In the matter of Pinata Pty Limited (in liquidation) (ACN 001 777 920) Bryce Geoffrey Lyle Killen -v- William James Hamilton [2012] NSWSC 162

THESE PROCEEDINGS 30Against this background, on 16 December 2010, the plaintiffs sued out of the Court an Originating Process containing an application described as one under ss 423, 447E and 1321 of the Corporations Act 2001 (Cth) (the Act). The Originating Process further describes the application as "a complaint about the actions and default of the Defendant as administrator of Pinata Pty Limited (in liquidation)." It claims the following relief:

1. An inquiry be conducted by the Court into the management of the company's business by the Defendant.
2. Any order or orders that the Court deems appropriate. 31The Originating Process was amended on 24 December 2010 in an immaterial respect. The plaintiffs were ordered to plead their complaints and filed an Amended Statement of Claim on 27 June 2011. 32The following are the complaints made against Hamilton: (a)that on or about 11 September 1996 Hamilton requested Bob Leigo to agree to the service of a demand on the Davies to repay the loan monies, which request Bob Leigo refused, and that Hamilton neglected to refer this refusal for determination under cl 4.3 of the deed; (b)that Hamilton wrongfully refused or neglected to take action to recover loan monies owed by the Davies and interest on those monies; (c)that Hamilton failed to recover the agistment charges; and (d)that Hamilton failed to recover the costs and loss of profits associated with the wrongful use of the piping. 33The pleading goes on to allege that as a consequence of the neglect and default of Hamilton as receiver of the partnership and as administrator of Pinata, the partnership and Pinata suffered damage, being the Davies' overdrawings plus accumulated interest, an amount for the agistment of stock, the cost of the piping, a loss of income by the partnership and Pinata due to the lack of the pipeline, the loss of Pinata property value due to the lack of the pipeline and loss of additional increases to the Pinata property value. In addition, the pleading asserts that as a consequence the fourth plaintiff suffered damage due to a forced sale of a motel and home park.

THE RELEVANT SECTIONS OF THE ACT 34Section 9 of the Act defines "controller", in relation to property of a corporation, relevantly to mean a receiver, or receiver and manager of that property. 35Section 423(1) of the Act provides as follows: If: (a) it appears to the Court or to ASIC that a controller of property of a corporation has not faithfully performed, or is not faithfully performing, the controller's functions or has not observed, or is not observing, a requirement of: (i) in the case of a receiver--the order by which, or the instrument under which, the receiver was appointed; or (ii) otherwise--an instrument under which the controller entered into possession, or took control, of that property; or (iii) in any case--the Court; or (iv) in any case--this Act, the regulations or the rules; or (b) a person complains to the Court or to ASIC about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller's functions and powers; the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit. 36Section 447E(1) of the Act provides as follows: Where the Court is satisfied that the administrator of a company under administration, or of a deed of company arrangement: (a) has managed, or is managing, the company's business, property or affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members; or (b) has done an act, or made an omission, or proposes to do an act, or to make an omission, that is or would be prejudicial to such interests; the Court may make such order as it thinks just. 37Section 1321(1) of the Act provides as follows: A person aggrieved by any act, omission or decision of: (a) a person administering a compromise, arrangement or scheme referred to in Part 5.1; or (b) a receiver, or a receiver and manager, of property of a corporation; or (c) an administrator of a company; or (ca) an administrator of a deed of company arrangement executed by a company; or (d) a liquidator or provisional liquidator of a company; may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit. 38Although relevant events occurred before the coming into force of the Act, the parties agreed that the provisions of the Act presently in force are no different to those at any other relevant time and that the proceedings should be determined with reference to the provisions of the Act as they now stand.

CONSIDERATION Section 447E of the Act - Hamilton as administrator 39The complaints against Hamilton in his capacities as voluntary administrator and deed administrator were manifestly unsustainable and were abandoned during the hearing. 40These complaints have difficulties, including the insuperable difficulty, which is dealt with below, that Hamilton did not have standing or authority to bring the claims against the Leigo interests that the plaintiffs say he should have brought. Those claims themselves have difficulties, which are also dealt with below. 41Beyond this, however, Hamilton occupied the offices of voluntary administrator and deed administrator only from 11 March 1996 to 17 July 1996. During that time Castanair put up the DOCA, which was to, and did, end his tenure only weeks after he took office. It is not fairly open to the plaintiffs (particularly Castanair, which proposed the DOCA) now in retrospect to complain that Hamilton did not embark on expensive and difficult litigation during the brief period he was voluntary administrator and deed administrator, especially given that Pinata was insolvent and that such a course would undoubtedly have destabilised the very DOCA process which Castanair was promoting. Moreover, Castanair itself did not disclose the existence of these alleged claims to the creditors of Pinata, who voted in favour of the DOCA. If these claims had substance, they would have been items in a final partnership accounting of credit in favour of Pinata and therefore a potential asset in its hands available for the benefit of the creditors of Pinata. Section 423(1) of the Act - Hamilton as receiver 42Section 423 of the Act applies to Hamilton only if, by the deed, Hamilton was a controller of property of Pinata. Under s 9 of the Act he was a controller in relation to property of Pinata if he was a receiver of that property. 43It was put on behalf of Hamilton that by the deed he did not become a receiver of Pinata's property as contemplated by s 9 but rather, was appointed by the partners as a receiver to be their agent, to take steps to wind up the partnership, including by disposing of all assets of the partnership in which one of the partners simply happened to be a corporation. This, it was put, was not an appointment as receiver and manager of property of Pinata. 44Long standing authority establishes that a partner's share in a partnership does not give the partner title to specific property but is a right to the partner's proportion of the surplus after realisation of assets and the payment of debts and liabilities. It is a fractional interest in a surplus of assets over liabilities on a winding up and in the future profits in the partnership business; see Bolton v Federal Commissioner of Taxation [1965] ALR 481 at 485, 491; Canny Gabriel Castle Jackson Advertising Pty Limited v Volume Sales (Finance) Pty Limited (1974) 131 CLR 321 at 327; Commissioner of State Taxation v Cyril Henschke Pty Ltd (2010) 272 ALR 440 at 446 [24]. Hamilton was not appointed as receiver to this interest but rather as an agent to carry out steps which would ultimately result in the determination of the extent of this interest. 45There is therefore some force in Hamilton's submission given that the deed did not appoint him receiver of Pinata's property in the sense of its interest in the partnership. It is, however, not necessary to determine this issue because there are a plethora of other compelling reasons why the proceedings must fail in any event. 46In Belvista Pty Ltd v Murphy (1993) 11 ACSR 628 McLelland CJ in Eq considered s 536(1) of the Corporations Law as it stood in 1996. That section (which applied to liquidators) was in its terms materially indistinguishable from s 423(1) as it would apply to Hamilton if he was a controller. At 630 His Honour observed the following: I wish to add that where, as here, a creditor or other interested party wishes to challenge the decision of a person in the position of a scheme administrator, or a liquidator, apparently arrived at in good faith, it is generally inappropriate to utilise the "complaint" provisions of s 536 of the Corporations Law rather than the "appeal" provisions of s 1321. As I observed in Northbourne Developments v Reiby Chambers Pty Ltd (1989) 8 ACLC 39 at 43 in relation to the predecessor of s 536, that section is concerned with aspects of the conduct of liquidators and others which are liable to attract sanctions or control for what might be broadly described as disciplinary reasons. 47On this footing, the plaintiffs fail at the first hurdle and are not entitled to invoke the section because during submissions they eschewed any assertion that Hamilton had acted other than in good faith in relation to the actions and omissions of which they complain. The complaints are not of a disciplinary nature. No reliance was placed on s 1321 of the Act. Further reasons why the plaintiffs must fail follow. 48First, it was put on behalf of Hamilton that the deed did not confer upon him the power or authority to sue one or more of the partners on behalf of another or others of them, as the plaintiffs contend he should have done. This submission was put on the basis that cl 3.1.3 of the deed does not comprehend a power in the receivers to commence proceedings by one partner against another or others. Clause 3.1.3 provides that the receivers shall have the powers granted to a liquidator under s 477 of the Corporations Law . Section 477(2)(a) of that enactment provides that a liquidator may bring or defend any legal proceedings in the name and on behalf of the company. It was put that this was not a power to commence proceedings for one partner against others. 49This is undoubtedly correct. 50For over 150 years it has been settled that neither during the partnership nor after its termination has any partner a cause of action at law to recover monies due to that partner from his fellow partners. The amount owing to one partner by his or her fellow partners is recoverable only by the taking of an account in equity after the partnership has been dissolved; see Richardson v Bank of England 41 ER 65. This principle has been affirmed by the High Court as recently as 2010; see Commissioner of State Taxation v Cyril Henschke Pty Ltd (above) at 445 [22]; see also Hurst v Bryk [2002] 1 AC 185. 51Under cl 3.1 of the deed the partners appointed the receivers their agent to wind up the affairs of the partnership. The powers they gave the receivers were given in aid of winding up the affairs of the partnership by gathering in its assets, paying its liabilities and dividing the surplus according to the partners' respective interests in the partnership. Clearly, this does not comprehend power in the receivers to bring proceedings to determine the extent of those interests, including by proceedings to determine monies due to one partner by his or her fellow partners, and on its plain meaning cl 3.1 does not confer such a power. To construe the provision otherwise would place the receivers in an impossible position of conflict and would assume an intention on the part of the partners to have an instrument which envisaged a course directly in conflict with long established principle. 52In any event, the partners could not validly authorise their agents to bring proceedings which they themselves could not bring; see Peter Watts and FMB Reynolds, Bowstead and Reynolds on Agency (19 th ed, 2011) [2-2006]. 53The only proper course for resolution of the loan, interest, agistment and piping claims was for Pinata to bring proceedings for an accounting, a course which it ultimately took in 2001 and which, for reasons already discussed, failed. 54Secondly, each of the matters complained of relates to a claim that should have been instigated by an ordinary piece of adversary litigation (in this case a claim for an accounting); see Artistic Builders Pty Ltd v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 at [147]. 55The proper motivator of each of the claims was Pinata. It motivated them from as early as 1996 but squandered its opportunity to obtain relief. In the 2001 proceedings it sued in respect of the loan account and interest claims and in respect of the piping. (Why it did not sue in respect of the agistment claim is unexplained). Under the Killens' stewardship, Pinata failed to put up the security it was ordered to provide and those behind it (including Darrel Killen) and standing to gain from the proceedings declined to accept any personal risk for costs. By the Third Cross-Claim Pinata and Bryce Killen complained of Hamilton's conduct but that claim was dismissed because it was out of time. There was no appeal. 56It follows that the plaintiffs' attempt now to invoke s 423(1) of the Act is an attempt to achieve by indirect means an outcome which the proper plaintiff, Pinata, failed to, and can no longer, achieve by direct means. The machinery of the section is unavailable to the plaintiffs in these circumstances. In my view, the proceedings are an attempt to obtain a collateral advantage beyond what the law offers and are an abuse of the process of the Court: Williams v Spautz (1992) 174 CLR 509 at 526-7. 57Thirdly, if the plaintiffs were otherwise entitled to invoke the section, the first requirement resting on them would be to establish some respect in which Hamilton did not faithfully perform or observe a requirement of the deed, that is, a failure faithfully to perform or observe a requirement of him as a receiver of the partnership. In my view they have failed to meet this requirement. 58Their first complaint is that Hamilton did not refer for determination under cl 4.3 of the deed the refusal of Bob Leigo to agree to the service of a demand on the Davies for the loan monies. This is an empty complaint. The evidence does not establish that Hamilton and Bob Leigo did not agree upon action to be taken in relation to dissolution of the partnership. Hamilton, correctly, was reluctant to commence proceedings and, as referred to above, Bob Leigo would have been in an untenable position. Moreover, there was no money in the partnership to embark on this exercise. Hamilton's evidence was that "there were no funds available". There is no basis upon which the Court could now determine what the expert would have decided. However, even if he or she would have determined that demand should be made, subsequent events reveal that the demand would have been rejected. The Davies' defended the very claim when Pinata brought it in 2001. 59As to the remaining complaints, for the reasons which follow, even if Hamilton could have prosecuted the claims against the Leigo interests, in my view he acted reasonably in not doing so. Leaving aside the lack of funds, the claims were attendant with significant difficulties justifying him in acting as he did. 60As to the assertion that Hamilton wrongly refused or neglected to take action to recover the Davies' loans and interest, this complaint is likewise without substance. The claim had difficulties. Hamilton gave evidence that the claim was attendant with lack of precision; that the terms of the alleged loans were not reduced to writing; that the records and accounts of the partnership had not provided for interest; that had interest been charged in earlier years the partners would have been entitled to claim a tax deduction on the gross amount; and that there were possible adverse taxation consequences for the partners if interest were to have been charged subsequently. He also gave evidence of an early meeting at which Darrel Killen and Bob Leigo were present at which the overdrawings were referred to but at which interest was not mentioned. I mention that Hamilton gave evidence of a final settlement with the Davies but the evidence of this was left in an unsatisfactory state at the conclusion of the hearing. 61The complaint against Hamilton in connection with the piping claim is also without substance. This claim too clearly had difficulties. Hamilton testified that he had no evidence as to the discussions or the terms and conditions agreed between the parties about where the pipeline was to go and as to its use, although he thought there was fairly firm evidence that Geoffrey Davies put it in the wrong position. Hamilton gave evidence that it is difficult to say whether the action was under contract or conversion and that the pipeline had been purchased for about $15,000 but the Davies said that they had installed it "so that the cost has gone to them". 62The final complaint concerns agistment. Hamilton's view was that there were arguments as to whether or not the landlords (meaning the respective owners of the blocks of land) were entitled to have a certain amount of their own cattle or sheep agisted on their properties. The amount involved was very small and his view was that the cost of trying to work it out was not worthwhile. It is significant that Pinata itself did not motivate this claim in the 2001 proceedings. 63Fourthly, the plaintiffs have failed to establish that Pinata suffered any loss by reason of anything done or not done by Hamilton. A somewhat perfunctory submission was put that Pinata suffered loss because by the time it took proceedings in 2001 its financial position had deteriorated from its position in 1996 so that it could not put up the security ordered and that the delay was attributable to Hamilton because, had he acted to pursue the claims the subject of the complaints, Pinata would have been able to put up security. The plaintiffs' evidence does not establish any of these propositions. The plaintiffs' evidence also does not establish the existence of any claim in the hands of the fourth plaintiff arising out of anything done or not done by Hamilton and it was not addressed in submissions. 64Finally, the plaintiffs' delay in bringing these proceedings, for which there is no acceptable explanation, can only be described as gross and in the circumstances it is on its own sufficient to disentitle the plaintiffs to the exercise of the Court's discretion under s 423(1). Hamilton, as he was entitled to do, has destroyed relevant records and Bob Leigo, who may have been a material witness in any contest on the merits of Pinata's claims, is deceased.

CONCLUSION 65The plaintiffs have fallen far short of satisfying the Court that they are entitled to invoke s 423(1)(b) of the Act, or indeed that the circumstances are such as to warrant the Court inquiring into the matter or taking any further action even if the section applied. 66Indeed, in my view these proceedings have been maintained despite the fact that the plaintiffs should have known that they could not succeed. The claim against Hamilton as administrator was correctly abandoned, but late. The plaintiffs have been guilty of gross delay. I have also concluded that the proceedings amount to an abuse of process. Arguably, each of these considerations on its own warrants an order for indemnity costs. In my view their cumulative effect is such as to put the matter beyond any reasonable doubt. 67The proceedings are dismissed. The plaintiffs are to pay the defendant's costs on an indemnity basis. 68The exhibits are to be returned.

Amendments 06 March 2012 - error identified in paragraph Amended paragraphs: para 65 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: 06 March 2012