J F Keir Pty Ltd v Priority Management Systems Pty Ltd

LEGISLATION CITED : Corporations Act 2001 (Cth), s 440D

Auburn Council v Austin Australia Pty Ltd (in liq) [2007] NSWSC 130 BBC Hardware Ltd v GT Homes Pty Ltd [1997] 2 Qd R 123 Complex Pty Ltd v Auslat Properties Macquarie Waters Pty Ltd [2007] NSWSC 435 Foxcroft v Ink Group Pty Ltd (1994) 15 ACSR 203; 12 ACLC 1063 CASES CITED : Oceanic Life Ltd v Insurance & Retirement Planning Services Pty Ltd (in liq) (1993) 2 Tas R (NC) N23; 11 ACSR 516 Ogilvie-Grant v East (1983) 7 ACLR 669; 1 ACLC 742 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 77 FCR 478; 153 ALR 626 Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1997) 25 ACSR 757; 16 ACLC 36 Rowa Australia Pty Ltd v Kalamazoo Logistics Pty Ltd (in liq) [2006] NSWSC 325

PARTIES : J F Keir Pty Ltd (Plaintiff) Priority Management Systems Pty Ltd (administrators appointed) (Defendant)

Mr C Harris SC; Mrs C Champion (Plaintiff) COUNSEL : Mr C R C Newlinds SC (Mr Gregory Sparks) Mr J M White (Administrators)

Matthews Folbigg Pty Ltd (Plaintiff) SOLICITORS : Baker & McKenzie (Mr Gregory Sparks) Kemp Strang (Administrators)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5042/06 J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) JUDGMENT 1 HIS HONOUR: On 19 June 2007 I commenced hearing a suit between J F Keir Pty Ltd, which trades under the name Priority Management - Annandale ("Annandale"), against Priority Management Systems Pty Ltd ("PMS"). PMS is a franchisor and Annandale is a franchisee. The suit concerned whether or not PMS had validly terminated its franchise agreement with Annandale. The case did not finish in the time allotted and I fixed 9 July 2007 with an estimate of a further four days for the balance of the case. Mr C Harris SC with Mrs C Champion appeared for Annandale and Mr C R C Newlinds SC with Ms J Chambers for PMS. 2 On Thursday 5 July 2007 administrators (Mr Ozem Kassem and Mr Deryk Andrew) were appointed to PMS. On Friday 6 July the plaintiff filed a notice of motion seeking leave to proceed against PMS pursuant to s 440D of the Corporations Act 2001 (Cth). 3 Yesterday when the motion was called on for hearing Mr C Harris and Mrs C Champion appeared for the plaintiff (Annandale) and Mr J M White of counsel appeared for the administrators. Mr Newlinds, counsel formerly briefed on behalf of PMS, sought to appear for Mr Gregory Sparks - acknowledging that there was doubt as to whether he had any right to be heard. No objection to him being heard was made by Mr Harris or Mr White. Mr White advised the Court that the administrators neither consent nor object to the grant of leave and that if leave is granted they will not appear to defend the proceedings. Mr Newlinds indicated that his client made no submissions on whether leave should be granted but if leave were granted Mr Sparks would not oppose orders being made that would see the franchise agreement remain on foot. 4 Mr Newlinds indicated that his client was concerned that if the administrators did not defend the case and the Court were forced to deliver judgment on the merits of the case in circumstances where evidence that was to be relied on by PMS was not read, and submissions that would have been relied on by PMS not made, the decision of the Court might be significantly adverse to Mr Sparks. Mr Sparks is the sole director and a 50 per cent shareholder of PMS, but he is also the person who made all decisions on behalf of PMS and he was the principal witness for PMS in the proceedings. 5 Mr White and Mr Newlinds then sought leave to withdraw and I granted that leave. Mr Harris then proceeded with Annandale's notice of motion and tendered two documents (Exhibit "A"), being minutes of a meeting of directors of PMS and a consent by the administrators to act. Mr Harris then made submissions as to why leave should be granted. 6 I was persuaded that leave should be granted and indicated that I would give my reasons for that decision today, which I now do. 7 Section 440D is in the following terms:

(1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or

(b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

(2) Subsection (1) does not apply to: (a) a criminal proceeding; or (b) a prescribed proceeding."

8 A number of cases relevant to s 440D were brought to my attention, namely Complex Pty Ltd v Auslat Properties Macquarie Waters Pty Ltd [2007] NSWSC 435; Foxcroft v Ink Group Pty Ltd (1994) 15 ACSR 203; 12 ACLC 1063; Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1997) 25 ACSR 757; 16 ACLC 36; Oceanic Life Ltd v Insurance & Retirement Planning Services Pty Ltd (in liq) (1993) 2 Tas R (NC) N23; 11 ACSR 516; Ogilvie-Grant v East (1983) 7 ACLR 669; 1 ACLC 742; Rowa Australia Pty Ltd v Kalamazoo Logistics Pty Ltd (in liq) [2006] NSWSC 325. I have also found helpful the notes to s 440D in "Corporations Legislation 2007", J R Harris and R Baxt, Lawbook Co, in which the learned authors set out at [440D.30] the matters that will be taken into account namely:

1. Whether the claim has a solid foundation and gives rise to a serious dispute.

2. Whether the administrator would be unreasonably distracted from his or her statutory duties and be obliged unnecessarily to incur substantial legal costs.

3. Whether the company is insured against the liability the subject of the claim.

5. Whether the applicant will suffer any disadvantage if leave is not granted.

6. Whether there are good reasons for allowing a creditor to depart from the general intention of Part 5.3A which is that a creditor ought not be able to take action against the company in such circumstances. 9 In Auburn Council v Austin Australia Pty Ltd (in liq) [2007] NSWSC 130 at [128] and Complex Pty Ltd v Auslat Properties Macquarie Waters Pty Ltd [2007] NSWSC 435 at [15], Einstein J approved the statement of general principles in "Ford's Principles of Corporations Law", Prof H A J Ford, Justice R P Austin and Prof I M Ramsay, LexisNexis, relevantly noting on the question of factors which the court might consider: "x. there are many factors that the Court might consider, including the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved and importantly, the stage to which the proceedings, if already commenced, may have progressed [cf Ogilvie-Grant v East (1983) 7 ACLR 669 at 672]. [see generally Oceanic Life Ltd v Insurance and Retirement Planning Services Pty Ltd (in liq) (1993) 11 ACSR 516 at 522]." 10 A recent example of the importance of the stage which the proceedings are at is Rowa at [17]. 11 From the authorities it can be seen that the starting point is that leave will generally not be granted to allow proceedings to be commenced or continued with, but as Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 77 FCR 478; 153 ALR 626; Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1997) 25 ACSR 757; 16 ACLC 36 and Rowa demonstrate, leave will be granted in appropriate circumstances. In my view this is a case in which leave should be granted and in coming to that view I take the following matters into account:

(1) The proceedings are at a very advanced stage - there have been four days of hearing with the completion of the evidence of the principal witness for Annandale (Mr Greenwood) and of the principal witness for PMS (Mr Sparks). Mr Harris informed me that he was not aware of any case in which leave had been sought during a trial.

(2) Since the proceedings will not be defended the remaining amount of time in the case is unlikely to be more than one day.

(3) Annandale has established at least that there is real dispute involving serious questions as to whether the franchise was wrongfully terminated.

(4) The proceedings do not involve a claim for any amount of money (that part of the relief sought was not proceeded with, there being, I was previously informed, a possibility in the future of other proceedings). What is sought is a declaration that the franchise of Annandale was not validly terminated by PMS. PMS is not then a creditor of PMS, and by these proceedings would become so only in respect of costs, most of which it has already incurred.

(5) No details were placed before the Court by the administrators as to the circumstances leading to the placing of PMS in administration. Exhibit "A" tendered by Annandale shows that it was Mr Sparks as director of PMS who made the decision to place PMS in administration, the reason being, it is stated, that "as the Company is likely to become insolvent at some future time". No details have been provided in that document or in any affidavit from administrators as to who the creditors are or might be, or what the amount of any debts are or might be. Nor has any detail been provided of what funds PMS has to defend the proceedings.

(6) The absence of opposition by the administrators to leave being granted.

(7) There was no evidence or even suggestion made on behalf of the administrators that the administration would or would be likely to be impeded by the proceedings. That may well be because of the decision that the proceedings would not be defended.

(8) The plaintiff as franchisee was (and if its contentions are correct, is) in a business relationship with PMS as franchisor. The proceedings were expedited so that this important issue relevant to the day to day conduct of affairs could be determined. 12 The matters to which I have referred above are sufficient to lead me to the view that leave should be granted, but two further matters reinforce that view:

(1) If a stay were not granted, the hearing time to date might well be wasted due to the fact that my commission as an Acting Justice of this Court will expire on 3 August 2007. This, as I understand matters, does not present a problem so far as reserved judgments are concerned, but would present a problem for continuation of the hearing. There are some possible means of dealing with that problem but as Mr Harris submitted there can be no certainty of any of them being available.

(2) In BBC Hardware Ltd v GT Homes Pty Ltd [1997] 2 Qd R 123, Thomas J did point out that the criteria for a grant of leave have not been authoritatively set out, but that secured creditors were more likely to obtain leave than unsecured creditors because "such leave would tend to interfere with the orderly disposition and control of unsecured creditors, all of whom are expected to prove in the one administration": at 126.45-127.5. In the present case, Annandale is not a secured creditor but nor is it a creditor. It is possible that the determination of whether or not Annandale is a franchisee would be useful to the administrators since as Mr Harris pointed out, should any attempted sale of the assets of PMS be contemplated, the income stream from Annandale in the form of a percentage of its fees earnt as franchisee, would probably be a positive feature of PMS's business. 13 It follows in my view that Annandale should be given leave to proceed with its case against PMS. **********

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