Sullivan v Energy Services International Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2180/02 - SULLIVAN v ENERGY SERVICES INTERNATIONAL PTY LTD (IN LIQ) JUDGMENT 1 HIS HONOUR: Up until 25 March 2002, Energy Services International Pty Ltd ("the Company") carried on business in Australia. It was wholly owned by a Malaysian corporation. Part of that business was to service electricity generators by removing their hazardous waste products. 2 The Company had a contract with Integral Energy, an electricity generator, pursuant to which Integral Energy paid the Company to remove all of its transformer oil from sites in outer Sydney. The transformer oil was contaminated with polychlorinated biphenyl ("PCB"). The contaminated oil was contained in Fullers Earth. 3 Material contaminated with PCBs requires to be dealt with in a special way because of the hazardous nature of the material. One needs a licence to store it, and one needs a licence to transport it. There are a limited number of plants in Australia which can remove the deleterious substances from the oil so that it can be reused and the Fullers Earth cleansed. It appears that these plants are in Young, NSW, in an outer suburb of Brisbane and an outer suburb of Melbourne. 4 The Company never had a licence to store or transport the hazardous materials. What it did was to contract with the plaintiff who runs a transport company and which has a licence to transport the hazardous material through NSW and also to store it. 5 At the time when the company went into liquidation, 481 barrels of contaminated material were stored at the plaintiff's depot in a Sydney suburb. 6 On 7 March 2002, the directors of the Company made a declaration of solvency. It would seem that this was made on the basis of a statement of assets and liabilities which showed that it had assets of $6,536,204 of which $5,286,204 was said to be "intellectual property" and liabilities of the same amount including a loan from its holding company of $5,200,000 and contingent liabilities for the disposal of Fullers Earth and PCB contaminated oil of $260,000. On 25 March 2002 the Company passed a resolution to wind up voluntarily, that is, to commence a members' voluntary winding up. Mr William Balfour Rangott, a chartered accountant practising in the Australian Capital Territory was appointed liquidator. 7 On 28 March 2002, Mr Rangott issued two notices of disclaimer of onerous property in Form 525 to the Corporations Regulations. The two notices were each dated 27 March 2002. The first referred to 481 200 litre drums containing PCB contaminated Fullers Earth and associated materials and the second, 48 intermediate bulk containers together with the PCB contaminated transformer oil in those intermediate bulk containers. 8 On 10 April 2002 the plaintiff filed an application claiming a declaration that the notices of disclaimer were ineffective and an order that those notices be set aside. A further order was sought that the liquidator take delivery of the products referred to in the notices of disclaimer forthwith. 9 Since the litigation commenced, Integral Energy "repossessed" the 48 IBCs in which there were 49,000 litres of contaminated oil. The current litigation concerns, accordingly, only the 481 barrels. 10 Before dealing with the submissions made by the parties I should note that for the purpose of the current litigation, counsel conceded that (1) I could treat the oil and Fullers Earth as the property of the Company over which the plaintiff was a bailee; (2) The cost of treating the Fullers Earth and removing the oil would be somewhere between $260,000 and $420,000; and (3) The value of the product after this treatment would be minimal. 11 Shortly before the voluntary winding up, the plaintiff served a statutory demand on the Company for the $60,000 then claimed to be owing to it and another creditor also served a statutory demand. As I have said, Integral Energy has made a claim for breach of contract and will doubtless be claiming the expense of doing for itself what it already paid the Company to do for it. The declaration of solvency was made on the basis that the Malaysian holding company would supply the liquidator with sufficient funds to pay all just debts. There is no evidence that this has happened as yet. There is also no evidence that the liquidator has taken any steps under s 496 of the Corporations Act to call a creditors' meeting which it is his duty to do if he considers that the Company will not be able to provide for the payment of its debts in full within 12 months of the commencement of the winding up. 12 By agreement for sale of business bearing date 15 March 2002, the Company agreed to sell its business with certain exceptions, to Energy Services Invironmental Pty Ltd, an Australian company carrying on business in New Zealand. This company is the third defendant and the cross-claimant. By the agreement, the third defendant agreed to purchase the business of the vendor together with its business name, and all plant, fittings and chattels for $830,000. The agreement provided that the Company would relinquish its technology rights so that they could be regranted to the purchaser. Clause 30 provided that the vendor disclosed that it had a claim against it in respect of contaminated Fullers Earth and contaminated oil for which the vendor would take full responsibility and indemnify, and keep indemnified, the purchaser in respect of any liability arising out of the claim or contamination. 13 The accountant to whom the third defendant was writing in negotiating the agreement for sale, was "Bill Rangott" of Canberra who presumably is the same person as the liquidator. Indeed, exhibits such as PX09 suggest that "Bill" with whom the New Zealand company was corresponding about the purchase of the business "advised that on an ongoing basis he was willing to pay 50 Australian cents per litre for PCB contaminated oil to be exported to and treated in New Zealand." It also appears from that exhibit that the company was willing to agree to have the option to purchase a 20% share in Energy Services International (NZ) Pty Ltd within three years at a firm offer price of AUD200,000. The only inference I can draw from PX09 and the other correspondence between the third defendant and the Company is that "Bill" is the person who later became the liquidator. 14 Section 568(1) of the Corporations Act permits a liquidator to disclaim property of the company that consists of property which may give rise to a liability to pay money or some other onerous obligation. 15 Section 568B of the Corporations Act provides, so far as relevant, as follows:

"(1) A person who has, or claims to have, an interest in disclaimed property may apply to the Court for an order setting aside the disclaimer before it takes effect, but may only do so within 14 days after … the liquidator lodges notice of the disclaimer.

(2) On an application under subsection (1), the Court:

(a) may by order set aside the disclaimer; and (b) if it does so - may make such further orders as it thinks appropriate.

(3) However, the Court may set aside a disclaimer under this section only if satisfied that the disclaimer would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors." 16 Section 568F of the Corporations Act empowers the court to order that disclaimed property vest in or be delivered to:

"(a) a person entitled to the property; or (b) a person in or to whom it seems to the Court appropriate that the property be vested or delivered … ". 17 Mr Aitken of counsel who appears for the plaintiff says that the plaintiff is a person who has an interest in the disclaimed property. The plaintiff is a bailee of the material and it is well recognised that such a bailee has what is often described as a "special property" in the goods bailed; see eg A L Hamblin Equipment Pty Ltd v Federal Commissioner of Taxation (1974) 131 CLR 570, 581 and Palmer, Bailment (Law Book Company, Sydney, 1979) pp 65-66. Then he says that his client suffers great prejudice because she has the goods on her property which are occupying about 50% of her storage area and constitute 80% of all the goods which she currently has stored in her warehouse. Furthermore, it will cost about $400,000 for her to dispose of the goods with no return other than a claim against the company in liquidation. She says that no prejudice will be caused to the Company's creditors because the Company has not got any creditors, it being a members' voluntary winding up where the liquidator must be taken to have formed the view that the Company will be able to pay all its creditors in full within 12 months of the commencement of the winding up or else he would have had to comply with his statutory duty to call a meeting under s 496 of the Act, which he has not done. 18 Mr Menzies QC and Mr Philips, who appeared for the first and second defendants, submitted that no order should be made setting aside the disclaimer because the first defendant, the Company, has no licence to either store or process contaminated waste. As the first defendant could not take possession of the drums, the Court should not order it to commit a breach of the law. Furthermore, no order could be made against the liquidator personally because company property does not, short of a vesting order, vest in the liquidator and the contaminated oil is a problem for the Company not the liquidator personally. 19 They also submit that no proceedings can be brought against any liquidator, including a liquidator in a members' voluntary winding up, without leave of the Court which the Court has not yet given. They recognise that the authorities only go so far as to the say that this applies to a Court appointed liquidator, but cite the 4th edition of McPherson on the Law of Company Liquidation (LBC, Sydney, 1999) pp 287-8. The submission is one which cannot be accepted. The reason why one cannot sue a Court appointed liquidator is as McLelland J pointed out in Re Siromath Pty Ltd (No 3) (1991) 25 NSWLR 25, 28; (1991) 9 ACLC 1587, 1590, based on the decision of Lord Brougham LC in Aston v Heron (1834) 2 MY & K 390, 396-7; 39 ER 993, 995, that the position of a Court appointed liquidator is the position of the Court and no-one can disturb it but through an application to the Court. Even if this point were of some merit, the Court would almost certainly grant leave to sue in the present circumstances. 20 Mr Menzies QC and Mr Philips say that in issuing the notice and attempting to disclaim the property, the liquidator is acting in the best interests of the Company and its creditors at large. As all the creditors are to be paid in full one doubts the second part of that statement: the first part is undoubtedly correct, but one may ask "So what?". 21 Counsel then say that an order setting aside the notice of disclaimer will not necessarily achieve what the plaintiff wishes to achieve, because the Court cannot make a vesting order vesting the material into either the Company or the liquidator, as they do not hold a licence to keep it. 22 They then say that there is no certainty that the property is property of the Company in any event. The short answer to this is that if it is not, then how can it be disclaimed. However, certainly when I first started the hearing of this case I wondered whose property I was really dealing with, and I thought that the questions which I directed to counsel showed that the Company had at least some property in the goods and that no-one else was asserting a title higher than that of the Company. 23 Counsel suggest that the property is bona vacantia and may have vested in the Crown. They refer to Re Potters Oils Ltd [1985] BCLC 203, 205. 24 Because I had notice of this submission at the commencement of the hearing, I indicated that I thought that the Crown might need to be joined as a party. No-one was particularly interested in picking up that suggestion so that the decision was made to proceed with the case as far as possible. I note, however, that in Re Potters Oils Ltd Harman J made it quite clear that he would not thrust such a chattel on the Crown without the Crown being given an opportunity to be heard and that in the only comparable case to the present, Tubbs v Futurity Investments Ltd [1998] 1 NZLR 471, the Crown was also a party. 25 I will return to Tubbs' case in a moment. Mr Menzies QC and Mr Philips say that I get no assistance from that case at all because of the completely different form in which the current disclaimer provisions of the Corporations Act appear. Traditionally, liquidators had to get leave to disclaim. To a great extent whether the liquidator got leave to disclaim was discretionary. However, in the exercise of that discretion, the Court took into account the effect of the disclaimer on all interested parties: Re Katherine et Cie Ltd [1932] 1 Ch 70; Re Middle Harbour Investments Ltd [1977] 2 NSWLR 652 and Re Tulloch Ltd (1978) 3 ACLR 808. Indeed, in that lastmentioned case, Needham J said at 816-7 that the discretion is exercised by taking into account the prejudice to the creditors if the disclaimer is not allowed weighed against a prejudice to other interested persons if the disclaimer is permitted to take place. 26 Thus, although after the Harmer Report the disclaimer provisions of the Corporations Act were recast, I do not consider that there is any great change from the previous position. There is only a change in degree in that s 568B(3) means that the Court does not set aside the disclaimer unless it finds not only that the prejudice falls one way rather than the other, but only if the prejudice caused to other interested persons is "grossly out of proportion" to the prejudice suffered by the creditors. 27 The only reported case on s 568B to my knowledge is Re Real Investments Pty Ltd [2000] 2 Qd R 555, 563-565. 28 In that case, Chesterman J laid down some clear guidance as to the exegesis of sub-section (3). He said at [29]-[31]: "Section 568B demands a comparison between the position of the person who will lose if the disclaimer is not set aside and that of the person who will lose if it is. Only if the prejudice to the former is 'grossly out of proportion' to the prejudice of the latter will the court be authorised to set the disclaimer aside. 'Prejudice' is a wide term, no doubt chosen deliberately. In most, if not all, cases one would expect prejudice to manifest itself in financial disadvantage. [30] In fact two sets of comparisons are called for. The first is an examination of the relative positions of [the company] and the creditors, on the supposition that the agreement is ended by disclaimer. The second is the same examination on the supposition that the agreement remains in force. The contrast in position between those comparisons allows the court to make the assessment described by the section. [31] The pre-condition is satisfied only if the alteration in [the company's] position between the first and second comparisons is to its disadvantage and is grossly out of proportion to the prejudice suffered by the creditors as shown by the two comparative positions. What is meant by 'grossly out of proportion' is, I think, that the change in [the company's] position between comparison one and comparison two must be much greater than the alteration in the creditors' position." 29 His Honour said later at [39]-[40]: "[39] I do not think that s 568B(3) is concerned with such potentialities. It is concerned with a more immediate comparison. It does not look to what subservient advantage may be wrought from the consequences of the disclaimer. It compels examination of what the primary consequence will be to those interested in the property or contract and the creditors should there be a disclaimer. Anything beyond direct consequences is to be ignored. [40] The language of the section suggests this approach. It talks of prejudice that the disclaimer 'would' cause, not that it 'might' cause. Any comparison beyond the immediate and direct effect of the disclaimer is too hard to evaluate with the necessary certainty to arrive at a conclusion that disproportionate prejudice 'would' occur." 30 I would respectfully adopt what his Honour said. However in a case where there are no creditors who will remain unpaid, the prejudice to the creditors is close to nil so that the prejudice to be demonstrated by the applicant is not great. 31 In Tubbs, Tubbs was the liquidator of a foundry. An integral part of the furnace owned by the foundry was a number of capacitors containing PCBs. The liquidator sold the furnace excluding the capacitors. The liquidator then sought to disclaim the PCBs. The liquidator sought consent to disclaim. Hansen J said that it was proper for the Court to balance the advantages and disadvantages of a disclaimer to be gained by the liquidator as against that of persons affected by the disclaimer (477). His Honour held that he should not exercise his discretion in favour of the disclaimer. He said at 479-480: "In this case, the liquidator was also the receiver. The receiver sold the goods knowing of the position. It was a voluntary, not Court-ordered liquidation. If disclaimer was allowed it would mean that a voluntary liquidation was no more than a way in which the company in liquidation could avoid its regulatory obligations and improve the payout to the creditors in circumstances where it was a creditors' voluntary liquidation. I do not believe the discretion should be exercised to achieve that result." 32 In my view, the disclaimer should be set aside, not only for the reasons given by Hansen J which are closely applicable to the present case where the whole of the evidence strongly suggests that the present is a device by those controlling the Company to avoid liability for the contaminated waste, but also because there is no appreciable prejudice to the creditors as they are all to be paid and there is significant prejudice to the plaintiff. The prejudice to the plaintiff is grossly out of proportion to the prejudice the other way. 33 Having reached this conclusion, it is not necessary to consider whether the Crown should have been joined. My feeling is, however, that in this sort of case generally, the Court would expect the Crown to be served and made a party. 34 The question now is what should happen to the material? 35 As I have set aside the disclaimers, there is no room for making any order under s 568F as that section deals solely with the Court's powers over disclaimed property. 36 However, as the matter was fully argued, I should say something about it in case the matter goes further. 37 Section 568F is the successor of legislation which has been in force since the 1929 English Act. The classical section was such as s 323 of the English Companies Act 1948 which continued to find its place in NSW Companies Acts up to s 296 of the 1961 Act. Section 296(6) of the 1961 Act empowered the Court to "make an order for the vesting of the property in or the delivery of the property to any person entitled thereto, or to whom it seems just that the property should be delivered by way of compensation for such liability as aforesaid". The purpose of that provision was to enable effect to the given to the intention of the legislature that the disclaimer should cause as little disturbance to the rights and liabilities of third parties as possible; see Re Carter & Ellis; Ex parte Savill Bros [1905] 1 KB 735, 742, 744. Thus, under the previous section, orders were often made vesting disclaimed property in a mortgagee: Re Carter & Ellis (supra); Re Middle Harbour Investments Ltd (supra) at p 658. 38 In Re Tulloch (supra) at 815, Needham J said of that sub-section: "It may be that there could be circumstances where a vesting order could be made in 'favour' of an unwilling recipient. I cannot, for the moment, conceive of such a case as being 'just', but I do not have to decide, in this case, whether such an order could ever be made."

The section at that stage provided that the Court could make a vesting order "on such terms as the Court thinks just." 39 The word "just" was omitted from the corresponding section (454) of the 1981 Act and was replaced by "proper" which was also employed in the Corporations Law, 1989 as enacted in s 568(11). 40 The present section has dropped all reference to what is just or proper and has substituted the power to vest property in a person to whom it seems to the Court appropriate that the property be vested. 41 As far as I am aware, there has never been judicial consideration of this provision. Certainly counsel did not refer me to any. 42 I do not consider that as a general rule it is open to the plaintiff to select some passer-by who might be a dealer in the property in question, add that person as a party and then suggest that the property might vest in that person. That is not quite what has happened here, but is close to it. It seems to me that it is only appropriate to make a vesting order in order to give effect to the general policy of the law of disclaimer which still comes out in sections such as 568D(2), that whilst the liquidator is to be relieved of the problems caused by the property, the disclaimer is to cause as little prejudice as possible to all other interested persons. 43 Mr Aitken for the plaintiff says that it would be most appropriate for an order to be made that it vest in the third defendant. Alternatively, it should vest in the Company. 44 Mr Aitken says the third defendant knew about the present problem, it bought the business, and on a proper construction of the contract, it bought the whole business subject to an indemnity by the Company of any liability because of the contamination problem. The evidence shows that it is quite acceptable to transfer this material to New Zealand where it can be processed, and indeed, there is a use for the oil once it has been decontaminated. Indeed, the third defendant says it is quite happy to take the material, but only on its own terms and that it should not be forced to take the material without compensation. It says that it did not purchase the contaminated material which is not mentioned in the schedule to the contract, and in any event, there was never any transfer to it by delivery, symbolic or otherwise, of the material which is, of course, a physical chattel. 45 The only reason why it is put that the third defendant is an appropriate person in whom the property should vest, is that the third defendant may well be able to realize the property at a profit and also that by virtue of its sale of business agreement, it is closely allied with the first defendant and on one view of it, purchased the whole of the business including the title to this property. Negatively, it is inappropriate that the property remain with the plaintiff, because it may well be that the plaintiff's only remedy is under the Uncollected Goods Act 1995. However, this is a hollow remedy, as the goods are unsaleable and would cost hundreds of thousands of dollars to dispose of legally. 46 I would not have made an order that the goods vest in the third defendant because it is not appropriate to do so. 47 However, it seems to me that the whole exercise has been one of the Company to rid itself of its obligations with respect to these hazardous goods by foisting them on to the plaintiff. Not only does it owe the plaintiff money, it has also foisted her with these goods costing the plaintiff money every day they are stored on her premises and possibly costing the plaintiff more money to dispose of them. Alternatively, there was an attempt to foist the obligation on to the taxpayer by having the property declared bona vacantia and so vest in the Crown. 48 It would have been appropriate had s 568F been applicable to order that the goods revest in the Company, or alternatively, that a direction be made to the liquidator that he perform his statutory duty by taking possession of the goods. The fact that the Company or liquidator does not have a licence to transport the goods or to store them is, to my mind, of no moment. They can just as easily as anybody else obtain the services of a licensed person to do that for them. If the expenditure set out in the figures on which the declaration of solvency was based of $260,000 to deal with the problem is not enough, then the Company will have to go into a creditors' voluntary winding up. 49 I have expressed the previous paragraph the way I have because it seems to me to be rather tautologous to make an order vesting in the Company what is the Company's property in any event if the basis on which I have made my decision is the correct one. It may be that a vesting order should be made to make the position more certain. What I will do is to stand the matter over for short minutes of order to be brought in, and if there is a real live question as to the form of order, I will deal with it at that stage. 50 As no order can be made under s 568F and it would be quite inappropriate in a members' voluntary winding up for the Company's liabilities to be foisted on to the plaintiff, it seems to me appropriate to make an order that the liquidator be directed to remove the goods from the plaintiff's warehouse at the Company's or his own expense within 14 days. 51 Alternatively, the plaintiff may give the second defendant a quote for the cost of removal and disposal of the material and if this is paid in cash within 14 days of the quote, that shall be a sufficient compliance with the order. 52 Of course, the plaintiff may prove in the winding up or claim against the liquidator other costs and expenses made in respect to the storage of the material. 53 The next question is the question of costs. The third defendant has been successful as against the plaintiff. It should get its costs as against the plaintiff. The cross-claim is otiose because the cross-claim is for indemnity, and as the New Zealand company has not suffered as a result of the claim, there is nothing to indemnify it against. 54 The plaintiff should have an order for costs against the first defendant which order should include the costs she has been ordered to pay the third defendant. The position of the second defendant then arises. 55 It is the liquidator who gives a notice of disclaimer, even though he or she does that under s 568(1) of the Corporations Act on the company's behalf. Under that section, where it is necessary for leave to disclaim to be obtained, the liquidator must be the person who makes the application rather than the company and this is what has occurred under the previous legislation in, for instance, Re Middle Harbour Investments Ltd (supra) and Re Tulloch Ltd (supra). It would seem, accordingly, that where the interested person is moving to set aside the disclaimer, that the liquidator is a proper party. 56 Where a liquidator is a proper party and goes no further than to defend the company's right, then ordinarily no order is made that the liquidator pay the costs personally. This is not, however, an invariable rule. 57 Where the liquidator has defended the company's position and at the same time has defended his own personal position, then perhaps the same rule applies. However, when the liquidator also seeks to justify his own personal position, his protection against a personal order for costs is not so clear. In the present case, his counsel made particular submissions that no order should be made vesting the property in the liquidator personally in addition to the submissions that the property should not vest in the Company. 58 In addition, in the present case, there is a not insignificant amount of material to suggest that the liquidator as accountant for the Company, was involved quite closely in the problem with contaminated oil before liquidation. 59 In Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622, Austin J discussed the options available to the Court in making orders against liquidators and administrators. That decision has been argued before the Court of Appeal and the decision reserved. However, his Honour suggests that in most cases the appropriate order for costs where the assets of the company are insufficient to pay a successful plaintiff, is that the liquidator pay those costs personally. 60 It seems to me that because of a number of facts including the fact that the liquidator's personal liability for costs was not really argued, that the Company being a members' voluntary winding up may well be able to pay the costs of the successful plaintiff and that the Cresvale case is awaiting decision on appeal, the appropriate order is that the Company pay the plaintiff's costs including the costs she has to pay the third defendant, but leave be reserved for the plaintiff to apply for an order for costs against the second defendant liquidator personally should she be so advised. 61 However, for the time being, all I need do is publish my reasons and request that short minutes of order be brought in. I will provisionally fix 24 October 2002 at 9.30 am for this purpose. However, should counsel contact my Associate by 21 October 2002 that date can be moved to some other suitable date.

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