Peake, in the matter of Australian Housewares Pty Ltd (in liq) [2003] FCA 170

REASONS FOR JUDGMENT 1 The joint liquidators of Australian Housewares Pty Ltd (in liq) seeks orders that certain creditors should be given an advantage over other creditors in the distribution of property received in proceedings instituted by the liquidators. Notice has been served on all the creditors and none appear to oppose the plan of distribution suggested by the liquidators. 2 The company was wound up by its creditors following a short period of administration. An investigation into the company's affairs indicated that the liquidators had a strong claim for insolvent trading against the former directors of the company. The liquidators wrote to all creditors, including those who had not yet lodged proofs, informing them that the liquidators had received advice that they had a good claim and asking for contributions to meet the cost of a public examination of the directors which the liquidators said should be undertaken before any action. It was suggested that each creditor should contribute an amount equal to 5.47 per cent of its debt. Seven creditors made the contribution. Four large creditors (excluding those who had some relationship with the company) did not contribute. The liquidators contacted them to see whether they might change their mind. One, the Commissioner of Taxation, refused. Another had ceased trading. The third advised that a contribution would be made, but no moneys were received. The fourth stated that it was still considering the liquidators' request. 3 As things transpired the liquidators did not conduct a public examination. Instead, with the consent of the contributing creditors, the action was commenced immediately to stop the directors disposing of their assets in order to defeat any judgment. Interlocutory injunctions were obtained to prevent that happening. Within a short period the action was settled and the directors paid $123,000 to the liquidators. Following the deduction of costs and expenses, the liquidators still hold approximately $30,000 (from which will need to be deducted the cost of this application) for distribution between the creditors. 4 The present application is made under s 564 of the Corporations Act 2001 (Cth). That section provides that where property has been recovered, protected or preserved by the payment of money or the giving of an indemnity by certain creditors, the court may make such orders as it deems just with respect to the distribution of that property with a view to giving those creditors an advantage over others in consideration of the risk run by them in paying the money or providing the indemnity. 5 The section does not give any guidance as to the principles upon which the court should act. It leaves the matter entirely at the discretion of the judge. This means that each case must be decided on its own facts with little assistance to be derived from other cases. The earlier cases do, however, suggest that the following broad matters are relevant. First, there is the risk faced by the contributing or indemnifying creditors. The greater the risk the higher their reward should be. Second, there is the public interest of encouraging creditors to indemnify liquidators who wish to pursue claims in the winding up of companies. Third, it seems that the advantage that should usually be conferred on contributing or indemnifying creditors should be more than nominal. 6 In this case the total amount of proved debts due to "external" creditors is $274,221 and if the money available for distribution were divided rateably, each creditor would get a dividend of approximately 10.94 cents in the dollar. The debts due to the contributing creditors amount to $133,810; $141,401 is owed to the non-contributing creditors. The liquidators wish to pay to contributing creditors the whole of the surplus assets, which will see them with a dividend of approximately 22.42 cents in the dollar. Under this proposal the non-contributing creditors will receive nothing. 7 Initially I was inclined to think that it would be unfair to deprive the non-contributing creditors of any share in the surplus proceeds resulting from the action. Principally this was because the risk undertaken by the contributing creditors was, strictly speaking, limited to the money they had provided. None of them had promised any further funds. Nor were they indemnifying the liquidators in respect of any potentially adverse costs order. On the other hand, if the liquidators needed more money it is likely that further contributions would have been made. In for a penny, in for a pound. On reflection, therefore, I think I should go along with liquidators' proposal. But for the action of the contributing creditors, there would be no fund to divide between the creditors. Furthermore, if I were to approve a mode of distribution which would leave some dividend for the non-contributing creditors, the amount that each of them would receive in this case is so small as to be de minimus. 8 I therefore propose to make an order applying the proceeds of the litigation in accordance with that suggested by the liquidators.