La Trobe Wholesale Finance Pty Ltd v KCRAM Pty Ltd

Background and evidence 5 As appears from Mr Donohoue's affidavit, the applicant is a mortgage financier. 6 The respondent, which carried on business as a firm of property valuers, was, since 2002, included on the applicant's panel of approved valuers. Its appointment was subject to its maintaining professional liability insurance of at least $2 million to conduct valuations of residential securities with ten years of run off cover and cover for breaches of the Trade Practices Act 1974 (Cth) ("the TPA"). 7 In 2007, the applicant considered a proposal to lend money on the security of a first mortgage over land situated in Queensland. Prior to advancing the funds, the applicant retained the respondent to value the property. 8 By a report dated 13 December 2007, the respondent valued the Queensland property at $900,000 and the valuer affirmed that he carried the required professional indemnity insurance of $2 million, fully paid up. 9 Mr Donohoue deposed that the applicant relied upon the valuation in entering the loan agreement and advancing $675,000 secured by a registered first mortgage over the Queensland property. In December 2008, the borrower defaulted and the applicant took possession of the property. 10 By a letter dated 14 December 2009, the applicant notified the respondent that a valuation of a Queensland property on 13 December 2009 indicated a value of $370,000 and formally put the respondent on notice that it would claim against it if there were a shortfall on realisation and the valuation had been negligently prepared. 11 Upon sale on 24 January 2010, the Queensland property realised only $385,000 and a retrospective valuation commissioned by the applicant indicated a value of $465,000 as at 13 December 2007. 12 The applicant contends that the respondent was negligent and engaged in misleading and deceptive conduct in preparing the valuation. The applicant claims that it suffered loss and damage totalling $322,778.87. 13 Mr Donohoue exhibited a certificate of currency of the respondent's professional indemnity insurance for the period from 4 June 2007 to 30 November 2009. 14 Mr Bannister deposed to his correspondence on 19 January 2012 with the Claims Manager at Brooklyn Underwriting ("Brooklyn"), inquiring whether Brooklyn held professional indemnity insurance for the respondent during the period when the applicant notified the respondent of a potential claim, and whether Brooklyn had received notification from the respondent of the circumstances which might give rise to a claim. By a letter dated 9 March 2012, Brooklyn confirmed that the respondent had a valid policy of professional indemnity with it during the period 31 December 2008 to 31 December 2009 and had notified it of the applicant's claim within the policy period. 15 Mr Bannister deposed: 8. On 3 April 2012, I sent a letter to Vincents Charted Accountants, the liquidator of the respondent, to confirm that in light of Brooklyn's confirmation of insurance Lander & Rogers held instructions to make application for, inter alia, an order pursuant to section 471 B of the Corporations Act 2001 (Cth) that the applicant be granted leave to commence proceedings against the respondent in liquidation. The letter also sought confirmation of the liquidator's likely response to such an application. Now produced and shown to me and marked with the letters "ADB3" is a true copy of the letter to Vincents Chartered Accountants dated 3 April 2012. 9. On 4 April 2012, I received a letter from Vincents Charted Accountants confirming the liquidator neither consented nor opposed the application to seek leave to proceed against the company pursuant to s.500(2) of the Corporations Act 2001 (Cth). Now produced and shown to me and marked with the letters "ADB4" is a true copy of the letter from Vincents Chartered Accountants dated 4 April 2012. 10. If leave to commence proceedings against the respondent is granted, the applicant proposes to file and serve a statement of claim in substantially the form now produced and shown to me and marked with the letters "ADB5". 16 The statement of claim exhibited to Mr Bannister's affidavit alleges, on the basis of the matters to which Mr Donohoue deposed, breach of contract, breach of duty of care, and misleading or deceptive conduct by the respondent. It seeks damages and further or alternatively, damages pursuant to s 82 of the TPA.

Discussion 17 Section 500 of the Act states: Execution and civil proceedings (1) Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void. (2) After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes. (3) The Court may require any contributory, trustee, receiver, banker, agent, officer or employee of the company to pay, deliver, convey, surrender or transfer forthwith or within such time as the Court directs to the liquidator any money, property of the company or books in his, her or its hands to which the company is prima facie entitled. 18 Section 500 applies in relation to a company subject to a creditors' voluntary winding up. 19 In Altinova Nominees Pty Ltd v Leveraged Capital Pty Ltd (Recs and Mgrs Apptd) (in LIQ) (No 2) [2009] FCA 42, Jacobson J referred to the Full Court's discussion of relevant authorities in Vagrand Pty Limited (in liq) v Fielding (1993) 41 FCR 550. His Honour stated at [18] to [21]: [18] The authorities contain two possible explanations of the objective of the predecessor of s 500(2) of the Corporations Act. The first is that the prohibition on proceeding without the grant of leave is intended to effect the statutory policy of ensuring that the assets are distributed rateably amongst all creditors so that no creditor will obtain an advantage over another. It is important to note that in making this statement in Re Sydney Formworksat 650, McLelland CJ in Eq pointed to the objective of enabling the Court: … effectively to supervise all claims brought against the company which is being wound up. [19] The second explanation is that without the restriction contained in the subsection, a company in liq would be subject to a multiplicity of actions which would be expensive, time-consuming, and in some cases unnecessary. [20] As McPherson J observed in Ogilvie-Grant at 672, the question of whether leave ought to be granted is reduced to one of choosing between two alternative forms of procedure, namely filing a proof of debt or commencement of legal proceedings. His Honour said that the effect of the subsection is that the claimant is required to lodge a proof of debt unless he or she can demonstrate that there is a good reason for departure from that procedure. [21] McPherson J also said at 672: It is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate but .. they … include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed. 20 The policy underpinning s 500(2) and the analogous s 471B (applicable to a company to which a provisional liquidator has been appointed or which is the subject of a compulsory winding up) recognises that ordinarily, the liquidation process will be more efficient, and the assets of the company best preserved, if those with provable claims lodge proofs of debt to be dealt with by the liquidator, rather than individually instituting or maintaining litigation against the company. Accordingly, leave is required in order to pursue the latter course. 21 In Viscariello v Bernsteen Pty Ltd (in liq) (2004) 235 LSJS 277; [2004] SASC 266 at [21], Besanko J stated, in relation to s 500(2) of the Act: Before considering the reasons of the Master and of the Judge, it is convenient to outline the principles which govern the exercise of the discretion under s 500(2) of the CA. In Ogilvie-Grant v East (1983) 7 ACLR 669, McPherson J (with whom Campbell CJ and Sheahan J agreed) discussed the principles relevant to the exercise of the discretion under an earlier analogue of s 500(2). I respectfully agree with his Honour's analysis which in my opinion applies with equal force to s 500(2). The question is whether a claimant should be permitted to proceed by action or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge. The question is one of choosing between alternative forms of procedure. The effect of s 500(2) is to require the claimant to adopt the course of lodging a proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. It is impossible to state exhaustively all the circumstances in which it may be appropriate to grant leave to proceed. Relevant factors are the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and, if proceedings have already been commenced, the stage to which those proceedings may have progressed. The fact that the company is insolvent and will not be able to satisfy a judgment is a factor against the grant of leave (Haviland v Joslow (No 4) Pty Ltd [1979] 2 NSWLR 318) because the Court will not give its imprimatur to fruitless proceedings. Nor will leave be granted if the claimant does not have a genuine claim. On the other hand, the fact that the claimant has an arguable claim for proprietary relief against the assets of the company is a factor in favour of a grant of leave (Robins Haigh McNeill Pty Ltd v Nichols-Cumming Advertising Australia Pty Ltd (in liq) [2001] VSC 427). 22 In Oceanic Life Ltd v Insurance and Retirement Planning Services Pty Ltd (in liq) (1993) 11 ACSR 516 ("Oceanic") at 520, Zeeman J summarised non-exhaustively, the matters relevant to the exercise of the discretion to grant leave under s 500(2), as follows: 1. Whether there is a substantial question to be tried. 2. Whether the action would interfere with the orderly winding up of the respondent. 3. Whether the action would serve any sufficient purpose. 4. Whether the action would have any adverse effect upon the respondent and its shareholders. As to the first of those matters, some of the cases express the test in terms of whether there is a prima facie case but that has been said to be misleading (see Vagrand Pty Ltd (in liq) v Fielding (1993) 10 ACSR 373; 11 ACLC 411 at 416-7. … As to the second of those matters, the grant of leave could be subject to conditions which would minimise interference with the orderly winding up of the respondent. As to the third of those matters, there is an obvious benefit to be derived from the proceedings in that they provide a necessary step in the process whereby the applicant may recover all or most of what it is seeking in the action from the insurer. That is a significant factor in favour of granting leave (see Vagrand Pty Ltd (in liq) v Fielding, supra, at 414. 23 Under both s 471B and s 500(2), consistently with the above principles, it will frequently be appropriate to grant leave if an applicant proposes to commence or maintain an action for damages on a claim where the company is insured against the liability for such damages and the costs of defending the claim (see Doran Constructions Pty Ltd v Beresfield Aluminium Pty Ltd [1999] NSWSC 499). 24 In Oceanic, Zeeman J stated at 521: It has been common to grant leave for the commencement or continuance of proceedings for damages against a company which is in the course of being wound up in circumstances where the company is insured against its liability to pay those damages and the costs of defending the proceedings, as is the case in the present proceedings. Examples of leave being granted in such circumstances are provided by Re Sydney Form Works Pty Ltd (in liq) (1965) 82 WN (Pt 1) (NSW) 558 and Re A J Benjamin Ltd (in liq) (1969) 90 WN (Pt 1) (NSW) 107. In all the circumstances it is appropriate that the applicant have leave in some form whereby it may commence proceedings or continue the proceedings already instituted. That leave will be granted upon condition that the action is limited to the matters pleaded in the proposed form of statement of claim and upon the further condition that the applicant will not seek to enforce any judgment which it may obtain against the respondent without leave first having been obtained. 25 A grant of leave may be subject to conditions. Typically, an applicant is required to refrain from enforcing any judgment without the leave of the Court. The Court may, where appropriate, order the applicant to pay the liquidator's costs of appearing as a respondent (Chand v Azurra Pty Ltd (in liq) (2011) 82 ACSR 383; [2011] NSWCA 58). 26 In the present case, I was satisfied, on the basis of the matters to which Mr Donohoue deposed, that there was a serious question to be tried. I was also satisfied that proceedings would serve a useful purpose, as the respondent may be entitled to be indemnified for the full amount of the applicant's claim under the policy of insurance. There was, at this stage, no submission or evidence to suggest that indemnity under the policy would not extend to the causes of action pleaded. 27 If the applicant establishes that the respondent is liable to it, and the insurer is liable to indemnify the respondent under the policy, pursuant to s 562 of the Act the applicant may recover its full claim from the insurer, subject to the deduction of expenses. 28 In Oceanic, when considering whether the company in liquidation and its shareholders would be adversely affected by a grant of leave to commence a proceeding for a claim in respect of which the company was apparently insured, Zeeman J stated: The state of the respondent's financial affairs does not appear from the material before me. It follows that I am unable to form a view as to whether the action is capable of affecting the rights of shareholders or as to whether it would be appropriate for the liquidator to allow the claim to go by default in the event that the insurer did not take over the conduct of the proceedings. In the absence of the respondent putting relevant material before me I do not consider that the possible effect of the action upon the respondent and its shareholders ought not to weigh heavily. 29 Similarly, in this case, the respondent made no submissions and filed no material to suggest that a grant of leave would have any adverse effect on it, its shareholders or any other party. 30 There was nothing to indicate that the commencement of the proposed action against the respondent would interfere with its orderly winding up. The conditions imposed would, in any event, guard against that effect.

Conclusion 31 In the circumstances, a grant of leave was appropriate. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-streeton.