BETWEEN : WARWICK ENTERTAINMENT CENTRE PTY LTD (RECEIVERS AND MANAGERS APPOINTED) atf THE WARWICK ENTERTAINMENT CENTRE UNIT TRUST

SILKCHIME PTY LTD (RECEIVERS AND MANAGERS APPOINTED) atf THE SILKCHIME UNIT TRUST

Corporations - Stay of proceedings pending determination of COR 173 of 2009 - Whether stay has been lifted - Application for further stay of proceedings - Turns on own facts

Corporations Act 2001 (Cth), s 421

Defendant's application for a further stay is dismissed

MARK ANTHONY KORDA and DAVID JOHN WINTERBOTTOM As Receivers and Managers of WESTPOINT CORPORATION PTY LTD (In Liq) (Receivers and Managers Appointed) and the companies listed in Schedule 1 -v- SILKCHIME PTY LTD (Receivers and Managers Appointed) atf SILKCHIME UNIT TRUST [2010] WASC 155

1 LE MIERE J: Mark Korda and David Winterbottom are receivers and managers of the plaintiff company, Warwick Entertainment. On 31 January 2008 the receivers commenced this action in the name of the plaintiff against the defendant, Silkchime, for recovery of an alleged intercompany debt in the amount of $12,706,904. The debt is recorded in the loan account between Warwick Entertainment and Silkchime. Silkchime denies the debt. Silkchime says that there was a joint venture agreement between Warwick Entertainment and Silkchime to the effect that the loan was advanced on a non-recourse interest free basis. Warwick Entertainment denies the alleged joint venture agreement.

2 On 15 September 2009 I ordered that the action be stayed pending determination of the application for directions in COR 173 of 2009 in the matter of Westpoint Corporation Pty Ltd (in liquidation) (receivers and managers appointed). At the same time I ordered that Warwick Entertainment and Silkchime be joined as defendants in the application for directions in COR 173 of 2009.

3 Warwick Entertainment says that the application for directions in COR 173 of 2009 has now been determined and hence the stay imposed by the order of 15 September 2009 no longer operates. Warwick Entertainment submits that the court should give directions for the further conduct of this action, including directions in relation to discovery. Warwick Entertainment also seeks orders for costs in relation to various interlocutory matters. Silkchime contends that the stay of this action should be renewed until judgment in COR 223 of 2009.

4 On 25 June 2010 I made final orders in COR 173 of 2009. The orders included:

1. The court directs that, subject to any findings or orders in COR 223 of 2009:

...

(c) the Receivers have a discretion whether to continue or otherwise deal with the following actions:

(i) Warwick Entertainment Centre Pty Ltd (Receivers and Managers Appointed) v Silkchime Pty Ltd (Receivers and Managers Appointed) Supreme Court of Western Australia proceeding number CIV 1094 of 2008;

...

and in exercising that discretion the Receivers must exercise their powers in good faith and having regard to the interests of the Priority Creditors.

1. The court directs that, subject to any findings or orders in COR 223 of 2009, the Receivers are justified in not retiring and in realising assets of:

(a) Westpoint Corporation and the first, second, third and fifth defendants (Borrowers); and

(b) the fourth defendant, Westpoint Management Ltd (in liq) (receivers and managers appointed) and Bayview Port Melbourne Ltd (in liq) (receivers and managers appointed) (Guarantors),

(together, Chargors) to create a fund available to satisfy the future liabilities of the Chargors to ING as a result of COR 223 of 2009 and any other threatened litigation.

5 The order made on 15 September 2009 was that the action be stayed pending determination of the application for directions in COR 173 of 2009. The application for directions in COR 173 of 2009 has been determined and hence the stay no longer operates.

6 Silkchime submits that this action should be stayed until judgment in COR 223 of 2009 for six reasons.

7 Silkchime contends this action should be stayed because COR 173 of 2009 did not resolve the issue of whether the receivers should have retired in January 2008 and that issue now falls to be determined in COR 223 of 2009. Silkchime submits that the basis for the stay of this action has not been resolved or disturbed by the result in COR 173 of 2009 and 'the stay should remain for the reasons for which it was made'.

8 The directions of the court in COR 173 of 2009 were to the effect that the receivers could continue to act as receivers unless and until any relevant findings or orders are made in COR 223 of 2009. There has been no appeal against those directions. The first reason advanced by Silkchime is not a sufficient ground for an order to stay the action.

9 Silkchime submits that there is a serious question to be tried in COR 223 of 2009 about the receivers' fees and the receivers' conduct in paying Corrs Chambers Westgarth (Corrs) $5.8 million at the rates in costs agreements when the entitlement was to costs under the statutory scales. That contention is a contention made by the plaintiffs in COR 223 of 2009. In COR 173 of 2009 I directed, in effect, that the receivers have a discretion whether to continue or otherwise deal with this action and that subject to any findings or orders in COR 223 of 2009 the receivers are justified in not retiring. Silkchime's second reason is not a sufficient ground for granting a stay of this action.

10 Silkchime submits that it is inappropriate to permit the receivers to augment the retention fund whilst they continue to flout s 421 of the Corporations Act 2001 (Cth), use their misconduct to increase costs and then claim an entitlement to increase the retention fund.

11 Mr Carey and Quarts Nominees Pty Ltd requested from the receivers copies of invoices of their fees in respect of the receiverships of companies in the Westpoint Group and copies of the invoices for the legal costs charged by Corrs in respect of the receiverships of those companies. The receivers refused to permit Mr Carey to inspect those documents but offered to allow Mr Carey to inspect certain documents which the receivers said were sufficient to discharge their obligations under s 421(2) of the Corporations Act. The dispute between Mr Carey and the receivers concerning inspection of the relevant documents is the subject of the proceedings in COR 147 of 2010. On 7 December 2010 I delivered reasons for judgment on a number of preliminary issues in those proceedings. The proceedings are continuing. The existence of those proceedings, the matters giving rise to them and the conduct of the proceedings to date is not a sufficient reason for staying the present action.

12 Silkchime submits that the Westpoint companies will undertake to confine their claims in COR 223 of 2009 so that the probable costs in that action can be reasonably assessed and should be less than the amount the receivers held as at February 2010. Silkchime submits that the Westpoint companies are preparing to undertake to confine their claims in COR 223 of 2009, in effect, to overcharging by the receivers and Corrs and to the consequences of the overcharging as regards the debt to ING, that is, the debt should have been repaid sooner. A minute of the proposed undertaking is attached to the defendant's written submissions of 13 September 2010. The Westpoint companies contend that $850,000, the amount held by the receivers in February 2010, is more than enough for the receivers' costs in COR 223 of 2009 so that the receivers should not be permitted to prosecute this action to supplement the retention fund.

13 In COR 173 of 2009 the receivers submitted that they were entitled to prosecute the Westpoint causes of action to build up a retention fund because the cash that they then had on hand was insufficient to provide an adequate retention fund to satisfy the likely costs of defending COR 223 of 2009 and other threatened litigation. Each of the parties put forward an estimate of the likely costs of the receivers defending COR 223 of 2009. The defendants in those proceedings relied upon the evidence of Ms Coulson, a barrister practising, amongst other things, in relation to costing issues, in support of their contention that the funds then held by the receivers constituted a sufficient retention fund to cover the likely costs of defending COR 223 of 2009 and other threatened litigation. In COR 173 of 2009 I did not attempt an accurate estimate of the likely costs of defending COR 223 of 2009. However, I did not accept Ms Coulson's estimates. In MARK ANTHONY KORDA and DAVID JOHN WINTERBOTTOM As Receivers and Managers of WESTPOINT CORPORATION PTY LTD (In Liq) (Receivers and Managers Appointed) and the companies listed in Schedule 1 -v- SILKCHIME PTY LTD (Receivers and Managers Appointed) atf SILKCHIME UNIT TRUST [2010] WASC 155, I made the following findings:

The Receivers presently have a fund of approximately $850,000. They have received advice that the estimated cost of defending COR 223 of 2009 is more than $4 million. I am not satisfied that that is an accurate estimate of the costs of defending COR 223 of 2009. That is because it is too early in the proceedings and there are too many uncertainties to estimate with any accuracy the costs of defending those proceedings. I approach Ms Banks-Smith's costs estimate as an indicative estimate, that is a rough cost projection that may be used by the Receivers for budget planning purposes in the early stages of the litigation. A reasonable person in the position of the Receivers would review the amount retained, or amount being realised to establish a retention fund, from time to time as the litigation proceeds. In those circumstances the Receivers are justified in pursuing reasonable and economically viable causes of action of the Chargors to create a fund of sufficient magnitude to meet the likely costs of defending COR 223 of 2009. It is sufficient that I form an opinion that the funds currently held by the Receivers may not be sufficient to meet the likely legal costs and I do form that opinion. The cash amount held by the Receivers is substantially less than the defence costs of COR 223 of 2009 estimated by Ms Banks-Smith.

Subject to a qualification that I will shortly refer to, the Receivers are justified in realising assets of the Chargors to create a fund available to satisfy the future liabilities of the Chargors to ING as a result of COR 223 of 2009 [92] - [93].

14 The position is not altered by the undertaking to be given by the Westpoint Companies. The fourth reason is not a sufficient reason for staying the action.

15 Silkchime submits that there is no evidence before the court as to the liability of the receivers of the Westpoint companies under the General Employees Entitlements and Redundancy Scheme (GEERS).

16 The court has directed in COR 173 of 2009 that, subject to any findings or orders in COR 223 of 2009, the receivers are justified in not retiring and in realising assets of the Westpoint companies. The fifth reason is not a sufficient ground for staying the action.

17 Silkchime submits that it is arguable that the receivers are not acting in good faith in seeking to prosecute this action. In COR 173 of 2009 the court directed that, subject to any findings or orders in COR 223 of 2009, the receivers have a discretion whether to continue or otherwise deal with this action and in exercising that discretion the receivers must exercise their powers in good faith and having regard to the interests of the statutory priority creditors. Silkchime says that the receivers were prepared to retire in 2008 and 2009 provided they were given a complete exoneration but now assert that they should not be compelled to retire because they wish to pursue claims to pay priority creditors. Silkchime says that in 2008 and until about August 2009 the Receivers did not appear to regard the interests of priority creditors as a matter of such significance that it would prejudice them retiring. That leads Silkchime to submit:

The receivers change of position gives rise to the suspicion that the prosecution of this action is not in good faith and that it is pursued for an ulterior purpose, namely, to apply pressure to Carey and the [Westpoint companies] to agree to the complete exoneration.

18 The allegations made by Silkchime are not established by the evidence. I find that the matters referred to by Silkchime do not give rise to an inference of bad faith.

19 At a directions hearing on 31 August 2010 Warwick Entertainment sought orders that the stay be lifted and other directions be made. I ordered that the parties put on written submissions in relation to those matters. On 20 December 2010, whilst judgment was reserved, the plaintiff applied for leave to file further submissions and to file and rely upon an affidavit sworn by Russell Harry Morgan on 20 December 2010 in support of the plaintiffs' contentions. Silkchime submitted that Warwick Entertainment should not have leave to file or rely upon the further affidavit or submissions. In the interests of justice Warwick Entertainment should have leave to rely upon the further affidavit and submissions. However, I have found it unnecessary to have regard to that further affidavit or the further submissions in determining whether or not the action should be stayed and the further steps to be taken.

20 The action should only be stayed for good reason. Silkchime has failed to establish that there are any good or sufficient reasons for staying the action.

21 Warwick Entertainment has raised a number of matters consequential upon the action not being stayed.

22 The parties should now proceed with the action. On 11 June 2009 orders were made that the parties confer and, if possible, agree in regard to categories of documents and proposed search terms that may assist in limiting the scope of discovery. The parties have conferred and agreed such terms from the ASIC hard copy data base. Warwick Entertainment submits that the parties should be given a short period to agree the appropriate categories for limited discovery. It is appropriate to order that the parties confer about the appropriate categories for limited discovery. I will hear the parties as to the time that should be allowed and the form of the order.

23 Warwick Entertainment proposes the following orders be made:

(a) The defendant's application by letter dated 18 September 2008 (mandate application) be dismissed.

(b) The defendant pay the plaintiff's costs of the mandate application on a party-party basis, to be taxed if not agreed.

(c) The plaintiffs' application by letter dated 1 July 2009 (dismissal of mandate application) be dismissed.

(d) The defendant pay the plaintiffs' costs of the dismissal of mandate application on a party-party basis to be taxed if not agreed.

(e) The defendant pay the plaintiffs' costs of requesting further and better answers to its request for particulars and further answers to interrogatories on a party-party basis to be taxed if not agreed.

24 Silkchime has not made any submissions in relation to those matters. Silkchime should have an opportunity to make written submissions in relation to those matters. I will hear the parties as to the time which Silkchime should be given and the form of the orders.