misappropriated or wasted during the liquidation, the company would potentially have a claim to recoup that loss. However, that is not this case. It does not seem to me that the Company suffers any loss because the distribution of claims permitted under s 556 of the Corporations Act, as between priority creditors, unsecured creditors and contributories is altered, for example, because the liquidator does further work and incurs further expenses or further remuneration, or because employees have greater priority claims, or because any other event occurs which shifts the distribution of claimants under s 556 of the Corporations Act inter se. Throughout the liquidation, the Company has had, whether as assets or as claims recoverable in the litigation, an amount of assets to be distributed in accordance with s 556 of the Corporations Act, and that amount was not diminished by being distributed in different proportions to claimants under that section. Assuming that Mrs Lewis' breach of duty led to the proceedings and the proceedings led to the liquidator doing additional work and claiming additional remuneration, the Company nonetheless suffered no loss, when that remuneration has not and cannot be paid by it other than by distribution of an unchanged pool of assets to persons entitled to it under s 556 of the Corporations Act. The size of the pie has not been diminished, although the liquidator may receive a slice of it that is of greater size, depending upon the outcome of his application for remuneration. In this case, the creditors suffered no loss, because they are paid in full. The contributories do potentially suffer a loss, so far as the distribution available to them is potentially reduced, but they were not, and could not have been, parties to the proceedings before White J or the relisting of those proceedings before me. The Company cannot, in these proceedings, recover loss which it has not suffered, although its contributories may have done so. I should note that this result is analogous, in principle, to the distinction that has been recognised in the somewhat different context of a solvent company, in dealing with issues of reflexive loss as between a company and its shareholders.
12. I should add, for completeness, that there also seemed to me to be policy reasons to hesitate before allowing a liquidator to recover remuneration in the novel manner for which Mr Golledge contends, even if, contrary to my view, that claim were otherwise available in law. It seems to me that that approach would create a significant obstacle to access to justice, for defendants in claims for equitable compensation brought by liquidators. It is difficult to see why a defendant in such a claim should be exposed to greater liability, because it seeks to defend a claim brought by a company in liquidation, than it would be if it defended a claim brought by a company not in liquidation, on the same facts. The risk of exposure to a liquidator's remuneration would, on any view, be a significant disincentive to access to justice for parties contemplating the defence of such claims. That issue would potentially arise, not only where the court had appointed a liquidator, as was the case here, but potentially also where a company was in a members' or creditors' voluntary winding up.
13. For these reasons, I am satisfied that the Plaintiffs are not entitled to recover from Mrs Lewis, as equitable compensation, an amount which the Company has not lost by paying any additional amount to its liquidator by way of remuneration referable to these proceedings, on a distribution of its assets in the winding up under s 556 of the Corporations Act. It is not necessary to address evidence as to quantum of the liquidator's remuneration, to which reference was made in respect of this claim, which will be addressed in the liquidator's application for approval of that remuneration.

Tax issues

1. A final question was identified as to whether the liquidator's calculations had taken into account a capital gains tax refund referred to in paragraph 66 of Mr David Lewis' submissions, although that question would only be relevant to these proceedings if it impacted on the amount of any equitable compensation to be ordered against Mrs Lewis, so far as that is the question that has been raised before me. Mr Lewis also pointed to a question as to income tax in that regard. Mr McDonald, for Mrs Lewis, did not press any question as to income tax, indicating that Mrs Lewis was satisfied that that matter had properly been addressed by the liquidator.
2. Mr David Lewis' submission as to capital gains tax was as follows: "The second to sixth and eighth defendants deny liability for any shortfall between the amount of income tax on net capital gains paid by the [Company] in respect of the year ended 30 June 2012 and the amount of the refund of income tax received by the [Company] and referred to in paragraph 24 in [the liquidator's] affidavit sworn 3 November 2016."
3. I should note, with no disrespect to Mr Lewis, that that made the position of the Second-Sixth and Eighth Defendants clear, but provided no explanation as to why it might be correct or incorrect. Mr Lewis referred, in respect of this issue, to a letter from solicitors acting for the liquidator dated 8 April 2016 (Ex DL10). That letter attached a copy of the franking account balance for the Company, but otherwise did not elucidate the issue. Mr Lewis also referred, in oral submissions, to Exhibit DL10 and a reference to a projected refund of $408,920 in respect of the 2012 income tax year, and to a possible interaction with the liquidator's evidence in his affidavit dated 3 November 2016. Mr McDonald did not seek to be heard in respect of this issue on behalf of Mrs Lewis. Mr Golledge did not address the issue in reply, having indicated that he could not identify a proposition calling for a response.
4. I can address this issue briefly. It is not easy to determine the basis of Mr Lewis' submission but, in any event, it does not relate to any matter in respect of equitable compensation against Mrs Lewis, which is the only matter I need to determine. Whether the Second-Sixth Defendants or the Eighth Defendant accept liability for any such shortfall is not a matter that I need to determine, where the claim that is brought before me is against Mrs Lewis, who does not seek to be heard in respect of this issue. It is not necessary to make any determination as to this issue.

Next step and costs

1. It is to be hoped that the resolution of these issues, in this judgment, will allow the parties now to calculate the amount of compensation to be awarded against Mrs Lewis, to the extent that each outstanding issue that was identified before me has now been addressed.
2. My preliminary view is that the only order that should be made in respect of costs is that the liquidator's costs of the application be costs in the winding up. The liquidator has not succeeded in all aspects of the application and it does not seem to me that he would be entitled to an order for costs against Mrs Lewis or Mr David Lewis. Mrs Lewis did not, with respect to Mr McDonald, take a particularly substantial role, and has not succeeded in all aspects of the positions she adopted, particularly so far as she adopted Mr David Lewis' position in respect of some issues. Mr David Lewis has not succeeded on some issues, and in any event would not be entitled to an order for costs, so far as he is self-represented in the application. I will, nonetheless, hear the parties in respect of the question for costs, if they seek to re-agitate those issues at the time orders are submitted.
3. The only order I propose to make, subject to hearing from Counsel, is an order that the parties submit agreed short minutes of order to give effect to this judgment within seven days or, if there is no agreement, their respective draft orders and short submissions as to the differences between them, indicating whether an oral hearing is requested.

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