Rodgers v Schmierer, in the matter of Reader

Background 2 The following reflects the facts as recounted by counsel for the applicant and sufficiently established by the evidence for the purposes of these proceedings. Mr Reader was, at material times, a director of Vokal. At the beginning of 2000, Vokal was in financial difficulty and the first respondents were appointed administrators on 15 May 2000. On 17 May 2000, Mr and Mrs Reader executed a mortgage over a property they owned at Eastwood in favour of the first respondents as administrators. The mortgage was stamped to a value of $50,000 and the first respondents were named as mortgagees. One available inference is that it was executed to secure the fees of the first respondents. 3 The first meeting of creditors of Vokal took place on 2 June 2000. A second meeting took place on 16 June 2000 when the creditors resolved to execute a deed of company arrangement. The deed was executed by Vokal on 23 June 2000. On the same date, Mr and Mrs Reader applied to a mortgagee company, Provident Capital Ltd ("Provident") for mortgage finance. The purpose of the application was to borrow money, effectively, to contribute towards the fund constituted by the deed of company arrangement. The mortgage finance sought was ultimately provided. 4 In July 2000, arrangements were made for the settlement of the draw down of the loan moneys from Provident on 1 September 2000. On 14 July 2000 the first respondents lodged a caveat over the property at Eastwood purportedly based on the mortgage executed on 17 May 2000. On 18 August 2000, the first respondents sent a letter to Mr and Mrs Reader indicating that approximately $145,000 would be necessary both for the contribution to the deed of company arrangement fund and to discharge the caveat that they had lodged over the Eastwood property. 5 On 1 September 2000, drawing on the finance from Provident, Mr and Mrs Reader paid $118,360.72 to either or both the first respondents and Vokal. Precisely to whom the money was paid and in what amounts is a matter of contention. On 7 November 2000 a notice was sent by the first respondents to the creditors of Vokal informing them that there had been a failure to comply with the deed of company arrangement. On 16 November 2000 the creditors terminated the deed of company arrangement and resolved to put the company into liquidation. At that point the first respondents became the liquidators of Vokal. 6 On 29 January 2001 Mr and Mrs Reader filed debtors petitions and the applicant was then appointed trustee of their estate. On 4 July 2001 the applicant commenced the primary proceeding against the first respondents and Vokal seeking a declaration under s 120 of the Actand consequential orders. 7 The applicant submitted there are two relevant transactions for the purposes of s 120. The first is the execution of the mortgage by Mr and Mrs Reader in favour of the first respondents which is said to be a transfer of property for the purposes of s 120. The second is the payment of $118,360.72 by Mr and Mrs Reader to either or both the first respondents and Vokal. Both transactions took place within two years of the bankruptcy of Mr and Mrs Reader. The applicant contended there was no consideration given by the first respondents or Vokal for either transfer. 8 It is not presently in issue that Vokal provided no consideration for any monies paid to the company by Mr and Mrs Reader in September 2000. Counsel for the first respondents indicated that, as liquidators of Vokal, they were prepared to admit a proof of debt for the entire amount, that is for $118,360.72. The substantive issue between the parties, however, is what portion, if any, of the $118,360.72 was paid to the first respondents on account of their own fees and to discharge the caveat lodged over the title of the Eastwood property. The first respondents submitted that they did not directly receive any of the $118,360.72 paid by Mr and Mrs Reader but rather that the entire amount was paid to Vokal which, in turn, used some of the amount to pay the first respondent's fees. Alternatively, the first respondents submitted that consideration at market value was given for any amount received by the second respondents continuing to act and incur debts as the liquidators of Vokal.

(b) enforcement process in relation to such property; except with the leave of the Court in accordance with such terms (if any) as the Court imposes." 10 The purpose of s 417B was conveniently summarised by Spender J in Solomons Franchise Systems Pty Ltd v Taydex Pty Ltd [1997] FCA 442 as follows: "The purpose of the section in the Law providing for a stay of proceedings and suspension of an enforcement process, was referred to by Lord Justice James in Re David Lloyd and Co (1877) 6 Ch D 339 at 344, where his Lordship said: 'These sections in the Companies Act and the corresponding legislation with regard to bankrupts enabling the court to interfere with actions, were intended, not for the purpose of harassing, or impeding, or injuring third persons, but for the purpose of preserving the limited assets of the company or bankrupt in the best way for distribution amongst all the persons who have claims upon them. There being only a small fund or a limited fund to be divided among a great number of persons, it would be monstrous that one or more of them should be harassing the company with actions and incurring costs which would increase the claims against the company and diminish the assets which ought to be divided among all the creditors.' McPherson J in Ogilvie-Grant v East, Liquidator of Gordon Grant and Grant Pty Ltd (1983) 7 ACLR 669 said at p 672 about the stay of proceedings in compulsory winding up: 'A more convincing explanation is that, without the relevant restriction, a company in winding up would be subjected to a multiplicity of actions which would be both expensive and time consuming, as well in some cases as unnecessary.' The position is that after a company has been placed in liquidation the creditors have to accept the collective enforcement procedure involved in proving for their debts to the satisfaction of the liquidator unless the court gives leave to enforce in some other way. In the circumstances of this case, the position of creditors of each of the applicants in the principal proceedings is that those creditors have the right to prove in the liquidation of that company, and that includes the right of any of the respondents so to prove. I do not think any useful purpose could be served by the court itself embarking on an inquiry as to the extent of the debt owing pursuant to the cross claim. In those circumstances, I decline to grant leave in respect of the cross claim. If that matter is not dealt with satisfactorily in the view of Mr Parr by the liquidator. There are provisions in the Law to permit that to be dealt with. At the end of the day, commercial realities and the likely return are likely to prove determinative of what steps are now taken in relation to the matter." 11 The considerations which may affect the exercise of discretion under s 471B cannot be listed exhaustively. Whether leave to proceed is given or refused will depend on the circumstances of the particular case. Factors which may be relevant include the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved and the stage to which proceedings, if commenced, have progressed; see McPherson J in Ogilvie-Grant v East, Liquidator of Gordon Grant and Grant Pty Ltd (1983) 7 ACLR 669 at 672 12 In this matter the applicant submitted that until there is a determination by the Court of how much of the funds made available by Mr and Mrs Reader were received by the first respondents on their own account and how much Vokal received for its purposes, it is not possible for the applicant to lodge a proof of debt in Vokal's liquidation. Moreover, it was submitted that the inextricable connection between the positions of the first respondents and Vokal, in relation to the $118,360.72, weighed in favour of the grant of leave. The applicant conceded that the question of what portion, if any, of the monies was received by the first respondents and what consideration, if any, was provided by them could be determined in the principal proceeding whether or not leave was granted to proceed against Vokal. However, it was submitted that the issue could be more readily and conveniently determined if Vokal was a party to the proceeding because the applicant, in gathering the necessary evidence, would have the benefit of procedures available against a party to the proceeding. 13 The applicant submitted that to lodge a proof of debt for the entire amount would simply place him in the same position as Vokal's other unsecured creditors. If some of the $118,360.72 must be paid back by the first respondents, creditors of Mr and Mrs Reader would be in a much better position to recover the amount than they would be simply as unsecured creditors for the whole amount in the liquidation of Vokal. 14 Submissions were made by the applicant on whether, on the evidence before the Court, there existed a prima facie case against the first respondents and Vokal. However, even accepting that it is necessary to establish a prima facie case before leave is given, the question would, I apprehend, be whether there is a prima facie case against Vokal. That appears to be conceded by the first respondents, as they are prepared to admit a proof of debt for the whole amount. 15 Counsel, who appeared for both the first respondents and Vokal, submitted that there would be no utility in allowing the applicant to proceed against Vokal when the first respondents, as liquidators, had indicated that they would admit a proof of debt for the whole amount. The applicant would achieve the same result as he would if entirely successful in his application against Vokal in the principal proceeding. Whether the outcome of the principal proceeding was a finding that Vokal alone was liable to pay the entire amount, or it was jointly and severally liable to pay the amount, the applicant would be in no better position lodging a proof of debt for the amount after judgment. Counsel submitted that lodging a proof of debt for the entire amount would not preclude the applicant from continuing the proceedings against the first respondents. If judgment was obtained against the first respondents for some or all of the amount, the proof of debt could be subsequently varied to take account of the judgement. This submission appears to assume that events will occur in a certain sequence and that the primary proceedings will be resolved before the distribution to creditors of Vokal's assets. 16 While I have some reservations about whether it is appropriate for the first respondents to agree to admit a proof of debt in the entire amount given the issues raised in the principal proceeding, I presently do not see the utility in giving leave to proceed against Vokal. Its involvement in the proceedings will, potentially, dissipate funds otherwise available to creditors. The only reason of substance advanced by the applicant concerned the forensic advantage of having Vokal as a party. That, in my opinion, is insufficient reason for the grant of leave. In addition, if judgment is obtained against the first respondents I do not apprehend that there would be any constraints on enforcing that judgment against them. Accordingly, I refuse leave. Having regard to the unusual circumstances in this matter, I propose to order that the costs of the application for leave be costs in the principal application. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

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