Westpac Banking Corporation v ITS Taxation Services

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4345/02 WESTPAC BANKING CORPORATION V ITS TAXATION SERVICES & ORS JUDGMENT 1 HIS HONOUR: This is a claim by a court-appointed receiver and manager, Mr Neil Singleton (the third defendant), to be paid his costs and disbursements incurred in the course of the receivership. The claim is resisted by the second and fourth defendants, and there is correspondence to indicate that some of the other defendants who have essentially the same interest as the fourth defendant (being co-chargeholders under a certain deed of charge to which I shall refer) also resist the claim. On the other hand, the fifth, sixth, ninth, eleventh, twelfth and fourteenth defendants have made submitting appearances. The first plaintiff, Westpac, has also appeared on the application, neither consenting to nor opposing it. 2 Mr Singleton was appointed, after a contested application, by order made by Young CJ in Eq on 3 September 2002, pursuant to s 67 of the Supreme Court Act 1970 (NSW) and Part 29 of the Supreme Court Rules. He was appointed receiver and manager, without security, to the whole of the property of ITS Taxation Services Pty Ltd ("ITS"), with all the powers referred to in s 420 of the Corporations Act. 3 There are two notices of motion now before the Court. The first, an amended notice of motion filed on 29 April 2003, seeks orders that the receiver be allowed remuneration in respect of the period from 3 September 2002 to 23 November 2002. An order is sought to permit the receiver to pay that amount together with all reasonable out-of-pocket expenses from funds held in a certain ANZ bank account. An order is also sought declaring that the receiver's claim has priority over claims made by the chargeholders identified in a deed of charge executed on 30 August 2002 between ITS and the chargeholders, who are the fourth to fourteenth defendants in the proceeding. The second notice of motion, filed on 30 October 2003, seeks similar orders with respect to remuneration for the period from 24 November 2002 to 30 June 2003. 4 There is only limited evidence before me concerning the proceeding as a whole, but the general nature of the dispute and in particular, the nature of the fourth defendant's claim to an interest in the Fund out of which the receiver wishes to be paid, can be gleaned from the pleadings. The application is made in a proceeding commenced by summons filed on 2 September 2002, and continued by a statement of claim dated 8 November 2002. The first plaintiff, Westpac, alleges that it provided financial accommodation to the second plaintiff, Investment Taxation Specialists Ltd ("Specialists"), and that Specialists secured that financing by a fixed and floating charge dated 13 June 2001 over all of its present and future assets and undertaking. As at 2 September 2002, according to Westpac's statement of claim, Specialists owed it nearly $4 million. Westpac alleges (inter alia) that Specialists, without its consent and in contravention of the charge, transferred $580,000 from its bank account to a bank account of ITS, by four transfers in June, July and August 2002. Westpac contends that these transferred amounts are held by ITS in trust for it. It claims that the second defendant, Mr Ross Anderson, procured the transfers as an officer of ITS and in breach of his duties. Mr Anderson was the sole director of ITS. 5 By its amended cross-claim filed on 19 May 2003, the fourth defendant alleges that it lent a substantial amount, bearing interest, to Business Finance Specialist Pty Ltd, a wholly-owned subsidiary of Specialists. Its primary claim is that in July 2002, it agreed to reinvest the monies that it had lent to BFS, under terms according to which ITS would become liable to repay the loan and would grant security. It says that on 30 August 2002 ITS executed a deed of fixed and floating charge in favour of, inter alia, the fourth defendant, and that the charge was stamped and registered. Paragraph 23 of the amended cross-claim pleads that ITS created a first ranking security in favour of the chargeholders including the fourth defendant. The fourth defendant claims first priority to the money in the fund attributable to ITS for payment of the loan. Its claim is for $321,428. In a letter to the Registrar of the Court dated 20 December 2002, which is in evidence on the application, the seventh defendant alleged that the amount secured by the deed of charge is, in total, around $940,000. 6 It is an agreed fact, for the purposes of the present applications, that notice of the deed of charge dated 30 August 2002 was lodged with the Australian Securities and Investments Commission on 2 September 2002. Mr Singleton has given evidence, not contested, that on the same day he consented to act as receiver and manager of ITS if so appointed by the Court, and that neither Westpac nor its legal advisers informed him that there was a charge registered over the assets of ITS, and that he caused a search of ASIC's records with respect to ITS to be conducted, which did not disclose the creation or registration of the charge. 7 During the period since his appointment, Mr Singleton, his partners and their staff carried out a considerable amount of work in the course of the receivership. He prepared a report on his work dated 11 April 2003, updated by his two affidavits of 28 October 2003, referring to work which may be broadly summarised as follows: · when he was appointed he took possession of ITS' cash at bank in the sum of $420,479.12 plus interest, and preserved it in a bank account under his control; · he collected debtors of ITS in the sum of approximately $360,000 (in his affidavit of 1 May 2003 he said that uncollected debtors amounted to $440,000, but he did not expect these amounts to be realised in full; by 28 October 2003 he had collected $362,080); · he also assisted the receiver of Specialists with the sale of the accounting businesses of the group of which Specialists and ITS formed components; · to that end, he (or his staff) visited the principals of the accounting and taxation practices to identify and preserve the value of the practices, including work in progress and debtors; · he liaised with the Tax Agents Board concerning registration requirements; · he reviewed the insurances of the ITS group and attempted to obtain appropriate cover; · he or his staff had numerous conversations with Mr Anderson with a view to preserving the assets of ITS; · he sought legal advice on various issues; · he issued demands for delivery to him of financial records, and investigated the financial records of ITS to identify and preserve its assets; · the task of asset preservation led him to investigate businesses operated from accounting practices located in six places in Sydney, suburban Sydney and country New South Wales; · he investigated the registered charge upon which the fourth to fourteenth defendants rely. 8 There has been no application for the removal of Mr Singleton as receiver and manager, and no evidence that any of the defendants has asked him to suspend or stop his work. His evidence is that the actions he has taken are actions he would have taken to preserve the assets of ITS had he been appointed receiver and manager by the chargeholders pursuant to their deed of charge. He says that the work he has undertaken has been of benefit to the chargeholders as much as to the plaintiffs. 9 As at 28 October 2003, Mr Singleton held $746,387.22, principally in an ANZ account. The first claim to remuneration, covering the period from 3 September to 23 November 2002, is for $126,825.05, plus disbursements including legal fees of $60,111.63. The second claim is for $105,885.55 plus disbursements of $78,304.98 for the period from 24 November 2002 to 30 June 2003. Essentially the claims to remuneration are on an hourly charge-out basis. 10 It will be seen that if Mr Singleton's claims are allowed in full, and he is permitted recoupment out of the fund that he holds in priority to the claims of the chargeholders, about half of the fund will be consumed. It seems likely that he will make a similar application in respect of costs and disbursements in the period from 1 July 2003, and there is also the question of costs of the present applications, dealt with below. If all of Mr Singleton's present and likely future claims are successful in full, there will be little if anything left in the fund to meet the claims of the chargeholders or any other claims against the company (including Westpac's claim so far as it relates to the fund held by Mr Singleton). If, on the other hand, the chargeholders' claim against the fund has priority over Mr Singleton's claim, it appears that there will be no asset from which Mr Singleton can be paid. 11 On 12 May 2003 I made an order, by the consent of the plaintiffs, Mr Singleton, and the fourth and fourteenth defendants, standing over Mr Singleton's first notice of motion with respect to remuneration until after the determination of the final hearing of the claim and any cross-claim but prior to the entry of any orders in respect of the determination. Mr Singleton has given evidence, which I accept, that he consented to the adjournment of the hearing of his first remuneration application on the understanding that one or more of the defendants might be making an application for expedition of the proceeding, and that the final hearing of the proceeding could be expected within a reasonably short period of time. In fact no application for expedition has been made. An application by the fourth defendant to have its defence and cross-claim mediated was rejected by the Court on 27 October 2003. As at 28 October 2003, when Mr Singleton decided to proceed with the first remuneration application and to make a second application, discovery had not been completed and not all the evidence (including Westpac's evidence) had been filed. Mr Singleton pointed out that between October 2003 and the final hearing he would be required to carry out substantial additional work and incur the cost of doing so, and he therefore requested that his two applications be determined as soon as practicable. 12 It seems to me reasonable for Mr Singleton to have resurrected his first application and to have made the second application, so as to recover remuneration and expenses for the period beginning at the time of his appointment and ending on 30 June 2003. It does not seem to me to be fair or reasonable that he, as a court-appointed receiver, should be required to await the final hearing of the proceeding before being paid, in circumstances where he has no control over the timetable for the hearing. The fact that at an earlier time he consented to deferral of his claim until the final hearing should not prevent him from taking a different attitude now, since it is plain that his consent was on the assumption that the final hearing would happen reasonably quickly. 13 His consent to deferral was given about 9 months ago. I am informed that the matter is at last substantially ready for hearing and should be placed in the Registrar's March Call-over List. There is at least a good prospect, therefore, that the case will be set down for hearing at some time during the second half of this year. But why, one asks, should the receiver, having done a very substantial amount of work pursuant to an appointment by the Court, be required to wait for payment until that time? 14 It is said that the determination of the receiver's applications will involve consideration of issues that will arise at the final hearing. But the submissions at the hearing of the applications have not identified any substantial overlapping. In particular, to the extent that the receiver's applications are to be determined upon the application of the principle of salvage to which I shall next refer, there is no significant overlapping with the issues likely to arise at the final hearing. 15 His Honour's order for the appointment of Mr Singleton as receiver did not make express provision for Mr Singleton's remuneration. According to Daniell's Chancery Practice (7th edition, 1982), p 1441, a receiver should ask for remuneration at the time of his or her appointment, although remuneration may be allowed subsequently in a proper case: see also J 0'Donovan, Company Receivers and Administrators (loose-leaf, vol 2) at [25.110]. The authors rely for that proposition on Harris v Sleep [1897] 2 Ch 80. In that case, upon the dissolution of a partnership one of the partners was appointed receiver by the court, and undertook to act as such without salary. He carried on the partnership business successfully for 18 months and then purchased it (with the court's sanction) for a price sufficient to pay the creditors in full. During that time, he performed manual work for the business, just as he had done, for wages, during the partnership. He claimed an allowance for those wages. While observing that if a receiver does not ask for an allowance for services to be rendered at the time of appointment "he runs a great risk of not getting it", Lindley LJ said that the court will see that what is right is done in the circumstances, and described the objection to remuneration as "shabby" (at 85). 16 In the present case there can be no doubt that the appointment was on the basis that Mr Singleton would be entitled to receive his reasonable remuneration, and reimbursement or exoneration with respect to reasonable expenses, out of the assets of which he had become receiver. In this respect, a receiver is unlike a trustee, for in the case a receiver, unless some other order is made the appointee is allowed a proper salary or allowance: Supreme Court Rules, Part 29, rule 3; 0'Donovan, [25.60]. Mr Singleton is an insolvency practitioner by profession, and is entitled to expect to be paid on a proper basis for the work he has done. 17 A court-appointed receiver, when entitled to payment of remuneration and expenses, has an indemnity over the assets placed under his or her control, entitling the receiver to reimbursement from or exoneration out of those assets to the extent that the claims for remuneration and expenses are reasonable. By virtue of the indemnity and lien, a receiver of the assets of the company can "look to the assets of the company of which he is a receiver to meet his proper remuneration and the liabilities properly incurred": Re Application of Central Commodities Services Pty Ltd [1984] 1 NSWLR 25, 27, per Needham J. 18 Although there was no issue of priority in that case, Needham J (at 27) quoted from Kerr on Receivers, and from an earlier edition of O'Donovan, statements to the effect that the receiver is entitled "to be paid next after payment of the costs of realisation", in priority to the claims of preferential creditors, and the court will "ensure that his remuneration takes precedence as far as possible over every other payment to be made out of the assets under its control". 19 Needham J's reasoning was applied to a claim for remuneration by a provisional liquidator in Shirlaw v Taylor (1991) 31 FCR 222. In their joint judgment, the Full Federal Court (Sheppard, Burchett and Gummow JJ) analysed the nature and origin of the receiver's indemnity and lien, treating it as part of a more general equitable principle. They said (at 228): "In Hewitt v Court (1982) 149 CLR 639 (at 667 et seq), Deane J referred to the treatment of the subject in Pomeroy's Equity Jurisprudence (5th ed, 1941). The view is there expressed (para 1239) that, in addition to equitable liens arising from contractual dealings in property, equity may raise liens based either upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg in an administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter: see also Note, "Equitable Liens" (1931) 31 Col L Rev 1335 at 1342-1343. Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund …." 20 They added (at 230): "In addition to the anxiety of the court to protect the position of its officer, in particular, lest there be in the future an absence of persons willing to take such appointments, the claims of the officer under a court-appointed administration may be seen as in the nature of 'salvage'. The principle is that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it: see In the Matter of Tharp (1852) 2 Sm & Giff 578; 65 ER 533 and Re Berkeley Applegate (Investment Consultants) Ltd (in liq); Harris v Conway [1989] Ch 32 and 51." 21 In the present case there is a single fund, the ANZ bank account, over which both Mr Singleton and the chargeholders make claims. Mr Singleton's claim is based on the right of indemnity and lien established by these cases. It is, as Bryson J observed in Shawyer v Amberday Pty Ltd (in liq) [2001] NSWSC 399 (18 May 2001) at [9], an equitable proprietary interest. The claim by the chargeholders is based on the deed of charge. It is not clear from the evidence before me on the application whether the deed of charge purports to create a fixed charge over assets such as the ANZ bank account, or merely a floating charge, and if the latter, whether any event has occurred to cause the charge over that asset to crystallise. It does appear from the pleadings, however, that the deed of charge does not purport to constitute a legal mortgage by conveyance of the bank account, subject to an equity of redemption. At its highest, therefore, the chargeholders' claim to the ANZ bank account is a claim to an equitable interest in the fund. 22 The conclusion that the chargeholders did not have a legal interest in the fund appears to be of some importance, having regard to the decision of the English Court Appeal in Choudhri v Palta [1994] 1 BCLC 184. In that case a court-appointed receiver sought recovery of his remuneration and expenses out of partnership assets which included land subject to registered charges in favour of two banks, which were created prior to the receiver's appointment. It was held that the court had no power to order that the receiver's remuneration and expenses be paid in priority to the sums secured by the charges. Scott LJ (with whom Sir Michael Kerr and Parker LJ agreed) accepted (at 187) the general proposition that a receiver's claim to costs and remuneration ranks second in priority only to the costs of realising the assets of the receivership, but he held that the relevant asset of the receivership was not the land as such, but the land encumbered by the charges. If, for example, the land had been subject to a lease at the time of the receiver's appointment, the court could not have interposed a lien to secure payment of the receiver's costs and remuneration in priority to the leasehold interest. 23 The registered charges in Choudhri's case were, as Bryson J pointed out in Shawyer at [13], statutory charges analogous for present purposes to registered mortgages under the Torrens system. They were, for the purposes of the law of priorities, statutory legal interests carved out of the chargor's estate. When the receiver took possession and control of the chargor's real property, he took possession and control of an interest in the land akin to an equity of redemption, rather than the unencumbered freehold. In contrast, in the present case the receiver took possession of and augmented the fund of money paid into the ANZ bank account. That fund was subject to a claim which was (at best) an equitable interest, but under the terms of Young CJ in Eq's order the receiver became receiver of the entire fund. The priority of the respective claims to the fund by the receiver and the chargeholders is to be determined by application of the principles concerning priority of equitable interests. 24 I do not regard anything in Bryson J's judgment in Shawyer as contrary to this analysis. In that case there was an issue (not before me now) as to whether one of the completing claimants had only a mere equity rather than a fully-fledged equitable interest. His Honour's dictum at [14], to the effect that the principle in Choudhri applies where property is subject to a fully constituted equitable mortgage, was in terms confined to real property and is inapplicable where, as here, the receiver has as a matter of fact taken possession and control of the entirety of the fund which is the property in question. 25 Although the chargeholders' claim is made under a charge registered under the Corporations Act, the priority provisions of Part 2K of the Act have no application here, because they apply only to competing registrable charges, whereas the receiver's lien is an unregistrable interest, and so the general law of priorities applies: Ford's Principles of Corporations Law (looseleaf), paragraphs [19.180], [19.181], [19.355] and [19.450]. It is elementary that a competition for priority between the holders of equitable interests in a fund is determined at general law by identifying the party with the better equity. In the present case it appears that the interest of the chargeholders arose earlier in time than the receiver's indemnity and lien, since he was appointed after the deed of charge was executed, and also after notice of it was lodged for registration. The fact that his search did not reveal lodgment of the notice of charge would not, of itself, entitled him to priority over their interest, since an equitable interest created later in time does not prevail over an earlier equitable interest simply because the holder of the later interest is a bona fide purchaser of that interest for value without notice. 26 Where, however, one of the claimants to priority is a court-appointed receiver seeking to recover remuneration and costs, there are some special factors in the equitable calculus. This is a case (unlike Shawyer: see Bryson J's observation at [15]) where the principle of salvage applies. In the words of the Full Federal Court in Shirlaw, those taking the benefit of the receiver's administration should not escape bearing the burden of the proper cost of it. Mr Singleton has applied his efforts to augmenting and protecting a fund which is available (subject to his costs and expenses) for the benefit of secured and unsecured creditors of the company, including the chargeholders. 27 The fact that the fund is likely to be inadequate to meet the chargeholders' claims, after Mr Singleton's costs and disbursements are deducted, is not a ground for denying Mr Singleton's claim, for a receiver does not guarantee that his or her efforts will generate or preserve sufficient assets to meet all creditors' claims. The fact that Mr Singleton's claim is in an amount not very different from the value of the assets he recovered during his receivership is coincidental and beside the point. The chargeholders have had the benefit of Mr Singleton's efforts in the sense that he has preserved and augmented an asset of the company which will be available (subject to deduction of his costs and expenses) to meet all relevant claims including theirs. 28 That this is a case of salvage is very plain from Young CJ in Eq's reasons for judgment of 3 September 2002, when the appointment was made. His Honour explained that the proceedings were "sparked off" a few days earlier when ITS indicated that it intended to grant a charge over its business in favour of some people who were alleged to be creditors (the fourth to fourteenth defendants). His Honour continued: "To put it starkly, and at the highest, the plaintiffs' claim is, at the moment, that the defendant [ITS] has abstracted its business, in the case of the second plaintiff [Investment Taxation Specialists], or business over which it has a charge in the case of the first plaintiff [Westpac], so as to make the charge valueless, or less valuable, and put the second plaintiff in the situation whereby every day the defendant trades, the second plaintiff loses money." 29 Later in his reasons for judgment, after referring to Westpac's submission that the affidavit evidence showed that it would be risky to leave Mr Anderson in control of the business of ITS, and after recording his extreme reluctance to appoint receivers for a number of very practical reasons, he said: "However, one does get to the stage where the suspicion that is raised by the material, and the need to protect property, is sufficiently strong that there is sometimes no real alternative." 30 Young CJ in Eq regarded the fund as being at risk, and an implication is that if Mr Singleton's appointment had not intervened, the whole or a substantial part of the fund may have been lost. In my opinion, Mr Singleton's equitable lien supporting his indemnity for his proper costs and disbursements is a better equity than the claim of the fourth to fourteenth defendants under the deed of charge, because those costs and disbursements were incurred pursuant to an appointment by the Court made, by way of salvage, to protect the assets of ITS and to ensure that monies due to the company were received and held safe pending determination of ultimate entitlements. Quantifying Mr Singleton's claims 31 Mr Singleton has provided detailed evidence which shows how he has calculated his claims to remuneration, and also identifies his disbursements. His counsel submitted that there is adequate information for the Court to make a determination of the amount of remuneration and disbursements properly recoverable from the fund under Mr Singleton's control. He contended that it has been open for any defendant to challenge the quantum of the claim for many months, and no challenge has been made. He urged the Court, in the absence of any such challenge, to determine the remuneration and expenses recoverable from the fund at the amounts claimed and supported by Mr Singleton's evidence. Counsel for the fourth defendant submitted that, if I were to decide that Mr Singleton is entitled to be paid his proper remuneration and disbursements from the fund, I should adjourn the applications to the Registrar for determination of the amounts recoverable. 32 I have decided to follow the course advocated by counsel for the fourth defendant. It appears from correspondence in evidence that there have been issues between Mr Singleton and some of the defendants, since at least 20 December 2002, on two questions of principle. One is the question of priority to the ANZ bank account, of the claims of Mr Singleton and the chargeholders. The other is the question whether Mr Singleton's claims should be deferred until after the determination of the final hearing. It is understandable that the defendants concentrated on those issues and, so far as can be gathered from the limited materials before the Court, have not applied themselves to the question of reasonableness of the amounts claimed (apart from a contention that standard rates appropriate for insolvency work should not be applied in a case such as this, and a general allegation that the amounts claimed are unreasonable, contentions that Mr Singleton endeavoured to answer in his affidavit of 17 March 2003). In the special circumstances of this case, it was not unreasonable of the defendants to take that attitude. I shall therefore give then the chance to make submissions with respect to the reasonableness of the amounts claimed by referring that question to the Registrar. Costs 33 Westpac seeks an order that its costs of the hearing of the applications be its costs in the proceeding. In my opinion it was reasonable for Westpac to appear in respect of the applications, given that it claims an interest in the fund out of which the receiver is to be paid. It is appropriate to make an order in the terms it requests. No submissions were made to oppose such an order. 34 Mr Singleton was successful on the principal issues raised in the applications, and is entitled to an order that his costs of the applications be paid. The question is whether, by analogy with the case of a trustee (see Jacobs' Law of Trusts in Australia, 6th edition by RP Meagher and WMC Gummow, 1997, paragraph [2109]), the order should be for recovery of costs out of the fund under Mr Singleton's control, or should be an order that those who opposed the applications pay his costs without recourse to that fund. 35 Mr Singleton carried out his work for the benefit of ITS and its creditors, including the fourth to fourteenth defendants. But for other considerations, it would be appropriate to order that his costs of a successful application to establish his priority to payment over the chargeholders be borne by the fund under his control, so that (in effect) the burden of paying those costs is distributed pro rata amongst the chargeholders. There are, however, two other considerations, relating respectively to the positions of the chargeholders and Westpac. 36 As noted above, some of the chargeholders have made submitting appearances in respect of the proceeding and therefore, by inference, the applications. It would be unfair to make an order having the effect that they must indirectly bear the burden of costs incurred by Mr Singleton which might have been avoided if others had taken the same approach. As far as Westpac is concerned, to allow Mr Singleton to recover his costs out of the fund under his control would be to permit depletion of the fund to which it claims to have an interest in priority to the claims of the chargeholders, prior to the determination of its claim. 37 Exercising my discretion as best I can, I have decided that the appropriate course is to allow Mr Singleton's costs of the applications to be recovered from the fund under his control (the ANZ bank account) up to and including 10 December 2003, and to order that the second and fourth defendants pay his costs of the applications thereafter. On 10 December 2003 Mr Singleton's solicitors wrote to Westpac's solicitors, confirming that Westpac would neither consent to nor oppose the applications. On the same day, Mr Singleton's solicitors wrote to the solicitors for the second, fourth, seventh, eighth and tenth defendants, requesting that they file and serve affidavits setting out their grounds of opposition to the applications. The seventh, eighth and tenth defendants did not respond, and did not appear at the hearing of the applications. It was resistance by the second and fourth defendants that led to the contested hearing of the applications on 9 February 2004. 38 Mr Singleton's applications raised issues not dependent upon the questions to be decided at the final hearing. In my opinion this is an appropriate case in which to permit the applicant to proceed to assessment forthwith. **********

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