Supreme Court of SA|1994-03-30|Before: Mr P, King CJ

KEITH ARTHUR RUSSELL AND MICHAEL FRIEDLANDER v WESTPAC BANKING CORPORATION, PETER THOMPSON, BDO NELSON PARKHILL SERVICES (SA) PTY LTD, JEFFREY JOHNSTON, JOHN SHEAHAN, ANTHONY SIMS AND A N BROOME (LIQUIDATOR) No. SCGRG 92/1010 Judgment No. 4479 Number of pages - 6 Corporations - companies winding up (1994) 12 ACLC 278, (1994) 13 ACSR 5 (1994) 61 SASR 583 [1994] SASC 4479 (30 March 1994)

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ(1), BOLLEN(2) AND MULLIGHAN(3) JJ

CWDS Corporations - companies winding up - Power of Court to authorize institution of proceedings where liquidator unwilling

who may be authorized

HRNG ADELAIDE, 9 February, 24 March 1994 #DATE 30:3:1994

Counsel for appellants: Mr D E Clayton QC with Mr G A

Counsel for respondents except Sheahan and Sims: Mr A J Besanko

Solicitors for respondents except Sheahan and Sims: Kelly and Co

JUDGE1 KING CJ This action as presently constituted is brought by the plaintiffs against the defendants alleging wrongful interference with the assets and the affairs of two companies, namely Seabird Corporation Limited and Flowertec Limited. It is alleged Westpac instigated a wrongful "unofficial administration" of those companies. It is alleged that this unofficial administration caused loss to the companies and depletion of their assets. The defendant Thompson is an officer of Westpac. The defendant BDO Nelson Parkhill Services (SA) Pty Ltd is a firm of accountants who are alleged to have conducted the wrongful administration. The defendant Johnston was a director of Parkhill. The defendants Sheahan and Sims were accountants who acted in various capacities in relation to the alleged wrongful administration.

Seabird and Flowertec are in liquidation. The plaintiffs have applied for authorization to use the names of Seabird and Flowertec as additional plaintiffs in the action. The application was dismissed by a Master. This is an appeal against that order.

Flowertec is a wholly owned subsidiary of Seabird. The plaintiff Russell is a director and shareholder of Seabird and a director of Flowertec. Both plaintiffs are guarantors of Seabird's indebtedness to Westpac. Seabird is guarantor of Flowertec's indebtedness to Westpac. It follows that if the assets of the companies are insufficient to meet their indebtedness to Westpac, the plaintiffs will be liable on their guarantee for the shortfall. It is not in dispute that there will be such a shortfall and Westpac has instituted proceedings against Russell and Friedlander to enforce their liability under the guarantees. The contention for the plaintiffs is that that shortfall would not exist or would be less if it had not been for the alleged wrongful "unofficial administration".

The liquidators of the companies have indicated that they do not intend to cause the companies to institute or join in action against Westpac on the cause of action pleaded by the plaintiffs. They have no objection to the companies being joined as plaintiffs at the instance of the present plaintiffs, upon the plaintiffs indemnifying them and the companies against liability for costs.

The general rule, being that which is generally referred to as the rule in Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461, is that for a wrong done to a company, the company is the proper plaintiff in an action to seek redress. When the company is in liquidation, the person in whom is vested the authority to institute proceedings, is the liquidator; Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1987-1988) 12 ACLR 730. There is power, however, in the Court to authorize other persons to conduct litigation in the name of the company; Cape Breton Company v Fenn (1881) 17 ChD 198; Aliprandi v Griffith Ventures Pty Ltd (1991) 6 ACSR 250.

The principles on which the Court will authorize the use of the name of a company in liquidation for the purpose of litigation are considered in the Cape Breton case. Jessel MR at p.207 said: "Under the old Winding-up Acts the creditors had no locus standi, the liquidators and the contributories were the only parties to the proceedings, and the creditors, when they had proved their debts, could not get payment in the winding-up, but were compelled to bring an action, or file a bill, as the case might be. Afterwards the creditors were admitted as parties to the proceedings, but nobody else. The only parties to the proceedings in a winding-up are the liquidators, the contributories, and the creditors. Of course applications may be made by other parties pro interesse suo, as in administration suits, for the purpose of removing the difficulties which the proceedings put in the way of their establishing their rights of recovering their property. But beyond that there is no person who has a right to intervene in the winding-up proceedings except the creditors and the contributories. Why should we allow the solicitor of a creditor or contributory to come in? As I have already said, it appears to me it would be very mischievous to do so. Then on what principle is it that a creditor or contributory has been allowed to sue in the name of the company? On the same principle on which a man could always have filed a bill in the old Court of Chancery against his trustee to be allowed to use his name to recover the trust property."

Cotton LJ said at p.208: "There is nothing in the Act of Parliament which gives the Court such power, and prima facie proceedings in the name of

the company ought to be conducted by the liquidator - an officer appointed by the Court and subject to the supervision of the Court. There may be, no doubt, special cases where, although the Court does not think fit to remove the liquidator on the ground that his conduct is not bringing an action is improper, it may give power to other persons to conduct the litigation upon their giving proper indemnity against any consequences of that litigation. But who are the persons who can be authorized to take these steps? In my opinion the creditors and the contributories only, not under any special clause of the Act, but because they are the persons who, under the terms of the Act, can intervene if they are advised that the liquidator does not properly do his duty. They have a right in special cases to ask the Court for leave to do that which the liquidator is advised not to do, or which, because he has no funds, he does not do, viz., take proceedings in the name of the company, but in my opinion the power of the Court to give leave to use the name of the company stops there, and is confined to those who are parties to the liquidation."

The plaintiffs' claim that they are both within the class of persons who may be authorized, if the Court sees fit, to use the names of both companies in litigation, is based upon a Deed executed by them on 17th July 1987. By that Deed they guaranteed payment of Seabird's liability to Westpac. That liability includes Seabird's liability as guarantor of Flowertec's indebtedness to Westpac. Under the terms of the Deed the guarantors are not entitled to prove in any winding-up of the debtor company in competition with Westpac or until Westpac has been fully paid. The plaintiffs have not paid Westpac under the guarantee, but demand has been made by Westpac and proceedings have been instituted by Westpac against the present plaintiffs to enforce their liability under the guarantee.

The learned Master based his decision upon the statements in the judgments in Cape Breton Company v Fenn supra which confine the class of persons who may be authorized to use the name of the company to creditors and contributories. He considered that there was no power to authorize persons outside those categories.

A guarantor is, of course, not a contributory and, until the creditor is paid under the guarantee, is not a creditor. He is a prospective creditor in the sense that if the debtor defaults and the guarantor pays out the creditor he is subrogated to the creditor's rights and becomes a creditor. The question is whether the class of persons who may be authorized to use the company's name in litigation is strictly confined to creditors and contributories or whether it extends to a guarantor who has not yet become a creditor by paying out the guarantee.

The position of a guarantor was not under consideration in the Cape Breton case, and no case has been brought to our attention in which the point has been decided or considered. The underlying principle, in the eyes of Jessel MR, appears to derive from an analogy with the rights of a beneficiary under a trust where the trustee fails to institute proceedings to recover trust assets or debts. The judgment of Cotton LJ bases eligibility upon being "parties to the liquidation". The eligible class consists of the persons in whose interests the winding up is carried out and who are entitled to derive benefit from the assets of the company in the winding-up. If the liquidator neglects the interests of such persons by failing to institute proceedings they may be authorized to do so.

The rationale, in my opinion, is that the failure of a liquidator to institute proceedings to recover assets or debts of the company ought not to operate to the prejudice of the persons in whose interests the winding-up is carried out and who are entitled to benefit from the assets of the company.

I consider that that rationale extends to a guarantor. If the guarantor is called upon to pay the creditor and does so, he becomes a creditor and a beneficiary in the winding-up. There may be cases, however, in which it would be unjust to require a guarantor to make payment before the institution of proceedings in the company's name, the success of which might relieve the guarantor of the necessity of realizing his own assets or incurring liabilities in order to make payment. I see no reason why the Court should so confine the eligible class as to deprive itself of the discretion to permit a guarantor to sue in the company's name if it sees fit to do so. The circumstances in which the discretion is used in favour of a guarantor, who has not become an actual creditor by paying out the creditor, may be uncommon, but there is no reason in principle why the discretion should not exist. A case such as the present in which the supposed claim by the company is against the creditor whose debt is the subject of the guarantee, could be an appropriate case for the exercise of the discretion.

As I take the view that the plaintiffs, as guarantors, are within the class of persons who may be authorized to use the names of the companies, it is unnecessary to consider the position of the plaintiff Russell as a shareholder, and therefore contributory, of Seabird. It is necessary, however, to consider the alternative contentions by which the defendants sought to uphold the learned Master's judgment.

Counsel for the defendants argued that the discretion to authorize the use of the companies' names should not be exercised in the plaintiffs' favour for three reasons. First the action could not benefit the creditors or shareholders of the companies. Second, the action was vexatious and oppressive because there were insufficient prospects of success. Third the action was vexatious and oppressive because it was unnecessary. The contentions of the plaintiffs, if sustained, would provide a complete answer to Westpac's action on the guarantee and would therefore exonerate them from any liability on the guarantee.

I do not think that the first point is of significance in relation to the exercise of the discretion. What is asked is authorization to join the companies as plaintiffs entirely at the plaintiffs' risk and expense and upon a satisfactory indemnity to the companies and the liquidators. That being so and the assets of the companies being at no risk, the absence of potential benefit for persons other than the plaintiffs is irrelevant.

As to the prospects of success, it is pertinent that the joinder of the companies would involve no drain on their assets. There is nevertheless a responsibility in the court "to see that any action taken in the company's name under (the court's) authority is not vexatious or merely oppressive"; Lloyd-Owen v Bull (1936) 4 DLR 273. The learned Master, after examining the Statement of Claim, an Opinion of Counsel, and the affidavits, concluded that the action was not vexatious or oppressive for want of merit. I have considered the arguments advanced by counsel on the appeal, but I see no reason to disagree with the Master. As the merits of the action will have to be canvassed at trial in due course, I think that it is undesirable to discuss them further.

As to the third point, it is true that much of what is alleged in the Statement of Claim is also alleged in the defence to Westpac's action on the guarantee. There may be contentions, however, available to Westpac against the guarantors under the terms of the guarantee which would not be available in an action by the companies for damages. Moreover it is by no means clear that the claim for damages could not succeed notwithstanding a failure of the pleas in the defence to the action in the guarantee. I am by no means convinced that the present action for damages is unnecessary.

The plaintiffs allege that Westpac and its agents have by unlawful and negligent acts wasted the companies' assets and thereby exposed the plaintiffs to liability, or greater liability, under their guarantee. They have pleaded causes of action which are on the face of the Statement of Claim and the other material advanced, plausible and arguable, at least if the companies are joined as plaintiffs. If the action were successful it would result in at least a reduction of the plaintiffs' liability. I think that they should be allowed to use the names of the companies as plaintiffs in the action.

I would allow the appeal. In my opinion there should be an order authorizing the plaintiffs, at their own expense and risk as to costs, to use the names of the companies as plaintiffs or co-plaintiffs in the action, conditionally upon the plaintiffs providing indemnities, to the satisfaction of a Master, to the companies and the liquidators thereof, against any costs, charges or expenses in connection with or arising out of the action.

JUDGE2 BOLLEN J I agree with the orders proposed by the Chief Justice and with his reasons.

JUDGE3 MULLIGHAN J I agree with the orders proposed by the Chief Justice for the reasons he has given.

KEITH ARTHUR RUSSELL AND MICHAEL FRIEDLANDER v WESTPAC BANKING CORPORATION, PETER THOMPSON, BDO NELSON PARKHILL SERVICES

At a glance

Court

Decision date

Before

Source

Judgment (30 paragraphs)

Parties

Cases Cited (1)