Supreme Court of WA|2010-06-25|Before: Mr J, Miere J

MARK ANTHONY KORDA and DAVID JOHN WINTERBOTTOM As Receivers and Managers of WESTPOINT CORPORATION PTY LTD (In Liq) (Receivers and Managers Appointed) and the companies listed in Schedule 1 -v- SILKCHIME PTY LTD (Receivers and Managers Appointed) atf SILKCHIME UNIT TRUST [2010] WASC 155 (25 June 2010)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : MARK ANTHONY KORDA and DAVID JOHN WINTERBOTTOM As Receivers and Managers of WESTPOINT CORPORATION PTY LTD (In Liq) (Receivers and Managers Appointed) and the companies listed in Schedule 1 -v- SILKCHIME PTY LTD (Receivers and Managers Appointed) atf SILKCHIME UNIT TRUST

MATTER : Westpoint Corporation Pty Ltd (ACN 009 395 751) (in liq) (Receivers and Managers Appointed) and the companies listed in Schedule 1

BETWEEN : MARK ANTHONY KORDA and DAVID JOHN WINTERBOTTOM As Receivers and Managers of WESTPOINT CORPORATION PTY LTD (In Liq) (Receivers and Managers Appointed) and the companies listed in Schedule 1

SILKCHIME PTY LTD (Receivers and Managers Appointed) atf SILKCHIME UNIT TRUST

WARWICK ENTERTAINMENT CENTRE PTY LTD (Receivers and Managers Appointed) atf WARWICK ENTERTAINMENT CENTRE UNIT TRUST

HUNTINGDALE VILLAGE PTY LTD (Receivers and Managers Appointed) atf the Huntingdale Village Unit Trust

PARAGON APARTMENTS LTD (Receivers and Managers Appointed)

VANNIN PTY LTD (Receivers and Managers Appointed) atf the HAY FAMILY TRUST

PERPETUAL NOMINEES LTD as Custodian of the ING Mortgage Pool for ING Funds Management Ltd as the Responsible Entity of the ING Mortgage Pool

Corporations - Company in liquidation - Application for directions under s 424 Corporations Act 2001 (Cth) - Whether the Receivers are obliged to realise floating charge assets pursuant to s 433 Corporations Act 2001 (Cth) - Floating charge assets comprising of causes of action - Whether the Receivers are obliged to retire - Whether the Receivers are entitled to create a retention fund - Declaration as to proper construction of provisions

First Defendant : Mr J W S Peters SC & Mr E F Wheelahan

Second Defendant : Mr J W S Peters SC & Mr E F Wheelahan

Third Defendant : Mr J W S Peters SC & Mr E F Wheelahan

Fourth Defendant : Mr J W S Peters SC & Mr E F Wheelahan

Fifth Defendant : Mr J W S Peters SC & Mr E F Wheelahan

ASIC v Lanepoint Enterprises Pty Ltd [2006] FCA 1493; (2006) 64 ATR 524

Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd [1992] FCA 140; (1992) 7 ACSR 245

Equus Financial Services Pty Ltd v RMBL Investments Pty Ltd (1996) 7 BPR 14,966; (1996) 22 ACSR 744

Expo International Pty Ltd v Chant (1979) 2 NSWLR 820

F & G Nominees Pty Ltd v Coxon [2007] WASC 113; (2007) 34 WAR 55

General Credits Ltd v Chemineer Nominees Pty Ltd (in liq) (1986) 4 ACLC 570

Inland Revenue Commissioner v Goldblatt [1972] 1 Ch 498; (1972) 2 WLR 953

Lumsden v Long (1998) 16 ACLC 1743

Nidamon Pty Ltd v Wayland (Unreported, NSWCA, 15 April 1994)

Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27

Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225

Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674; (1991) 5 ACSR 673

Re Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch 498

Re Odessa Promotions Pty Ltd; Pescod v Harrison [1979] ACLC 32

Re One Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83

Re Pearl Maintenance Services Ltd [1995] 1 BCC 657; [1995] 1 BCLC 449

Re Southern Cross Airlines Holdings Ltd (in liq) [2000] 1 Qd R 84; (1998) 145 FLR 386

Russell v AGC (Advances) Ltd [1988] VicRp 13; [1988] VR 97; (1988) 19 ATR 138

Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114

Westminster Corporation v Haste [1950] 1 Ch 442

White v Huxtable, In the Matter of Lake Federation Pty Ltd (receivers and managers appointed) [2006] FCA 559; (2006) 57 ACSR 435

Whitton v ACN 003 266 886 Pty Ltd (in liq) [1996] FCA 1789; (1996) 42 NSWLR 123; (1996) 14 ACLC 1,799

1 LE MIERE J: Westpoint Corporation Pty Ltd was the head company of the Westpoint Group of companies which includes the first to fifth defendants, Westpoint Management Ltd and Bayview Port Melbourne Ltd. The sixth defendant appointed the plaintiffs as receivers and managers of each of those companies. Westpoint Corporation, Westpoint Management and Bayview Port Melbourne are each in liquidation and are not parties to these proceedings. I will refer to the first to fifth defendants as the defendants and the sixth defendant as ING. The plaintiffs apply under s 424 of the Corporations Act 2001 (Cth) (the Act) for directions in relation to matters arising in connection with the performance or exercise of their functions and powers as receivers and declarations under s 25(6) of the Supreme Court Act 1935 (WA) (the Supreme Court Act) or the inherent jurisdiction of this court.

2 On 28 September 2005 companies in the Westpoint group entered into related agreements. ING entered into a loan agreement (the Loan Agreement) with Westpoint Corporation, the first defendant (Silkchime), the second defendant (Warwick Entertainment), the third defendant, (Huntingdale Village), and the fifth defendant (Vannin) (the Borrowers). ING advanced $45,294,000 to the Borrowers under the Loan Agreement. The fourth defendant (Paragon Apartments), Bayview Port Melbourne, Westpoint Management and Norman Phillip Carey (Guarantors) as guarantors entered into a guarantee and indemnity (Guarantee) with ING as lender. By way of materially identical instruments of fixed and floating charge (Charge Instruments), each of the Borrowers and each of the corporate Guarantors (together the Chargors) granted a fixed and floating charge in favour of ING over the whole of their assets and undertaking or, in the case of Silkchime and Westpoint Management, specific assets, to secure the borrowings under the Loan Agreement.

3 On 24 January 2006, acting pursuant to the Charge Instruments, ING appointed the plaintiffs and Oren Zohar as receivers and managers of the Chargors. ING and the receivers entered a Deed of Indemnity. Zohar retired as a receiver and manager on 14 February 2008. I will refer to the plaintiffs as the Receivers. Since 24 January 2006, acting pursuant to the Charge Instruments, the Receivers have realised assets and caused the Chargors to repay amounts due to ING. On 16 February 2006 Westpoint Corporation was placed into liquidation.

4 The principal amount presently outstanding to ING under the Loan Agreement is approximately $50,000. The Receivers assert that Westpoint Corporation has a present liability of $4,550,000 in respect of entitlements due to unpaid employees or the General Employees Entitlements and Redundancy Scheme, which has paid approximately $2,000,000 to unpaid employees and is entitled to recover this amount from Westpoint Corporation in lieu of the employees.

5 The defendants say that at least since 23 January 2008 the Receivers have failed or refused to apply the Chargors' assets realised by them in accordance with the terms of the Charge Instruments and continue to hold the proceeds and not apply them in accordance with the terms of the Charge Instruments.

6 On 4 September 2009 the defendants, as applicants, commenced proceedings in the Federal Court against ING, the Receivers and Westpoint Corporation (in liq) in respect of the conduct of the receiverships by the Receivers. Those proceedings were transferred to this court and are now COR 223 of 2009. The defendants have alleged in COR 223 of 2009 that the Receivers should have retired in January 2008 and maintain that the Receivers should immediately retire.

7 The Receivers say, that in circumstances where no releases have been given, despite being requested by ING and the Receivers, ING and the Receivers have reasonably formed the view that further threatened litigation may still be commenced. The Receivers and ING intend to defend COR 223 of 2009 and any other proceedings which are commenced against them and will incur substantial costs in so doing.

8 The Receivers submit that the effect of the provisions of the Loan Agreement, the Guarantee, the Charge Instruments and the Deed of Indemnity is that:

(a) ING is liable to indemnify the Receivers for their costs in defending any proceedings against them in respect of the conduct of the receiverships - other than for any negligent act or omission, or any act or omission done or omitted by either of them otherwise than in the bona fide performance of their powers as agents or any act or omission done in contravention of s 180 - s 183 of the Act;

(b) ING is liable to indemnify the Receivers for any personal liability under s 433 of the Act;

9 ING says it has not formed the opinion that there is no prospect that money or damages will become owing (actually or contingently) by each Chargor to ING and there has been no reasonable basis for ING to have formed such an opinion by reason of:

(a) ING having a right of indemnity from the Chargors in respect of ING's liability to indemnify the Receivers against a personal liability to pursue the various causes of action identified in sch 2 to the application in order to pay amounts to priority creditors under s 433 of the Act;

(b) ING has a right of indemnity from the Chargors in respect of ING's liability to indemnify the Receivers against the costs of defending COR 223 of 2009 and other threatened litigation;

10 The defendants say that they and their related entities do not threaten to bring any litigation against the Receivers or ING other than COR 223 of 2009. Supreme Court CIV 1094 of 2008 brought by Warwick Entertainment against Silkchime has been stayed pending determination of the present application.

11 The Receivers presently have cash on hand of approximately $850,000 from realisation of assets of the Chargors. The Receivers submit that there are reasonable prospects that, and ING and the Receivers have formed the opinion that, this cash surplus is less than the money or damages which they consider may become owing (actually or contingently) by the chargors to ING. ING and the Receivers intend to continue to realise assets of the Chargors, by pursuing litigation or otherwise, until the cash surplus from realisations reaches the amount which they consider may become owing (actually or contingently) by each chargor to ING.

12 The first principal issue concerns s 433 of the Act which provides that a receiver appointed under a floating charge must pay out certain types of debts in priority to any claims for principal and interest due under the charge.

13 Most of the assets that have been realised by the Receivers have been assets secured by a fixed charge. The remaining assets of Westpoint Corporation include various causes of action which must be litigated or settled in order to realise any further funds. The causes of action are identified in sch 2 to the Originating Process (the Westpoint causes of action). The Receivers and ING have formed the view that certain of those actions are commercially viable actions to maintain. The Receivers and ING have formed the view that action which the Receivers have caused Warwick Entertainment to commence and pursue against Silkchime in Supreme Court action No 1094 of 2008 is a commercially viable action.

14 The Receivers seek a direction whether they are obliged or entitled, by reason of s 433 of the Act, to realise the floating charge assets constituted by the Westpoint causes of action in order to pay the priority creditors of Westpoint Corporation referred to in s 433(3) of the Act (the Priority Creditors), in circumstances where ING, the secured creditor who appointed the Receivers, might otherwise be paid in full but the Priority Creditors would not be paid.

15 The second issue concerns whether the Receivers are obliged to retire as receivers and managers of the Chargors. The Receivers seek a direction that they are not obliged to retire at a time when the principal amount which was borrowed, and interest on that principal amount, has been (or can be) repaid to ING, but:

(i) there is litigation threatened against the Receivers and ING in respect of the Receivers' conduct of the receiverships and the costs and fees charged by the Receivers;

(ii) ING has a potential obligation to indemnify the Receivers against a liability which they have as receivers of Westpoint Corporation to pay the Priority Creditors under s 433 of the Act;

(iii) the Chargors are not contractually entitled by the terms of their charges to a discharge of the charges unless in the reasonable opinion of ING there is no prospect that money or damages will become owing (whether actually or contingently) by the Chargors to ING;

(iv) ING has not formed such an opinion; and

(v) ING has not formed the opinion that there is no prospect that money or damages will become owing (actually and contingently) by the Chargors to ING, by reason of the matters referred to in paragraphs (i) and (ii) above.

16 The third issue concerns the entitlement of the Receivers to realise assets of the Chargors to create a fund available to satisfy the future potential liabilities of the Chargors to ING. The Receivers seek a direction that, if they are not obliged to retire as receivers and managers, they are obliged or entitled to realise the remaining assets of the Chargors to create a fund available to satisfy the future liabilities of the Chargors to ING, to the extent that those assets are causes of action which need to be pursued in order to recover any funds and if they are not pursued in a reasonable and expeditious fashion such recovery will be prejudiced.

17 The fourth issue concerns the Receivers' application for the following declarations:

(i) clauses 11.2(b)(i) and 12.1(c) of the Loan Agreement ...

(ii) clauses 1.1, 3.1, 8.2(b)(i) and 9.1(c) of the Guarantee ...

(iii) clause 1.1 (definition of 'Secured Money'), 3.2(a), 17.2(b)(i) and 18.1(b) of the Charge Instruments ... and

(iv) clause 5.1(a)(iii) and 5.1(c) of the Deed of Indemnity between ING and the [Receivers]

is that:

(a) ING is liable to indemnify the Receivers for their costs in defending any proceedings against them in respect of the conduct of the receiverships - other than for any negligent act or omission, or any act or omission done or omitted by either of them otherwise than in the bona fide performance of their powers as agents, or any act or omission done in contravention of sections 180 to 183 (inclusive) of [the Act];

(b) ING is liable to indemnify the Receivers for any personal liability under s 433 of [the Act];

(i) proceedings COR 223 of 2009 against the [Receivers] and ING are pending;

(ii) there is a risk of further litigation against the [Receivers] and/or ING by the [Defendants] or some of them (the Potential Future Litigation);

(iii) the costs of defending proceedings COR 223 are reasonably expected to exceed the cash reserves held by the [Receivers];

(iv) the costs of the Potential Future Litigation are reasonably expected to exceed the cash reserves held by the [Receivers],

the [Receivers] are:

(v) not obliged to retire as receivers and managers; and

(vi) are entitled (if they think fit and except to the extent that they do not consider it commercially viable to do so) to proceed with their claims in Perpetual Nominees Ltd v Richstar Pty Ltd Federal Court of Australia action WAD 60 of 2008 (Richstar Action) and Warwick Entertainment Centre Pty Ltd v Silkchime Pty Ltd Supreme Court of Western Australia action CIV 1094 of 2008 (Silkchime Action) and to realise such remaining assets as they consider necessary to create a fund to meet the costs of defending COR 223 and the Potential Future Litigation;

(3) Alternatively to 2, that in the circumstances referred to in (2)(i) and (iii) above, the [Receivers] are:

(i) not obliged to retire as receivers and managers; and

(ii) entitled (if they think fit and except to the extent that they do not consider it commercially viable to do so) to proceed with their claims in the Richstar Action and the Silkchime Action and to realise such other assets as they consider necessary to create a fund to meet the costs of defending COR 223 of 2009.

(4) In the event that the court makes the directions sought ... to the effect that the [Receivers] are entitled or obliged to realise the floating charge assets [constituted by the Westpoint causes of action] in order to pay the Priority Creditors ... and in circumstances where then current reserves held by the [Receivers] are exceeded by the value of the entitlements of the priority creditors, a declaration that the [Receivers] are:

(a) not obliged to retire as receivers and managers; and

(b) entitled to realise the [Westpoint causes of action] (except to the extent that they do not consider it commercially viable to do so).

18 First, the Receivers contend that, by reason of s 433 of the Act, they are entitled, but not obliged to the extent that they do not consider it commercially viable, to realise the Westpoint causes of action in order to pay the Priority Creditors.

19 Secondly, the Receivers contend that the court should declare and/or direct that they are not obliged to retire as receivers and managers.

20 Thirdly, the Receivers contend that the court should declare and/or direct that they are entitled, but not obliged to the extent they do not consider it commercially viable, to realise the remaining assets of the Chargors to create a fund available to satisfy the future potential liabilities of the Chargors to ING, and in particular the likely costs of defending COR 223 of 2009 and the potential future litigation.

21 Fourthly, the Receivers contend that the court should declare and/or direct that the effect of the provisions of the Loan Agreement, the Guarantee, the Charge Instruments and the Deed of Indemnity is:

(a) ING is liable to indemnify the Receivers for their costs in defending any proceedings against them in respect of the conduct of the receiverships - other than for any negligent act or omission, or any act or omission done or omitted by either of them otherwise than in the bona fide performance of their powers as agents, or any act or omission done in contravention of s 180 - s 183 of the Act;

(b) ING is liable to indemnify the Receivers for any personal liability under s 433 of the Act;

22 First, ING made no submissions on the legal question that arises under s 433 of the Act.

23 Secondly, ING supports the position of the Receivers as to the defence costs of litigation in COR 223 of 2009 and the threatened litigation. ING submitted that the benefit of any right of retention would be entirely illusory if the Receivers were not, as a matter of law, permitted to build up a fund to meet the reasonably anticipated costs of their defence.

24 Thirdly, as to the declaration sought by the Receivers as to the material effect of the Transaction Documents and the Deed of Indemnity ING in substance supported the Receivers position as to the proper construction.

25 First, the defendants contend that the Receivers are not obliged or entitled, by reason of s 433 of the Act, to realise any of the Westpoint causes of action in order to pay the Priority Creditors. The defendants further contend that if the Receivers are obliged or entitled, by reason of s 433, to realise any or all of the Westpoint causes of action in order to pay the Priority Creditors (which is denied), they are nevertheless obliged to retire as receivers and managers of the companies referred to in sch 1, save for Westpoint Corporation.

26 Secondly, the defendants contend that this court is unable or it is inappropriate for it, in this application, to declare or direct that the Receivers are not obliged to retire as receivers and managers, except to the extent that the court forms the view that the Receivers are obliged to continue the receiverships to meet any obligation cast upon them by s 433.

27 Thirdly the defendants contend that this court is unable or it is inappropriate for it, in this application, to declare or direct that the Receivers are obliged or entitled to realise the remaining assets of the Chargors to create a fund available to satisfy the future potential liabilities of the Chargors to ING.

28 Fourthly, the defendants contend that this court is unable or it is inappropriate in this application, to declare and/or direct that the material effect of the provisions of the Loan Agreement, the Guarantee, the Charge Instruments and the Deed of Indemnity is as alleged by the Receivers in circumstances where such declarations and/or directions depend upon the outcome of extant proceedings, that is COR 223 of 2009.

29 Finally, the defendants say that if the court makes or gives any of the relief sought by the Receivers it should only do so on such terms which protect the defendants' position in COR 223 of 2009 and which does not provide the Receivers and ING with immunity from suit in relation to any of their past or future conduct.

30 The Receivers have sought directions under s 424 of the Act. The power to make directions under s 424 is a broad one, intended to facilitate the work of receivers: Re Odessa Promotions Pty Ltd; Pescod v Harrison [1979] ACLC 32, 103 at 32. The section provides a statutory exception to the general rule that a court will not give an advisory opinion. The power of the court to give directions under s 424 is analogous to the giving of directions to a liquidator under s 479(3) and s 511: Re One Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 [28].

31 Section 424 enables a receiver to apply for a direction whether or not he or she may lawfully take a particular proposed course of action: Re One Tel Networks Holdings Pty Ltd [43]; but not where the answer to that question would require the making by the court of a commercial decision for a receiver: Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd [1992] FCA 140; (1992) 7 ACSR 245. In Re One Tel Networks Holdings Pty Ltd at [32] the court refused an application for an order that a receiver and manager appointed under an instrument of charge would be justified in making an agreement to compromise disputes with liquidators of the company. The court refused because the court would otherwise be making or condoning a commercial judgment.

32 The role of s 424 is to provide a procedure for a receiver to obtain some guidance from the court in conducting the receivership and so as to give protection against a claim for breach of duty or allegations that he or she has acted improperly or unreasonably: see Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114; Re Southern Cross Airlines Holdings Ltd (in liq) [2000] 1 Qd R 84; (1998) 145 FLR 386.

33 Despite the breadth of the jurisdiction conferred on the court by s 424 there is a limit to the matters upon which a court may or should give directions to a receiver under s 424. The provision enables a receiver to apply to the court for directions in relation to any matter arising in connection with the performance or exercise of any of his or her functions and powers as receiver. It is doubtful whether s 424 enables a receiver to apply for a determination as to the validity of the appointment. This apparent absence of power has been overcome by the enactment of s 418A. It might be argued that a direction that a receiver is entitled to continue the receivership is not a direction in relation to any matter arising in connection with the performance or exercise of any of the receivers' functions and powers as receiver. That was not the subject of argument. The defendants submitted that the court should not make such a direction because of the existence of COR 223 of 2009 and the matters raised in those proceedings, not because s 424 does not empower the court to make such a direction. The defendants say that any entitlement to continue the receiverships is bound up in the disputed issue of why they did not retire two years ago and other matters that are in issue in COR 223 of 2009.

34 The defendants submit that a direction under s 424 is not binding on the defendants in such a way as to create any kind of legal estoppel and that this is so notwithstanding that they have been joined in the proceeding and filed material opposing the making of the direction.

35 It has been suggested that the reported and unreported authorities reveal discordant judicial opinion on the issue of whether an order under s 479(3) of the Act, and analogously an order under s 424 of the Act, can bind third parties in relation to substantive issues: Johnson R 'The Power of the Court to Give Directions to a Liquidator - Plagued by Uncertainty?' (2005) 13 Insolv LJ 213, 223. The better view is that a direction under s 424 does not bind third parties in relation to substantive issues even when they are joined as defendants to the proceedings. In White v Huxtable, In the Matter of Lake Federation Pty Ltd (receivers and managers appointed) [2006] FCA 559; (2006) 57 ACSR 435 Young J said:

A direction under s 424 of the Corporations Act is a direction only. A direction in that form does not address the question whether the receivers have acted reasonably and/or discharged their duties under s 420A. Nor is such a direction binding on the defendants in such a way as to create any kind of legal estoppel. This is so notwithstanding that the directors have been joined in the proceeding as defendants and filed material opposing the making of the direction in the original form [21].

36 In addition to seeking directions under s 424 of the Act, the Receivers seek declarations under s 25(6) of the Supreme Court Act or the inherent jurisdiction of the court. In respect of proceedings seeking directions under provisions similar to s 424, it has been held that the court has sufficient flexibility in its procedures to enable proceedings begun as an application for directions to be converted into proceedings for the determination of substantive rights. In Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674; (1991) 5 ACSR 673 McLelland J expressly acknowledged the possibility that the rules and procedures of the court were sufficiently malleable to permit directions proceedings to be transformed into proceedings more suitable for the determination of substantive rights (680).

37 The parties which are potentially affected by the directions or declarations sought by the Receivers have been joined as parties to these proceedings. The Originating Process has been amended to seek declarations under s 25(6) of the Supreme Court Act or the inherent jurisdiction of the court. The defendants accepted that they were not prejudiced by reason of that amendment. The court has power to make declarations in these proceedings if it is appropriate to do so.

First principal issue: priority creditors and s 433

38 In their amended Originating Process the Receivers seek a direction as to whether they are obliged or entitled, by reason of s 433 of the Act, to realise the floating charge assets consisting of the Westpoint causes of action in order to pay the Priority Creditors in circumstances where ING might otherwise be paid in full but the Priority Creditors would not be paid. In their written submissions, the Receivers stated that the issue upon which directions are sought is whether the Receivers are required to continue to realise commercially viable floating charge assets, in this case by pursuing reasonable causes of action, in order to pay outstanding entitlements of the Priority Creditors which will not be satisfied out of existing net realisations of floating charge assets.

39 Section 433(2) of the Act describes the persons to whom s 433 applies. Relevantly, the section applies to a receiver appointed on behalf of the holders of any debenture of a company that is secured by a floating charge, or to a person who takes possession or assumes control on behalf of the holders of any debentures of a company, of any property comprised in or subject to a floating charge, if this occurs before a winding up has been voluntarily commenced or ordered by the court. In this case it is common ground that the section applies to the Receivers.

40 Where s 433 applies, s 433(3) imposes an obligation on the receiver or other person taking possession or assuming control of property of the company to pay, out of the property coming into his, her or its hands the debts or amounts then described in priority to any claim for principal or interest in respect of the debentures. The debts or amounts described include wages and certain other payments to employees payable by the company in respect of services rendered to the company by employees before the appointment of the receiver.

41 'Property' in s 433(3) applies to property that is subject to a floating charge which the receiver receives in his character of receiver: see Re Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch 498 where the Court of Appeal of England and Wales considered the equivalent English statutory provision where the words 'any assets' were used instead of 'property'. The section has no application to property received by the Receivers that was subject to a fixed charge in favour of ING.

42 The relevant Priority Creditors are prior employees of Westpoint Corporation who are owed holiday and superannuation entitlements. In addition, approximately $2 million has been paid out by the Commonwealth General Employees Entitlements and Redundancy Scheme (GEERS). GEERS is subrogated to the priority rights of the creditors who have been paid out.

43 In the course of the hearing some evidence was tendered in relation to the identification and quantum of the Priority Creditors entitlements and there was some argument about that issue. However, counsel for both the Receivers and the defendants agreed that the court should not, at this time, give any directions concerning the quantum of 'priority payments' or which particular payments or amounts are 'priority payments'.

44 Section 433 has a long history. Its origin is to be found in the Preferential Payments in Bankruptcy (Amendment) Act 1897 (UK), s 3. The history and purpose of that statutory provision is referred to in a number of the speeches in Buchler v Talbot [2004] UKHL 9; [2004] 2 AC 298; (2004) 2 WLR 582. The relevant UK law starts with the statutory creation of a class of preferential debts in the 19th Century. The Companies Act 1883 (UK), s 4 made provision that to a defined extent unpaid wages and salaries of employees should be paid before all other debts in the distribution of the assets of a company being wound up. That and subsequent statutory provisions did not affect the proprietary rights of chargees. The secured claims of debenture holders are pursued, not in the winding up, but by enforcement of the debenture holders proprietary rights as chargees of the assets in question. The relevant legislation gave preferential creditors a limited degree of priority in the winding up of a company but their status remained that of unsecured creditors. As such, along with other unsecured creditors, they could lay no claim to assets charged to a debenture holder unless and until all payments secured by the debenture had been made. Lord Nicholls explained:

In practice this meant that unpaid workers, although accorded priority in a winding up, often received nothing. The debenture holder, by virtue of his (crystallised) floating charge, scooped the pool. There was no surplus available for distribution among unsecured creditors, preferential or otherwise [11].

45 The law was changed in the UK by the Preferential Payments in Bankruptcy (Amendment) Act 1897. Section 2 of that Act provided that in the winding up of any company the preferential payments, should, so far as the assets of the company available for payment of general creditors may be insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company and shall be paid accordingly out of any property comprised in or subject to such charge. Section 3 made corresponding provision for what should happen if a debenture holder appointed a receiver or took possession of property comprised in a floating charge when the company was not being wound up. Section 3 provided that in such a case:

the debts mentioned in section 1 of the said Preferential Payments Act shall be paid forthwith out of any assets coming to the hands of the receiver, or other person taking possession as aforesaid, in priority to any claim for principal or interest in respect of such debentures.

46 The purpose and effect of s 433 and its statutory predecessors is to protect the position of preferential creditors by giving preferential claims priority over the claims of floating chargees who would have otherwise 'scooped the pool' of the chargor's assets.

47 In Westminster Corporation v Haste [1950] 1 Ch 442 the English equivalent to s 433 of the Act has been described as not being:

a merely negative provision to the affect that the receiver is protected if he does not pay the debenture-holders. It is a provision which requires him to pay the preferential creditors out of any assets coming into his hands (447).

48 There are many authorities to the effect that s 433 imposes a positive obligation on a receiver to pay preferential payments. However, those authorities all concern cases where the receiver had converted assets while subject to a floating charge into money or otherwise had in his hands money derived from assets that were the subject of the floating charge. The question in this case is whether s 433 requires the Receivers to realise assets the subject of the floating charge so as to provide a fund from which the preferred payments may be made. Counsel for all of the parties informed me that their research had not turned up any authority which directly addresses that issue.

49 The Receivers submit that the notion of property coming into the hands of the receiver for the purpose of s 433 does not limit the receiver's obligation by reference to physical assets which have been collected in the course of a receivership. They submit that it would be unworkable to confine property 'in the hands of' the receiver to physical property because such a definition would exclude the right of the receiver to draw out of a bank account. The Receivers submit that, at the least, property comes into the hands of the receiver for the purposes of s 433 once the receiver has obtained the realisable proceeds of the property of which the receiver has taken possession or assumed control. The Receivers submit that the critical issue is whether s 433(3) means that property comes into the hands of the receiver simply by reason that the receiver has taken possession or assumed control of it. In other words, there is no additional requirement introduced by the notion of property coming into the hands of the receiver.

50 The Receivers submit that this interpretation is consistent with the general observations of Gobbo J in General Credits Ltd v Chemineer Nominees Pty Ltd (in liq) (1986) 4 ACLC 570 and of Marks J in Russell v AGC (Advances) Ltd [1988] VicRp 13; [1988] VR 97; (1988) 19 ATR 138 that the obligation under s 433(3) crystallises at the time of the receiver's appointment, and is not altered by what actually occurs during the course of the receivership. Further, the Receivers submit that the purpose of s 433(3) is to ensure that priority debts are paid to the extent possible and having regard to that purpose, a receiver may have a duty to act in the interest of the priority creditors and, acting as if appointed by them, the receiver has a duty to pay such priority debts as possible. In effect this creates a mini-regime of external administration in favour of priority creditors. The Receivers referred to two cases which they submit support their contention.

51 The first case is Re Pearl Maintenance Services Ltd [1995] 1 BCC 657; [1995] 1 BCLC 449. The company factored its debts to TSB Factors Ltd (TSB). At the same time it purported to create a fixed charge over its book debts in favour of TSB. TSB appointed receivers under its charge and its debts were fully discharged. TSB continued to collect book debts for the receivers in return for a commission. The receivers made an application for directions to determine whether the charge in favour of TSB was a fixed or floating charge and whether the receivers' duties continued under s 40 of the Insolvency Act 1986 (UK), notwithstanding that the debt of TSB had been discharged. Section 40 of the Insolvency Act 1986 (UK) is to a similar effect as s 433 of the Act. Section 40(2) of the UK Act provided that the company's preferential debts there referred to 'shall be paid out of the assets coming to the hands of the receiver in priority to any claims for principal or interest in respect of the debentures'. One of the issues raised in the case was whether the receivers should continue in office, notwithstanding that they had achieved sufficient realisations of the assets to enable them to discharge principal and interest due to TSB as holders of the debentures. Carnwath J answered the question in this way:

In my view, the answer to this question becomes apparent if one considers the nature of the duty and rights created by s 40. The cases show that s 40 creates a positive duty (not merely a restriction) in favour of the preferential creditors, and that it is a duty enforceable by action in tort for damages (Westminster City Council v Haste [1950] 2 All ER 65, [1950] Ch 442; IRC v Goldblatt [1972] 2 All ER 202, [1972] Ch 498). Thus it is a duty which creates statutory private rights, enforceable as such by the preferential creditors. This being so, it would be very odd if those rights disappeared, merely because the debenture-holder (who in the context of these statutory rights is a third party) has been paid off. It is no answer to say that the rights are recreated by s 175 in the liquidation. As the figures in this case (and in Re GL Saunders) show, the preferred debts under s 175, which are determined by reference to a different date, may be much less valuable.

Thus, although the receiver starts as the appointee of the debenture-holder, statute imposes upon him a duty to the preferential creditors which is capable of having a separate life of its own. It does not cease merely because the debenture-holder is satisfied. The receiver remains under a duty to meet the claims of the preferential creditors, so far as can be done out of floating charge assets (663 - 664).

However, that does not answer the question in this case. In answering another question in the case, Carnwath J said:

... It does not seem to me to matter very much when or by what route those book debts find their way into the receivers' hands. The nature of the charge as created remains the same. Once within the receivers' hands they would come within the scope of the duty under s 40(2), and remain subject to it so long as the duty continued (663).

That is, it was assumed that the book debts had come into the hands of the receiver before the debt of TSB had been discharged and the book debts had been realised.

52 The second case is Lumsden v Long (1998) 16 ACLC 1743. In that case a receiver went into possession of a company's assets but then relinquished his appointment on the basis that it was invalid. All of the company's assets then came under the control of a liquidator. The company's liquidator sought a declaration that the receiver was liable for priority debts, claiming that s 433 applied to the receiver. Murphy JR held that the statutory priority accorded by s 433 was analogous to a trust obligation, and that the company assets relinquished by the receiver were impressed with the same obligation as imposed upon the receiver (1749). Hence, the liquidator was not entitled to leave the receiver in a position where he had no company funds to meet the statutory priority. There was a declaration that the liquidator was liable to pay the priority debts under s 433 out of the company's property. The Receivers submit that this analysis is based upon the obligation under s 433 affecting all of the relevant property of the company, not just the realised proceeds of the company's property. Again, that case stands for the proposition that s 433 imposes on a receiver a personal duty to pay the priority creditors out of the property coming into his hands and that that duty continues notwithstanding the appointment of a liquidator, but it was common ground that the relevant property out of which the priority payments could be made had come into the hands of the receiver.

53 The defendants submit that s 433 of the Act does not impose on the Receivers a duty to realise assets comprised in the floating charge merely in order to pay the preferential debtors when the chargee has been repaid in full. The defendants say that the effect of s 433(2) is that s 433 applies where a receiver is appointed. Section 433(3) casts an obligation only when a further step occurs, namely 'property [has come] into his/her or its hands'. The defendants submit that the expression 'property coming into his hands' should be construed to refer to the proceeds from the realisation of floating charge assets.

54 I do not agree with that submission if it goes so far as asserting that a receiver who takes possession of property in his character as receiver can have no obligation to pay preferential creditors unless the property has been converted into money before the receivership ends. For example, property may come into the hands of a receiver when the receiver takes possession of chattels and offers them for sale. If, before the chattels were sold, the debenture holder removed the receiver and directed the receiver to deliver the chattels to the company and the company subsequently sold the chattels and paid the sale proceeds to the debenture holder, the receiver may be personally liable to the preferential creditors: see Inland Revenue Commissioner v Goldblatt [1972] 1 Ch 498; (1972) 2 WLR 953.

55 In Whitton v ACN 003 266 886 Pty Ltd (in liq) [1996] FCA 1789; (1996) 42 NSWLR 123; (1996) 14 ACLC 1,799 Whitton was appointed receiver of the defendant company by Heller Financial Services under a deed of charge which created a floating charge and a fixed charge over certain assets of the company. After his appointment, Whitton continued to conduct the business until he subsequently sold it. Bryson J determined a number of issues including whether, on the true construction of the deed of charge, a floating charge or a fixed charge was created over book debts of the company which arose after crystallisation of the charge on the appointment of the receiver utilising property, comprising cash, money at bank, stock and work in progress, owned by the company at the time of crystallisation of the charge (described as trade-on book debts). Another issue was whether Whitton, as agent of Heller Financial Services in possession of the property of the company was obliged by s 433(3) of the Act to pay out of any of specified classes of property certain preferred debts including wages and superannuation contributions. After noting that s 433(3) creates a statutory duty to make a payment out of the property referred to, and that if that duty is not complied with, the creditor entitled to a priority debt has a cause of action for damages against the controller for breach of that statutory duty, Bryson J said:

For most assets subject to floating charges some process of conversion into money must be carried out by the controller before a payment can be made. Even a book debt must be collected, and for many classes of property it is necessary to carry out processes which may involve expenditure in order to convert them into money. I would think that there would be no breach of the subsection if a controller effected conversion into money by valuing the property subject to a floating charge and appropriating the same amount of money in his hands from some other source to payment of the priority debts. With respect I do not think that it can be correct to suppose that it is the controller's duty immediately to convert the very assets subject to a floating charge into money by selling those assets for the purpose of paying the priority debts; that might tear the heart out of the company's business and affairs and defeat the prospects of successful administration in the interest of anybody else, and I do not find it possible to suppose that that was the legislature's purpose in enacting s 433(3); it must have been contemplated that some process of conversion would take place as part of the whole process of winding up even if that involved some delay, or some expense (137).

It is implicit, if not explicit, in that passage that the property coming into the hands of the receiver out of which he must pay the priority debts includes the assets subject to the floating charge and is not confined to the money realised by selling the assets. That is made clear in a later passage where Bryson J said:

Any rights to preference under s 433 could extend only to property which was subject to a floating charge before crystallisation on 8 March 1995. Cash, money at bank, and stock in trade then would be; it is out of these assets that the controller is obliged by s 433 to pay the preferential debts, and if he does not do so and uses them, even in an economically rational way, to bring some other assets into existence such as book debts for completed work, his liability for damages for breach of his statutory duty is measured by reference to the value of the assets subject to the floating charge on 8 March 1995, and not by reference to the value of anything towards the later creation of which they contributed. (Of course there might well be other elements in the calculation of those damages.) In my opinion the controller's liability neither increases with success nor diminished with failure of any venture in which he utilises assets which have been subject to a floating charge.

I made the qualification in parenthesis because, following the terms of s 433(3), the controller's obligation is to pay the priority debts out of property coming into his hands, and while the value of that property at the time when it came into his hands may establish the measure of his liability where it is readily convertible into money with which to make a payment, establishing the amount of his liability might be more complex where there is some need to expend money or work in converting the property into money. If the legislated obligation to pay a debt out of property cannot be complied with without a process of conversion into money it must be understood as authorising that process and anything necessarily involved in it, including expenditure. Section 433(3) does not give rise to equitable interests and does not authorise tracing of the property out of which the debt is to be paid into other property in the manufacture of which it is used, whether or not tracing would be advantageous (146 - 147).

56 The defendants submit that the construction contended for by the Receivers ignores the difference between a receivership and a liquidation. They submit that the Act acknowledges that companies may be returned to normal operation after receivership. The defendants further submit that if s 433 were construed in the way contended for by the Receivers it would give rise to practical absurdities and perverse outcomes. The defendants offered the following example. Assume a secured creditor is owed $100,000 under a fixed and floating charge. The secured creditor's debt is paid out of the realisation of the fixed charge assets. However, the receiver was also appointed as receiver in respect of the floating charge assets. Within those floating charge assets are causes of action in debt. The secured creditor no longer needs to be paid. The company and its management and employees wish the company to continue in operation. To do so, they would require the receiver to retire so that creditors would deal on normal terms, the trading of the company continues and, thereby, the employment of the employees continues. A construction that the receiver is obliged to realise floating charge assets and may not retire, but must continue to pursue the floating charge assets would not assist the employees whose efforts augmented those assets. The company could well fail and the employees be dismissed. The defendants submit that that is not what Parliament intended.

Notion of property coming into Receiver's hands

57 Paragraph 11.11 of each of the Charge Instruments provides that ING may, amongst other things, appoint a receiver and manager of the Secured Property or a part of it. Secured Property is defined to include any legal or equitable estate or interest of the Chargor in any present and future undertaking and property. It includes choses in action including a cause of action. The Receivers were appointed receivers and managers of the whole of the Secured Property, not merely part of it. The Receivers have commenced proceedings in respect of two causes of action. The first is Perpetual Nominees Ltd v Richstar Enterprises Pty Ltd Federal Court of Australia Action WAD 60 of 2008, to recover a debt that was owing by Richstar to ING and was assigned to Dosius and Paquero (the Richstar action). The second is Warwick Entertainment Centre v Silkchime, Supreme Court of Western Australia Action CIV 1094 of 2008, to recover a $12 million inter-company loan (the Silkchime action). However, the Receivers do not presently have in their hands property out of which they can pay the preferred creditors without expending money and work in converting, or attempting to convert, the property constituted by the causes of action into money which they can pay to the preferred creditors. Are the Receivers obliged to undertake that task and in the process risk losing money?

58 The obligation created by s 433(3) is that the receiver must pay 'out of the property coming into his hands' the priority debts in priority to any claim for principal or interest in respect of the debentures. It is, as I have said, well established that the section is not merely a negative provision to the effect that the receiver is protected if he does not pay the debenture holders. It is a provision which requires him to pay the preferential creditors out of any property coming into his hands. However, there must be some qualification to that duty. Obviously, a receiver is not obliged to pay to the preferential creditors amounts in excess of the value of the property, or the amount which can be realised from the property. To do so would require of the receiver that he do more than pay the preferred creditors, 'out of the property coming into his hands'.

59 The defendants submit that where the chargee has been paid in full and the receivership should otherwise be terminated, the receiver is under no duty to undertake work or expend money to realise assets to generate funds from which the preferred creditors may be paid. The defendants submit that the position is correctly stated in O'Donovan J, 'Company Receivers and Managers' at [11.4130]:

The receiver's personal obligation to pay the preferential debts is capable of having a separate life of its own so that it does not cease simply because the debenture holder is paid in full. [Re Pearl Maintenance Services Ltd; Re Pearl Building Contracts Ltd [1995] BCC 657]. Nevertheless, receivers should not be expected to continue collecting and realising the assets covered by the floating charge for the purpose of paying preferential debts after the secured debt has been discharged [Contrast Re Pearl Maintenance Services Ltd; Re Pearl Building Contracts Ltd [1995] BCC 657 at 663-664]. Indeed, receivers who have paid out the debenture holder in full have achieved the primary objective of the appointment and should take steps to finalise the receivership [See Expo International Pty Ltd v Chant [1979] 2 NSWLR 820; (1979) 4 ACLR 679; Rottenberg v Monjack [1992] BCC 688; [1993] BCLC 374 at 378 and [15.330]]. There should be no obligation to prolong the receivership simply to realise other assets comprised in the floating charge in order to pay the preferential debts still outstanding. The receiver's personal obligation to pay the preferential debts ahead of the principal and interest owing to the debenture holder is restricted to the 'property coming into [their] hands]; [Section 433] it does not require the receivers to collect and realise surplus floating assets simply for the purpose of paying the preferential debts. Those preferential debts which remain unpaid after the debenture holder has been satisfied may be left to a liquidator to pay in the ultimate winding up of the company [See s 556].

60 In Westminster Corporation v Haste Danckwerts J said of the English equivalent of s 433 of the Act:

To my mind that is not simply a negative provision which means the receiver is protected if he simply does not pay the debenture holders; it is a provision which requires him to pay the preferential creditors out of any assets coming to the hands of him as receiver. Therefore, it seems to me that, if he has had any assets out of which this payment could have been made, he is under a liability in tort to the plaintiffs (447).

The Receivers do not at the present time have any assets out of which they can pay the preferred creditors. They can only pay the preferred creditors by realising the Westpoint causes of action. To do so will require the expenditure of substantial sums, time and effort. Interpreting s 433 to require a receiver to do so would not promote the purpose or object underlying the statutory provision. That purpose is to prevent a floating chargee from scooping the pool by enforcing the security and leaving preferential creditors in the cold. Interpreting s 433 so as to require a receiver to prosecute the causes of action is to require the receiver, and the chargee indemnifying him or her against the loss and expense, to risk their own funds for the benefit of the preferred creditors. Neither the text nor purpose of s 433 requires the statutory provision to be interpreted in that way.

61 Where the Receivers have taken no steps to prosecute a cause of action they are under no duty to do so. However, different considerations may apply in relation to the Richstar action and Silkchime action, that is, the proceedings already commenced by the Receivers. The Receivers owe duties to the preferred creditors analogous to the duties owed to the Chargor. Those duties include the duty to exercise the Receivers' powers in good faith, including a duty not to sacrifice the preferred creditors' interests recklessly: see Expo International Pty Ltd v Chant (1979) 2 NSWLR 820, 834 (Needham J) in relation to the duty owed to a chargor. The Receivers have commenced actions in respect of the two causes of action referred to. The Receivers should exercise their powers to continue or resolve those proceedings in good faith and not sacrifice the preferred creditors' interests recklessly.

62 In their amended Originating Process the Receivers seek a direction whether they are obliged or entitled, by reason of s 433 of the Act, to realise the Westpoint causes of action in order to pay the priority creditors of Westpoint Corporation referred to in s 433(3), in circumstances where the secured creditor (ING) might otherwise be paid in full but the Priority Creditors would not be paid. It is appropriate to direct the Receivers that they are not required, by reason of s 433, to realise the floating charge assets constituted by the Westpoint causes of action in order to pay the Priority Creditors. The Receivers have a discretion whether to continue to prosecute the Richstar action and the Silkchime action. In exercising that discretion the Receivers must exercise their powers in good faith and having regard to the interests of the Priority Creditors.

63 It is not appropriate to give a direction whether the Receivers are entitled, by reason of s 433, to realise the floating charge assets constituted by the Westpoint causes of action in order to pay the Priority Creditors. The Receivers have the power to do so. That power is conferred upon them by the Charge Instrument in respect of Westpoint Corporation. Subject to the qualification I have referred to in relation to the Richstar action and the Silkchime action, the Receivers are not required to prosecute those causes of action so as to realise assets to pay the Priority Creditors. Apart from those observations, I find the notion of 'entitlement' vague if not incomprehensible.

64 In COR 223 of 2009 the defendants, who are the plaintiffs in that proceeding, allege that since at least 23 January 2008, wrongfully and in breach of their duties, the Receivers have failed to exercise their powers and duties properly and in particular failed to take steps to terminate the receivership as soon as the interests of ING were satisfied. The defendants seek an inquiry into the conduct of the Receivers and orders that the Receivers be removed as receivers of each of the defendants and that they give up possession and control of the property of each of the defendants. The parties agree that none of those matters should be determined in these proceedings. The directions should protect the defendants' position in COR 223 of 2009 and ensure that the directions made do not provide the Receivers and ING with immunity from suit in relation to any of their conduct the subject of COR 223 of 2009. I will direct that subject to any findings or orders made in COR 223 of 2009:

the Westpoint Charge Instrument confers on the Receivers the power to prosecute the Westpoint causes of action;
the Receivers are under no duty to commence proceedings to realise the Westpoint causes of action for the purpose of paying the Priority Creditors; and
the Receivers have a discretion whether to continue or otherwise deal with the Richstar and Silkchime actions and in exercising that discretion the Receivers must exercise their powers in good faith and having regard to the interests of the Priority Creditors.

Second principal issue: whether the Receivers are obliged to retire

65 The Receivers seek a direction as to whether they are obliged to retire as receivers and managers at a time when the principal amount which was borrowed, and interest on that principal amount, has been repaid to ING but:

(1) the Chargors are not contractually entitled to a discharge unless in the reasonable opinion of ING there is no prospect that money or damages will become owing by the Chargors to ING; and

(2) ING has formed the opinion that there is a prospect that money or damages will become owing by the Chargors to ING by reason of:

(i) threatened litigation against the Receivers and ING;

(ii) ING's potential obligation to indemnify the plaintiffs against any liability they may have under s 433.

66 The defendants say this is not a proper question to answer. They submit that the Receivers do not intend to retire but that they intend to remain and defend COR 223 of 2009. The defendants submit that whether that is appropriate or not depends upon the outcome in COR 223 of 2009 and the disputed facts in that proceeding.

67 In essence, the Receivers submit that they are not obliged to retire as receivers and they are entitled to realise outstanding causes of action of the chargors to create a fund available to satisfy the possible liabilities of the Chargors to ING for defence costs in defending COR 223 of 2009 and any other proceedings against them by the defendants. In his opening submissions senior counsel for the Receivers identified a number of propositions which he submitted bear on the question of whether the directions should be made.

68 Senior counsel for the Receivers submitted that his propositions are not contentious. The first is that the defendants take a critical view of the way in which the receivership has been conducted and hold that view with regard to the way in which the receivership has been conducted from the outset. I accept that the defendants hold that view. It is manifested by the allegations made by the defendants in COR 223 of 2009.

69 The second proposition is that the defendants' criticisms are resisted by the Receivers. That is apparent from the position taken by the Receivers in these proceedings and from the Receivers' defence filed in COR 223 of 2009.

70 Proposition 3 is that the defendants have held that critical view and accompanied that critical view with direct and indirect threats of litigation against the Receivers since at least early 2008. The evidence shows that to be correct.

71 The fourth proposition is that the defendants have continued to hold that view and take the view that the Receivers' failure to retire since 2008 constitutes a further breach of the Receivers' obligations. I accept that is correct. Senior counsel for the defendants has maintained that view in these proceedings.

72 The fifth proposition is that COR 223 of 2009 gives effect to the defendants' criticism of the Receivers' conduct, both prior to and since early 2008 but that those proceedings do not necessarily entail the universe of the defendants' complaints, nor do they necessarily bring together all of the litigation the defendants have threatened historically, so that there remains the possibility of further litigation beyond COR 223 of 2009. I accept that there is a possibility of further litigation beyond COR 223 of 2009. I do not assess, and I do not find it necessary in these proceedings to assess, the risk of such further proceedings being commenced.

Propositions relating to maintaining and establishing a retention fund

73 The Receivers' remaining propositions relate to maintaining and establishing a retention fund as security for the costs of defending COR 223 of 2009 and other proceedings against the Receivers. The sixth proposition is that the defendants accept that the Receivers and ING have an entitlement to maintain a retention fund to cover the costs and contingencies relating to COR 223 of 2009. The seventh proposition is there is an issue between the parties as to the quantum of cots likely to be incurred in COR 223 of 2009 and whether there is a risk of further litigation over and beyond COR 223 of 2009. The eighth proposition is that if the current reserves held by the Receivers are inadequate to meet the costs of defending COR 223 of 2009 and any other threatened litigation then there is an issue between the parties whether or not the Receivers should be entitled to add to the fund by pursuing the Westpoint causes of action.

74 The ninth proposition is that in the course of the Silkchime and Richstar actions the defendants challenged the right of the Receivers to pursue those recovery actions on the ground that the Receivers were obliged to retire as receivers. The defendants applied for the proceedings to be dismissed or stayed on that basis. The Silkchime action was stayed pending the determination of that issue in other proceedings.

75 Before reaching a decision on the second principal issue, whether the Receivers are obliged to retire as receivers and managers, I will consider the third principal issue.

Third principal issue: right to maintain a retention fund

76 The third principal issue is whether the Receivers are entitled to realise assets of the Chargors to create a fund to satisfy the future potential liabilities of the Chargors to ING. The Receivers submit that they have a common law right, independent of any contractual arrangements between ING and the defendants, to retain a fund against the potential costs of defending litigation brought against them by a chargor. In support of that contention the Receivers cite ASIC v Lanepoint Enterprises Pty Ltd [2006] FCA 1493; (2006) 64 ATR 524 [49] and F & G Nominees Pty Ltd v Coxon [2007] WASC 113; (2007) 34 WAR 55 [23] - [27]. Those two cases concerned the rights of a receiver or controller appointed by the court, not a receiver appointed out of court. The Receivers submit further that the litigation in COR 223 of 2009 is, in effect, an action seeking an account from the Receivers and the general rule is that a mortgagee who is threatened by the mortgagor with contested accounts is entitled to retain its costs of the accounts: Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225, 11, 230; Equus Financial Services Pty Ltd v RMBL Investments Pty Ltd (1996) 7 BPR 14,966; (1996) 22 ACSR 744, 14,968; Nidamon Pty Ltd v Wayland (Unreported, NSWCA, 15 April 1994) 17 - 18; Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 [63].

77 It is not necessary to consider whether the principles referred to by the Receivers apply to a receiver appointed out of court because it is common ground that the Receivers have a right to retain a fund against the costs of defending litigation brought against them by a chargor. The defendants expressly submitted that: 'If litigation is anticipated, the receiver is entitled to retain a reasonable sum from the fund created as security for his costs: see Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225'.

78 In Project Research Pty Ltd v Permanent Trustee of Aust Ltd, Hodgson J said at 11,230:

Accordingly, although initially I considered this unlikely, it does now seem to me that if a mortgagee bona fide and on reasonable grounds states a payout figure, which a mortgagor proposes to pay under protest, it is open to the mortgagee to require the payment, in addition to that figure, of a reasonable sum to cover anticipated costs of the proceedings in which the matter will be contested. Of course, in doing so, the mortgagee does take the risk that, contrary to his expectation, his conduct may subsequently be judged unreasonable and to amount to misconduct disentitling him to his costs, or even rendering him liable to pay the costs of the mortgagor. But subject to that risk, I think it is open to a mortgagee to take that step.

However, I accept that the defendant/mortgagee does reasonably anticipate proceedings in the nature of accounts, for which it will be entitled to costs unless it has been guilty of misconduct, and in relation to which it could be reasonable for it to retain security out of which to satisfy those costs. However, I do not think it is reasonable for the defendant not to attempt to give an estimate as to what these costs would be; if it were, it would mean that a mortgagee who was asked for a payout figure, and then told that it would be paid under protest, could refuse altogether to give a discharge of the mortgage otherwise than at the conclusion of redemption proceedings, after full accounts had been taken. I think that such a view was against the approach of the Privy Council in Bank of New South Wales v O'Connor ...

It may be reasonable for a mortgagee to specify a very generous estimate of its anticipated costs: the Privy Council referred to 'a proper margin'. Indeed, it may be appropriate to have regard to a 'law' which I think deserves to be as well known as Parkinson's law (which has various versions such as 'work expense to fill the available time'). I refer to Hofstadter's law, which appears at page 152 of Godel, Escher, Bach by Douglas Hofstadter, and which is as follows: 'It always takes longer than you expect, even when you take into account Hofstadter's law'. The relevant version of this law, which I call Hofstadter's law (costs version) is: 'It always costs more than you expect, even when you take into account Hofstadter's law (costs version)'.

If the defendant in this case had given evidence to justify retention of well in excess of $20,000, showing some basis for this, I may well have considered that it should be permitted to do so: this would have been at the defendant's risk, of course, in that its conduct in retaining such a sum might ultimately be judged unreasonable. However, in the absence of evidence from the defendant, I have to do the best I can on the basis of the evidence led by the plaintiff to decide what would be, in the words of the Privy Council in Bank of New South Wales v O'Connor, 'the probable costs of the suit' together with a 'proper margin'. There could be appeals from the taxing officer, so that I would not regard $4,500 as sufficient. On the whole, I think $20,000 would be a generous estimate of the costs which the defendant might incur, allowing ample margin for error. I am not, of course, deciding that it is reasonable for the defendant to retain that amount: questions of reasonableness and misconduct can only be decided when accounts have been taken.

For those reasons, I would order the return of the proceeds of sale, apart from a sum of $20,000. That sum can be retained as security by the defendant, and should be put into some appropriate interest-bearing account.

79 The Receivers were appointed as receivers and managers by ING pursuant to the contractual arrangements between ING and the defendants. Clause 3 of the Charge Instruments provides:

The Lender must at the request of the Chargor discharge the Security Interests created by this document if the Chargor's obligation to pay the Secured Money is satisfied and in the Lendor's reasonable opinion:

(a) there is no prospect that money or damages will become owing (whether actually or contingently) by the Chargor to the Lendor; and

(b) no payment towards satisfaction of the Chargor's obligation to pay the Secured Money is likely to be void, voidable or refundable under any law (including any law relating to insolvency).

80 On the proper construction of the relevant instruments referred to earlier the Chargors will owe money to ING in respect of the Receivers' costs of defending COR 223 of 2009 and any other proceedings unless the Receivers have acted wrongfully and are not entitled to an indemnity. Further, the Chargors are obliged to pay to ING costs incurred in creating a fund to meet the costs in defending those proceedings.

81 On the evidence before the court ING has not formed the opinion that there is no prospect that money or damages will become owing by the defendant chargors to ING. In fact, ING has formed the opposite opinion, that is, that there is a prospect that money or damages will become owing. That opinion is reasonably based. There is a dispute between the Receivers and the defendants whether the Receivers have engaged in wrongful conduct including overcharging. If COR 223 of 2009 is resolved in the Receivers favour they will be entitled to an indemnity for their costs from ING and ING will be entitled to an indemnity from the defendants. Furthermore, there is the possibility of other threatened litigation.

82 Furthermore, the Receivers say they have a common law right, independent of any contractual right, to retain a fund against the potential costs of any litigation brought against them by the defendants. As I have said, the defendants concede that is so. It is not necessary or appropriate to determine in advance whether the Receivers conduct may have disentitled them from relying upon a retention fund, if litigation against the Receivers is subsequently successful. The Receivers are entitled to retain a fund against the estimated defence costs of COR 223 of 2009 and other threatened litigation.

83 The Receivers accept that it is not appropriate to attempt to assess in advance whether their conduct may have disentitled them from relying upon a retention fund, if litigation against the Receivers is subsequently successful. In the present circumstances, the Receivers are entitled to retain a fund against the estimated costs of defending COR 223 of 2009 and any other threatened litigation. Whether or not the Receivers, or ING, are entitled to be indemnified by the Chargors against any legal fees and other costs and expenses which they incur in defending COR 223 of 2009 or other litigation brought against them by the defendants depends upon the findings that might be made in the course of such proceedings.

84 The Receivers say that they are entitled to prosecute the Westpoint causes of action to build up a retention fund because the cash they presently have on hand is insufficient to provide an adequate retention fund to satisfy the likely costs of defending COR 223 of 2009 and other threatened litigation.

85 Much time was spent at the hearing of this matter considering the parties respective estimates of the likely costs of the Receivers' defending COR 223 of 2009. The Receivers relied upon the evidence of Ms Banks-Smith, a legal practitioner who was a partner at Freehills for 13 years and is now a member of the independent bar. The defendants relied upon evidence of Ms Coulson, a barrister practising, amongst other things, in relation to costing issues.

86 Ms Banks-Smith, in a report dated 22 December 2009, stated that subject to certain exclusions, on the basis of her instructions, and taking into account the early stage of the litigation, she estimated that the costs of the Receivers in defending COR 223 of 2009 to the end of the trial (and including the known costs of the present action) are $4,096,000 made up as follows:

Ms Banks-Smith delivered a supplementary opinion on 9 February 2010, on the basis of further instructions, in which she estimated that the legal costs of the Receivers in defending an additional eight potential claims against them relating to the sale of assets by the Receivers and an additional potential cause of action based on alleged wrongful disclosure of documents was $2,654,520.

87 Ms Coulson set out her opinion in a report dated 16 February 2010. In her report Ms Coulson estimated that the costs of defending COR 223 of 2009 was $373,694.50. In her report Ms Coulson said that she considered Ms Banks-Smith's estimate of the defence costs did not represent an accurate estimate for the following reasons:

(a) it is based on a scope which is broader than that pleaded in the statement of claim as defined in her instructions;

(b) it assumes that it will be necessary to discover substantially more documents than that which is pleaded;

(c) it allocates resources in an extravagant manner, such as to result in a disproportionate balance between the value of the subject matter and the defence costs;

(d) it applies unreasonable hourly rates for a number of fee earners; and

(e) it provides no mathematical detail for the figures arrived at.

So far as the last criticism is concerned, that was remedied by the Receivers' solicitors subsequently providing Ms Banks-Smith's worksheets which provided the mathematical detail for her costs estimates.

88 It is neither necessary nor possible to attempt an accurate estimate of the likely costs of defending COR 223 of 2009. However, I do not accept Ms Coulson's estimates, or her reasons for stating that Ms Banks-Smith's estimate does not represent an accurate estimate of the costs of defending COR 223 of 2009 for a number of reasons. First, Ms Coulson takes a narrow view of the issues raised in the statement of claim. I am not satisfied that the issues are necessarily confined in the manner described by Ms Coulson. Senior counsel for the defendants conceded that the claim for damages is unconfined and may include damages for consequential loss. The particulars to [25] of the statement of claim identify extensive factual issues that will need to be traversed and extend, as Ms Coulson conceded, into almost every aspect of the receivership. The defendants' claims in COR 223 of 2009 allege unreasonable remuneration charged by the Receivers and expenses unreasonably incurred. The issues in relation to the reasonableness of the costs of the receivership will involve identifying the work done by them and their legal advisors and assessing the reasonableness of the charges for the performance of that work.

89 Secondly, I am not satisfied that discovery will be confined in the manner Ms Coulson assumes. Discovery is likely to be extensive. Mr Hirsh, the defendants' solicitor, said that discovery will be sought of all receipts and payments for the receivership and all source documents relevant to each receipt and payment for the receiverships. In her affidavit of 22 February 2010 Ms Sutherland, the Receivers' solicitor, says that the Receivers have 506 lever arch files of correspondence and documents generated or received during the receivership and the solicitors have in excess of 360 lever arch files. Ms Banks-Smith gave evidence to the effect that significant documentation is generated in a receivership as receivers move in and take over the operation of a business. The production of documents including invoices and narrations of work will require careful review for questions of privilege and such reviews will be time consuming and expensive due to the extent of the documentation and the extensive discovery or production which the defendants have indicated that they will be seeking in COR 223 of 2009.

90 Thirdly, I am not persuaded that what Ms Coulson describes as 'the costs issue' is likely to be resolved in the manner she describes in her report. The procedure which Ms Coulson proposed should be used to resolve the matter is a reference under O 66. That is not a procedure which can be used to assess the Receivers' costs. Furthermore, Ms Coulson said that the process she proposed for a provisional costs assessment required the consent of the parties. Ms Sutherland's evidence was that the Receivers would not consent. I am not satisfied that the Receivers' position is unreasonable. In any event, a reference to a referee for report would in any event involve a long and extensive hearing. It is likely that what Ms Coulson describes as the 'costs issue' will be decided at the trial of the action not in the manner proposed by Ms Coulson.

91 COR 223 of 2009 has not yet proceeded beyond the pleadings stage. Almost any estimate made at this time of the costs of defending the proceedings is as likely to be too little as too much. The Receivers must, as they have done, form a judgment of the likely costs after making proper enquiries and where necessary taking appropriate advice. The Receivers may properly retain an amount equal to a generous estimate of the costs which they are likely to occur, allowing a proper margin for error.

92 The Receivers presently have a fund of approximately $850,000. They have received advice that the estimated cost of defending COR 223 of 2009 is more than $4 million. I am not satisfied that that is an accurate estimate of the costs of defending COR 223 of 2009. That is because it is too early in the proceedings and there are too many uncertainties to estimate with any accuracy the costs of defending those proceedings. I approach Ms Banks-Smith's costs estimate as an indicative estimate, that is a rough cost projection that may be used by the Receivers for budget planning purposes in the early stages of the litigation. A reasonable person in the position of the Receivers would review the amount retained, or amount being realised to establish a retention fund, from time to time as the litigation proceeds. In those circumstances the Receivers are justified in pursuing reasonable and economically viable causes of action of the Chargors to create a fund of sufficient magnitude to meet the likely costs of defending COR 223 of 2009. It is sufficient that I form an opinion that the funds currently held by the Receivers may not be sufficient to meet the likely legal costs and I do form that opinion. The cash amount held by the Receivers is substantially less than the defence costs of COR 223 of 2009 estimated by Ms Banks-Smith.

93 Subject to a qualification that I will shortly refer to, the Receivers are justified in realising assets of the Chargors to create a fund available to satisfy the future liabilities of the Chargors to ING as a result of COR 223 of 2009.

94 The qualification to which I have referred is as follows. In COR 223 of 2009 the defendants claim that the receivers should have retired in January 2008 and maintain that the receivers should immediately retire. All of the parties to the present proceeding agreed that the court should not determine the issues raised in COR 223 of 2009 and should not determine the defendants' contention that the receivers should have retired. Accordingly, any direction made in these proceedings must have no effect upon the defendants' claims in COR 223 of 2009. In this case the appropriate direction should be to the effect that subject to any findings or orders made in COR 223 of 2009 the Receivers are justified in realising the remaining assets of the Chargors to create a fund available to satisfy the future potential liabilities of the Chargors to ING.

95 I now return to the second principal issue, that is whether the Receivers are obliged to retire as receivers and managers. The cash on hand presently held by the Receivers is insufficient to provide a fund against the estimated defence costs. In such circumstances the Receivers are entitled to continue the receivership until they have established a sufficient fund. The position is analogous to that of a mortgagee who may refuse to discharge a security without the mortgagor paying, in discharge of the mortgage, a reasonable sum to cover anticipated costs of proceedings in which accounts will be contested: Project Research Pty Ltd v Permanent Trustee of Australia Ltd (11,230).

96 It is not proper or appropriate to make any direction whether the Receivers are obliged to retire or are entitled to continue as receivers and managers insofar as such a direction depends upon or may effect the outcome of the proceedings in COR 223 of 2009. The appropriate direction is that subject to any findings or orders made in COR 223 of 2009 the Receivers are justified in not retiring and in realising assets of the Chargors to create a fund available to satisfy the future liabilities of the Chargors to ING as a result of COR 223 of 2009.

Fourth principal issue: proper construction of the financial instruments

97 I have set out earlier in these reasons the Receivers' contentions as to the material effect of relevant provisions of the Loan Agreement, Guarantee, Charge Instruments and the Deed of Indemnity.

98 Clause 11.2(b)(i) of the Loan Agreement provides that the Borrower must on demand pay, and if paid by ING, the Borrower must reimburse to ING, ING's costs and expenses in relation to the exercise or attempted exercise or the preservation of any rights of ING under the Loan Agreement or under the Transaction Documents. The Transaction Documents are the Loan Agreement, the Guarantees, and the Charge Instruments.

99 Clause 12.1(c) of the Loan Agreement provides that the Borrower indemnifies ING on demand against any liability, loss, cost or expense caused or contributed to by the exercise or attempted exercise of any right by ING under the Loan Agreement, or under the Guarantee or any of the Charge Instruments or by any receiver or manager appointed by ING under the Transaction Documents.

100 Clause 3.1 of the Guarantee provides that the Guarantors unconditionally and irrevocably guarantees to ING the punctual payment to ING of the Guaranteed Money. The Guaranteed Money is defined in cl 1.1 to mean all money and damages which the Borrower under the Loan Agreement are or at any time may (or there is a prospect may) become actually or contingently liable to pay to it for the account of ING for any reason whatsoever and includes any money by way of principal, interest, fees, costs, indemnities, charges, duties or expenses or payment of liquidated or unliquidated damages for which the Borrower is or at any time may become so liable, or as a result of a breach of or default under any obligation by the Borrowers under the Loan Agreement.

101 Clause 8.2(b)(i) of the Guarantee provides that the Guarantor must pay, and if paid by ING the Guarantor must reimburse to ING, ING's costs and expenses in relation to the exercise or attempted exercise or the preservation of any rights of ING under the Transaction Documents. Transaction Documents are not defined but it is common ground that they comprise or include the Loan Agreement, the Guarantees and the Charge Instruments.

102 Clause 9.1(c) of the Guarantee provides that the Guarantor indemnifies ING on demand against any liability, loss, cost or expense caused or contributed to by the exercise or attempted exercise of any right by ING under the Loan Agreement or the Guarantee or under any of the Charge Instruments or by any receiver or manager appointed by ING under those instruments.

103 Clause 1.1 of each of the Charge Instruments defines Secured Money to mean all money which the Chargor is or at any time may become actually or contingently liable to pay to or for the account of ING for any reason whatsoever and includes money by way of principal, interest, fees, costs, indemnities, charges, duties or expenses or payment of liquidated or unliquidated damages for which the Chargor is or at any time may become so liable, or as a result of a breach of or default under any obligation by the Chargor.

104 Clause 1.1 defines Secured Property to mean any legal or equitable estate or interest of the Chargor in any present and future undertaking and property.

At a glance

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Judgment (257 paragraphs)

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