[1992] FCA 617; (1992) 39 FCR 251

Practice and Procedure - company in liquidation - application for leave to proceed - claim that contract void ab initio - claim for damages - whether leave to proceed should be granted - discretion - application granted

Companies (New South Wales) Code 1981, ss 371(2), 438(2)

Bankruptcy Act 1966, s 82(2)

Trade Practices Act 1974, s 87

Ogilvie-Grant v East (1983) 1 ACLC 742

Re Autolook Pty Ltd; O'Brien v Bills (1984) 2 ACLC 30

Re Berkeley Securities (Property) Ltd (1980) 3 All ER 513

Re Islington Metal and Plating Works Ltd (1983) 3 All ER 218

1. Leave to proceed granted in respect of the claim for relief under s 87 of the Trade Practices Act 1974.

2. Such leave does not extend to taking any steps to enforce any judgment which may be obtained in the proceedings against the property of the company without the leave of this Court or the Supreme Court of New South Wales.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

NORLING J. This is an application for leave to proceed against the first respondent ("Vagrand") which is in liquidation. The application is expressed to be brought pursuant to s 471(2) of the Corporations Law, but since the liquidation started before the commencement of Chapter 5 of the Corporations Law the application is properly brought pursuant to s 371(2) of the Companies (New South Wales) Code 1981: vide s 601 of the Corporations Law.

"371(2) Where an order has been made for the winding up of a

company, or a provisional liquidator has been appointed in respect of a

company, no action or other civil proceeding may be commenced or

proceeded with against the company except:

(a) by leave of the Court; and

(b) in accordance with such terms as the Court imposes."

3. The action in respect of which the applicants seek leave to proceed arises out of the collapse of the Westmex Group. The applicants' case is that they disposed of units in the Australian Petroleum Fund ("Auspet") unit trust to Vagrand either directly induced by representations made in a Part A statement issued by Vagrand (which is a wholly owned subsidiary of Westmex Limited) and in certain correspondence, or indirectly lost those units to Vagrand as a result of those representations. The case is put in the alternative because it is alleged that as a result of the representations made in the Part A statements Vagrand received sufficient acceptances of its offer from other unit holders to ensure that it was in a position to proceed with the compulsory acquisition of the applicants' units had it been necessary to do so.

4. It is alleged that the accounts included in the Part A statement were false or misleading in a number of respects which are set out in the Statement of Claim. The second respondents are the members of the firm of chartered accountants who prepared a report which was included in the Part A statement.

5. In substance, the offer made by Vagrand to the applicants and other unit holders was of an exchange of shares in Westmex for units in Auspet.

6. The applicants allege that the various matters referred to in the Part A statement and in the published accounts were such that if the true circumstances of Vagrand had been stated in the accounts, the net asset backing of the Westmex shares offered as consideration for the Auspet units would have been substantially reduced.

7. The applicants seek two types of relief in the proceedings. Principally they seek an order under s 87 of the Trade Practices Act 1974 declaring void ab initio the contracts between the first applicant and the first respondent by which the former exchanged its Auspet units for the Westmex shares of the latter, together with an appropriate order for restitution - vide subs 87(2). Further or in the alternative the applicants claim damages against all the respondents pursuant to s 82 of the Trade Practices Act, s 68 of the Fair Trading Act 1987 (NSW), and/or at common law. An order for compensation is also sought under s1005 of the Corporations Law.

8. The value of each unit in Auspet is presently about 10 cents. The applicants were entitled to about 182,000 units prior to the acceptance of the take-over offer.

9. Vagrand's only significant asset is a large holding of Auspet units valued at about $13 million. The units are subject to a charge which, if enforced, would require payment to the chargee of a sum of about $4,136,000. Vagrand's liabilities consist of a debt of about $27 million owed to another company in the Westmex Group. It has a contingent liability for a much larger sum.

10. If the applicants had disposed of their Westmex shares within a short period after they received them in exchange for their Auspet units, they would not have suffered any loss. It was some time after the completion of the take-over that the Westmex Group collapsed and the shares in Westmex became of little or no value.

11. Whether or not the applicants are given leave to proceed against Vagrand, the proceedings will be pursued against the second respondent. It seems to be common ground between counsel that if the applicants succeed in their claim for damages against the second respondent, they will also obtain damages against Vagrand. Conversely, if the claim for damages fails against the second respondent, it will also fail against Vagrand.

12. The statutory restriction on commencing or proceeding with civil actions against a company in liquidation contained in s 371(2) of the Companies (New South Wales) Code is accompanied by a discretion, vested in the Court, to grant leave to proceed on "such terms as the Court imposes". However, the section itself gives no indication of the circumstances in which such leave should be granted. In exercising the discretion therefore the courts have looked to the legislative policy underlying s 371(2).

13. In Ogilvie-Grant v East (1983) 1 ACLC 742 the Full Court of the Supreme Court of Queensland held that the requirement of leave under a provision equivalent to s 371(2) is primarily concerned with the orderly winding up of the company in that it is designed to avoid a multiplicity of actions which would be expensive, time consuming and in some casesunnecessary: see also Re A.J. BenJAmin Ltd (in Liq) (1969) 90 WN (Pt 1) 107 per Street J at 110. Where leave is not granted, an applicant is left to pursue his claim by lodging a proof of debt with the liquidator.

14. In Ogilvie-Grant McPherson J said (at 744) that the Court's discretion "reduces largely to one of choosing between alternative forms of procedure", with the onus resting on the applicant to demonstrate why, in relation to his or her particular claim, it is more appropriate to proceed by way of action to judgment. This approach was followed by Rogers C.J. in Comm. D. in Capita Financial Group Ltd v Rothwells Ltd (No 2) (1989) 7 ACLC 634.

15. Choosing the more appropriate course of proceedings will largely be a matter of deciding where the balance of convenience lies (see Stewart v Intercity Distributors Limited (1960) NZLR 944 at 946 and Ogilvie-Grant (supra) at 744); and whilst decisions in other cases may afford guidance as to the exercise of the discretion, it is always a matter to be determined having regard to all the circumstances of the particular case under consideration.

16. No doubt it would be inappropriate to grant leave to proceed when the applicant does not have a genuine claim or when the claim is futile. As Rogers C.J. in Comm D pointed out in Capita Financial Group (supra at 636) the resources of the company in liquidation should not be frittered away in defending baseless claims. Thus courts have only granted leave when the applicant has shown that he has a prima facie case: Re Sydney Formworks Pty Ltd (in liq) (1965) NSWR 646 at 650; Re Harry B Harvey Pty Ltd (in liq) (1971-1973) CLC 40-051; Ex parte Walker (1982) 6 ACLR 423 at 426; Ogilvie-Grant (supra) at 744; and Maclean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 7623 at 646. It is now accepted however that such a requirement will be satisfied if it is demonstrated that there is a real dispute between the parties: vide Capita Financial Group (supra at 637) and Zempilas v J.N. Taylor Holdings Ltd (in prov liq) (No 4) (1991) 9 ACLC 297 at 298.

17. In summary, in the exercise of its discretion under s 371(2) the Court should only grant leave to proceed where it is satisfied that a real dispute exists between the parties and that in light of all the circumstances it is more convenient (or otherwise appropriate) to allow the matter to proceed to judgment.

18. It was submitted by Mr Coles QC, senior counsel for the liquidator, that the applicants have not demonstrated to the Court a prima facie case and that the application for leave should therefore be dismissed. It is true that the only evidence presently before the Court in support of the allegations made in the Statement of Claim is an affidavit sworn by the first applicant containing no more than broad assertions that the applicants have claims for relief of the kind sought in the Statement of Claim. For instance, the assertion is made that "various matters referred to in the Part A statement and the published accounts are such that had the true circumstances of the company been published in the accounts, it would have substantially reduced the net asset backing that was claimed for the Westmex shares offered as consideration for the Auspet units." It is also asserted in the affidavit that the matters referred to in the Statement of Claim impacted upon the company's financial position and its financial earning capacity.

19. Whilst the evidence may at this stage of the proceedings be thin, I am satisfied that there is sufficient material before the Court to justify the conclusion that a real dispute exists between the parties.

20. Mr Coles further submitted that it is not appropriate to grant leave to proceed because the applicants have no real prospects of success. He referred to a number of difficulties which lie in the path of the applicants in proving their case against Vagrand. Not the least of these difficulties is the difficulty which confronts the applicants in proving damage. Mr Coles contended that the applicants did not suffer any damage because if they had sold their Westmex shares they would not have suffered any loss. The applicants' response to this argument is, in effect, that the Westmex shares were represented as being a sound investment and therefore worth retaining and that they retained them for that reason. Whether the claimants will be able to prove their entitlement to relief is a serious question. However I do not think I am required to, or should, determine that question at this stage of the proceeding. As McPherson J said (with the concurrence of the other members of the Court) in Ogilvie-Grant while the prospects of success in the proposed action is a relevant consideration in determining an application for leave to proceed, it is not necessary, nor is it the function of the Court, to determine the questions upon which the liability of the defendant will ultimately depend.

21. Of course, if the suggested legal hurdles were such as to render the claim futile, it would not be appropriate to grant leave to proceed. But where, as here, the hurdles amount to no more than serious questions, they should not of themselves preclude the granting of leave.

22. Turning then to the question of convenience. In the first place Pendal Nominees Pty Limited, which owned 7,600,000 units in Auspet, has commenced proceedings in the Supreme Court of New South Wales against agrand and the second respondent alleging the same causes of action as are relied upon by the applicants in the present proceedings. It seems likely that the present proceedings will be something in the nature of a test case for the interests of all former unit holders in Auspet and shareholders in Westmex, who are not out of time or who otherwise have a provable debt in liquidation. This would suggest that proceeding by way of action to judgment is the more convenient course.

23. On the other hand the liquidator has stated in evidence that he is presently without funds to conduct the litigation. Mr Coles submitted that this should weigh heavily against the granting of leave to proceed. However since Vagrand owns Auspet units worth about $13 million which are charged only to the extent of about $4.136 million, I would have thought that steps could be taken by the liquidator to obtain more than sufficient funds to oppose the proceedings. Moreover, the charge was given as additional security in aid of a guarantee given to the chargee by another company which is solvent. There is no evidence before the Court establishing that the chargee will seek to enforce the charge against Vagrand. It will have no need to do so if the solvent company meets its obligations under the guarantee. Further, it would seem that one of the major creditors of Vagrand could, if it chose to do so, put the liquidator in funds to defend the proceedings.

24. In any case there is no reason to suppose that the second respondents will not vigorously oppose the claim made against them. As I have said, if the applicants do not succeed in their claim for damages against the second respondent, they will not succeed against the first respondent. This being so, the burden of costs which will fall upon the liquidator in opposing the proceedings could well be greatly reduced if he takes the view, as he well might, that he can safely leave to the second respondent the task of mounting the major opposition to the applicants' claims.

25. It was further submitted by Mr Coles that no purpose would be served in granting leave to proceed in that any award of damages which may result would not be a provable debt against the company in liquidation. This submission was based upon the combined operation of s 438(2) of the Companies (New South Wales) Code and s 82(2) of the Bankruptcy Act 1966.

26. Sub-section 438(2) of the Companies Code provides, inter alia, that in the winding up of an insolvent company the same rule shall prevail with regard to the respective rights of secured and unsecured creditors and debts provable as are in force for the time being under the Bankruptcy Act in relation to the estates of bankrupt persons. Sub-section 82(2) of the Bankruptcy Act provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. It was submitted that, as pleaded in the statement of claim, the claim against Vagrand was for unliquidated damages for breaches of the Trade Practices Act 1974 and the Fair Trading Act 1987 (NSW) and that no claim was made for damages for breach of contract. Mr Coles argued that since Vagrand was already in liquidation proceeding by way of action to judgment could not produce a provable debt and would therefore be a futile exercise.

27. Mr Coles' submission finds support in a number of Australian decisions: see In re Southern Cross Coaches Ltd (1932) 49 WN 230; Page v Commonwealth Life Assurance Society Limited (1936) 36 SR 85 at pp 90-100; Re A.J. BenJAmin Ltd (In Liq) (1969) 90 WN (Pt 1) 107 and Re Autolook Pty Ltd; O'Brien v Bills (1984) 2 ACLC 30. However, in Re Berkeley Securities (Property) Ltd (1980) 3 All ER 513 Vinelott J held that comparable English legislation does not prevent the grant of leave to proceed to a party wishing to prosecute an unliquidated claim for damages in tort against a company being wound up by the court. His Lordship found that a claim for damages in tort was excluded only if it remained unliquidated when lodged with the liquidator. The fact that it was unliquidated at the time the company went into liquidation therefore did not, in his opinion, render proceeding by way of action to judgment a futile exercise. The correctness of Vinelott J's decision was doubted by Harman J in Re Islington Metal and Plating Works Ltd (1983) 3 All ER 218 and he declined to follow it.

28. In my opinion there is much to be said for the approach taken by Vinelott J in Berkeley Securities. The anomalies that can arise from excluding unliquidated claims in tort, but including unliquidated claims in contract, from the class of claims which can be proved in a liquidation are starkly illustrated in Southern Cross Coaches (supra). As Professor Ford observes in his Principles of Company Law, 5th ed para 2220, exclusion of unliquidated claims in tort makes more sense in bankruptcy than in company liquidations because a claimant may pursue the claim against a bankrupt after the bankrupt has been discharged, but a company ceases to exist on dissolution. The extraordinary consequences which can flow from a strict application of the bankruptcy law to the winding up of an insolvent company are demonstrated by Vinelott J in Berkeley Securities. They led him to conclude ((1980) 3 All ER at 528) that the literal application of s 30(1) of the English Bankruptcy Act (which is in terms virtually identical with s 82(2) of the Australian Act) led to consequences which "are so absurd as to compel the conclusion that the bankruptcy rules must be modified in some way if they are to fit into the scheme of the winding up of an insolvent company". In McIntyre v Perkes [1990] FCA 100; (1990) 92 ALR 577 Gummow and von Doussa JJ. after referring (at 590) to the divergent views in Berkeley Securities and Islington Metal noted that the Australian Law Reform Commission has drawn attention to practical difficulties arising from the law as it presently stands.

29. In the present state of the law in Australia, I think I should follow the Australian cases of which the latest directly in point is Autolook. To do otherwise would be to introduce an unfortunate disconformity in the approach taken in this Court and in the Supreme Court of New South Wales to applications for leave to proceed against companies in liquidation.

30. However, none of the cases to which I have referred preclude the granting of leave to an applicant who seeks a remedy other than a money judgment. Thus leave to proceed has been given to a plaintiff who seeks an order of specific performance (Thames Plate Glass Co v Land and Sea Telegraph Co (1871) 6 Ch App 643), or an injunction (see Wyley v Ex Hall Coal Mining Co (1864) 33 Beav 538), or rescission of a contract (Re Pacaya Rubber and Produce Co (1913) 1 Ch 218). Section 82(2) of the Bankruptcy Act refers only to demands in the nature of unliquidated damages and has no application to claims for the type of relief sought by the claimants in the present case under s 87 of the Trade Practices Act.

31. Mr Coles submitted that s 87 can only be called in aid by a claimant who establishes a claim for damages under s 82, but I do not think this is the case. It is true that the High Court in Sent v Jet Corporation of Australia Ltd [1986] HCA 35; (1986) 160 CLR 540 held that compensatory relief under s 87(1A) can be applied for and granted only if a proceeding is instituted or has been instituted under a provision of Part VI other than s 87 in respect of conduct engaged in in contravention of Part V. However in response to that decision sub-s (1C) was inserted in s 87, providing as follows:

"An application may be made under sub-section (1A) in relation to a

contravention of Part V notwithstanding that a proceeding has not been

instituted under another provision of this Part in relation to that

contravention"

Thus an order granting relief under s 87(2) need not be ancillary to an award of damages under s 82(2). Indeed the reasoning of the High Court in Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 109 ALR 247 appears to be predicated on the basis that ss 82 and 87 give rise to separate and distinct claims for relief. Moreover in Demagogue Pty Ltd v Ramensky (Full Federal Court, 20 November 1992, unreported) Black C.J., Gummow and Cooper JJ. held that the "loss or damage" to which s 87 refers is not always recoverable under s 82.

32. I am not persuaded that the applicants will suffer any real prejudice if they are not given leave to proceed with their claim for damages. Indeed, during the course of argument, it became apparent that the real relief which the applicants seek from Vagrand is an order for restitution of the Auspet units. In any case it is always open to the applicants to proceed by way of lodging proofs of debt with the liquidator; and if, as has been foreshadowed, he rejects these proofs, to appeal to the Court.

33. But the position is quite different in respect of the claim for relief under s 87 of the Trade Practices Act. The present proceedings provide the only means of determining the question as to the applicants' entitlement to an order for restitution of their units. Therefore if leave is not granted, the claim for relief under s 87 of the Trade Practices Act will effectively be lost.

34. Mr Coles submitted that the claim for restitution was doomed to failure. He submitted that the fact that the units transferred to Vagrand had become subject to the charge abovementioned destroyed any prospect of the claimants obtaining an order for restitution. I do not think this will be the case if the charge is discharged, as it may well be, by the time the proceedings come on for hearing.

35. Mr Coles also submitted that the claimants were only seeking an order for restitution because Vagrand was insolvent and could not satisfy an award of damages which might be made against it. He argued that, in the exercise of its discretion the Court should not grant leave to proceed with a claim which was only brought because of the company's insolvency.

36. The underlying premise of this argument is that an order under s 87 of the Trade Practices Act should only be made as ancillary to an order under s 82. But as I have already observed, I do not agree with this submission and it is inconsistent with the decision in Demagogue Pty Ltd v Ramensky (supra). Even if Vagrand were solvent, it would be competent for the claimants to seek an order under s 87.

37. There is no evidence that the completion of the winding up will be delayed if the present proceedings are allowed to continue. In any event, any prejudice which would otherwise be caused by the delay in a final hearing of the present proceedings could be avoided by an order for expedition, if warranted.

38. Having regard to all the circumstances I think I should grant leave to proceed only in respect of the claim for relief under s 87 of the Trade Practices Act. Leave to proceed is not granted with respect to the claim for damages against Vagrand. The leave which I have granted does not extend to taking any steps to enforce any judgment which may be obtained in the proceedings against the property of the company without the leave of this Court or the Supreme Court of New South Wales. I will hear the parties on the question of costs.