Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Judgment

1. GLEESON JA: Application is made by the respondents to four appeals, Cancer Care Associates Pty Ltd, CCA Estates Pty Ltd, Davjul Holdings Pty Ltd and Armmam Pty Ltd (together, the lot owners), for leave to proceed against the appellant, Rialto Sports Pty Ltd (Rialto), a company in voluntary administration, under s 440D of the Corporations Act 2001 (Cth). Leave is sought for the limited purpose of pursuing the lot owners' motions in each appeal for adoption of a referee's report. Those motions are fixed for hearing by this Court on 16 November 2023.
2. Section 440D(1) of the Corporations Act provides that during the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except with the administrator's written consent or with the leave of the court and in accordance with such terms (if any) as the court imposes.
3. Although the lot owners are the respondents to the appeals, it is common ground that their respective notices of motion filed 15 May 2023 seeking orders that this Court adopt the referee's report dated 17 April 2023 answer the description of a "proceeding in a Court against the company" as referred to in s 440D of the Corporations Act.
4. Rialto was placed in administration by resolution of the company's director on 2 October 2023 (the appointment date). Mr Dominic Calabretta and Mr Grahame Ward were appointed administrators of the company. The administrators oppose the grant of leave to proceed.

Background

1. The background to the present applications is conveniently summarised by Adamson JA in a judgment delivered on 25 September 2023 when making a freezing order against Rialto: Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd; Rialto Sports Pty Ltd v CCA Estates Pty Ltd; Rialto Sports Pty Ltd v Davjul Holdings Pty Ltd; Rialto Sports Pty Ltd v Armmam Pty Ltd [2023] NSWCA 228. Her Honour said at [3]-[6]: [3] The applicants (who are the respondents to the appeal to this Court) are proprietors of commercial lots within a property situated at the Kingsway, Miranda (the Miranda development). Three out of four of the applicants purchased a lot off the plan from the respondent, a property developer. [4] The applicants sued the developer for breach of its contractual obligations to provide a property free of defects. On 9 December 2021, the applicants obtained judgments in the District Court of New South Wales for the combined sum of about $1.4 million for damages for defects in their respective lots. The developer appealed. The appeal was dismissed, save to the extent that it was upheld by consent: Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146. The basis on which the appeal was upheld by consent was, in substance, that the reasons of the Court below were inadequate. [5] The only issue following the appeal was the quantum of the applicants' damages. This Court referred that question for inquiry and report to a referee, Janet Grey. Ms Grey, who delivered her report on 17 April 2023, found that the applicants are collectively entitled to about $1.3 million. [6] Each of the applicants filed a notice of motion seeking orders that this Court adopt the report. The developer has not filed a motion seeking a rejection of any part of the report. The applicants' notices of motion are listed for hearing in this Court before Bell CJ and Gleeson JA on 16 November 2023. The applicable principles which govern consideration by a Court of a report of a referee are conveniently summarised by McDougall J in Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 at [7]. Paragraphs 7-(8) are of particular relevance to the present case and confirm that the Court, on receipt of a report in these circumstances, does not engage in an investigation into the merits of the report, although it is entitled to exercise a supervisory jurisdiction over the referee's report.
2. It is necessary to set out some further facts.
3. Rialto is the trustee of the Rialto Unit Trust (the Trust) constituted by a trust deed dated 8 January 2004. The beneficiary of that trust appears to be the "Tripodina Family Trust". Rialto owned several lots in the commercial building which it developed at the Kingsway, Miranda. In December 2022, Rialto transferred its remaining lot, being lot 24, to Santo Peter Tripodina Investments Pty Ltd (Tripodina Investments) for a stated consideration of $2,250,000. The sole director of Rialto is Adrian Vincent Tripodina. The sole director of Tripodina Investments is Santo Peter Tripodina. Rialto and Tripodina Investments have the same registered office and place of business. Tristate Produce Merchants Pty Ltd (Tristate), of which Santo Tripodina is the sole director, holds a registered security interest over "all present and required property" of Rialto.
4. On 25 September 2023, Adamson JA made freezing orders against Rialto with a combined value of about $1.7 million and ordered Rialto to provide information as to its assets and liabilities in the usual way. That affidavit was due on 2 October 2023, the appointment date of the administrators, however the affidavit was not provided.
5. Although the administrators have not yet formed a final view, they consider it likely that Rialto is insolvent. Rialto is not actively trading. Mr Calabretta, one of the administrators, deposes that having reviewed the financial records of Rialto, the Trust had a net asset deficiency at the appointment date of ($2,237,087.31). This is to be contrasted with a net asset deficiency of ($125,966.58) recorded in the balance sheet of the Trust for the year ended 30 June 2022. The major integers underlying that change in financial position appear to be (i) a reduction in cash of about $700,000, following the (assumed) receipt of the proceeds of sale of lot 24 in December 2022, and (ii) an interest expense totalling $1,979,382.20 recorded in the profit and loss account of Rialto as of 2 October 2023 in relation to related-party loans from Peter Tripodina and the Tripodina Family Trust totalling about $1.4 million.
6. As at the appointment date, the only substantial assets of Rialto were monies held in bank accounts with Westpac totalling about $1.54 million. Aside from the claims of the lot owners of about $1.3 million plus interest and costs, the stated liabilities of Rialto in its balance sheet as at 2 October 2023 comprise (i) related party loans totalling about $3.6 million, and (ii) trade creditors of about $186,000.
7. Mr Calabretta also deposed that on the appointment date he met with Mr Adrian Tripodina, the director of Rialto, who indicated that it was his intention to submit a DOCA proposal for the consideration of creditors; however, the administrators have not yet received a DOCA proposal. At the first meeting of creditors of Rialto held on 11 October 2023, the administrators admitted proofs of debt from the lot owners for voting purposes. Their appointment as administrators was confirmed at that meeting and no committee of inspection was formed.

Submissions

1. The lot owners emphasise that the Court has a wide discretion to adopt the report and referred to the principles applied in exercising that discretion which are summarised by McDougall J in Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2003] NSWSC 547 at [7]. It is said that the lot owners have a very strong case for the adoption of the referee's report, noting that Rialto's submissions contesting adoption of the report merely assert that the lot owners have not discharged their ouns of proof, and do not identify any asserted error by the referee. It is also said that the grant of leave, and the likely adoption of the referee's report and subsequent judgment, will save time and further depletion of Rialto's bank account.
2. The administrators say that it is not in the interests of the general body of creditors to grant leave to proceed pursuant to s 440D because: (i) the continuation of the proceedings will deplete the company's funds which would otherwise be available in the external administration for the benefit of the general body of creditors, and (ii) the continuation of the proceedings has the potential to distract the voluntary administrators from their duties.
3. Mr Calabretta gives an estimate, on information and belief from the administrators' general counsel, that the costs of preparing and defending the motions could be in the vicinity of $50,000-$75,000; however, counsel for the administrators fairly accepted that this is a very general estimate. It is said that the lot owners should prove their claim in the external administration in the usual way, by lodging a proof of debt, given their claims are monetary claims, and if the lot owners do not agree with the outcome of the adjudication on their proofs, then there are mechanisms available to them to challenge that decision by way of an appeal (in the Equity Division), pursuant to s 90-15 of the Insolvency Practice Schedule.
4. Mr Calabretta says that if leave to proceed is granted, then he will need to strongly consider an application to extend the convening period of the administration pursuant to s 439A(6) of the Corporations Act, which, as it stands, is to be held no later than 6 November 2023. If it is necessary to bring such an application, it is said that would involve a further depletion of their finite pool of funds available to creditors.

Relevant principles

1. The applicable principles for the grant of leave under s 440D are not in dispute.
2. The purpose of the requirement of leave is to freeze civil proceedings against the company in voluntary administration, so that the administrator can formulate a rational plan for future action.
3. It has been said that this reflects two general themes. First, the undesirability of an administrator being distracted from his or her statutory duties and being required to incur the expense associated with litigation. Second, the undesirability of permitting one creditor to advance their own interests in respect of some disputed matter at the expense of, or at least ahead of, the interests of creditors more generally; that includes to prevent the creation of preferences and interference in the disposition of the property of the company whilst under administration: Slater v Global Finance Group Pty Ltd (1999) 30 ACSR 519 at 522 (Wheeler J); Re Capital General Corp Ltd [2001] VSC 570; (2001) 19 ACLC 848 at [13], [20], [21] (Warren J).
4. There is some divergence in the authorities as to whether the exercise of the Court's discretion to grant leave under s 440D should be approached with an assumption that leave will only rarely be granted, or whether such an approach is an unwarranted confinement of the Court's discretion: see, for example, Foxcroft v The Ink Group Pty Ltd (1994) 15 ACSR 203 at 204-205 (Young J); Brian Rochfort Ltd v Textile Clothing and Footwear Union (NSW) (1998) 47 NSWLR 47 at 67-68 (Austin J); cf Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305; (2011) 285 ALR 207 at [36] (Hammerschlag J).
5. Assuming that there is a difference in approach, it is not necessary to decide which view is correct. On either view, the outcome in this case is the same. Nevertheless, three observations should be made.
6. First, as Doyle J observed in Pybar Mining Services Pty Ltd v Challenger Gold Operations Pty Ltd [2018] SASC 156 at [14]-[15], there is likely to be little practical difference between the competing approaches. That is because, as Hammerschlag J said in Larkden at [39], "[a] stay is the starting point. There must be circumstances which warrant its displacement."
7. Second, the apparent divergence in the authorities can be reconciled, as Doyle J suggested in Pybar at [15]: … Indeed, these two approaches might be reconciled on the basis that they are merely expressed at differing levels of generality or abstraction. It is true that at the most general or abstract level the discretion is unfettered and so must be approached without any preconception as to the caution or rarity with which it will be exercised. However, once the Court moves to the task of exercising the discretion, the considerations underpinning the rationale for the existence of s 440D will generally carry significant weight, and thus require the identification of other considerations of at least equivalent weight before it will be appropriate to grant leave to proceed. While it is perhaps unnecessary to describe this as taking a cautious approach, and as resulting only rarely in leave being appropriate, they are in my mind accurate enough descriptions of the practical application and outcome of the exercise of the discretion under s 440D.
8. Third, as this Court explained in Lianos v Order of AHEPA NSW Inc (No 2) [2020] NSWCA 304 at [24] (Emmett AJA, Macfarlan and Meagher JJA agreeing): While there have been suggestions that leave will rarely be granted, that proposition must be understood in the circumstances of the particular case in which leave is sought. Thus, it may well be that leave will rarely be granted where a claimant seeks to enforce a debt against an association that is subject to administration, where either a DOCA or a liquidation will require the lodging of a proof of debt by the claimant. If there is a real dispute about the debt, leave might well be granted but on terms that no step be taken to enforce any judgment except by way of proof of debt in the administration or winding up. (Citation omitted.) (Emphasis added.)
9. Although not to be treated as a shopping list, some of the factors which the authorities have identified as relevant to the exercise of the discretion to grant leave under s 440D include (see, for example, Attard v James Legal Pty Ltd [2010] NSWCA 311; 80 ACSR 585 at [146]; JF Keir Pty Ltd v Priority Management Systems Pty Ltd [2007] NSWSC 748 at [8], and Kavourakis v Waverley Bowling & Recreation Club Ltd [2010] NSWSC 439 at [5]; Pybar at [16]): • whether the proceedings have a solid foundation and give rise to a serious dispute; • whether, and the extent to which, the administrator would be distracted by the proceedings from his or her own duties and obliged to incur legal costs; • the stage which the proceedings have reached; • who appointed the administrator and the circumstances of that appointment; • who is applying for leave to proceed; • whether the claim is a monetary one; • whether the claim is one in respect of which the company is insured; • any disadvantage to the applicant in not being granted leave to proceed; and • whether there are otherwise good reasons for allowing a creditor to depart from the general intention of Pt 5.3A which is that a creditor ought not be able to take action against the company.

Disposition of applications

1. For the reasons set out below, I am satisfied that the lot owners have established that this is an appropriate case in which to grant leave to proceed.
2. First, it is not in dispute that the claim made by each lot owner for adoption of the report has a solid foundation and gives rise to a serious dispute.
3. Second, although the underlying claim of each lot owner involves a monetary amount for damages, interest and costs, the nature of the application for adoption of the report is not one which can easily be dealt with under the proof of debt procedure, given the wide discretion conferred on the Court by Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 20.24 relevantly to adopt, vary, reject all or part of a report, or decide a matter on the evidence before a referee: see Chocolate Factory at [7], specifically in principles in (1), (7), (8), (9), (10), (13) and (14).
4. Third, the lot owners will suffer disadvantage if leave to proceed is not granted because the purpose of the reference by this Court to the referee under UCPR, r 20.14 of the issue of certain defects and the cost of rectification would be frustrated if the reference was to ignored and the lot owners deprived of the opportunity to establish now, by relying upon the report, the quantum of their claims for damages, interest and costs, and instead required to prove their claims afresh under the proof of debt procedure and any appeal therefrom on rejection of their proof of debt: see Re Jay-O-Bees Pty Ltd (in liq); Rosseau Pty Ltd (in liq) v Jay-O-Bees Pty Ltd (in liq) [2004] NSWSC 818; (2004) 25 ACSR 565 at [47]-[48] (Campbell J).
5. This is not a case in which the proof of debt procedure or any appeal therefrom would be more convenient or involve less delay and expense. Further, obtaining judgment would not create any preference, since the grant of leave should be subject to the usual condition precluding enforcement of any judgment which the lot owners might obtain without the leave of the Court.
6. Fourth, I do not consider that the administrators would be unreasonably distracted from their statutory duties or would be obliged unnecessarily to incur substantial legal costs. As to their statutory duties, it was not suggested that the administration is of any complexity. As indicated, Rialto is not trading, its only assets comprise cash, and apart from a small quantum of trade creditors, there are effectively only two interested groups of creditors: (i) related-party creditors, and (ii) the lot owners. In forming an opinion on the best course for creditors, the administrators' primary tasks will be to (a) investigate any potential voidable transactions, (b) consider the status and validity of the claims of related-party creditors, and (c) consider the merits of the lot owners' motions claims for damages, interest and costs. It is difficult to see how the last task could be undertaken without the administrators incurring the cost of obtaining legal advice on the merits of the applications to adopt the report.
7. As to the likely legal costs of dealing with the application for adoption of the report, the parties have filed submissions, the matter is ready for hearing and is listed for a half day hearing on 16 November 2023. (I note that supplementary submissions by Rialto on one issue which were due on 11 October 2023 have not yet been filed.) For the reasons given above, the adoption of the report procedure would be more convenient and would involve less delay and no greater expense than the proof of debt procedure.
8. Insofar as it is said that the administrators might incur costs relating to an application for an extension of the convening period for the second meeting of creditors, that is no more than a speculative possibility; it is not a sufficient reason to decline to grant leave to proceed.
9. Sixth, that the appointment was made by the company and the circumstance of that appointment favours a grant of leave. Relevantly, the appointment of the administrators occurred on the date the affidavit of assets and liabilities was due, and given its proximity to the hearing date fixed for the motions to adopt the report, the clear inference is that the decision of the company director to appoint voluntary administrators on 2 October 2023 was designed to frustrate the hearing of the motions on 16 November 2023.
10. For the above reasons, I am satisfied that there are good reasons for allowing the lot owners, as unsecured creditors, to depart from the general intention of Pt 5.3A of the Corporations Act that their applications against the company be stayed.

Orders

1. Accordingly, at the conclusion of the hearing on 13 October 2023 I made the following orders: 1. In each appeal (CA2022/3420, 3426, 3432, 3439), leave be granted to the respondent under s 440D of the Corporations Act 2001 (Cth) to proceed with the notice of motion filed 15 May 2023 against the appellant, Rialto Sports Pty Ltd (administrators appointed), on condition that the respondent is not to take any steps to enforce any judgment that may be obtained in the respective appeals against the appellant without leave of the Court. 2. The costs of each application be the applicant's costs in the cause.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 October 2023