Plaintiffs v Defendants

2 At trial the plaintiffs abandoned their complaint about the sale process. A substantial part of the affidavit material filed by the parties, and no doubt preparation for trial, was devoted to that issue. The plaintiffs were given leave to file a further amended statement of claim in which they acknowledge receipt of $173,957.23 paid to them by the defendants on 4 June 2007 following a summons for final judgment. While acknowledging the payment for the purpose of their claim, the purport of the acknowledgment was to support a claim for costs by justifying the commencement of the proceeding on that basis alone.

3 The substantive allegation and claim advanced by the plaintiffs, following their most recent amendment, is an allegation that between 14 February 2006 and 25 November 2007 the defendants converted the whole of the proceeds derived from the realisation of the assets of Graphics and Rowprint, save for the reasonable costs of realisation, by appropriating the proceeds to themselves as remuneration and expenses. The plaintiffs claim damages for conversion. They accept in their prayer for relief that an adjustment must be made for the sum of $173,957.23 paid to them by the defendants, but reject a concession previously made that their claim should be reduced by the amount of any employee claims having priority pursuant to s 561 of the Corporations Act.

4 As for the allowance to be made for the reasonable costs of realisation, the plaintiffs contend that it is for the defendants to justify any claim they may have, based upon the principles enunciated in Re Universal Distributing Co Ltd (in liq).[1] The defendants contended that the issue was not properly raised. Consequently, evidence was not directed to the reasonableness of the defendants' remuneration and expenses, or whether amounts had been properly apportioned.

5 The plaintiffs also seek an inquiry pursuant to s 536 of the Act "into the matter", whatever that may mean.

6 The defendants challenged the plaintiffs' standing to maintain the proceeding. Their primary contention is that s 561 of the Act denied the plaintiffs any opportunity to recover any further amount. The adjustment of priorities in favour of the Commonwealth, for payments made under the General Employment Entitlement and Redundancy Scheme, meant that even if the defendants were required to disgorge all remuneration and expenses, the only beneficiary would be the Commonwealth. The amount due to the Commonwealth, under s 561 of the Act, exceeds the upper limit of the plaintiffs' claim. The amounts due to the Commonwealth are $75,573.68 in respect of Graphics and $327,143.61 in respect of Rowprint.**

**7 On 15 April 2004 the plaintiffs entered into a loan agreement with Graphics and Rowprint as borrowers and with Richard Hugh Catchlove as guarantor. The loan agreement recorded a loan having been made by the plaintiffs to the companies in the sum of $300,000 repayable in five years. Rowprint and Graphics carried on business as graphic designers and printers in leasehold premises at 90-96 Leveson Street, North Melbourne, Victoria. The first plaintiff, Barry Bray, was the general manager of both companies and Richard Catchlove was the sole director.

8 Each company gave a debenture, as a co-borrower, to the plaintiffs as lenders. Each charge was a fixed and floating charge over the assets of the company. Each charge is dated 15 April 2004. They were entered in the Register of Company Charges in accordance with Chapter 2K.2 of the Act on 29 April 2004.

9 In early 2001 Rowprint had refinanced its plant and equipment and, to secure that finance, created a fixed charge in favour of CBFC, dated 30 January 2001, which was entered on the Register of Company Charges on 6 February 2001. Accordingly, the fixed charge in favour of CBFC predated and had priority over the fixed component of the charge granted by Rowprint to the plaintiffs.

10 In June 2005 the companies negotiated further financial accommodation by entering into agreements with St George Bank Ltd to factor book debts. The factoring agreements with St George are dated 23 June 2005. To secure the factoring facilities each company granted to St George a charge over all present and future assets, including all debtors. St George required the plaintiffs to enter into a deed of priority which had the effect that the charges in favour of St George ranked ahead of those given by the companies to the plaintiffs.

11 The companies experienced financial difficulties and on 31 October 2005 the defendants were appointed joint and several administrators. On 25 November 2005, following a resolution of the creditors of the companies, the defendants were appointed joint and several liquidators of the companies. As at the date of liquidation, the plaintiffs claim to have been entitled to approximately $275,000 from Rowprint and Graphics. There is some uncertainty about the individual indebtedness of Rowprint and Graphics under each loan agreement.

12 The administrators sought and obtained the approval of secured creditors to realise the chattels of both companies. Having secured that approval they assumed the duties and liabilities of controllers under Part 5.2 of the Act. The defendants engaged MJ Bent Auctioneers, initially to seek offers for sale of the chattels as a single lot and then, on advice from Mr Bent, to realise the chattels by public auction. Mr Bent conducted a public auction on 29 November 2005. At that auction the defendants sold chattels belonging to the companies and received $566,985. All proceeds were subject to charges in favour of CBFC, St George and the plaintiffs. St George continued to collect the book debts due to the companies.

13 By February 2006 the entitlement of St George under its financing arrangements and securities had been satisfied. St George did not make any claim under the fixed component of its charges. CBFC was paid approximately $325,000 from the proceeds realised from the sale of assets subject to its charge, leaving a shortfall of approximately $165,000.

14 The defendants retained the whole of the proceeds from the sale of Graphic's chattels subject to the plaintiffs' charges as expenses and remuneration. From the sale of the Rowprint's chattels the defendants retained $9,563.54, as the amount attributable to the realisation of chattels subject to the plaintiffs' charges. The defendants' total claim for remuneration and expenses in relation to the realisation of Rowprint's chattels was $24,509.65.

15 The defendants claimed to be entitled to costs and expenses reasonably incurred in the care, preservation and realisation of the property or as remuneration for work done to call in and convert assets into cash under the Universal Distributing principle.[2] The plaintiffs dispute the claim. They argue that, in the absence of proof by the defendants of their entitlements, the plaintiffs are entitled to recover the whole of the proceeds from the sale.

16 In addition to realising chattels, the defendants called in other assets, such as debts, which were subject to the floating component of the plaintiffs' charges. There is no dispute as to how much the defendants recovered, but there is a dispute as to the character of some receipts. The plaintiffs allege, in respect of Rowprint, that the defendants received $112,934.70; and in respect of Graphics, $46,648.67, all of which was subject to their floating charges. The defendants contend that only $36,909.20 was subject to the plaintiffs' floating charges. For the most part, the dispute over the character of the receipts is confined to amounts recovered from Downey's & Sherwood Pty Ltd, which the defendants submit were amounts derived from their activity in continuing to trade following their appointment. The issue was not explored at trial.

17 The defendants alleged that they have paid to the plaintiffs the sum of $174,899.82, including the sum of $942.59, paid by a separate cheque dated 8 August 2007. They also rely upon a deed of priority dated 5 November 2005, executed by Mr Bray, in which he agreed with the defendants to subordinate all rights and claims he had under the debentures to the rights and claims of the defendants as administrators, by way of equitable charge or lien under Part 5.3A of the Act. The defendants submit that the evidence establishes that Mr Bray paid Ms Gilbert for full entitlement under her charges and that as a consequence she has no beneficial interest in the claims made in this proceeding. They submit further that, as administrators of Graphics, they became entitled to remuneration in the sum of $35,654.63 and also incurred and paid expenses; and, as administrators of Rowprint, they became entitled to remuneration in the sum of $43,984.60 and incurred and paid expenses. The defendants submit that the deed of priority dated 5 November 2005 and s 561 of the Act each provide them with a complete answer to the plaintiffs' claims.

18 Until the most recent amendments to the pleadings, made during the trial, the defendants' entitlement to remuneration and expenses was not in issue. Even now the plaintiffs do not directly challenge the defendants' entitlements. The plaintiffs submitted that in the face of their claim for the whole of the proceeds, the defendants were obliged to establish their Universal Distributing claim for remuneration and expenses. The defendants, on the other hand, submitted that it was for the plaintiffs to initiate a challenge to their remuneration and expenses. They submitted that the plaintiffs' claim was at best premature; and that the plaintiffs made an unquantified claim, with no allegation in their statement of claim, that the defendants were not entitled to the remuneration and expenses recovered by them.

19 It became apparent from the plaintiffs' opening submissions and cross-examination that they intended to make a wide ranging challenge to the defendants' remuneration and expenses and to the apportionment of the work undertaken in the realisation or calling in of the assets subject to the plaintiff's charges. At one point, the plaintiffs indicated an intention to take advantage of the absence of evidence from the defendants concerning their entitlement, in order to have their claims adjudicated without regard to any such entitlement.

20 In my opinion the plaintiffs should have put the defendants on notice, in their statement of claim, that they alleged that the defendants were not entitled to remuneration and expenses, or some part of it, or that it was not actually incurred in the calling in or realisation of particular assets. Had such an allegation been made the defendants could have addressed the issue in their evidence. The fact that the issue was not exposed until the commencement of the trial, meant that it could not be resolved without a lengthy adjournment. No application for an adjournment was made. The parties were content to have any issue concerning the defendants' entitlements resolved, if at all, after the resolution of what they regarded as the principal issues. I acceded to that course, although having regard to my conclusions in relation to the main issues, there seems little, if any, utility to the plaintiffs in making any challenge hereafter to the defendants remuneration and expenses.

21 The principal issues at trial are reflected in the following questions:**

(a) Are the plaintiffs entitled to maintain their claim for conversion of the whole of the proceeds of realisation of the assets subject to their charges, less any reasonable costs of realisation and amounts already paid to them by the defendants?

(b) Is s 561 of the Act a complete answer to the plaintiffs' claim or the plaintiffs' right to bring the claim?

(c) Are the defendants entitled to rely upon the Deed of Priority dated 5 November 2005 to support their claim for fees and expenses in the period of the administration of Rowprint and Graphics?

(d) What, if any, action should be taken under s 536 of the Act?

**22 The plaintiffs allege that the defendants, by failing to pay to them the entire proceeds from the realisation or calling in of the assets, converted to themselves an amount received which cannot be justified as remuneration and expenses under the Universal Distributing principle.

23 In my opinion the plaintiffs' allegation of conversion of the proceeds from the realisation of assets is misconceived. The plaintiffs had a right to possession, for the purpose of sale, of fixed assets that were not subject to the charges in favour of CBFC and St George. As far as book debts and other assets subject to the floating charges are concerned, they are in the nature of a chose in action. It is doubtful whether the plaintiffs would ever become entitled to possession of book debts under a floating charge so as to found an action for conversion, although I need not decide that issue. Money derived from the realisation of assets, whether subject to the fixed or floating charge, is not recoverable by the plaintiffs in an action for conversion. Money, as currency, is not amenable to such a claim, although the plaintiffs may have a right to sue in a restitutionary action for money had and received.[3]

24 The claim for damages for conversion requires the court to find that the defendants converted an amount yet to be ascertained. The plaintiffs accept that the amount is only calculable after the defendants' claim for remuneration and expenses is established. The defendants have made their claim which the plaintiffs choose to ignore. Instead, the plaintiffs expect the defendants to prove their entitlement as a step in the plaintiffs' case to arrive at the amount allegedly converted. Their claim for damages for conversion has no substance and is rejected.

25 Even if the plaintiffs may be taken to have made a restitutionary claim, which is by no means certain, they rely upon the resolution of an undefined and unpleaded dispute to justify and quantify their claim. The plaintiffs' claim for an order that the defendants pay to them the whole of the proceeds of realisation of the assets of Graphics and Rowprint ignores the claims already made by the defendants. The plaintiffs have deliberately refused to raise the very issue upon which their entitlement depends - a resolution of the defendants' entitlement to remuneration and expenses.**

Section 561 as a Defence

26 Section 561 of the Act provides,

Priority of employees' claims over floating charges

So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of:

(a) any debt referred to in paragraph 556(1)(e), (g) or (h); and

(b) any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and

(c) any amount in respect of which a right of priority is given by section 560;

payment of that debt or amount must be made in priority over the claims of a chargee in relation to a floating charge created by the company and may be made accordingly out of any property comprised in or subject to that charge.

**27 Section 561 of the Act imposes an obligation on the party in receipt of proceeds from the realisation of property, subject to a floating charge, to apply the funds first in payment of specified debts, which in this case is a substantial debt due to the Commonwealth. The defendants received the proceeds from the collection of the book debts of both companies as agents for the plaintiffs to call in and collect the charged property. In so doing they were controllers for the purpose of the Act.

28 Although the defendants assumed control of chattels subject to the fixed charges prior to the commencement of the winding up of the companies, they did not take possession or assume control of the book debts until some time after the commencement of the winding up. While s 433 of the Act does not apply, s 561 required the defendants to pay the proceeds to the Commonwealth in priority to claims by the plaintiffs.

29 Proceeds from the realisation of assets subject to a charge is not property of the company available for the payment of creditors.[4] Section 561 of the Act does not convert the proceeds from the realisation of charged property into property of the company. But, upon coming into possession of such funds, a liquidator, as agent of the chargee or controller or however described, is required, after charging reasonable remuneration and expenses incurred in protecting, realising or calling in the assets,[5] to pay the debt given priority under s 561, before meeting the claims of a chargee. In the present case this required the defendants, after deducting their entitlement for remuneration and expenses, to pay the balance to the Commonwealth. The defendants contend that they have complied with their obligations and there is no such balance available for payment to the Commonwealth.

30 The plaintiffs do not allege that the defendants should pay all or some part of their remuneration and expenses to the Commonwealth. In the circumstances the defendants' reliance on s 561 is unnecessary, anticipating a case the plaintiffs choose not to advance. If the plaintiffs were to challenge the defendants' entitlements in support of a restitutionary claim, s 561 of the Act might then be invoked by the defendants to defeat the plaintiffs' claim.**

**31 The defendants' reliance upon the deed of priority dated 5 November 2005, executed by Mr Bray, must accommodate the absence of any such deed executed by Ms Gilbert. There was some evidence given about the preparation of a deed of priority for execution by her but, if it was ever executed, it has not found its way into evidence. The defendants submitted that the absence of a deed of priority signed by Ms Gilbert is not fatal to their contention that, whatever else may be said about their entitlement to remuneration, they were entitled under the deed to the remuneration claimed and charged by them for the period of the administration. Their remuneration for that period in respect of Graphics was $35,654.63 and for Rowprint $43,984.60.

32 The plaintiffs had deliberately refrained, in their statement of claim, from challenging the defendants' remuneration. Consequently, the defendants did not prepare to support their claims. They submitted, however, that if required to establish their right to remuneration under the deed of priority, their legitimate claims, on that basis alone, would at least make a serious inroad into the quantum of the plaintiffs' claim and may completely extinguish any claim the plaintiffs might arguably have.

33 The role of Ms Gilbert in this litigation is, at best, uncertain. She did not give evidence, by affidavit or otherwise. The defendants, as administrators and liquidators, had no direct communication with her. All communications were through Mr Bray. Ms Gilbert's absence from any participation in the proceeding is explained by Mr Bray on the basis that she was variously interstate or overseas. There is another explanation.

34 Mr Dye deposed to a conversation with Mr Bray on 21 February 2006 in which Mr Bray said that he had borrowed sufficient funds to pay out Ms Gilbert and had done so. Mr Bray said in evidence that when he received payment from the defendants of approximately $175,000 on 8 August 2007 he "made sure that [Ms Gilbert] was reimbursed for what she was owed". The defendants rely upon this evidence to contend that Ms Gilbert no longer has any legitimate interest in prosecuting this proceeding.

35 I accept the evidence of Mr Dye concerning his conversation with Mr Bray, to the effect that Ms Gilbert has been paid in full. In the circumstances I accept the defendants' submission that from the time of payment of her entitlement, Ms Gilbert ceased to have any legitimate interest in making the claims made by the plaintiffs in this proceeding insofar as they seek to recover additional amounts from the defendants.

36 The plaintiffs did not submit that Mr Bray, having discharged the liability of the company to Ms Gilbert, thereupon became subrogated to her rights as mortgagee. Mr Bray did not give evidence of the terms under which he paid Ms Gilbert's entitlement. It is possible that Mr Bray may have acted under a personal obligation to indemnify Ms Gilbert.

37 Although the issue was not argued at trial, there does not seem to be any basis upon which the equitable doctrine of subrogation ought to be applied, so as to avoid an unconscionable result.[6]

38 There are additional reasons why the doctrine of subrogation would not apply. Each debenture includes the following provision:**

1. A transfer of this debenture shall be in writing under the hand of the transferor in common form and shall be signed by the transferee and all joint transferors and transferees. The transfer shall be lodged with the company together with such evidence of the title of the transferor (including production of the debenture) as the company may reasonably require. The transfer shall remain the property of the company.

**There is no evidence of any assignment or transfer of Ms Gilbert's interest in the charge to Mr Bray.

39 Mr Bray is bound by the terms of the deed of priority he executed. The absence of a deed signed by Ms Gilbert does not assist the plaintiffs. In cl 2 of his deed, Mr Bray agreed that he would subordinate all rights and claims under his charges to the rights and claims of the defendants to an indemnity for liabilities and remuneration during their administration. Under cl 2.3 Mr Bray agreed not to enforce the securities granted by Ms Gilbert and himself, or permit or join with Ms Gilbert in enforcing the securities, or make any claim pursuant to it until such time as all monies payable or to become payable to the administrators had been fully paid. Consequently, the defendants' claims for remuneration and expenses during the period of their administration is soundly based, subject to the general supervision of the Court over their conduct as controllers.**

**40 Although s 561 of the Act may have the practical consequence of denying the plaintiffs any material benefit from this proceeding, they had standing to challenge the conduct of the defendants as controllers (s 424) or as liquidators (s 536). But, after abandoning their complaint about the sale process, the plaintiffs' challenge to the defendants' conduct is vague and unparticularised. The plaintiffs' unwillingness to directly challenge the defendants' right to remuneration and expenses deprived the relief sought under s 536 of the Act of substance.

41 In their amended statement of claim dated 28 November 2007 the plaintiffs seek an inquiry pursuant to s 536 of the Act. The basis for that claim was found in paragraph 29. They alleged that the defendants had not faithfully performed their duties as liquidators of Rowprint and Graphics when realising the chattels of Rowprint and Graphics subject to the fixed charges. That complaint has since been abandoned.

42 The prayer for relief in the plaintiffs' most recent statement of claim, dated 20 October 2008, contains no claim for an inquiry pursuant to s 536, although paragraph 30C alleges that the court "ought enquire into the matter". The inquiry sought under paragraph 30C seems to embrace the sale process (since abandoned) and the allegation of conversion of the proceeds from the realisation of assets subject to the charges. Nothing else is said to identify the grounds upon which the plaintiffs might contend that the defendants, as liquidators, had not faithfully performed or were not faithfully performing their duties.

43 I do not regard the unpleaded assertion by the plaintiffs that the defendants are not entitled to some part of their remuneration and expenses, as a basis upon which to conduct an inquiry under s 536 of the Act.**

**44 I have reached the conclusion that the plaintiffs had standing to maintain this proceeding, although I reject their primary claims for conversion and for payment of the proceeds from realisation of assets subject to the floating charges. Insofar as their claim relates to the proceeds from the sale of chattels, they have not challenged the defendants' remuneration and expenses and accordingly, they have failed to establish an element of their claim. Their failure to raise any issue in their pleading, challenging the defendants entitlements, was not an oversight. It was part of a deliberate strategy to attempt to force the defendants to justify their claims.

45 Any complaint under s 536 (1)(b) of the Act must be properly particularised before the court will embark upon an inquiry. No grounds are alleged to support such an inquiry.

46 I will hear the parties on what orders should now be made in this proceeding, including orders for costs.**

[1] [1933] HCA 2; (1933) 48 CLR 171.

[2] In Re Universal Distributing Co Ltd (In Liquidation) [1933] HCA 2; (1933) 48 CLR 171, 174-5.

[3] R Goff and G Jones, The Law of Restitution 3rd ed Sweet & Maxwell London 1986

[4] Meadow Springs Fairway Resort Ltd (In Liquidation) v Balanced Securities Ltd [2008] FCA 861; (2008) 66 ACSR 649.

[5] Buchler and anor v Talbot and ors [2004] UKHL 9; [2004] 2 AC 298.

[6] Cochrane v Cochrane (1985) 3 NSWLR 403, 405; Registrar General v Gill, Court of Appeal (NSW) Unreported, 16 August 1994; Boscawen v Bajwa [1995] EWCA Civ 15; [1995] 4 All ER 769, 777.