FEDERAL COURT OF AUSTRALIA

Atlas Copco Australia Pty Ltd v Max Smith Enterprises Pty Ltd
[2009] FCA 1054

CORPORATIONS – applicationfor leave to proceed against a corporation in liquidation – no prospect of recovering a money judgment – public interest in pursuing errant entities – prospect of making declarations sufficient to justify leave being granted – leave to proceed granted

Corporations Act 2001 (Cth), s 500(2) 

Executive Director of the Department of Conservation and Land Management v Ringfab Environmental Structures Pty Ltd [1997] FCA 1484 followed

Trade Practices Commission v Manfal Pty Ltd (No 3) (1991) 33 FCR 382 followed  

ATLAS COPCO AUSTRALIA PTY LTD (ACN 000 086 706) v MAX SMITH ENTERPRISES PTY LTD (ACN 010 558 755) and MAX FRANCIS SMITH

NSD 456 of 2009

FOSTER J

17 SEPTEMBER 2009

SYDNEY

THE COURT ORDERS THAT:

1.                  Pursuant to s 500(2) of the Corporations Act 2001 (Cth), the first and second respondents be granted leave to commence and to continue proceedings against Bedrock Drilling (Aust) Pty Ltd (ACN 131 248 318) (In Liq) (Bedrock).

2.                  Bedrock be joined as a cross-respondent in the Cross-Claim referred to below.

3.                  Upon condition that the respondents will not seek to enforce any judgment which they may obtain against Bedrock without the prior leave of the Court, the respondents be granted leave to file and serve a Cross-Claim against Bedrock in the form of Annexure H to the affidavit of Max Francis Smith sworn on 28 July 2009 and filed in these proceedings. 

4.                  The costs of this application be costs in the proposed Cross-Claim as between the respondents and Bedrock. 

5.                  The proceedings (including the Cross-Claim against Bedrock and against John Howard Austin) be listed for further directions before Foster J on 28 October 2009 at 9.30 am. 

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                     The first and second respondents in these proceedings (the respondents) seek an order pursuant to s 500(2) of the Corporations Act 2001 (Cth) that they be granted leave to commence and to continue proceedings against Bedrock Drilling (Aust) Pty Ltd (ACN 131 248 318) (In Liq) (Bedrock) and to file a cross-claim against Bedrock in the form of Annexure H to the affidavit of Max Francis Smith sworn on 28 July 2009 and filed in these proceedings.

2                     Bedrock was placed into liquidation on 4 June 2009 by way of creditors’ voluntary winding up.  Mr Blair Alexander Pleash was appointed liquidator of Bedrock on that day.

3                     The respondents informed Mr Pleash of their intention to make the application which is before me today.  The respondents served all relevant Court documents on Mr Pleash well in advance of today’s hearing.  Mr Pleash has not indicated one way or the other whether he consents to or opposes the orders which the respondents seek today.

4                     The respondents have also applied to join John Howard Austin, who, it is said, was the principal person with whom they dealt on behalf of Bedrock insofar as the transactions which are relevant to these proceedings are concerned.  Earlier today, I made orders joining Mr Austin as the third respondent in the proceedings and also as a cross-respondent in the Cross-Claim foreshadowed by the respondents.

5                     In the principal proceedings, the applicant alleges that the first respondent was guilty of misleading and deceptive conduct in respect of the sale of certain compressors under the brand name Atlas Copco.  The second respondent is sued as an accessory to the first respondent’s breaches.  In substance, and without admissions, of course, the respondents contend that they are innocent parties in whatever contravening conduct took place in the sense that the compressors sold by the first respondent were all obtained, one way or another, from Bedrock through the agency of Mr Austin. 

6                     Bedrock is a company which has no assets and may have liabilities of the order of $430,000.  It is quite clear that there is no prospect of the respondents recovering any money from Bedrock.  

7                     In the proposed Cross-Claim, the respondents allege that Mr Austin, and thus Bedrock, represented to them that the compressors sold to the first respondent by Bedrock were both compliant with AS 1210 and otherwise appropriately certified by State WorkCover authorities.  On the respondents’ case, it is Mr Austin and Bedrock who are the real perpetrators of the contraventions about which the applicant complains in the proceedings. Of course, this does not mean that the respondents will not, ultimately, be held liable to the applicant for what has occurred, but it is an important complexion on the case which the respondents urge upon the Court for present purposes. 

8                     The evidence tendered in support of the present application establishes that there is a serious or substantial question to be tried on the respondents’ proposed Cross-Claim against Bedrock and against Mr Austin.  

9                     Compressors of the type sold by the respondents are used on mining sites throughout the country and are subject to certification, as I have already mentioned, by State WorkCover authorities.  That certification is an important occupational, health and safety regulatory mechanism put in place by State legislatures in order to ensure the safety of workers on those sites.  There is, therefore, a substantial public interest in ensuring that, if the respondents’ allegations are accepted by the Court, the true perpetrators of what has occurred be identified by the Court and be made the subject of appropriate orders.

10                  Counsel for the respondents has submitted that the relevant principles which should guide me in considering his clients’ application were summarised by Lee J in Executive Director of the Department of Conservation and Land Management v Ringfab Environmental Structures Pty Ltd [1997] FCA 1484.  In that case, his Honour said:

Section 500(2) of the Corporations Law requires the leave of the Court to be obtained before an action may be commenced against a company in liquidation. The purpose of such a provision is to prevent a company in liquidation being subjected to actions that are expensive and, therefore, carried on at the expense of the creditors of the company and, perhaps, unnecessarily: Fielding v Vagrand Pty Ltd (In Liquidation) (1993) 11 ACLC 172 at 174; Ogilvie Grant v East (1983) 1 ACLC 742 at 744; Maher v Taylor (1984) 8 ACLR 931 at 934; Re A J Benjamin Ltd (In Liquidation) (1969) 90 WN (Pt 1) (NSW) 107 at 110.

In determining whether leave should be granted, the Court considers whether the balance of convenience lies in allowing the applicant to proceed by way of action to judgment, or whether the applicant should be left to pursue his claim by lodging a proof of debt with the liquidator.  The matter is one of discretion and the onus is on the applicant to demonstrate why it is more appropriate, in respect of a particular claim, to proceed by way of action: Fielding v Vagrand at 174; Ogilvie Grant v East at 744; Stewart v Intercity Distributors Limited (1960) NZLR 944 at 946.

For leave to be granted, it must be shown that there is a serious or substantial question to be tried: Oceanic Life v Insurance & Retirement Planning Services Pty Ltd (In Liquidation) (1993) 11 ACLC 1157 at 1159; Olgilvie Grant v East at 744; and a real dispute between the parties: Fielding v Vagrand at 175; Zempilas v J N Taylor Holdings Ltd (In Provisional Liquidation) (No 4) (1991) 9 ACLC 297 at 298; Capita Financial Group Ltd v Rothwells Ltd (No 2) (1989) 7 ACLC 634 at 637.  Leave will not be granted where the applicant does not have a genuine claim or where the claim would be futile. Hence, leave has been refused where the claim has been for unliquidated damages arising otherwise than by reason of a contract, promise, or breach of trust, on the basis that by virtue of the joint application of s 82(2) Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) and s 553(2) of the Corporations Law (or equivalent provisions), such a claim would not be provable in the winding up of an insolvent company unless judgment had been entered prior to the order for winding up: Re Autolook Pty Ltd; O’Brien v Bills (1984) 2 ACLC 30 at 33, Re A J Benjamin Ltd (In Liquidation) at 110; Page v Commonwealth Life Assurance Society Ltd (1935) 36 SR (NSW) 85 at 99; In re Southern Cross Coaches Ltd (1932) 49 WN 230; Cutten and Harvey v Mount (1989) 50 SASR 81; Fielding v Vagrand at 176-177; cf Re Berkeley Securities (Property) Ltd [1980] 3 All ER 513.

As a result of amendments to the Corporations Law in 1992 (see ss 553 and 553E), s 82(2) of the Bankruptcy Act is no longer imported into the Corporations Law, and a claim for damages against Nericon would no longer be futile for that reason. However, nonetheless it may be inappropriate in all the circumstances to grant leave in respect of such a claim. The orderly winding up of Nericon and the interests of Nericon’s existing unsecured creditors must also be taken into account: Oceanic Life Ltd v Insurance and Retirement Planning Services Pty at 1159.  In a situation such as the present, where the liquidator has no funds to conduct a defence and there is little prospect of funds becoming available and the company is not insured against the damages sought, there is strong reason for refusing leave: Maher v Taylor at 934; Re A J Benjamin at 109-110.  Furthermore, claims against Nericon cannot be sustained unless CALM succeeds in its claims against the first and second respondents.

With respect to the declaratory and injunctive relief, it is a factor in favour of granting leave that the relief cannot be obtained otherwise than by a successful application to the Court: Vagrand Pty Ltd (In Liquidation) v Fielding (1993) 11 ACLC 411 at 414; Fielding v Vagrand at 177; Wyley v Exhall Coal Mining Co Ltd (1864) 33 Beav 538.  The real purpose of the application to join Nericon is to obtain orders that will bind it in the event that the claims against the first and second respondents are made out.  Another matter to consider in granting leave is that the joinder would enable the liquidator to participate in the mediation process provided by this Court and being used by the existing parties. However, these purposes can be achieved without Nericon actively participating in the proceedings as a respondent. It is likely that the declaratory and injunctive relief sought by CALM against Nericon could be obtained by consent, if CALM succeeded against either the first or the second respondent.  On the material before the Court it is apparent that at least the second respondent will contest the applicant’s claims.  In view of the undertaking given by the liquidator, CALM’s position is protected as far as Nericon is concerned and no interlocutory proceeding against Nericon is required.  If circumstances change CALM may apply to vary the order I propose to make.  Meanwhile, if it considers it appropriate CALM may lodge a proof of debt with the liquidator.

A grant of leave can be made subject to conditions directed at minimising interference with the orderly winding up of the company in liquidation: Oceanic Life Ltd v Insurance and Retirement Planning Services Pty Ltd at 1159. In the present case, it is appropriate in all the circumstances that leave be granted to join Nericon to the proceedings, the proceeding against Nericon being restricted to claims for declaratory and injunctive relief and not to include a claim for damages or account of profits.  In addition, Nericon will not be required to participate in the proceeding by filing a defence or taking any other step.

11                  In essence, the applicant for leave must satisfy the Court that there is a serious or substantial question to be tried and that the interests of justice (including the balance of convenience) would be best served by the applicant for leave being permitted to proceed.  The fact that a money judgment may not be ordered is not determinative.  The prospect of making declarations may justify the grant of leave.

12                  One matter which is often important is whether the applicant for leave should be left to pursue his claim by lodging a proof of debt.  In the present case there will almost certainly be difficulties in the respondents successfully lodging a proof of debt in the liquidation of Bedrock.  However, this is not a significant matter in this case, since there is no prospect that any funds will be available to meet such a proof in any event. 

13                  Counsel has also drawn my attention to the observations made by Lee J in Trade Practices Commission v Manfal Pty Ltd (No 3) (1991) 33 FCR 382. At 388, his Honour said that, in many cases, there will be a public interest in ensuring that all errant entities are identified and dealt with.  This is particularly the case where the subject matter of the contraventions is serious and involves matters of the kind in play here, that is to say, the safety of workers on mine sites.

14                  Although initially I had some reservations about granting the leave which the respondents seek, the respondents have now satisfied me that it is appropriate, in the present case, to make an order in the terms of the usual order made in cases such as this.  I am prepared to make those orders because the subject matter of the contraventions alleged against Bedrock is serious and involves an important matter concerning the regulation of workers’ safety and should, therefore, receive the consideration of the Court in the way contemplated by the reasoning of Lee J in Ringfab Environmental Structures Pty Ltd [1997] FCA 1484, notwithstanding the fact that the Court may not order any monetary judgment in favour of the respondents against Bedrock and notwithstanding the fact that Bedrock has no assets.

15                  For these reasons I propose to make the orders sought.

Associate:

Dated:         21 September 2009