Ilhan v Cvitanovic

CATCHWORDS : CORPORATIONS - winding up - members voluntary winding up - proof of debt based on judgment debt - whether liquidator may go behind judgment to seek debt - approaches in bankruptcy considered - whether applicable to insolvent company winding up - whether applicable to solvent company winding up

Bankruptcy Act 1966 (Cth). LEGISLATION CITED : Companies Act 1961, 291(2) Consumer, Trader and Tenancy Tribunal Act 2001, s 51(3) Corporations Act 2001 (Cth), Part 5.5, Division 4, ss 478(1)(a), 494, 501, 553E, 1321

Assignees of Gardiner v Shannon (1804) 2 Sch & Lef 228 Awada v Linknarf Ltd [2002] NSWSC 873; (2002) 55 NSWLR 745 Ayerst (Inspector of Taxes) v C & K (Constructions) Ltd [1976] AC 167 Commissioner of Taxation v Linter Textiles Australia Ltd [2005] HCA 20; (2005) 220 CLR 592 Corney v Brien [1951] HCA 31; (1951) 84 CLR 343 Ex parte Pottinger; Re Stewart (1878) LR 8 Ch D 621 O'Brien v Tanning Research Laboratories Inc (1988) 14 NSWLR 601 CASES CITED : Re Flatau; Ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83 Re Hawkins; Ex parte Troup [1895] 1 QB 404 Re One.Tel Ltd [2002] NSWSC 1081; (2002) 171 FLR 206 Re Quatrovision Ltd [1982] 1 NSWLR 95 Re Van Laun; Ex parte Chatterton [1907] 2 KB 23 Tanning Research Laboratories Inc v O'Brien (1987) 11 ACLR 778 Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332 Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212

TEXTS CITED : Ford and Austin's "Principles of Corporations Law", 7th edition (1995)

S Semih Ilhan - First Plaintiff PARTIES : Jerene A Ilhan - Second Plaintiff Daniel I Cvitanovic - Defendant

COUNSEL : Mr R J Brender - Plaintiffs Ms K L Watson, Solicitor - Defendant

SOLICITORS : Forbes Dowling Lawyers - Plaintiffs Meehans Solicitors - Defendant

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

4597/08 SEMIH ILHAN & ANOR v DANIEL I CVITANOVIC JUDGMENT 1 HR MD Pty Limited (formerly Hartrez Pty Limited), which I shall call "Hartrez", is subject to members voluntary winding up. The defendant is its liquidator, having been appointed upon inception of the members voluntary winding up on 30 November 2007. 2 The plaintiffs, claiming to be creditors of Hartrez, lodged a proof of debt or claim dated 18 December 2007 in the sum of $9,607.48. The defendant rejected the proof on 22 August 2008. The plaintiffs, by originating process filed on 5 September 2008, apply under s 1321 of the Corporations Act 2001 (Cth) for an order that the proof of debt be admitted. 3 When this application came before me for hearing on 9 March 2009, I ordered, by consent, that the following question be separately determined: "Whether it is open to the defendant to reject the plaintiff's proof of debt in the winding up of HR MD Pty Limited based on a judgment debt in circumstances where the company is in the course of members voluntary winding up." 4 It is accepted that if this question is answered in the negative, the plaintiffs are entitled to the relief they seek. 5 The only question agitated before me was a question of law, namely, whether a liquidator in a members voluntary winding up (as distinct from any other type of winding up) may in any circumstances call in question a judgment debt and seek to go behind the judgment when adjudicating a proof of debt based on the judgment debt. The plaintiffs' contention is that, in a members voluntary winding up, a debt of the company in liquidation that is a judgment debt must be accepted without question and it is not open to the liquidator in any circumstances to canvass the true state of any indebtedness of the company to the judgment creditor. 6 The facts relevant to the determination of the separate question are uncontroversial. Hartrez traded as "Joyce Mayne Mount Druitt". In 2006, the plaintiffs purchased from Hartrez two air conditioning units for their home. The units were delivered and installed but disputes about their quality or fitness arose. The plaintiffs took proceedings against Hartrez in the Consumer, Trader and Tenancy Tribunal ("CTTT"). On 21 March 2007 the CTTT ordered that Hartrez pay $8,135.00 to the plaintiffs "immediately". On 28 March 2007, the registrar of the CTTT issued a certified copy of the order. The plaintiffs afterwards filed that document in the registry of the Local Court at North Sydney, whereupon it operated as a judgment of the Local Court by force of s 51(3) Consumer, Trader and Tenancy Tribunal Act 2001. 7 At no stage was there a hearing on the merits in the CTTT. The matter was first before the CTTT on 16 November 2006. One of the plaintiffs attended, as did a director of Hartrez. Directions were made (including as to production of documents by Hartrez) and the matter was adjourned to 21 March 2007. On that occasion, one of the plaintiffs again attended but there was no appearance by or on behalf of Hartrez. The matter proceeded to a hearing in the absence of Hartrez and the order for the payment of money by Hartrez was made. Hartrez later applied for a rehearing. On 4 June 2007, the CTTT made orders as follows: "1. The application for a re-hearing of matter GEN06/52670 is not granted as: the Chairperson is not satisfied that the applicant [ie, Hartrez] may have suffered a substantial injustice. 2. The stay order made on matter GEN06/52670 on 15/5/07 is lifted. 3. The parties are to note that the orders made on matter GEN06/52670 on 21/3/07 remain in full force and effect." 8 This determination was accompanied by "Written Reasons" as follows: "The rehearing applicant did not attend the hearing because he had 'forgotten' about it. The rehearing applicant chose not to comply with the Tribunals order of 16/11/06 and send the applicants including the Tribunal the documents it now wishes to rely upon. The documents were in existence at and should have been exchanged by 30/11/06. The applicants have been trying to resolve this matter since mid-2006. There is nothing in the documents now produced by the respondent which necessarily will lead to a different determination. The application is refused." 9 Following filing of the certified copy of the CTTT's order in the registry of the Local Court, Hartrez filed a notice of motion seeking a "stay of proceedings". The notice of motion was heard by the Local Court on 27 July 2007 and dismissed. The plaintiffs later obtained the issue of a writ of execution which was returned unsatisfied on four occasions between 18 July 2007 and 15 October 2007. 10 Relying on the deemed judgment of the Local Court arising by operation of s 51(3) of the Consumer, Trader and Tenancy Tribunal Act 2001, the plaintiffs lodged with the defendant a proof of debt dated 18 December 2007 for a total of $9,607.48, being: 1. Judgment debt $ 8,135 . 00 2. Local Court registration fees 126 . 26 3. Local Court and Sheriff's Office fees 244 . 00 4. ASIC searches 196 . 00 5. Administrative expenses 300 . 00 6. Interest 606 . 22 $ 9,607 . 48

11 On 22 August 2008, Hartrez's liquidator rejected this proof of debt. In subsequent correspondence with the plaintiffs' solicitors, the liquidator made it clear that he saw proceedings in this court as the appropriate means of obtaining "a final determination as to whether or not your client has a claim". The liquidator thus signalled an expectation that an appeal against rejection of the proof of debt would be an appropriate occasion for determining the state of the account between the plaintiffs and Hartrez, regardless of the deemed judgment of the Local Court. 12 Mr Brender of counsel, who appeared for the plaintiffs, submitted that, in the case of a members voluntary winding up such as the present, a liquidator must take a judgment debt as he finds it and cannot seek to go behind the judgment, even where it may be liable to be set aside. He conceded that the position is different in an insolvent winding up and that, in that situation, a liquidator may sometimes go behind a judgment debt and make further inquiry when seeking to determine the true state of the account between the company in liquidation and the party by whom a proof of debt based on the judgment debt has been lodged. 13 The present case of members voluntary winding up is one in which the directors of Hartrez, at the time of the passing of the special resolution for winding up, formed and recorded, in accordance with s 494 of the Corporations Act, an opinion that the company would be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up. The situation is thus, of its very nature, one in which the directors considered and rejected the possibility that the company about to enter winding up was insolvent. 14 There can be no doubt that, in bankruptcy, the trustee may in certain circumstances go behind a judgment. The relevant principle of bankruptcy law was stated by Buckley LJ in Re Van Laun; Ex parte Chatterton [1907] 2 KB 23 at 31: "Whether the creditor alleges that there has resulted, and that he relies upon an account stated, or a covenant entered into by the debtor, or a judgment which he has obtained, the principle, I apprehend, is exactly the same, and it is this - that the trustee is not the person who has stated the account, is not the covenantor, is not the judgment debtor, but is entitled to say, 'It is my business to see that those who seek to rank against this estate are persons who are really creditors of that estate'. If there be a judgment it is not necessary to shew fraud or collusion. It is sufficient, in the language of Lord Esher, to shew miscarriage of justice - that is to say, that for some good reason there ought not to have been a judgment." 15 The observation of Lord Esher to which reference is here made is not explicitly identified. The reference seems, however, to be to his Lordship's judgment in another bankruptcy case, Re Flatau; Ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83 which was mentioned arguendo in Re Van Laun. Lord Esher MR said in that case at 85: "It is not necessary now to repeat that, when an issue has been determined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to shew that there has been fraud, or collusion, or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to inquire into the validity of the debt." 16 To the same effect is the statement of Lord Esher MR in the later case of Re Hawkins; Ex parte Troup [1895] 1 QB 404 at 409: "We have said that the Court will go behind the judgment, and I think the cases show that the Court will go behind a judgment by consent. ... We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it is fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning creditor, should have a receiving order made against him. In the same way, when a creditor comes to prove in bankruptcy the Court will go behind the judgment, and inquire into the whole transaction which preceded it ." [emphasis added] 17 The question whether a court of bankruptcy is bound to accept a prior judgment without question was addressed in Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212, an appeal from the Federal Court of Bankruptcy. Barwick CJ said at 224, speaking of the question as it relates to the petitioning creditor's debt: "But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v Brien [1951] HCA 31; (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner." 18 The principle of bankruptcy law applicable to assessment of a proof of debt based on a judgment debt is that, if there is good reason to question whether the judgment debtor is truly indebted in terms of the judgment, the trustee may - indeed, should - take the view that the judgment is not of itself sufficient to prove the debt. A typical case is that of a default judgment 19 This principle has been held to apply also in the case of an insolvent company winding up. The matter was considered by Powell J in Re Quatrovision Ltd [1982] 1 NSWLR 95. His Honour's decision that the bankruptcy rule applied in an insolvent winding up under the Companies Act 1961 was not based on s 291(2) that caused the bankruptcy law to apply to three discrete matters upon the winding up of an insolvent company. One of those matters was "debts provable" but the rule allowing a trustee in bankruptcy to go behind a judgment when assessing a proof of debt was said not to relate to "debts provable". Powell J resorted to "the context of the administration of insolvent companies". His decision was stated thus at 103: "[I]t seems to me that the position of a liquidator of an insolvent company is so strongly analogous to that of a trustee in bankruptcy that one ought to apply to him, when dealing with proofs of debt, the bankruptcy rule which Mr Pegler seeks to have applied in this case. The bases for my view are twofold, they being: 1. while he is strictly the agent of the company and not a trustee for the creditors or contributories, a liquidator is subjected to certain statutory duties, which duties involve him in effectively getting in the property of the company and applying it, according to a defined order, in satisfaction of the liabilities of the company; 2. as from the making of the winding up order, so Lord Diplock has said ( Ayerst v C & K (Construction) Ltd [1976] AC 167, at p 180; see also Pritchard v M H Builders (Wilmslow) Ltd [1969] 1 WLR 409; [1969] 2 All ER 670) the Act gives "to the property of a company in liquidation that essential characteristic which (distinguishes) trust property from other property, viz, that it (cannot) be used or disposed of by the legal owner for his own benefit, but must be used or disposed of for the benefit of other persons"; 3. the only persons entitled to share in the property available for distribution to creditors are those whose claims are, pursuant to the provisions of the Companies Act , 1961, s 291, admissible to proof, and, in fact, admitted to prove for the purposes of the winding up." 20 Although in Re Quatrovision Ltd was mentioned in the course of argument in Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332, the members of the High Court did not refer to it in affirming the applicability to the winding up before it of a principle stated as follows in the joint judgment of Brennan J and Dawson J (at 339): "A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution. In this respect, there is no reason to distinguish between the position of a liquidator and that of a trustee in bankruptcy." 21 Their Honours went on to quote the passage from the judgment of Buckley LJ in Re Van Laun set out above. 22 The Tanning Research Laboratories case was a case of court-ordered winding up. Whether it was an insolvent winding up (or, for example, a winding up on the just and equitable ground) does not appear from the judgments in the High Court or before Cohen J at first instance (Tanning Research Laboratories Inc v O'Brien (1987) 11 ACLR 778) or in the Court of Appeal (O'Brien v Tanning Research Laboratories Inc (1988) 14 NSWLR 601). 23 As Ms Watson observed in her submissions on behalf of the liquidator, the point emphasised by Brennan J and Dawson J in Tanning Research Laboratories is that a liquidator is concerned with the "interests of creditors and contributories". Ms Watson placed emphasis on the reference to contributories. The question of admission of proofs of debt is not something to be approached solely or even predominantly with creditors' interests in mind. The interests of contributories are put on the same plane as those of contributories. The preoccupation is with the interests of the whole of the constituency interested in the estate under administration. It thus cannot be argued that the ability of the court, in certain circumstances, to go behind a judgment to which the company is subject is solely a safeguard for creditors in case of insolvency. It is for the protection of the administration of the estate as a whole for the benefit of both creditors and contributories alike. Due and proper administration may, of course, lead to less onerous calls on contributories or a surplus divisible among them. 24 The passage in the joint judgment of Brennan J and Dawson J quoted at [20] above is followed immediately by a reference to the decision of the House of Lords in Ayerst (Inspector of Taxes) v C & K (Constructions) Ltd [1976] AC 167, a case also mentioned by Powell J in Re Quatrovision Ltd (above). The reference is not elaborated but its import is clear. The decision is notable, for present purposes, for the following observation, at 176, of Lord Diplock (with whom Viscount Dilhorne, Lord Kilbrandon and Lord Edmund-Davies agreed): "The procedure to be followed when a company is being wound up varies in detail according to whether this is done compulsorily under an order of the court or voluntarily pursuant to a resolution of the company in general meeting, and, in the latter case, whether it is a members' voluntary winding-up or a creditors' voluntary winding-up; but the essential characteristics of the scheme for dealing with the assets of the company do not differ whichever of these procedures is applicable . They remain the same as those of the original statutory scheme in the Companies Act 1862. For the sake of simplicity, in stating the essential characteristics of the statutory scheme I propose to refer only to those sections of the Companies Act 1948 which apply in a compulsory winding-up and to omit those sections which have a corresponding effect in the case of a voluntary winding-up ." [emphasis added] 25 This passage was approved by Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J in Commissioner of Taxation v Linter Textiles Australia Ltd [2005] HCA 20; (2005) 220 CLR 592 at [38]. Their Honours said: "Indeed, in Ayerst , Lord Diplock indicated that the essential characteristics of the scheme for dealing with the assets of a company do not differ between a voluntary winding up and a compulsory winding up. That may be conceded."

(It may be added that, significantly for present purposes, Lord Diplock mentioned not only creditors voluntary winding up but also members voluntary winding up and included both, along with compulsory winding up, as possessors of the "essential characteristics" which "do not differ"). 26 At paragraph [54] of the joint judgment in Linter Textiles, the following passage in Ford and Austin's "Principles of Corporations Law", 7th edition (1995) at 1013 is quoted with approval: "Whether the company is insolvent or solvent, the company holds its property beneficially but subject to the statutory scheme of liquidation under which the liquidator is to pay creditors and distribute any surplus among members. Unsecured creditors and contributories have the benefit of the liquidator's administration of the company's estate. Their special interest is to some extent like that of objects of a discretionary trust; they have a right to have a fund of assets protected and properly administered. That interest, although not an interest in specific assets, will be protected against third persons. For example, a holder of an unregistered registrable charge who asks the court to extend the time for registration or a person who seeks rectification of an instrument of charge which could prejudice unsecured creditors will not ordinarily succeed if the company is in liquidation or on the verge of liquidation." 27 The statements of Lord Diplock and members of the High Court in both Tanning Research Laboratories and Commissioner of Taxation v Linter Textiles Australia Ltd, as well as the passage in Ford and Austin, emphasise that the process of winding up and the functions to be performed by a liquidator do not, in any aspect of substance, differ as between a voluntary winding up and a compulsory winding up or as between an insolvent winding up and a solvent winding up. 28 Section 501 of the Corporations Act applies to a voluntary winding up, whether it be a creditors voluntary winding up or a members voluntary winding up (it appears in Division 4 of Part 5.5 headed "Voluntary Winding Up Generally": see Awada v Linknarf Ltd [2002] NSWSC 873; (2002) 55 NSWLR 745 at [11]). Section 501 requires a liquidator to apply the company's property, in the first instance, "in satisfaction of its liabilities". In the case of a winding up in insolvency or by the court, the obligation with respect to liabilities, although slightly differently worded, is really identical: to "cause the company's property to be collected and applied in discharging the company's liabilities" (s 478(1)(a)). 29 Under each provision, the same process is envisaged. The need for the liquidator to ascertain the company's "liabilities" is precisely the same. The system of proving debts common to all modes of winding up is directed towards determining the company's "liabilities". There is no reason why that process should proceed on one footing if the company is insolvent and on another if it is solvent. 30 The process is, in each case, one of equitable administration of an estate. As Fullagar J pointed out in Corney v Brien [1951] HCA 31; (1951) 84 CLR 343 at 354, courts of bankruptcy adopted the practice of seeking the true state of indebtedness lying behind a judgment because that was the approach taken by the Court of Chancery in administering deceased estates. The practice there, as explained by Cotton LJ in Ex parte Pottinger; Re Stewart (1878) LR 8 Ch D 621 at 626, was to look "upon bonds, covenants, and judgments, if voluntary, in the light of legacies", so that they were paid only after debts of the deceased for valuable consideration had been paid. The concern was to ensure that the claims of genuine and undisputed creditors for value were not prejudiced by the recognition of impeachable liabilities. In Assignees of Gardiner v Shannon (1804) 2 Sch & Lef 228, Lord Redesdale, Lord Chancellor of Ireland, said of a liability on a voluntary bond: "[C]ould his executors have paid this as against his creditors? Though it might be recovered at law, it would be postponed in equity as a voluntary bond." 31 The rule currently under discussion, although today regarded as a rule of bankruptcy, can thus be seen to have had it origins in equity. It may therefore be regarded as reflecting an equitable principle applying generally to cases in which an estate falls to be administered for the benefit of persons interested in it - whether the estate be a deceased estate, a bankrupt estate or the estate of a company in the course of being wound up. In the case of a bankrupt estate, of course, the situation will always be one of insolvency. In the other cases, the estate may or may not be insolvent; and I take the suspicion that attended "bonds, covenants, and judgments, if voluntary" to apply whether or not the administration is an administration in insolvency. 32 I would add, in conclusion, that, even if, on the narrower and more modern view, the rule allowing circumstances behind a judgment to be inquired into is regarded as a rule of bankruptcy, the Corporations Act itself does not indicate that it applies only to an insolvent winding up. Section 553E lays down a general rule that "in the winding up of an insolvent company the same rules are to be observed with regard to debts provable as are in force for the time being under the Bankruptcy Act 1966". This section does not cause the rule allowing a trustee in bankruptcy to go behind a judgment to apply in the winding up of an insolvent company. There are two reasons for this. First, the rule is not a rule in force "under" the Bankruptcy Act 1966 (Cth). Second, the rule is concerned with the process of assessing proofs, not with the identification and quantification of provable claims, so that, as Powell J recognised in Re Quatrovision Ltd (above), it is not a rule "with regard to debts provable": see Re One.Tel Ltd [2002] NSWSC 1081; (2002) 171 FLR 206. 33 With s 553E irrelevant and inoperative, the rule allowing the circumstances behind a judgment to be examined to determine whether there is in truth a liability - a rule about the equitable administration of an estate - may be seen to be applicable to a solvent winding up such as the members voluntary winding up in the present case. 34 The separate question is answered as follows: "The circumstances that the winding up is a members voluntary winding up and that the debt sought to be proved is a judgment debt do not, of themselves and without more, preclude rejection by the defendant of the plaintiffs' proof of debt." **********

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