Supreme Court of WA|2005-02-22|Before: Mr P, Ms P, Dr J

Krishell Pty Ltd v Nilant & Ors [2005] WASC 14 (22 February 2005)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : KRISHELL PTY LTD -v- NILANT & ORS [2005] WASC 14

Corporations - Liquidation - Application to set aside decision of liquidator - Extension of time for application - Relevant principles - Assignment by liquidator of judgment debt and right of appeal against adverse judgment in favour of third party which set-off against judgment debt - Whether right of appeal is property of company - Whether assignment should be set aside - Turns on own facts

Burnells Pty Ltd (In liq) v Walsh [1979] Qd R 440

CLC Corporation v Read [1999] FCA 384; (1999) 17 ACLC 800

Cummings v Claremont Petroleum NL (1996) 185 CLR 124

Derwinto Pty Ltd (In liq) v Lewis [2002] NSWSC 731

Esber v Commonwealth [1992] HCA 20; (1992) 174 CLR 430

Gardner Corporation Pty Ltd v Zed Bears Pty Ltd [2003] WASC 13

Gardner Corporation Pty Ltd v Zed Bears Pty Ltd, unreported; SCt of WA; Library No 990181; 13 April 1999

Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; (1998) 1 All ER 98

Leon v York -O-Matic Ltd [1966] 1 WLR 1450

Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434

Re Equity Funds of Australia (In liq) (1976) 2 ACLR 238

Re Minerals Securities Australia (In Liq) and the Companies Act [1973] 2 NSWLR 207

Re Movitor Pty Ltd (In liq) v Sims (1996) 14 ACLC 587

Re Teller Home Furnishers Pty Ltd (In liq); Electronic Industries v Horsburgh [1967] VicRp 35; [1967] VR 313

Rocom International Pty Ltd v Prentice [2002] FCA 604

Torkington v Magee [1902] 2 KB 427

UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1262

Westpac Banking Corporation v Totterdell (1998) 20 WAR 150

Carob Industries Pty Ltd (in liq) t/as Foremost Equipment v Simto Pty Ltd [1999] WASC 258; (2000) 18 ACLC 177

Carob Industries Pty Ltd (in liq) v Simto Pty Ltd [2000] WASCA 362; (2000) 23 WAR 515

Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550

Clements v Simto Pty Ltd [2001] WASCA 183

UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667

1 MASTER NEWNES: This is an application by the plaintiff under s 1321 of the Corporations Act 2001 (Cth), in essence, for orders that the sale by the first defendants, as liquidators of Gardner Corporation Pty Ltd, to the second defendant of certain property of the company be set aside. The application under s 1321 is outside the 21-day period limited for such applications and the plaintiff has therefore made an application for an extension of time pursuant to O 81G r 81 of the Rules of the Supreme Court 1971 (WA).

2 The circumstances giving rise to the application under s 1321 of the Act are somewhat unusual and it is necessary first to describe them.

3 In 1995, Gardner Corporation sold to Krishell Pty Ltd and Zed Bears Pty Ltd what has been referred to as a "Gardner's Electronics" franchise. By the terms of the franchise agreement entered into between those parties, each of the directors of Zed Bears and Krishell guaranteed the performance of those companies under the sale agreement.

4 A dispute subsequently arose between Gardner Corporation, on the one hand, and Zed Bears and Krishell on the other. Ultimately Gardner Corporation commenced proceedings against Zed Bears, Krishell and their directors (the "original defendants") claiming that Zed Bears and Krishell had breached the terms of the franchise agreement. Gardner Corporation claimed damages for breach of the franchise agreement and in addition it also claimed moneys it alleged were due and owing to it under that agreement. The original defendants denied there had been any breach of the franchise agreement and claimed that they had been induced to enter into the franchise agreement by misleading and deceptive conduct on the part of Gardner Corporation, contrary to s 52 of the Trade Practices Act 1974 (Cth). They claimed that the managing director of Gardner Corporation, Mr Gardner, the second defendant in these proceedings, was knowingly concerned in that conduct. The original defendants counterclaimed in the action and sought, among other things, damages from Gardner Corporation.

5 On 13 April 1999, after a trial of some 15 days, Steytler J found that the original defendants were jointly and severally liable to pay Gardner Corporation outstanding franchise fees and certain other moneys payable under the franchise agreement: Gardner Corporation Pty Ltd v Zed Bears Pty Ltd, unreported; SCt of WA; Library No 990181; 13 April 1999. The amount so owing was referred to a Master for determination.

6 On the original defendants' counterclaim under the Trade Practices Act, Steytler J found that Gardner Corporation had engaged in misleading and deceptive conduct and that Mr Gardner had been knowingly concerned in that conduct. His Honour found, however, that only Krishell and its directors had been misled by the conduct and only they were entitled to damages. The question of Krishell's entitlement to damages was stood over for further hearing.

7 A Master of this Court subsequently found that Krishell and its directors, Mr and Mrs Myers, were liable under the franchise agreement to pay to Gardner Corporation the total sum of $98,559.50 and interest on that sum.

8 The hearing of Krishell's entitlement to damages took place over five days in November 2002 and judgment was delivered in January 2003: Gardner Corporation Pty Ltd v Zed Bears Pty Ltd [2003] WASC 13. Steytler J found that Krishell was entitled to damages against Gardner Corporation in the sum of $109,932.28 and, in addition, to damages in the sum of $98,559.50 and interest, which it was entitled to set off against the sum which the Master had assessed as payable by Gardner Corporation to Krishell. That left a balance of $109,932.28 owing by Gardner Corporation to Krishell.

9 Gardner Corporation lodged an appeal (being FUL 14 of 2003) against the findings of Steytler J and sought orders that Krishell's counterclaim be dismissed in its entirety and that Krishell pay Gardner Corporation the sum of $98,559.50 plus interest, found by the Master to be payable under the franchise agreement.

10 Accordingly, the effect of the appeal, if successful, would be that the damages awarded to Krishell in the sums of $109,932.28 and $98,559.50 would be set aside and Gardner Corporation would be entitled to recover the sum of $98,559.50 which had been found to be due and payable to it.

11 Subsequently an order was made in this Court that Gardner Corporation be wound up in insolvency and the current first defendants were appointed as liquidators of the company.

12 The liquidators subsequently obtained legal advice that it was not in the interests of creditors for the liquidators to continue with the appeal. On 20 October 2003, Mr Nilant wrote to Mr Myers, by his solicitors, and to Mr Gardner, informing them that it was not the intention of the liquidators to pursue the appeal and inviting offers for the purchase of the company's rights to the appeal. The liquidators required that any offer be submitted to them by 24 October 2003. Subsequently, by letter of 23 November 2003, Mr Nilant, apparently in response to a request by telephone by Mr Myers' solicitors, agreed to allow Mr Myers an additional week to make such an offer.

13 On 11 November 2003, Mr Gardner submitted an offer to the liquidators to purchase the appeal rights for the sum of $5000. That offer was accepted by letter from the liquidators to Mr Gardner of 12 November 2003. The terms of the agreement required Mr Gardner, among other things, to obtain the leave of the Court to proceed in the name of the company and to be responsible for the costs of that application, which must be filed within 14 days of the determination of a then pending application by Krishell to dismiss the appeal for want of prosecution.

14 The application by Krishell to dismiss the appeal for want of prosecution was dismissed by the Full Court on 14 November 2003. The Full Court ordered that any application for leave to proceed with the appeal by Gardner Corporation in its name be filed within 10 days of that date. It appears that Krishell, by its solicitors became aware at about that time of the agreement between the liquidators and Mr Gardner in relation to the appeal rights.

15 On 24 November 2003, the liquidators, on behalf of Gardner Corporation, and Mr Gardner entered into what was described as a "Deed of Confirmation" to "ratify and confirm" the agreement of 12 November 2003. Clause 1 of the deed provided that the agreement would become unconditional upon the Court granting Mr Gardner "leave to proceed with the Appeal in the name of the Company". The deed went on to provide that should leave be refused the sum of $5000 would be repaid to Mr Gardner. In the deed the parties ratified and confirmed that the company's rights to the appeal included, among other things, the company's right to claim payment of the sum of $98,559.50 and interest pursuant to the orders of Steytler J of 4 February 2003 and any right of the company to defeat or limit any claims awarded to the respondents at first instance.

16 A further deed was entered into by the same parties on 5 March 2004. By that deed, the parties agreed to add to cl 1 of the deed of 24 November 2003 the words "and/or in the name of the Purchaser as assignee". That is, the deed, as amended, became unconditional upon the Court granting Mr Gardner leave to proceed with the appeal in the name of the company and/or in his own name as assignee.

17 In the meantime, Krishell had been in contact with the liquidators, objecting strenuously to the transaction with Mr Gardner. It appears from the correspondence in evidence that on or shortly before 14 November 2003, Krishell's solicitor, Mr Kyle, had a telephone conversation with Mr Nilant in which Mr Kyle said to Mr Nilant that a meeting of creditors should be called and each of the creditors offered the right to purchase any appeal rights of Gardner Corporation. Mr Nilant replied that convening a creditors' meeting to consider the sale of the appeal rights would result in costs being incurred which were unlikely to be justified in view of the amount likely to be offered for the appeal rights. Moreover, the only parties that could conceivably have any interest in them were Krishell and Mr Gardner.

18 In a letter of 14 November 2003 Krishell's solicitors reiterated Krishell's request that an immediate meeting of creditors be called to discuss the matter. In that letter Krishell's solicitors went on to say that "any further attempt to benefit the directors of the company to the detriment of creditors will be the subject of serious complaint by our client."

19 I should interpose that it is difficult to see what benefit, "to the detriment of creditors", Mr Gardner was thought to have received if it did not include the right to the judgment debt. In the course of argument I understood counsel for the plaintiff to say that by that date, following the hearing of the application in the Full Court, Krishell understood that the sale of the appeal rights included an assignment of the judgment debt to Mr Gardner.

20 Mr Nilant responded by a letter of 18 November 2003 in which, among other things, after noting that no offer for the appeal rights had been received from Krishell and reiterating what he had said in the telephone conversation, Mr Nilant referred to reg 5.6.15 of the Corporations Regulations and said that he required Krishell to provide security in the sum of $2323 in respect of the costs of a meeting of creditors before a notice of meeting would be sent out. In the letter Mr Nilant noted that the agreement for the sale of the appeal rights was expressly subject to Mr Gardner obtaining the leave of the Court to proceed with the appeal and that Krishell would be able to be heard on that application.

21 Krishell's solicitors responded by letter of 20 November 2003 in which they said that in light of, among other things, Mr Nilant's comments, and the requirement that Mr Gardner make application to the Court for leave to proceed in the name of the company, Krishell did not pursue its request for a creditors' meeting. Krishell's solicitors questioned whether the liquidators had the power to dispose of the appeal rights and observed that that would be dealt with on the application to the Court.

22 On 24 November 2004, Gardner Corporation and Mr Gardner applied for an order that Mr Gardner be granted leave to proceed with the company's appeal in the name of the company. In support of that application, an affidavit of Mr Nilant, sworn 24 November 2004, was filed. Relevantly for present purposes, it annexed a copy of the deed of confirmation of 24 November 2004.

23 The question of the liquidators' powers to sell the appeal rights was raised again by Krishell's solicitors at a meeting of creditors of Gardner Corporation on 8 January 2004. Krishell's solicitors contended that the right of appeal was not an asset of Gardner Corporation. They also complained that Krishell had not been offered the right to purchase the judgment debt owed by Krishell to Gardner Corporation. The liquidators' response was to the effect that the judgment debt was valueless unless the appeal was successful and it was therefore inextricably connected to the right of appeal.

24 The current application was filed on behalf of Krishell on 26 March 2004. On 7 April 2004, an application was made by Krishell for an extension of time within which to file the application under s 1321, the prescribed period of 21 days from the date of the liquidators' decision having expired.

25 It is necessary to turn, in the first instance, to the application for an extension of time to make the application under s 1321.

26 It is well established that the discretion to grant an extension of time is broad and flexible and that the question in each case is whether it is just in all the circumstances to grant the extension. Factors that are relevant to the exercise of that discretion include the length and nature of the delay, the responsibility and reason for it, whether prejudice has been caused by the delay and whether the claim sought to be advanced in arguable: CLC Corporation v Read [1999] FCA 384; (1999) 17 ACLC 800; Derwinto Pty Ltd (In liq) v Lewis [2002] NSWSC 731; Rocom International Pty Ltd v Prentice [2002] FCA 604.

27 In the present case, the delay is, in the circumstances, substantial. Krishell was aware by 14 November 2003 that the liquidators had agreed to sell the appeal rights to Mr Gardner. By 24 November 2003, or thereabouts, at the very latest Krishell must have been aware, by the copy of the deed of confirmation annexed to Mr Nilant's affidavit for leave to continue the appeal, that Mr Gardner had acquired the company's rights to enforce the judgment in favour of Gardner Corporation. Indeed, at a meeting of creditors on 8 January 2004, Krishell's solicitor had complained that Krishell had not been afforded an opportunity to acquire the rights to that judgment debt. Nevertheless, the application to set aside the transaction was not made until 26 March 2004, at least four months after the transaction came to Krishell's attention, and some four and a half months after the liquidators' decision had been made.

28 Over that period it must have been apparent to Krishell and its advisers that the winding-up of Gardner Corporation was proceeding and that Mr Gardner was taking steps to pursue the appeal rights, including by the application of 24 November 2004 for leave to continue the appeal. It must also have been evident that Mr Gardner was incurring costs in doing that, including the costs of further affidavits of Mr Gardner of 11 February 2004 and 8 March 2004 and an affidavit of his solicitor sworn on 8 March 2004, filed in support of the application.

29 On the issue of delay, it was submitted on behalf of the plaintiff that the agreement between the liquidators and Mr Gardner was amended as late as March 2004, so it was still changing some 21 days before the plaintiff's application was filed. It was also submitted that it was appropriate that the plaintiff deferred making this application until Mr Gardner's application for leave to pursue the appeal had been determined. Counsel said that the plaintiff's objection to the agreement had been live from the outset and the question of the liquidators' powers to enter into it had been raised within days of the agreement being made.

30 I do not accept that those matters provide a satisfactory reason for the delay. The amendment on 5 March 2004 was of a minor nature and did not go to the heart of the agreement, as the current application does. It is the case that the plaintiff had complained about the agreement with Mr Gardner in November 2003 and continued to do so for some time after that. It did not, however, foreshadow an application of the present nature to set aside the agreement. The plaintiff went no further than saying that its objections to the agreement would be raised on Mr Gardner's application for leave to pursue the appeal. That course, to the extent it is relevant to that application (on which I express no view), is still open to the plaintiff.

31 On the issue of prejudice, Mr Gardner says that since 12 November 2003 he has, in difficult financial circumstances, expended significant amounts on legal costs to pursue the appeal rights, including selling household effects and the motor vehicles of his wife and son for that purpose. He has reached a compromise with a debtor, the ANZ Bank, based on the pending appeal. He has also obtained the agreement of the Australian Taxation Office to defer proceeding against him on the basis that he has a contingent claim for payment of the judgment debt through the exercise of the right of appeal. In short, it is asserted by Mr Gardner that he has incurred significant costs and rearranged his financial affairs on the basis that he had secured the right of appeal, including the judgment debt of Gardner Corporation. In an affidavit sworn on 21 May 2004, Mr Nilant says that this application has delayed the finalisation of the liquidation and the costs of it are likely to absorb the funds which would otherwise have enabled priority creditors to be paid out in full.

32 On the other hand, Mr Myers, on behalf of Krishell, says that if Krishell is afforded an opportunity to acquire the appeal rights and the entitlement to the judgment debt, it would be prepared to pay "significantly more" than the $5000 paid by Mr Gardner.

33 As I have said, whether the substantive application has any prospect of success is a relevant consideration on the question of whether time should be extended and it is therefore necessary to turn to the merits of Krishell's application under s 1321 of the Corporations Act.

34 The principles to be applied on an application to challenge the decision of a liquidator in the management or sale of the assets of a company are well-known. The Courts have consistently been reluctant to interfere where the issue was whether, in some business or commercial sense, a liquidator had acted prudently. The Court will not interfere simply because its opinion might differ from that of the liquidator. It will interfere only where it is shown that the liquidator did not address the correct question, made errors of law, failed to take into account relevant matters or took into account irrelevant matters or where the decision in the circumstances appears to be such that no reasonable liquidator could arrive at it: Re Equity Funds of Australia (In liq) (1976) 2 ACLR 238 at 239; Westpac Banking Corporation v Totterdell (1998) 20 WAR 150 per Ipp J at 156.

35 In considering whether to review a decision of a liquidator the Court must bear in mind that it is well established that the commercial decisions of liquidators are to be accorded great weight. As Street CJ in Eq observed in Re Minerals Securities Australia (In Liq) and the Companies Act [1973] 2 NSWLR 207 at 232:

"When the Court is required to pronounce upon the commercial prudence of a transaction, it enters upon a slippery and uncertain field. Apart from a lawyer's disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence restrict the available material to far less than is necessary for the making of a commercial decision."

36 In that case Street CJ considered (at 231) that ultimately every challenge must probably depend on broadly stated considerations such as whether the liquidator's action has such importance and can be seen to have such defects as to justify the Court exercising its supervisory power.

37 See also Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434; Burnells Pty Ltd (In liq) v Walsh [1979] Qd R 440; Leon v York -O-Matic Ltd [1966] 1 WLR 1450; Re Teller Home Furnishers Pty Ltd (In liq); Electronic Industries v Horsburgh [1967] VicRp 35; [1967] VR 313.

38 The first ground relied upon by the plaintiff was that the appeal rights as such were not property of the company and therefore the liquidators could not dispose of them.

39 The defendants submitted that the judgment debt of Gardner Corporation was clearly assignable and the assignment of that debt carried with it, as an incidental existing right, the right to contest by way of appeal Krishell's set-off against that debt. It was also argued that the assignment was in truth an assignment of the net balance (if any) in favour of Gardner Corporation as between the judgment debts of Krishell and Gardner Corporation found in the original action, plus the incidental right to have that balance determined.

40 It was submitted that it is accepted law that the assignment of property may entail "the assignment of a right of action which is an incidental remedy for the recovery of a property assigned". Counsel referred to Crossley Vaines on Personal Property, (5th ed) at 271 - 272; Meagher, Gummow & Lehane, Equity: Doctrines and Remedies, (4th ed) par 6-480 and s 20(1)(b) of the Property Law Act 1969 (WA). Accordingly, it was submitted, the incidental remedies expressly assigned in the deed of assignment between the liquidators and Mr Gardner included "any rights or entitlements of the Company in the appeal to defeat or limit any claims awarded to the respondents to the appeal in terms of the judgments at first instance". Therefore, the relevant rights in or to the appeal acquired by Mr Gardner include the judgment debt and the right to pursue the appeal. That, it was submitted, is reflected in s 20(1)(b) of the Property Law Act and such a right was characterised as "substantive" in a similar context in Esber v Commonwealth [1992] HCA 20; (1992) 174 CLR 430 at 440.

41 The plaintiff simply contended that a right of appeal in respect of a judgment creating a liability in the appellant is not a chose in action. A liquidator could not therefore assign such a right.

42 It is clear that a liquidator has wide powers under s 477(2)(c) of the Act to sell the property of a company in liquidation. It is also clear that the property of a company includes a "thing in action": Corporations Act, s 9. It was not in issue that the liquidators could assign the judgment debt of the company. Whether or not the liquidators could assign the company's right of appeal was, however, in issue.

43 A thing in action or chose in action describes "personal rights of property which can only be claimed or enforced by action, and not by taking physical possession": Torkington v Magee [1902] 2 KB 427 at 430. The right must have a proprietary character: JG Starke Assignments of Choses in Action in Australia, Butterworths, Sydney, 1972 at p 3; Halsbury's Laws of England, (4th ed), vol 6, par 5-01. A chose in action is property, "something capable of being turned into money": Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; (1998) 1 All ER 98 at 117 per Lord Hoffman.

44 It is accepted that a chose in action which a company has against a third party falls within the definition of "property" in s 9 of the Act and can be sold by the liquidator under s 477(2)(c) of the Act: Re Movitor Pty Ltd (In liq) v Sims (1996) 14 ACLC 587 at 596; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1262 at 1275 - 1278.

45 The question of whether a right of appeal is capable of assignment was considered in the context of the Bankruptcy Act 1966 (Cth) in Cummings v Claremont Petroleum NL (1996) 185 CLR 124. In that case sequestration orders were made against the estates of two respondents (the appellants in the High Court) to proceedings in the Federal Court after judgment had been reserved but before it was delivered. Judgment was then pronounced against both respondents for substantial damages for conspiracy and deceit, breaches of directors duties and contravention of the Fair Trading Act (SA). Judgment was subsequently entered against both respondents. The respondents filed notices of appeal. The applicants in the proceedings applied for the notices of appeal to be set aside.

46 Brennan CJ, Gaudron and McHugh JJ held that the right to appeal was not property of the bankrupt within the meaning of the Bankruptcy Act and neither appellant had any financial interest that conferred locus standi to appeal; even his contingent interest in a surplus in the estate did not give him such an interest. Brennan CJ, Gaudron and McHugh JJ said at 133:

"A right to appeal may be a substantive right, [footnote omitted] but it is another question whether such a right has the character of property. Some rights created by statute can constitute property, [footnote omitted] but a right to appeal does not have the character of property merely because it is the creature of statute. A chose in action may be the property of the person entitled to enforce it, [footnote omitted] but a liability to satisfy a judgment enforcing a chose in action is not property of the person against whom the judgment is entered. A liability is not property of the person liable. Nor is a right to appeal against a money judgment property of the judgment debtor. ... As a matter of ordinary language, a judgment debtor's right to appeal against the judgment is not property."

47 Their Honours pointed out (at 134) that if the appeal relates to property that became vested in the trustee on the bankruptcy, or if the appeal relates to a claim by the bankrupt for money or property that would be vested on recovery in the trustee, the right to appeal is vested in the trustee. But it does not follow that a right to appeal against a money judgment entered in an action against a bankrupt is property of the bankrupt and, on that account, vested in the trustee. Such a right of appeal is not property of the bankrupt and does not vest in his trustee. Brennan CJ, Gaudron and McHugh JJ went on to conclude that the appellants did not themselves have a sufficient interest in the appeals to give them locus standi to bring them.

48 Dawson and Toohey JJ, without deciding whether a right of appeal is a chose in action or property according to general concepts, found that it was "property" within the meaning of the Bankruptcy Act, even where the appeal is against a judgment imposing a monetary obligation on the bankrupt. Their Honours concluded, however, that the appellants were not entitled to appeal against a judgment which was enforceable only against the estates vested in their trustees.

49 A copy of the notice of appeal by Gardner Corporation was put in evidence on this application. By it, Gardner Corporation seeks orders, in effect, that the orders of Steytler J that it pay to Krishell the sum of $109,000 and $98,559.50, and that Krishell be entitled to set off the latter sum against the amount that was found to be owing by Krishell to Gardner Corporation, be set aside and that Krishell's counterclaim for damages be dismissed and that Krishell and the Myers pay to Gardner Corporation the sum of $98,559.50 plus interest.

50 I am inclined to the view that the right of appeal is property of Gardner Corporation. While Gardner Corporation appeals against the finding of liability on the part of Gardner Corporation and the damages awarded against it, it also appeals against the order of Steytler J that the plaintiff may set off against the sum awarded to Gardner Corporation an equivalent sum by way of damages and it seeks an order that the plaintiff pay to it the sum of $98,559.50. That is, it seeks to have set aside the set-off which currently precludes it from recovering money owed to it by Krishell. If, therefore, the appeal were successful it would not simply relieve the company of its liability to the plaintiff but would enable Gardner Corporation to recover the amount of the judgment in its favour. In that sense the appeal is for the recovery by the company of its property. It is therefore assignable by the liquidators.

51 Nevertheless, I do not consider the position is clear beyond argument. It is, I think, arguable that the appeal rights were not property of the company and were incapable of assignment by the liquidators to Mr Gardner. But that is not the end of the matter. The plaintiff seeks an order that the decision of the liquidators to enter into agreement to sell the appeal rights, including the entitlement to the judgment debt, "be reversed". As to the bare right of appeal, it argues that as a matter of law this is not capable of being sold by the liquidators. However, if the plaintiff's contention is correct then the agreement with Mr Gardner, to that extent, simply has no effect. The agreement will not have been effective to transfer the bare right of appeal to Mr Gardner. All that will have been transferred is the right to the judgment debt and the rights associated with it; Mr Gardner will not have acquired the right of appeal. It was not contended by the plaintiff that the failure of the agreement in respect of the company's right of appeal would affect the assignment of the judgment debt.

52 If, on the other hand, the assignment of the company's right of appeal was effective in law I am not satisfied that it was a improper exercise of the liquidators' powers to dispose of it as they did, for reasons to which I will come shortly.

53 To the extent it may be relevant, the question of whether or not the agreement did in fact effect a valid assignment of the right of appeal is a matter that can be dealt with (if necessary) on Mr Gardner's application for leave to proceed with the appeal. By the deed the liquidators expressly agreed that Mr Gardner may seek the leave of the Court to proceed with the appeal either in the company's name or his own name and agreed neither to oppose nor consent to such an application. The standing of Mr Gardner to proceed with the appeal, including (to the extent it may be relevant) whether the agreement with the liquidators was effective in respect of the assignment of the right of appeal, is a matter appropriately considered in that context.

54 The plaintiff also contested the assignment by the liquidators of the benefit of the judgment awarded to Gardner Corporation. Indeed, as appeared in the course of argument, that was the plaintiff's real complaint.

55 The plaintiff argued that neither Krishell nor any other creditor had been offered the opportunity to acquire the judgment debt and, indeed, the assignment of the judgment debt had simply been given to Mr Gardner for no consideration, after he had agreed to acquire the right of appeal. The plaintiff, by Mr Myers, says the plaintiff would have paid "considerably more" than Mr Gardner had the opportunity been offered to it.

56 It was submitted that it was not in the interests of the company or its creditors to permit the sale to Mr Gardner because the amount offered by Mr Gardner was insignificant in the context of the liquidation and a greater amount could have been, and could be, obtained by the liquidators by offering the judgment rights to the plaintiff.

57 I should say that I am not persuaded that Krishell did not understand the original offer of the appeal rights to involve an assignment of the judgment debt. In any event, it appears the only evidence that a higher price could have been, and could be, obtained by the liquidators for the judgment debt is the evidence of Mr Myers to which I have referred. Perhaps understandably, Mr Myers has not disclosed the amount which Krishell would be prepared to pay, but it is little assistance to be informed that it is "considerably more" than Mr Gardner paid. It is not at all evident what that might mean in monetary terms. In that context, it is relevant to observe that the amount any reasonable person might be prepared to pay is likely to be quite limited and therefore it is not clear that the amount Krishell would have to pay to ensure it secured the appeal rights would be substantially greater than $5000. The amount of the judgment in favour of Gardner Corporation is an amount of some $85,000. It will only be of any value if the appeal currently on foot is successful and then only if the damages awarded to Krishell are extinguished, or to the extent that they are reduced, and also only to the extent that the costs incurred in prosecuting the successful appeal are recovered from Krishell. The risks (including the risks of an adverse costs order) inherent in an appeal are also relevant to the value of the judgment debt.

58 It is also notable that when the liquidators required Krishell to provide the sum of $2323 in order to convene a further meeting of creditors to consider the sale of the appeal rights, Krishell declined to provide it.

59 As the defendants have observed, if the present application were to be successful, the sale process would have to start again. All that has been done and all the money that has been expended to date by Mr Gardner on the basis that he has acquired the appeal rights, including the right to the judgment debt, would be lost if Krishell were the successful purchaser.

60 I do not accept the plaintiff's contention that the assignment of the judgment debt was given to Mr Gardner without consideration by the deed of 24 November 2003 after it became apparent from the argument in the Full Court on the application to strike out the appeal for want of prosecution that the liquidators could not sell the bare appeal rights alone. In my view, it is clear from the argument in the Full Court that the liquidators and Mr Gardner had understood the appeal rights to include the judgment debt. It appears from the letter from Krishell's solicitors of 14 November 2003 that at least by that stage Krishell was also of that understanding. I might add that if the original offer of the appeal rights was not understood to include the judgment debt a recipient is likely to have been puzzled as to why the liquidators thought anyone would be interested in purchasing them. In that context I might also observe that although in his letter of 20 October 2003 Mr Nilant invited Mr Meyers to contact him with any queries, neither Mr Meyers nor his solicitors did so.

61 It was also submitted on behalf of the plaintiff that it is contrary to the policy of the Corporations Act for a liquidator to assign property of a company to a former controller of the company whom the liquidator believes may have acted in breach of his obligations under the Corporations Act. It was asserted that, in this case, the liquidators believed that Mr Gardner had acted in breach of various obligations under the Corporations Act.

62 No authority was referred to for that proposition and I do not accept that a liquidator's hands are tied in that way when disposing of property of the company to the best advantage of the creditors.

63 It was further submitted on behalf of the plaintiff that it was inappropriate for the liquidators to assign the company's right of appeal to Mr Gardner when it was clear the Mr Gardner has no assets and no personal capacity to pay the costs of the appeal, in circumstances where the security for the costs of the appeal which had been previously provided by Gardner Corporation was, so it was submitted, wholly inadequate. Although under the terms of the agreement Mr Gardner agreed to indemnify Gardner Corporation in respect of the appeal, it was submitted that the company would remain at risk of an order for the costs of the appeal if it was conducted by Mr Gardner.

64 I am not satisfied, however, that the amount of the security for the costs of the appeal, which was provided pursuant to an order of the Court, is inadequate. Moreover, the agreement with Mr Gardner is expressly subject to the approval of the Court to the appeal being prosecuted by Mr Gardner. Issues of liability for costs or further security for costs can appropriately dealt with at that point. That issue would not, in my view, be sufficient to impugn the liquidators' decision.

65 In the end, I am not satisfied on the evidence that in entering into the transaction with Mr Gardner the liquidators acted unreasonably or other than in good faith and on the basis that the assignment to Mr Gardner was in the best interests of the company. I consider that the plaintiff has fallen well short of making out its contention that the assignment to Mr Gardner (including, as I think is the case, the appeal rights themselves) was imprudent and that in entering into it the liquidators were in error.

66 As to the assignment of the right of appeal itself, the judgment debt in favour of Gardner Corporation was of no value unless and until the appeal was successful, so that the set-off which precluded its recovery was removed. The prosecution of the appeal would involve significant cost and the risks inherent in any appeal, including the risk of an adverse costs order on the appeal. In the circumstances it was clearly open to the liquidators to conclude that it was not worthwhile for them to pursue the appeal in an endeavour to obtain the value of the judgment debt. It was also reasonable for the liquidators to attempt to realise any value that the judgment debt may have to a third party. The liquidators, in my view rightly, concluded that the only parties likely to be interested in it - albeit it for different reasons - were Mr Gardner and Krishell. But in order to realise any amount for an assignment of the judgment debt the right of appeal of Gardner Corporation clearly had to be made available to the assignee. In my view, it was not unreasonable for the liquidators to take the course they did and to provide the appeal rights to Mr Gardner as assignee of the judgment debt, subject to the approval of the Court to Mr Gardner proceeding with the appeal.

67 In the circumstances, I would refuse leave to extend the time for the making of the application. The plaintiff knew of the transaction by, at the latest, 24 November 2003 and it knew that Mr Gardner was proceeding on the basis that he had acquired the rights concerned and was incurring costs on that basis. Krishell took no steps to impugn the transaction until 16 March 2004. Mr Gardner now faces the prospect of losing all the money he has spent on the matter to date. The liquidators face the prospect of further costs and delay in the liquidation in offering the appeal rights for sale. No satisfactory explanation for the delay by Krishell has been offered and, in my view, it is simply too late now to endeavour to set aside all that has been done, against an uncertain increase in the return to creditors.

68 In any event, I would have refused the substantive application for the reasons that I have set out above. In the end, I am not persuaded that grounds have been shown which would warrant this Court interfering with the decision of the liquidators.

Krishell Pty Ltd v Nilant & Ors [2005] WASC 14

At a glance

Court

Decision date

Before

Catchwords

Source

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Judgment (99 paragraphs)

Krishell Pty Ltd v Nilant & Ors [2005] WASC 14 (22 February 2005)

Parties

Legislation Cited (2)

Cases Cited (6)