Corporations - Application for leave to proceed against company in liquidation and subject to deed of company arrangement - Corporations Act 2001 (Cth), s 444E(3), s 471B - Relevant principles - Whether plaintiff's claim extinguished by deed of company arrangement - Turns on own facts

Corporations Act 2001 (Cth), s 444E(3), s 471B

1 NEWNES J: This is an application by the plaintiff for leave to proceed against the third defendant under s 444E(3) and s 471B of the Corporations Act 2001 (Cth) (the Act), the third defendant being the subject of a winding up order and a deed of company arrangement. The plaintiff also seeks an order that the validity of the writ be extended, pursuant to O 7 r 1(2) of the Rules of the Supreme Court 1971 (WA), the writ having been issued on 16 February 2006 and not yet having been served on the third defendant.

2 In the action, the plaintiff claims damages from, among others, the third defendant in relation to the purchase, in February 2000, by Curtin Hotels Pty Ltd (Curtin Hotels) of a hotel business in York.

3 The background to the plaintiff's claim is set out in an affidavit in support of the application sworn by the plaintiff on 29 March 2007. Although the basis of the claim is set out in some detail in the affidavit, the essential facts can be stated quite shortly. The plaintiff was formerly a director of Curtin Hotels. In February 2000 he was interested in purchasing a hotel in Western Australia. The plaintiff alleges that in the course of discussions regarding the possible purchase of the Imperial Inn (the hotel) in York, a representative of the third defendant, which operated a real estate agency, made certain representations to him regarding the hotel's profitability. The plaintiff says that in reliance upon, among other things, those representations, on 19 February 2000 he caused Curtin Hotels to enter into a contract to purchase the hotel from the first defendants.

4 The plaintiff alleges that the representations made to him by, among others, the third defendant, were made negligently and/or were misleading or deceptive. Contrary to the representations, the hotel was highly unprofitable, and as a result of its acquisition Curtin Hotels suffered substantial losses. The plaintiff says he was not aware of what he claims was the misleading and deceptive conduct or negligence of the third defendant until about July 2005 when he came into possession of the trading figures for the business in 2000, prior to Curtin Hotels' acquisition of it.

5 Curtin Hotels was placed into administration on 3 October 2005 and a winding up order was made on 27 October 2005.

6 The plaintiff says the liquidator of Curtin Hotels declined to take any legal proceedings against the current defendants on the ground that he had no funds to do so, but he agreed to assign any rights of action to the plaintiff.

7 In or about December 2005 or January 2006, the liquidator informed the plaintiff that the creditors had approved the sale of the rights of action. By a deed of assignment dated 15 February 2006, the liquidator of Curtin Hotels assigned to the plaintiff any rights of action it had against the current defendants. Notice of that assignment was given to the third defendant by a letter from the plaintiff's solicitors also dated 15 February 2006.

8 The writ of summons was issued on 16 February 2006. It was not served on any of the defendants at that time. The plaintiff says that he was then in the course of a marriage break-up and was unemployed and without an income. He was not in a position to proceed with the action and the writ had been filed only because of concern that a limitation period affecting the first defendant might be about to expire. The plaintiff says he was endeavouring to obtain the assistance of a litigation funder to provide the resources necessary to pursue the action. He was aware that the writ was valid for service for a period of 12 months after it was issued.

9 The writ had still not been served when, on 25 September 2006, the Federal Court ordered that the third defendant be wound up on the grounds of insolvency. On 12 September 2006, the liquidator of the third defendant appointed an administrator of the third defendant pursuant to s 436B(1) of the Act. On 17 October 2006, a deed of company arrangement (DOCA) was entered into between the administrator (as deed administrator), the third defendant, a Mr Colin King (a director of the third defendant and described in the DOCA as 'Director'), and Fort Ross Nominees Pty Ltd (FRN), the trustee of Mr Kings' family trust. I will come back to the DOCA in due course.

10 The writ was served on the other defendants in late 2006. Although there is no direct evidence as to precisely when that occurred, as their appearances were filed on various dates in January 2007 it is reasonable to infer that service was effected in December 2006 or January 2007. The plaintiff says that at the time the writ was served on the other defendants he was advised that as the third defendant was in liquidation an application to the court would be necessary in order to pursue the action against the third defendant. The plaintiff says it was only in the later part of 2006 that he had become aware that the third defendant was in liquidation.

11 On 24 January 2007, the plaintiff gave notice to the liquidator of the third defendant of his intention to bring this application. The application was filed on 13 February 2007, some three days before the writ ceased to be valid for service, and was immediately served on the liquidator of the third defendant and on the deed administrator.

12 There has since been significant delay in the resolution of the application, due principally, it appears, to negotiations between the solicitors for the plaintiff and the deed administrator to effect an amendment to the DOCA. That amendment, effected on 24 October 2007, inserted cl 25, which relates to claims in respect of which the third defendant has an applicable policy of insurance. I will return to that subject in relation to the application for leave to proceed.

13 The plaintiff does not explain how his financial circumstances have changed since the writ was issued or when they changed, but it appears that, by one means or another, he is now in a financial position to pursue the matter.

14 Against that background, I will turn first to the application for an extension of the validity of the writ.

15 The principles to be applied on such an application were not in issue between the parties. It is clear that there is a wide discretion to order an extension of the validity of a writ for service under O 7 r 1(2), and that the discretion is to be exercised as the justice of the case requires: Bell Group NV (In Liq) v Aspinall (1998) 19 WAR 561, 575.

16 The principal factors relevant on an application of this nature include:

(d) any hardship or prejudice caused to the plaintiff by refusing the renewal, or to the defendant by granting it.

See Van Leer Australia Pty Ltd v Palace Shipping KK [1981] HCA 11; (1980) 180 CLR 337, 344, 346; Brealey v Board of Management Royal Perth Hospital [1999] WASCA 158; (1999) 21 WAR 79.

17 Those factors are not, of course, exhaustive, nor are they to be treated simply as a check list, as the ultimate question must always be what the interests of justice require in the particular circumstances of the case.

18 It was submitted on behalf of the plaintiff that the delay in issuing the writ had been adequately explained as having come about by reason of the plaintiff's financial position and personal circumstances at the time the writ was issued. The writ had been issued in February 2006 in order to avoid the expiration of a limitation period which it was considered might expire early in 2006.

19 Counsel argued there would be no hardship or prejudice to the third defendant if the validity of the writ were to be extended. The plaintiff has made it plain that the only relief he seeks is in respect of the proceeds of an insurance policy held by the third defendant and which the insurer accepts responds to the claim. The plaintiff does not seek to participate in any dividend payable under the DOCA and will not claim any relief against the third defendant outside the proceeds of the insurance policy.

20 The extension of the validity of the writ would not provide any impediment to the steps to be taken under the DOCA or to any future activities of the third defendant. The DOCA expressly provides that it may be terminated although there are extant proceedings against the third defendant if (as is the case here) the third defendant has an insurance policy covering any liability it may have in respect of the proceedings.

21 It was submitted that there would, however, be substantial prejudice to the plaintiff if the writ were not extended, in that any fresh claim may now be statute-barred. The first trading losses in the hotel were incurred by Curtin Hotels in 2001 and it is at least arguable that the cause of action arose then, although the plaintiff did not become aware of the alleged negligence or misleading and deceptive conduct of the third defendant until about July 2005.

22 It was submitted on behalf of the third defendant that the delay had not been adequately explained. The writ was issued at a time when the third defendant was not in any external administration and service could readily have been effected. Given the lapse of time, it is to be inferred that the plaintiff has not pursued the prosecution of his claim diligently. None of the delay can be sheeted home to the third defendant.

23 Counsel argued that there was no evidence that there would be hardship or prejudice to the plaintiff if the writ were not renewed. There are five other defendants to the proceedings in respect of whom claims for the same damage have been made, each of whom has already been served with the writ. In addition, if, as the plaintiff says, he did not become aware of the alleged misleading and deceptive conduct or negligence until July 2005, the limitation period would not have begun to run until July 2005. Non-renewal of the writ would not, therefore, result in the action being statute-barred.

24 On the other hand, there would be general prejudice to the third defendant if the writ were renewed in that the third defendant is close to a position where it will be able to recommence trading and the action has the capacity to overshadow its return to trading and cause difficulties and disruption in the future.

Should the validity of the writ be extended?****

25 On the material before me, I am satisfied that the interests of justice require that the validity of the writ be extended to enable service on the third defendant, subject to the further issue of leave to proceed under the Act.

26 On the evidence, the plaintiff first became aware of the third defendant's alleged misleading and deceptive conduct or negligence in or about July 2005. At that stage, any cause of action was that of Curtin Hotels. It appears that Curtin Hotels was then in serious financial difficulty. According to the plaintiff, it was as a result of the losses suffered as a consequence of its purchase of the hotel that Curtin Hotels went into administration on 3 October 2005 and liquidation on 27 October 2005.

27 In the circumstances, there does not appear to have been unreasonable delay on the plaintiff's part between those events and the assignment to the plaintiff in February 2006 of any rights of action of Curtin Hotels against the defendants. The writ was then issued promptly.

28 The evidence as to the reason for delay in service of the writ on the third defendant is not entirely satisfactory. The plaintiff says that his personal circumstances and financial position made it impossible for him to pursue the action following the issue of the writ and that he was endeavouring to obtain the necessary financial resources to fund the action from a litigation funder. Although, as the third defendant's counsel pointed out, there is no significant expense involved in serving a writ, I think it is clear that the plaintiff did not want to enliven the interlocutory processes of the court by serving the writ until he was in a financial position to comply with those processes.

29 A difficulty, however, is that the plaintiff does not disclose any details of his financial circumstances then or now, nor does he disclose the endeavours he made after February 2006 to obtain the necessary funds to pursue the matter or the outcome of those endeavours. The evidence is in the most general terms and does not condescend to the level of detail that ought to be provided in such a case. It is therefore left to be inferred that the plaintiff's financial incapacity to pursue the matter continued until at least toward the end of 2006, when service was effected on the other defendants.

30 The plaintiff, having apparently discovered for the first time late in 2006 that the third defendant was in liquidation and subject to the DOCA, then moved reasonably promptly to seek the necessary leave to continue the action against the third defendant. The plaintiff's solicitors took the view that the application for leave to proceed had to be determined before the writ could properly be served on the third defendant. It was evident, however, that leave to proceed would not be obtained before the writ expired and the present application to extend the writ was therefore made.

31 I accept the plaintiff's submission that there would be substantial prejudice to him if the validity of the writ were not extended. It is by no means clear that, as was submitted on behalf of the third defendant, any cause of action against the third defendant arose only in July 2005 upon the discovery by the plaintiff, on behalf of Curtin Hotels, of the financial documents which revealed the alleged negligence or misleading and deceptive conduct of the third defendant. At the very least, if the validity of the writ is not extended and the plaintiff has to issue fresh proceedings, he is liable to be faced with a clearly arguable limitation defence. It is not suggested by the third defendant that any limitation issue arises in respect of the current proceedings.

32 On the other hand, I am not satisfied that there would be any substantial prejudice to the third defendant if the validity of the writ were to be extended. It has, of course, long been recognised that the mere fact of delay can be a cause of prejudice to a party to litigation. There was, however, no evidence on behalf of the third defendant directed to the question of prejudice and counsel for the third defendant was unable to point to any particular prejudice or, indeed, to any general prejudice of an identifiable nature. Counsel did not indicate in what way the action, if permitted to proceed, had the capacity to overshadow the third defendant's return to trading or to cause it difficulties and disruption. In the circumstances, it is not apparent how that might be likely to occur.

33 Having regard to the extent of the delay and the explanation offered for it, and weighing the prejudice that would be likely to be suffered by each party by the refusal or grant of the renewal, I consider that, on balance, the interests of justice require that the validity of the writ be extended. The extension should be for such period as would reasonably enable service to be effected on the third defendant.

The applications under s 444E(3) and s 471B of the Act

34 It is necessary, then, to turn to the applications under the Act. Counsel were in agreement that in the present case there is no material difference between the principles to be applied on an application under s 471B of the Act and those to be applied under s 444E(3) of the Act. I accept that that is the case.

35 It is clearly impossible to state exhaustively the circumstances in which the court should exercise its discretion to grant leave to proceed. However, in determining whether leave to proceed should be granted, generally relevant factors will include:

(c) the degree of complexity of the legal and factual issues involved;

(d) the stage to which the proceedings, if already commenced, have progressed;

(e) the extent of any prejudice to the creditors or to the orderly winding up if the action proceeds; and

(f) whether the company has a policy of insurance from which any judgment will be paid.

36 See, for instance, Re Gordon Grant & Grant Pty Ltd (1982) 1 ACLC 196, 199; Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314, 317; Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550.

37 Where there is an insurance company standing behind the company to pay any judgment which the plaintiff may obtain, that is a factor strongly favouring the grant of leave. In such circumstances, the proceedings will generally cause no prejudice - procedural or substantive - to the other creditors: Re AJ Benjamin Ltd [1969] 2 NSWR 374; Re Sydney Formworks Pty Ltd [1965] NSWR 646; Re Coastal Constructions Pty Ltd (1994) 13 ACSR 329.

38 It was not in issue between the parties, for the purposes of this application, that the plaintiff has an arguable cause of action on the merits. Although the action against the third defendant is obviously at a very early stage, the claim appears to be a substantial one and to be of a nature that is appropriately the subject of litigation in the court.

39 It was common ground that the third defendant has a policy of insurance which responds to a claim of the nature the plaintiff seeks to establish and under which the third defendant will be entitled to be indemnified in respect of the plaintiff's claim if that claim is successful. The plaintiff has stated, and his counsel reiterated in the course of argument, that the plaintiff does not seek to participate in any distribution under the terms of the DOCA and accepts that his only recourse for recovery of any sum awarded to him in the action will be from the proceeds of the insurance policy.

40 The real issue between the parties on the application was whether the plaintiff's claim was already barred by the terms of the DOCA. In particular, the issue was whether, under the terms of the DOCA, the plaintiff's claim against the third defendant was discharged by the distribution, in May 2007, of funds in a 'Distribution Fund' to the Creditors admitted to proof, other than FRN and the Director. I will refer to the recipients of that distribution as the 'non-subordinated creditors'.

41 Before turning to the terms of the DOCA, it is convenient to refer to the relevant provisions of the Act. Section 444D(1) of the Act provides that a deed of company arrangement binds all creditors of a company under external administration so far as concerns claims arising on or before the date specified in the deed. In this case, the date specified in the DOCA is 12 September 2006. It is plain that any claim the plaintiff may have arose before that date.

42 Section 444H of the Act provides, in effect, that a deed of company arrangement releases the company from a claim only insofar as the deed provides for the release and the creditor concerned is bound by the deed. A deed of company arrangement can bind not only creditors whose debts are due and payable, but also contingent and prospective creditors who have claims for unliquidated damages: Brash Holdings Ltd v Katile Pty Ltd [1996] VicRp 4; [1996] 1 VR 24, 33; Hoath v Connect Internet Services Pty Ltd [2006] NSWSC 158; (2006) 229 ALR 566, 608.

43 I turn then to the DOCA, which provides, by cl 8.1, that it binds all persons having a 'Claim'. A Claim is defined in cl 1.1 to mean 'any action, demand, suit, proceeding, debt, claim, loss, damage or other liability (present or future, certain or contingent, ascertaining or sounding in damages) whatsoever and howsoever incurred arising directly or indirectly from any act or omission by the Company or by any agreement, circumstance or event occurring on or before [12 September 2006]'.

44 Pursuant to cl 1.1 of the DOCA, 'Creditor' means 'any person who has a Claim against the Company'. It was not in issue that, in respect of the claim in question, the plaintiff is a Creditor as defined, albeit the plaintiff has not lodged a proof of debt. It is also clear that FRN is a secured Creditor, having registered a charge over the assets of the third defendant on 6 September 2005.

45 The DOCA goes on to provide, so far as relevant:

9.1 Establishment of Distribution Fund

The Deed Administrator will establish a fund in which he will deposit and retain all funds realised from the Assets of the Company, including all and any funds currently held by the Administrator ('the Distribution Fund').

9.2 General distribution of Distribution Fund

Subject to clause 10, the Distribution Fund shall be distributed to the Creditors in accordance with sections 555 and 556 of the Corporations Act after payment of:

(a) the Deed Administrator's Remuneration, the Deed Administrator's Costs; and

(b) the other payments as set out in subclause 9.3.

10.1 Subordination of Claims by Director and FRN

The Director and FRN:

(a) agree to subordinate any Claim they have or may have against the Company to the interests of all other Creditors, and allow all Claims of all other Creditors to rank ahead of any Claims they may have and to be paid out in full before either the Director or FRN receive any dividend or distribution from the Assets whatsoever;

(b) acknowledge that they are being treated differently to the other Creditors;

(c) confirm that they have had the opportunity to consider their position and seek advice;

(d) warrant and confirm that, other than by the lodgement of proofs of debt in respect of such Claims, they will make no demand for payment of any of their Claims and otherwise take no action to enforce any Claim they have or may have against the Company (either through enforcement of FRN's Charge or otherwise) unless or until such time as every other Creditor has been paid in full in accordance with clause 9; and

(e) warrant that they will not take action to have this Deed terminated or varied on the grounds that it is oppressive, unfairly prejudicial or unfairly discriminatory against them or on any other ground.

12.1 Upon payment from the Distribution Fund by the Deed Administrator to the Creditors pursuant to clause 9, all Claims shall be absolutely discharged and extinguished and the Company will be released by the Creditors from all Claims and if requested by the Deed Administrator or the Company, the Creditors shall execute and deliver to the Company such form of release of any such Claims as the Deed Administrator or the Company require.

...

24.1 This Deed may be pleaded by the Company against any Creditor in bar of any Claim the subject of this Deed which is not admitted or established under this Deed.

24.2 This Deed may be pleaded by the Company against the Directors and FRN in bar of any Claim the subject of this Deed made by those parties in contravention of clause 10.

25.1 In this clause 25:

(a) Insured Claim means the Claim of an Insured Creditor to which insurance held by or on behalf of the Company or available under any legislation would, but for this Deed, have application;

(b) Insured Creditor means a Creditor with a Creditor's Claim to which insurance held by or on behalf of the Company or available under any legislation would, but for this Deed, have application;

(c) Insurance Excess means any part of an Insured Claim which will not be indemnified by insurance held by or on behalf of the Company or available under any legislation (including but not limited to any deductible or excess); and

(d) Insurance Proceeds means any amount in respect of an Insured Claim received by the Company or the Deed Administrator by reason of insurance held by or on behalf of the Company or available under any legislation.

25.2 This clause 25 applies when there is an Insured Creditor.

25.3 When this clause 25 applies:

(a) Section 562 of the Corporations Act 2001 applies to this Deed in relation to any Insurance Proceeds and does so as if reference to the 'third party' was a reference to the Insured Creditor for whose Insured Claim the Insurance Proceeds were received. To the extent that there is an Insurance Excess the Insured Creditor will, in relation to that part of the Insured Claim, be subject to all of the provisions of the Deed;

(b) If the Insured Claim is not resolved when this Deed is otherwise ready for termination in accordance with clause 15:

1. the Deed may be terminated in any event;
2. on termination of the Deed the component of the Insured Claim represented by the Insurance Excess is released in accordance with clause 12. Clause 12 does not apply to the remainder of the Insured Claim until resolution of the Insured Claim. However, until resolution of the Insured Claim:
   1. the Insured Creditor must make all reasonable endeavours to resolve the Insured Claim as soon as possible; and
   2. the Insured Creditor's entitlement in respect of the Insured Claim is limited to any Insurance Proceeds in fact received by the Company on account of the Insured Claim.

1. the Company must pay to the Insured Creditor any Insurance Proceeds in fact received by the Company on account of the Insured Claim; and
2. clause 12 then applies.

25.4 For the avoidance of doubt, this clause, being a clause inserted into this Deed pursuant to a Deed of Variation dated 24 October 2007 ('the Variation') does not, and is not taken to, override, waive or prevent the Company from relying on, any right the Company has or might have had to rely on any defence, discharge, release or bar to Claims available to it as at the date of the Variation, including, but not limited to all or any such rights that had accrued under this Deed prior to the Variation.

46 It appears from the evidence that, on 28 May 2007, the non-subordinated creditors were paid in full from the Distribution Fund. However, to date, part only of FRN's claim has been paid and the Distribution Fund has not yet been exhausted. The position of the Director is unclear.

47 It was submitted on behalf of the third defendant that the effect of cl 12.1 of the DOCA was that once payment from the Distribution Fund was made to the non-subordinated creditors under cl 9, all Claims, other than those of the Director and FRN, were discharged and extinguished. It was argued that the Director and FRN were the subject of separate, specific provision under cl 10.1 of the DOCA, so that their claims remained unaffected.

48 It followed that, the non-subordinated creditors having been paid from the Distribution Fund on 28 May 2007, the plaintiff's claim against the third defendant had thereupon been discharged and extinguished.

49 Counsel argued that cl 25 of the DOCA did not assist the plaintiff. It did not take effect until 24 October 2004, when the plaintiff's claim had already been extinguished. Clause 25 simply made provision for any insurance claim which might involve litigation that persisted beyond the resolution of all other matters to be dealt with under the DOCA. It could not, and was not intended to, exempt the plaintiff's claim from the operation of cl 12.1.

50 Counsel for the plaintiff argued that the effect of cl 12.1 was that, until the Distribution Fund had been paid out in full to Creditors, it did not operate to discharge or extinguish the Claim of any Creditor and the third defendant was not released from any such claim. It was not in issue that the Distribution Fund had not been paid out in full. The non-subordinated creditors had been paid from it, but there were still funds in the Distribution Fund and the claim of FRN had not been paid in full.

51 It followed that cl 12.1 did not operate to discharge the plaintiff's claim, which was now subject to cl 25. The effect of cl 25 was that cl 12.1 did not operate to discharge any extant claim which was covered by an insurance policy. Pursuant to cl 25.3(c) (ii) of the DOCA, it was only once such a claim had been resolved that cl 12 took effect and released the third defendant from the claim.

52 In my opinion, cl 12.1 of the DOCA does not have the effect contended for by the third defendant. I consider it is clear from the DOCA that the Claims of Creditors are discharged and extinguished only upon the final distribution of the Distribution Fund to Creditors under cl 9.2. There is no warrant to read cl 12.1 as giving effect to such a discharge upon payment of a portion of the Distribution Fund to some only of the Creditors - in this case, the non-subordinated creditors. Indeed, if it were to be read in that way it would follow that upon payment to the non-subordinated creditors of their share of the Distribution Fund, the claims of all Creditors, including FRN and the Director, would be extinguished and discharged. That is plainly not intended.

53 In that connection, I do not accept the argument of the third defendant that the effect of cl 10 is to remove FRN and the Director from the operation of cl 9, thereby avoiding the discharge of their claims under cl 12.1 upon a distribution to the non-subordinated creditors under cl 9. By cl 10, FRN and the Director agree to make no demand, and to take no action to enforce any claim against the third defendant, 'unless or until such time as every other Creditor has been paid in full in accordance with clause 9'. The effect of cl 10, therefore, is simply that the entitlements of FRN and the Director, as Creditors, to share in a distribution of the Distribution Fund under cl 9 rank after the claims of the other Creditors. It does not take them outside the operation of cl 9 or cl 12.1.

54 On the evidence, the Distribution Fund has not been fully distributed to Creditors and at least part of the claim of FRN remains unpaid. That, at least, was the case as at 24 October 2007 when cl 25 was inserted in the DOCA. It follows, in my opinion, that the plaintiff's claim has not been discharged by virtue of cl 12.1 of the DOCA. So far as it is affected by the DOCA, it is now subject to cl 25.

55 I am satisfied that leave to proceed should be granted. There is an insurance company standing behind the third defendant and the plaintiff does not seek to go beyond the proceeds that will be payable under the insurance policy should his claim be successful. The DOCA contains, in cl 25, specific provisions which enable the plaintiff's claim to be pursued without significantly affecting the steps to be taken under the DOCA and its ultimate termination. The proceedings will not unduly interfere with the DOCA or affect the rights of the other creditors, and it is appropriate that the plaintiff's claim be determined by means of those proceedings.

56 I would extend the validity of the writ to enable service on the third defendant and would grant to the plaintiff leave to proceed in the action. I will hear counsel on the precise terms of the orders, including the time for which the validity of the writ should be extended and the conditions to be attached to leave to proceed.