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[2013] NSWSC 163
Supreme Court of NSW
2013-02-18
Young AJ
Original judgment source is linked above.
Herbert Smith Freehills Shareholder Claimants - DC Legal Pty Ltd File Number(s): 2012/316862
Judgment 1HIS HONOUR: The present proceedings are an application by two trustees for judicial advice either under s 63 of the Trustee Act 1925 (NSW) or the corresponding provision under the Western Australian Trustees Act 1962 (s 92). Counsel are agreed that it does not matter which. 2The plaintiffs are trustees of The Compass Resources Creditors' Trust. 3It is necessary to trace the derivation of this Trust. Compass Resources Limited was placed into voluntary administration by its directors on 29 January 2009. The appointment of administrators was confirmed by the creditors at their first meeting on 10 February 2009. A committee of creditors was appointed and the administration proceeded to a DOCA and thereafter various revised or amended versions of the DOCA, ending with what has been called the Further Revised DOCA. 4On or about 15 November 2001 in accordance with the terms of the Further Revised DOCA, the Creditors' Trust was created, the trustees being the administrators. Money was placed into a trust fund to be administered in accordance with the trust to pay various creditors. It was anticipated that, under the Trust, all creditors with a claim of less than $100,000 would receive 100 cents in the dollar and creditors who had submitted claims exceeding $100,000 would receive about 50 cents in the dollar. The trustees were furnished with cash and there was also a bond for an amount of about $2.5 million which would be payable to the trustees on 15 November 2014 if certain circumstances prevailed. 5At the time it was set up, it was not anticipated that there would be any further claimants on the fund other than those whose proofs of debt had been accepted. However, later it was clear that there were additional claimants on the funds, a group of people who have been described in the present proceedings as shareholder claimants. These people are persons who bought shares in Compass Resources at a time when, they claim, the purchase was made because of false and misleading conduct on behalf of Compass Resources or alternatively because of a illegal failure to disclose information to the market. The total claims by these people are about $2.6million though each individual claim appears to be not in excess of $100,000 (there may be a couple of exceptions). 6The administrators first of all called for informal proofs of debt and later for formal proofs of debt. Some of the shareholder creditors put in a proof of debt, but those that did had their proofs of debt rejected. The material before me shows that the shareholders were asked to provide comments on the issues raised at a meeting of which their claims were considered. They did not do so and the proofs of debt were rejected on or about 8 December 2009. There was no appeal. 7After that rejection the infrastructure of the administration changed, in that the Creditors' Trust was divorced from the administration and any claimant became a claimant on the Trust Fund. In November 2011, the trustees invited submissions of formal proofs of debt. The invitation was firstly by a circular to creditors bearing the date 21 November 2011 which was sent to each creditor, though the shareholder claimants did not receive a copy, and secondly by newspaper advertisement. The call was for formal proofs of debt by 28 December 2011. 8On about 23 December 2011, the trustees received 71 formal proofs of debt from shareholder creditors from Mr Bruce Dennis, the Principal of the law firm DC Legal. Sixty-three of these were from shareholders submitting a proof of debt for the first time but the proofs were broadly in identical form. 9By letter dated 11 January 2012 the trustees rejected the formal proofs of debt. They also indicated to those submitting them that the time for appealing was 14 days from that date. 10However, on 11 January 2012 the trustees did something else as well. They paid a dividend to those creditors who had lodged a proof of debt and whom the trustees considered were proper creditors. They paid out $2.46million, being 100 cents in the dollar to 17 creditors who had lodged proofs of debt amounting to less than $100,000, and 30 cents in the dollar to 5 creditors who had lodged proofs of debt amounting to more than $100,000. Because of this distribution there is only about $310, 000 left in the Trust Fund. The shareholder creditors were naturally incensed by what had occurred. They did put on an application to appeal against the rejection of the proof of debt and those proceedings are still pending. 11Not only are those appeals pending, but the shareholder creditors have also commenced proceedings in this Court to remove the trustees on the basis that they ought not to have made the interim distribution and that they should have taken steps to recover the moneys paid. Those proceedings are also pending. 12It is in those circumstances that the trustees have sought judicial advice from the Court. 13The judicial advice sought falls into five main issues, viz:
A.The jurisdiction under s 63 of the Trustee Act 1925 19It is quite clear that the attitude of the courts to applications under s 63 of the Trustee Act has changed over the last 30 years or so. In early times the courts were extremely reluctant to decide questions on these applications where there was any seriously disputed question of fact or law and often the advice given to trustees would be that they should commence proceedings by way of originating summons for determination of the issues in a suit in which all interested parties were represented. This was so that anyone who was affected by the result of the case could tell the court their concerns and make submissions on facts and law. Furthermore, the courts were extremely wary about giving advice on commercial decisions. The furthest a court would go would be to say to a trustee, "You should take the best advice from experts in the field and you would be justified in following that advice". Indeed, in commercial matters that is still the case. 20However, there is now provision in s 63 for the advice to be served on people to be bound and for them to have the opportunity of disputing it. For this and other reasons the court is now more ready to give trustees advice under s 63 in non-commercial matters. 21Where a trustee is sued is now, after the decision of the High Court in Macedonian Orthodox Community Church and Petka Incorporated v Bishop Petar [2008] HCA 402; 237 CLR 66, in a separate category. The High Court made it clear in that case that, generally speaking and subject to the court's discretion in a particular case, trustees were entitled to receive the court's advice when they were sued as to what they should do, and indeed a necessary corollary was that, ordinarily, trustees who are sued should take no step in defence of the suit without obtaining judicial advice as to whether it would be proper to defend the proceedings. 22It is clear that, although this is the general rule, the court is still given a discretion in a proper case not to give the advice. Indeed the plurality in the High Court recognised at [67] on page 92 that there are various types of trusts, particularly: (a) a non-charitable private trust; (b) a charitable trust; and I suppose by default, (c) other trusts. It is far more likely that a court would lean towards providing judicial advice to the first two categories of trustee. In the third category the trustee is often a person who has made it his or her business to act as a trustee for reward, has skills in the area, and has probably obtained insurance. In the past the courts were sometimes reluctant to give the same tender advice to such people as to a voluntary trustee. Although this is still a valid discretionary factor, it seems to me that a fair reading of the High Court's decision in the Macedonian Petar case is that, ordinarily, if a trustee is sued the court should give a trustee judicial advice as to whether he or she should defend the proceedings. 23The High Court recognised that there were exceptions to the general rule in that there must be a matter presented to the Court which concerns the trustee's duty as trustee or the interpretation of the trust so that "a decision by the trustee accused of breach of trust whether to contest the allegation is unrelated to any aspect of 'the trustee's duty as trustee'" (at 103). This is the plurality approving the words of Barrett J in Re Australian Pipeline Ltd [2006] NSWSC 1316; 60 ACSR 625 at [25] 632. 24Mr Dubler put that this was not a case where the Court should give a trustee advice. Particularly, the advice should not give the trustee virtually a "free kick" by defending the proceedings at the cost of the trust fund, thereby further running it down or completely extinguishing it. The matter is one of discretion: Mr Dubler does make some valid points as he always does. However, it does seem to me that where a trustee is sued there is almost a presumption, after the Macedonian Petar case, that the Court should give the trustee advice. In my view I should do so in the instant case. 25I should note that, in the ordinary case under s 63, it is not the habit of the Court to initiate advice. The Court expects the trustee to take proper advice. The ordinary order is that the trustee would be justified in acting on such advice. 26Before dealing with the other matters, I should say that Mr Dubler made it clear that there was no allegation at all of any malice on behalf of the trustees. The shareholder claimants' claim was that the trustees had acted unwisely and carelessly in making the interim distribution before the time for appealing against the rejection of the proof of debt had expired.
B. Question 2. Should the trustees now seek to recover the amounts paid to the creditor defendants by the interim distribution? 27The major problem here is the basis on which the trustees can compel such a recovery. 28If action is taken under the indebitatus count, the trustee has to show that it had paid the money because of some mistake, so that it is recoverable as money had and received. That may be difficult for the trustees to establish because, as I understand it, their basic position is that the persons to whom they paid the money under the interim distribution were in fact entitled to the money and there was no mistake. The only possible error they may recognise is that it was unwise to pay it out until the time for appealing against the rejection of the proof of debt had expired. 29Even if that problem is overcome, trustees would be met in at least some cases, including with respect to the largest payment made to Orica Limited, that the payee has undergone a change of position after the payment was made. It is clear from the authorities that that would be a good defence to a claim for money had and received. 30There may also be some action in equity - but again this is doubtful - under the doctrine in Re Diplock [1948] Ch 465 (CA), that a beneficiary under a will has a remedy in equity against a person to whom the executor has wrongfully paid his or her benefaction. However, that is available to the beneficiary not the trustee. 31Counsel drew my attention to the provisions of s 65 of the Western Australian Trustees Act 1962 which gives a statutory action to a beneficiary where money is wrongly paid to a third person. However, the section only applies to a distribution from a deceased estate, so there is no application here. 32Accordingly, there are good reasons for not venturing into this area unless absolutely necessary. 33In these circumstances it would seem to me unwise for a trustee at least at this stage to commence proceedings to recover the interim distributions and I advise them that they are justified in not doing so at this time.
C. Question 4. Should the trustees attempt to discover further shareholder claimants? 34The question for me, in brief, is whether the trustees are under a duty to seek out other persons who may have very similar claims to the shareholder claimants who have already made a claim to be beneficiaries of the trust. 35Uninstructed, I would have thought that it is appropriate to pay attention to what is the proper analysis of the situation where the liquidator of the court makes a decision on the proof of debt. In early days it was an officer of the court who actually made the initial determination; later, the legislature delegated the initial decision to the liquidator, but subject to supervision or review by the court. That is why, today, liquidators and administrators make decisions on proofs of debt but there is a review to the Supreme or Federal Court. 36It is clear that, when the court is considering an "appeal" against a proof of debt, the proceeding is a new proceeding and the onus of proof is on the plaintiff. What is a trifle odd is that the liquidator ceases to be an adjudicator and becomes a party: Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; 169 CLR 332 at 340-1, Re Jay-O-Bees Pty Ltd [2004] NSWSC 818; 50 ACSR 565 at 575. 37The scheme in insolvency is that it is up to the claimant whether he or she will put in a proof of debt. An advertisement is published, usually saying that proof of debt should be submitted by day X and that, if the proofs are not submitted by that date, then a distribution will be made according to the proofs of debt that are submitted. The latecomer still has a right to put in a proof of debt for, after all, his or her debt has been converted by statute into a right to lodge a proof of debt and does not otherwise exist. A consequence is that a late proof does not take part in the current distribution. 38However, in Re Jay-O-Bees, Campbell J said that a liquidator's duty to act honestly and impartially between the creditors required the liquidator to bring to the attention of possible claimants the need to submit proof. I quote from para [86]: "A liquidator also has a statutory obligation to apply the assets of the company in discharge of the company's liabilities before any distribution amongst the shareholders. That duty provides a separate basis for concluding that he is required to take all steps reasonably open to him on the information in his possession to ascertain whether someone who that information suggests might possibly be a creditor makes a claim to be such:... The duty of a liquidator is ' ... not merely to advertise for creditors, but to write to the creditors of whose existence he knows, and who do not send in claims, and ask them if they have any claim': Pulsford v Devenish [1903] 2 Ch 625 at 631 per Farwell J; Harry Goudias Pty Ltd v Port Adelaide Freezers Pty Ltd (1992) 7 ACSR 303 at 306-7 (Mullighan J)." 39In Re Armstrong-Whitworth Services Co Ltd [1947] Ch 673, the liquidator had documents in his possession which indicated that certain former employees enjoyed possible workers' compensation claims. While the liquidator had advertised for claims in the usual way, he made no attempt to contact these potential claimants personally and thus failed "to take all steps reasonably open to him on the information in his possession to ascertain whether any of the former employees concerned did make any such claim" (at 691). 40Similarly, in Harry Goudias Pty Ltd v Port Adelaide Freezers Pty Ltd (1992) 7 ACSR 303, the liquidator failed, prior to dissolution of the company, to invite proof of a claim of which he was aware, albeit the claim was contingent upon the success of proceedings against the company in breach of contract and tort. Mullighan J of the Supreme Court of South Australia noted that mere advertisement was insufficient to discharge the duty where a liquidator was aware of other claimants who had not proved, and that liquidators were obliged "to inquire into all claims" (citing with approval Austin Securities Ltd v Northgate & English Stores Ltd [1969] 1 WLR 529 at 532 per Lord Denning MR and at 535 per Lord Edmund Davies LJ) (at 306 - 307). 41More recently, in Re Ion Ltd [2010] FCA 1119; 80 ACSR 302, deed administrators sought directions under s 477D of the Corporations Act 2001 (Cth) as to, inter alia, the proper procedure for notifying shareholder claimants of their right to lodge proofs of debt. There, as here, certain shareholders had lodged formal proofs of debt alleging misleading and deceptive conduct, and also contraventions of the company's disclosure obligations under the Corporations Act and ASX Listing Rules. In directing the deed administrators as to the manner in which other shareholder claimants should be notified, Dodds-Streeton J remarked that, "[A] liquidator is obliged to inquire into all claims. He or she has a duty to invite proofs of claims from persons with claims, even if they have not responded to the advertisement, if the liquidator is aware of creditors who have not proved" (at [51] - [53] 311). 42I agree with the submissions of counsel that the duty of a trustee under a creditors' trust must be of the same order. 43In their open submission (MI 04), counsel for the trustees set out a method of fulfilling any duty under this head. This follows what occurred in Re Ion Ltd [2010] FCA 1119; 80 ACSR 302. I advise the Trustees that they would be justified in carrying out what is stated in paragraphs [103], [104], [108] and [114] of MI 04.
D. Question 5. What is to occur if there is a deficiency at time of distribution? 44If there is a deficiency at the time of distribution, the claimants must either have a distribution on a pari passu basis or on a "first come, best dressed" basis. 45There is a lot to be said in favour of a pari passu distribution. McPherson's (4th ed) at p574 truly says: "The principle of equality of division among creditors is one of the (if not the most) fundamental principles of the law of liquidation (and of insolvency in general) and is at the very heart of the whole statutory scheme of winding up." 46I was initially tempted not to give any advice on the issue because, until the state of affairs as at the date of distribution becomes clear, the question is too hypothetical. 47However, if there is a settlement of these proceedings, which may hopefully occur in the near future, the question may be very real. 48As the trustees only currently hold no more than $310,000, the Trustees' bond is not payable until 15 November 2014, and the odds are that the interim distributions are not readily recoverable, there is almost bound to be a shortfall if the shareholder claimants succeed to any marked extent. 49The only substantial argument against a pari passu distribution is that, as counsel for the plaintiff points out, that there is some indication in clause 6(a)(i)(D) of the Trust Deed that claims in the relevant category would be paid in full, but this seems to be on the assumption that there is sufficient monies for all claims, other than those specifically to receive only 50 cents in the dollar, to be paid in full. 50As para 124 on page 29 of MI 04 stated: "Further, the pari passu approach would also be consistent with s 555 of the Corporations Act (which the Trust Deed seeks to incorporate through clause 8.2(a)), which states that: Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and if the property of the company is insufficient to meet them in full, they must be paid proportionately." 51The arguments for the pari passu view are so strong that I advise that the trustees would be justified in adopting that method of distribution. E. Questions 1-3 52These are dealt with in the supplementary judgment. F. Costs and Ongoing Proceedings 53I consider that the plaintiffs are entitled to be paid their costs of this application out of the assets. I will reserve all other questions of costs. 54Parties agreed before me at the oral hearing that it would be best for the matter now to go to mediation. The trustees said that the judicial advice should be delivered before the mediation, and I agreed with this, but that has now occurred subject to anyone seeking leave to appeal. 55I will thus stand the proceedings over for the plaintiff to bring in short minutes. There should be four sets, viz: (1)Orders to carry out these reasons; (2)Orders, to be kept confidential, dealing with Questions 1 and 3; (3)Orders for mediation in the removal proceedings plus ancillary orders; (4)Similar orders in the other proceedings. 56The short minutes should incorporate, in the appropriate places, liberty to apply on five days' notice.
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Jones
Hirst