La Trobe Wholesale Finance Pty Ltd v Silkwax Pty Ltd trading as AcVal Turner... [2011] FCA 1102 | Case summary

Judgment (9 paragraphs)

[1]

Subject to the condition in Order 2 hereof, pursuant to s 471B of the Corporations Act 2001 (Cth), the applicant be granted leave: 1.1 nunc pro tunc to commence; and 1.2 to proceed with until judgment, this proceeding against the respondent. 2. Leave is granted on condition that the applicant is prohibited from enforcing any judgment against the respondent without leave of the court. 3. The respondent file and serve a defence by 12 October 2011. 4. The applicant file and serve any reply by 19 October 2011. 5. The parties exchange lists of documents by 2 November 2011. 6. The parties to complete inspection of documents produced under discovery by 9 November 2011. 7. Pursuant to Order 72 of the Federal Court Rules, the proceeding be referred to mediation by a Registrar of the Court. The mediation shall be conducted on a date to be fixed by the Registrar after 16 November 2011. In the event that the matter does not settle at the conclusion of the mediation, the Registrar conduct a case management conference immediately following the mediation to consider the most economic and efficient means of bringing the proceeding to trial and of conducting the trial, at which conference the Registrar may give further directions. 8. Costs reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Relevant legislation and principles 14 La Trobe requires leave to continue the proceeding pursuant to s 471B of the Act, which provides: While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with: (a) a proceeding in a court against the company or in relation to property of the company; or (b) enforcement process in relation to such property; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes. 15 The longstanding requirement for leave to begin or proceed with litigation against, or enforcement process against the property of, a company in liquidation was explained by McLelland CJ in Eq in Re Sydney Formworks Pty Ltd (In liq) (1965) 82 WN (Pt 1) (NSW) 558 at 562 as follows: This view is in keeping with what I consider to be the obvious intention of the section, namely, to ensure that the assets of the company in liquidation will be administered in accordance with the provisions of the Companies Act and that no person will get an advantage to which, under those provisions, he is not properly entitled, and to enable the Court effectively to supervise all claims brought against the company which is being wound up. 16 The applicant for leave must accordingly advance grounds which, on balance, justify the pursuit of its claim by litigation against the company (with the attendant risk of diminution of the company's assets, potential prejudice to other creditors and interference with the orderly course of winding up), rather than by the usual course of lodging a proof of debt on winding up. 17 While it is not necessary for the applicant to demonstrate a prima facie case against the company in the technical sense (see Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550 at 554-556, approving the observation of McPherson J in Ogilvie-Grant v East (1983) 1 ACLC 742 at 743-745), an applicant must, as variously expressed in relevant authorities, satisfy the court that the claim is sufficiently serious and solidly founded to be allowed to proceed (see Goodman v Glenhurst Corporation Pty Ltd [2008] FCA 1482 at [4]) or adduce evidence clearly establishing the existence of a serious claim and a real dispute (see Lawrence v Brighton Hall Securities Pty Ltd (in liq) [2009] FCA 1425 ("Lawrence") at 11; Altinova Nominees Pty Ltd v Leveraged Capital Pty Ltd (Receivers and Managers Appointed) (in liq) (No 2) [2009] FCA 42 at [22]). 18 The Court will take into account other relevant factors in determining whether there is good reason to depart from the usual procedure of proof of debt, including, but not limited to, the quantum of the claim, the complexity of the legal and factual issues involved, the stage of the litigation (if any), whether an avalanche of litigation will be unleashed, whether rejection of a proof of debt would be almost inevitable, whether a test case is involved, whether the company's resources are meagre relative to the likely costs (see generally Ford's Principles of Corporations Law at [27.126] and the cases there cited) and, importantly to the present case, whether an insurance fund is or may be available to meet the applicant's claim against the company. 19 In Ex parte Walker (1982) 6 ACLR 423 at 426 ("Walker"), Master Lee QC usefully summarised principles relevant to the grant of leave pursuant to s 471(2) as follows: 1. An application for leave nunc pro tunc to commence any action or to continue any action which was commenced without obtaining leave may be given if good cause is shown on the merits: Australian Company Law and Practice (Wallace and Young) at p 654. 2. Section 230(3) ensures that assets of the company in liquidation will be administered in accordance with the Act and that no person obtains an advantage to which, under the Act, he is not properly entitled. It enables the court effectively to supervise all claims brought against the company: Re Sydney Formworks Pty Ltd (in liq), supra. 3. There must be no prejudice to the creditors or to the orderly winding up of the company if the action is allowed to proceed: Re Sydney Formworks Pty Ltd, supra; Re A J Benjamin Ltd (in liq), supra and the Companies Act. 4. The applicant's claim must be of a type which should proceed by action to judgment, rather than one which is capable of being dealt with in an ordinary way by proof of winding up: Century Mercantile Co v Auckland Provincial Fruitgrowers Society [1921] NZLR 272; Battiston v Maiella Constructions Pty Ltd [1967] VR 349. 5. Leave is more likely to be granted where there is an insurance company standing behind the company to pay any judgment which the plaintiff might obtain against it. If successful, such an action is unlikely to prejudice the creditors or the company: Re Sydney Formworks Pty Ltd (in liq), supra; Re A J Benjamin (in liq), supra, the section is not designed to protect an insurer. 6. A condition is often imposed that the plaintiff will not enforce any judgment against the company without the leave of the court. This ensures that the court retains ultimate control: Re Sydney Formworks Pty Ltd (in liq), supra, and Re A J Benjamin Ltd (in liq), supra. 7. Mere delay itself in applying for leave will not prevent leave being granted. Leave is not to be withheld simply and solely as a punishment: Re A J Benjamin Ltd (in liq), supra. 8. Leave may be granted after the expiry of the relevant period of limitation, to continue an action commenced within the limitation period without the leave of the court. 20 It is clear, however, that the above summary is not exhaustive and the matters relevant to the exercise of the court's discretion in this context may vary according to the circumstances of each particular case. 21 In Lawrence, McKerracher J granted leave nunc pro tunc to begin a representative proceeding pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) against the applicant's former financial adviser which had gone into liquidation. 22 Although the company in liquidation was without funds, it was arguably entitled to be indemnified under a policy of insurance for liability for the misleading or deceptive conduct or negligent misstatement on which its investment clients had allegedly relied. 23 Although the representative claims involved complex legal and factual issues, given the evidence of the company's financial position, there was no likelihood that the clients would recover any substantial amount unless leave were granted. 24 McKerracher J did not assume that the insurance policy applied, but observed that if coverage under it had appeared hopeless, it would have militated against a grant of leave (at [16]-[17]). 25 It appeared, however, that if the company's liability were established, the onus would pass to the insurer to establish that the policy excluded the applicant's claim. In order to avert the possibility of prejudice to other unsecured creditors, his Honour granted leave subject to the condition that the applicant was prohibited from enforcing any judgment against the company without the leave of the court. 26 In Re Coastal Constructions Pty Ltd (in liq) (1994) 13 ACSR 329, leave was granted nunc pro tunc to commence proceedings against a company in liquidation in respect of the applicant's personal injuries suffered in the course of his employment by the company. 27 The company, through its insurer, opposed leave, alleging prejudice by reason of the applicant's delay, as a potential witness could not recall the event and relevant papers could not be located. 28 White J noted the summation of principles in Walker. His Honour observed at 332 that: There is no doubt that the applicant's claim is of a type which should proceed by action to judgment rather than one which is capable of being dealt with in the ordinary way by proof in a winding up. In this case, there is an insurer standing behind the company to pay any judgment which might be obtained against the company and such an action will thus not prejudice the rights of the creditors.

discussion 29 In the present case, as deposed by Mr Bannister, of the lawyers for La Trobe, he notified the respondent's liquidators, Mr Park and Ms Trenfield of KordaMentha, of La Trobe's intention to make the present application, confirming that he believed that the respondent had professional indemnity insurance for the period 11 August 2008 to 11 August 2009 in which La Trobe gave notice of the potential claim. Mr Bannister exhibited: (a) a Lloyds Certificate of Insurance for the respondent for the period from 11 August 2008 to 11 August 2009; (b) the Coverforce Professional Indemnity Insurance Policy (which indicated that the indemnity limit was $2,000,000 for any one claim and $4,000,000 in the aggregate and that the insurance was provided on a "claims made" basis, whereby the policy would only "respond to Claims first made against the Insured during the Policy Period or within the reporting period specified in the Insurance Contracts Act"); and (c) a claim notification of Coverforce dated 29 July 2009, which stated that "our client has reported the following claim" and attached a letter of La Trobe to AcVal Turner Valuers dated 9 February 2009 which stated: Lot 1, Earl Street BESERKER QLD 4701 We refer to the abovementioned and to which we now advise. We refer to your valuation dated 21st September 2007 valuing the security property at $2,250,000.00. A valuation of the same property completed on 1st December 2008 indicated a value of $295,000.00. We now formally advise you that your company is on notice that: • Upon the realisation of the security property if there is a shortfall to the mortgagee; and • If the original valuations conducted by your company were negligently prepared, La Trobe will claim from your company the amount of the shortfall. We respectfully recommend that you place your indemnity insurer on notice and confirm in writing you have done so. … 30 The claim notification stated the claim details as "Valuation Dispute - Claimant La Trobe - Lot 1, Earl Street, Beserker QLD 4701" and stated the date of loss as "9/02/2009". 31 Mr Bannister deposed to correspondence with the respondent's liquidators and service of the interlocutory application and supporting affidavits. He exhibited the liquidator's email dated 15 September 2011 which stated, inter alia, "I have no objection to the application on the basis such a claim is subject to the Company's pre-appointment insurance policy". 32 At the hearing of the application, the insurer of the respondent company appeared by telephone and did not oppose the grant of leave. The insurer acknowledged that notification of La Trobe's claim was made within the relevant policy period. It foreshadowed that it may allege exclusion of the claim by way of defence, together with any claims of proportionate liability. 33 I am satisfied, on the basis of the matters to which Messrs Donohue and Bannister deposed, that La Trobe's claim has a solid foundation and gives rise to a real and serious dispute. 34 The claim is discrete and, at this early stage, at least, the issues do not appear complex or unusual. 35 While there is no material before the court to indicate the level of the respondent company's assets and liabilities, the likely costs of the litigation, or any arrangements for funding any defence of the claim, the evidence establishes that the respondent had an insurance policy which arguably entitles it to indemnification in relation to La Trobe's claim, the insurer was notified of the claim or its factual basis by a claim notification dated 9 February 2009 and La Trobe has corresponded with the insurer's solicitors. Before me, the insurer indicated that it may contend that La Trobe's claim is excluded under the insurance policy but did not identify the basis of exclusion. 36 As there was no evidence of the company's assets and liabilities before the court, it is possible, although improbable, that the company may have sufficient assets to satisfy all claims, including that of La Trobe, in full. 37 The insurer's liability to indemnify the company in relation to La Trobe's claim under the insurance policy is nevertheless arguable. If it is established, it is probable that any judgment ultimately obtained by La Trobe will be satisfied from the proceeds of the insurance policy. The liquidators do not oppose the present application on that basis. There was, however, nothing to indicate how the costs of defending the claim would be borne. 38 In the circumstances, subject to the imposition of a condition to address the uncertainty over the company's assets and liabilities, the insurer's liability under the insurance policy and any costs of defending the litigation, I was persuaded that the continuation of the proceeding against the respondent is unlikely to prejudice the interests or rights of other creditors, diminish the company's assets or resources or impede the orderly winding up of the company. 39 I therefore granted leave pursuant to s 471B of the Act, subject to the condition not uncommonly imposed in such cases, that the applicant be prohibited from enforcing any judgment against the respondent without the leave of the court. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton.

La Trobe Wholesale Finance Pty Ltd v Silkwax Pty Ltd trading as AcVal Turner Valuers

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