FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission; In the matter of Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2006] FCA 1827

Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) (acn 110 693 251)

WAD 152 OF 2006

SIOPIS J

17 NOVEMBER 2006

SYDNEY

IN THE MATTER OF LANEPOINT ENTERPRISES PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (acn 110 693 251)

THE COURT ORDERS THAT:

1.                  The applicant’s notice of motion dated 17 November 2006 is dismissed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF LANEPOINT ENTERPRISES PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (acn 110 693 251)

REASONS FOR JUDGMENT

1                     This is an application for a stay of the orders made by French J on 10 November 2006, pending an appeal against that decision.  The application is made by John Patrick Cronin and Shaun Robert Fraser, the receivers and managers of Lanepoint Enterprises Pty Ltd.  I will refer to them henceforth as the applicants.  They are also the receivers and managers of Bowesco Pty Ltd.  The effective respondent to this application is Bowesco Pty Ltd (Receivers and Managers Appointed) acting by its sole director.  I will henceforth refer to it as the respondent.

2                     The orders which French J made were as follows:

‘1.     The receivers and managers of the respondent do make provision out of its assets for the payment to Bowesco Pty Ltd (Receiver and Manager Appointed) of:

(a)          legal expenses reasonably incurred by it in opposing the winding up application brought by the Australian Securities and Investments Commission in WAD 177 of 2006 to a maximum figure of $50,000, the quantum of such payment to be taxed by a Registrar of the Court if not agreed;

(b)          legal expenses reasonably incurred by Bowesco Pty Ltd (Receiver and Manager Appointed), in connection with its application, in these proceedings, for the provision of such funds, to a maximum of $7,500 to be taxed by a Registrar of the Court if not agreed.

2.             Upon the filing and service by Bowesco Pty Ltd (Receiver and Manager Appointed) of an application seeking an order pursuant to s 1321 of the Corporations Act 2001 (Cth) appealing against the refusal by the receivers and managers of the respondent to make provision for Bowesco’s legal expenses in connection with proceedings relating to an option assigned to Bowesco by Westpoint Corporation Pty Ltd, the receivers and managers of the respondent make provision for the payment of Bowesco’s reasonable legal expenses in connection with the prosecution of an application for leave to appeal and any consequent appeal from the decision of this Court in Australian Securities & Investments Commision, In the Matter of Richstar Enterprises Pty Ltd v Carey (No 9) [2006] FCA 1425 to a maximum of $50,000, the sum to be paid to be taxed by a Registrar of the Court if not agreed.

3.            The application filed pursuant to the preceding order shall be allocated to a separate court file and a copy of this order and the reasons for judgment placed on that file.

4.            In complying with the preceding orders the receivers and managers of the respondent may make interim payments out of the funds provided from time to time.

5.            The costs of the application are otherwise reserved.’

3                     This application has been brought on an urgent basis because I also have before me today an application by the respondent, seeking orders that the applicants make a payment in respect of certain nominated items of the respondent’s legal costs in relation to its forthcoming application for leave to appeal, and any consequent appeal referred to in O 2 of the orders of French J above.  The respondent’s application for leave to appeal is listed for hearing before the Full Court in Perth on Thursday, 23 November 2006.

4                     Senior counsel for the applicants has advised me that the applicants have not made the payment for legal costs requested by the respondent because, firstly, they are not obliged to do so as French J did not require any payment to be made until after the conclusion of taxation, and, secondly, because they had in mind to appeal French J’s decision in any event.

5                     I have before me a copy of the notice of appeal.  I have also been told that a notice of appeal has either already been filed in Perth today, or will be filed in Perth today.  The grounds of appeal are as follows:

‘1.     The learned primary judge erred in failing to take into account that in respect of the $972,749 due from Lanepoint Enterprises Pty Ltd to Bowesco Pty Ltd:

(a)          the receivers of Bowesco are entitled (pursuant to their appointment on 3^rd April 2006) to collect the $972,749, and to apply that money to meeting the outstanding debt to the secured creditor and the expenses and liabilities incurred in the receivership;

(b)          the $972,749 is needed by the receivers of Bowesco to meet the following:

(i)      the income tax liability to the ATO                       $1,200,000

(ii)     the outstanding debt to the secured creditor        $     50,000

(iii)        the estimated costs of the receivership

incurred to date                                                    $   120,000

(iv)        provision for anticipated legal expenses to be

incurred by the receivers                                      $   650,000

                                                                            $2,020,000

                                                                             ________

(c)           the consequence of the receivers paying part of the $972,749 to Bowesco by its director Ms. Carey‑Hazell is that the receivers of Bowesco will be left with:

(i)            a personal liability by the receivers to the ATO for the income tax payable in respect of the capital gain generated by the receivers’ disposal of Bowesco’s liquor store;

(ii)          insufficient funds to meet the outstanding debt to the secured creditor, and the expenses and liabilities incurred and to be incurred in the receivership.

2.            The learned primary judge’s reasons are internally inconsistent in so far as His Honour concluded that:

(a)         Bowesco by its sole director was not entitled to funding from the receivers of Bowesco, having regard to the need for the receivers to make adequate provision for income tax liabilities and anticipated legal expenses;

(b)         Bowesco by its sole director was entitled to funding out of the money due by Lanepoint to the receivers of Bowesco.

3.            Having failed to find that the receivers of Lanepoint had made any error of principle, had acted in bad faith, or had made a decision that was so unreasonable it should not be allowed to stand, the learned primary judge should have dismissed the application.’

6                     In considering whether to stay the orders, I deal firstly with the merits of the appeal.  In his reasons for decision, French J distinguished between the position of the receivers and managers of Bowesco and Lanepoint, in relation to the manner in which they dealt with applications for legal funding brought by the respondent.

7                     In [59] of his reasons French J said as follows:

‘…the position of the two companies is different and leads to different outcomes.  Having regard to the small cash reserve held by the receivers and managers in Bowesco, I do not consider the refusal of the receivers to provide funding out of its assets for the purposes of legal representation and advice unreasonable.  By way of positive finding, I consider it a reasonable position to adopt.’

8                     In referring to the ‘small cash reserve’, French J was there referring to the evidence that the cash held by the receivers and managers of Bowesco was only about $6800.  At [60] of his reasons French J continued:

‘The position is different with Lanepoint.   Having regard to the uncertain extent of its liability to Perpetual, I do not consider that I should make any order for the payment of any funds out of Lanepoint to defend the winding up application or otherwise.  On the other hand, Bowesco is a preferred creditor subrogated, by reason of payments made pursuant to its guarantee, to the rights of Suncorp-Metway.  That is to the extent of a figure in excess of $900,000.  On that basis it can properly claim to be a person aggrieved by the refusal of the Lanepoint receivers to make funds available to it for the purpose of opposing its winding up application and prosecuting its appeal.  In my opinion the receivers ought to have allowed Bowesco funding for that purpose out of the assets of Lanepoint having regard to the small quantum of funding sought.  The sum of $50,000 to oppose the winding up application and $7,500 for the costs of this application would have been a reasonable allocation.  The sum of $80,000 for the cost of prosecuting the appeal seems high.  I would allow $50,000 as reasonable for that purpose.  The sums allocated would constitute a maximum figure in each case, the final payment to be either agreed or taxed if there is a dispute.  In my opinion the receivers would be permitted to make a reasonable interim payment in relation to the prosecution of the appeal and the defence of the winding up application.  The costs of Bowesco in prosecuting the present application can hopefully be agreed up to a maximum of $7,500.  I propose to make orders accordingly.’

9                     Senior counsel for the applicants submitted that French J made an error of principle in that he did not appreciate that the amount of $972 749 which is owed by Lanepoint to Bowesco pursuant to a subrogation of Bowesco to the secured creditor’s rights, would be required by the receivers and managers of Bowesco to meet other costs and provisions, and that there would not, therefore, be a surplus available to the secured creditor.

10                  In my view, French J did not approach the question on the basis that there would necessarily be a surplus amount of $972 749 available from which funding for the respondent’s legal costs would come.  French J dealt in his judgement, at some length, with two potential liabilities facing the receivers and managers of Bowesco, namely, legal fees in respect of a possible claim by Mr Carey, and a potential income tax liability in relation to the sale of a liquor outlet, and held that it was reasonable for the receivers and managers to make provision in these potential liabilities.  The potential liabilities in respect of these two sources alone totalled $1.8 million approximately, which clearly exceeds the sum of $972 749.

11                  French J was, therefore, plainly aware that potential liabilities facing the receivers and managers of Bowesco had the capacity to exhaust the $972 749, with the consequence that there would be no surplus from that amount for the secured creditor.  What weighed with French J, however, in considering the reasonableness of the receivers’ and managers’ conduct in declining Bowesco’s funding request, was that the amount of the provisions called for by the receivers and managers ‘totally dwarfed’ the amount claimed for legal costs by the respondent, and that there was sufficient flexibility in the estimation of the amounts comprising the provisions, to accommodate the comparatively small amount claimed by the respondent in relation to legal costs.

12                  Accordingly, although it is always possible that things may change between now and the appeal, my assessment of the applicant’s appeal, as currently formulated, is that the prospects of success are weak.

13                  The next factor that I must take into account, in deciding whether to grant a stay is the principle that a party who has received a judgment is ordinarily entitled to the benefit of that judgment.  The argument which is made against that proposition is that the receivers and managers would be prejudiced if any amount was paid under the judgment to the respondent, because any such amount may not be recoverable and would, therefore, cease to be available to the receivers and managers of Bowesco to meet personal liabilities.  In his affidavit one of the receivers and managers, Mr John Patrick Cronin, says that there will be a personal liability on the part of the receivers and managers in relation to tax liability, which is in excess of $1 million, and $650 000 in relation to potential legal fees that might arise through defending anticipated litigation from Mr Carey and others associated with the Westpoint Group.

14                  However, as senior counsel for the applicants recognised, the receivers and managers will not suffer the prejudice, referred to by Mr Cronin, personally, because they have the benefit of an indemnity from their appointor, Suncorp‑Metway Limited (‘Suncorp’).  So, the real party that might ultimately suffer prejudice is Suncorp.  There is a risk that any amount paid under the orders of French J will not be recoverable if the applicants’ appeal is ultimately upheld.  However, in the context of the existing risks for Suncorp arising from the contingencies referred to above, the prejudice to Suncorp, a major public trading corporation, in assuming this additional risk of non‑recovery, is, in my view, not a sufficient prejudice to outweigh the prejudice that would be suffered by the respondent in being deprived of the prima facie right of a successful party to enjoy the benefit of a judgment that it has obtained.

15                  It was also argued that I should grant the stay because there would be no prejudice to the respondent.  The applicants submitted that French J’s orders only required payment of an amount in respect of the respondent’s legal costs, after the costs were taxed or otherwise agreed.  Therefore, said the applicants, the respondent had the protection of French J’s orders, and it should undertake the legal work involved in pursuing the application for leave to appeal, without the benefit of the interim payments it was seeking by its application before the Court today.  It was further submitted that, if the respondent ultimately lost the benefit of French J’s orders in respect of the legal costs it had incurred, because the applicants succeeded in their appeal, then that was only the workings of justice, in the sense that French J’s orders should never have been made.

16                  It is the case that French J referred in his orders to the taxation of the costs if not agreed, and O 4 of his orders is couched in the language of a permissive, rather than a mandatory, provision.  However, in my view, French J was conscious of the fact that the application for leave to appeal was pending, and he anticipated that there would be a reasonable working relationship between the parties, and that some payments would be made in advance of the hearing date, with taxation only being necessary if the amount of the final payment was not agreed.

17                  There is some substance in the applicant’s submission that if a stay was to be granted, the respondent would continue to enjoy the protection of French J’s orders until taxation of the costs in respect of the application for leave to appeal.  However, there is prejudice to the respondent if a stay is granted, because, it is the respondent which has the immediate benefit of the order for the payment of its costs, and a stay would deprive it of that advantage.  By their argument, the applicants seek a reversal of the onus in respect of prejudice, and a subversion of the principle that it is the party who has won at first instance, that is entitled prima facie to performance of the orders so obtained.

18                  Weighing these factors in the scale, I have come to the view that, as, the prospects are weak, and the prejudice that may be suffered by the receivers and managers and their appointor, is not sufficient to outweigh the prima facie right of a winning party to the benefit of its judgment, I will refuse the stay.

Associate:

Dated:         22 December 2006