FEDERAL COURT OF AUSTRALIA

Lardis v Free [2014] FCA 304

THE COURT ORDERS THAT:

1.    The defendant’s costs be costs in the liquidation of Amazon Pest Control Pty Limited

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT ORDERS THAT:

2.    The defendant is granted approval pursuant to s 477(2A) and s 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act) to enter into a deed of assignment with Michael Victor Lardis in the form of Exhibit B in these proceedings.

3.    The defendant is granted approval pursuant to s 477(2A) and s 477(2B) of the Corporations Act to enter into a deed of assignment with Edward Ted Lakis in the form of Exhibit A in these proceedings.

4.    The defendant is granted approval to do all things and take all actions reasonably necessary to give effect to orders 1 and 2 above.

5.    The parties have liberty to apply at three days’ notice to seek directors in relation to any matter arising in respect of orders 1, 2 or 3.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1     On 14 December 2012, Black J of the Supreme Court of New South Wales made an order that Amazon Pest Control Pty Limited (Company) be wound up under s 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act): In the matter of Amazon Pest Control Pty Limited [2012] NSWSC 1568 (winding up proceedings). Justice Black’s order was stayed until 24 January 2013, when the appointment of the defendant (Mr Free) as liquidator of the Company became effective.

2    The Company’s business was the provision of pest and termite control services in Sydney. The plaintiff (Mr Lardis) and Mr Edward (Ted) Lakis (Mr Lakis) were each directors and secretaries of the Company and each had one of the two issued shares in it. Mr Lardis resigned as a director on 14 December 2012. I will refer to Mr Lardis and Mr Lakis collectively as “the directors”.

3    It was Mr Lakis who initiated the winding up proceedings. Justice Black accepted that although the Company appeared to be solvent there were various indications that the Company was in the nature of a "quasi-partnership" and there was a break down in relations between the directors which commercially frustrated the conduct of the Company’s business. One of the issues addressed by Black J (at [8]-[11]) is the extent to which personal expenses may have not been described appropriately in the Company’s accounts. At [21], Black J said:

In my view, the extent of payment of personal expenses from the Company and the misdescription of those expenses in the Company's financial records are matters that frustrate the commercially sensible operations of the Company and would also warrant a lack of confidence in the conduct and management of its affairs. It may well be the case, as Mr Lardis contends, that the Company is still able to perform pest control work, since Mr Lakis has had only a limited involvement in that work for some years by reason of his involvement in the gyms and his subsequent depression. However, the matters to which I have referred above mean that there can be no expectation that Mr Lakis will receive dividends from the Company proportionate to his investment in it, since the Company's profitability would necessarily be affected by the disguised personal expenditures that Mr Lardis has been paying from the Company.

4    Mr Free sent a notice to creditors dated 11 April 2013. It was notice of a meeting to be held on 26 April 2013. It included the following (as written):

5.    Pursuant to Section 477(2A) of the Corporations Act 2001, to authorise the Liquidator to be able to compromise debts in excess $100,000;

6.    Pursuant to Section 477(2B) of the Corporations Act 2001, to authorise the Liquidator to enter into litigation funding facilities to pursue any legal actions including voidable and insolvent transactions arising from the liquidation;…

5    The notice was accompanied by a Report to Creditors dated 11 April 2013 (Report to Creditors). Among other things, the Report to Creditors said:

    After negotiations with Mr Lakis about the amount of his loan account with the Company, Mr Free accepted an amount of $117,330 in full settlement of the loan account (Section 6.5).

    “Prima facie”, Mr Lardis owed the Company $411,058. Mr Free wrote to Mr Lardis to recover this amount and invited him to provide Mr Free with a listing of expenses that he believed to be genuine Company expenses. At Section 6.5 of the Report to Creditors, Mr Free said:

Mr Lakis has spent a significant amount of time compiling a schedule of payments made in relation to Mr Lardis’ personal drawings from the Company. Mr Lakis has provided me with a listing of these drawings which total $386,335.84 in the period 14 September 2007 to 18 July 2012 … Creditors should note that these drawings do not include Mr Lardis’ wages and relate solely to credit card payments, cash withdrawals and cheque payments. Mr Lakis’ affidavit has further noted that some of these expenses have been entered into the ledger as a non-personal trade creditor or purporting to be a genuine Company expense, when they are not.

Mr Lardis has advised that some of the transactions in the schedule provided by Mr Lakis appear to be Company expenses, but he does not deny that the balance are his personal expenses. Mr Lardis has advised that he is of the view that there was nothing improper in the way that he used the Company credit card because he had an agreement with Mr Lakis in respect to the reimbursement of his personal expenses. In addition, Mr Lardis has advised that he did the majority of the work in the Company and accordingly should be entitled to additional funds. Mr Lakis denies that there was an agreement and notes that Mr Lardis was paid a higher wage to support his additional work load.

Mr Lardis has not provided any evidence to support his statements that there was an agreement in respect of Company expenses, nor has he provided this office with a list of the transactions that he believes are genuine Company expenses. Mr Lardis further noted that the [sic] he was of the belief that the transactions were prepared by the Company’s bookkeeper and checked by the Company’s accountant.

The directors have duties pursuant to sections 180 and 183 of the Act which are not discharged by the presence of a bookkeeper or accountant. Accountability remains with the directors.

    Section 6.5 of the Report to Creditors went on to note:

In addition, creditors should note that I have been approached by a related party of the Company who are [sic] considering purchasing the debt from Mr Lardis as a chose in action. In this regard, I will be seeking creditor approval (at the upcoming meeting) in respect of section 477(2A) of the Act, which authorizes a Liquidator at his discretion, to compromise debts owed to the Company in excess [of] $100,000. The value attributed to this chose in action will be determined by reference to Mr Lardis’ defences and to his ability to settle debt owing to the Company (after considering which expenses are true Company expenses).

    Mr Free had investigated the conduct of the directors and his preliminary view was that the directors might have engaged in breaches of their duties as directors under the Corporations Act (Section 8.15).

    A request to creditors to put to Mr Free any proposals for investigation or litigation funding to pursue any of the matters mentioned in the Report to Creditors. Failing receipt of a proposal, Mr Free would finalise the winding up and have the Company dissolved as soon as possible (Section 8.17).

6    Mr Free submitted a report to the Australian Securities and Investments Commission (ASIC) pursuant to s 533 of the Corporations Act on 11 April 2013. On 12 April 2013, ASIC notified Mr Free that it would take no action on the report. He did not receive any litigation funding proposal.

7    The meeting of creditors of the Company was held on 26 April 2013. Each of the directors and their legal representatives attended it. The minutes record the following:

COMPROMISE OF DEBTS

The motion is that:-

“The Liquidator is authorized at his discretion pursuant to Section 477(2A) of the Corporations Act 2001, to compromise debts owed to the company in excess $100,000”.

The chairperson noted this resolution refers to the chose in action which will be assigned for an amount of $1 only as there is currently an estimated 100 cents in the dollar distribution to unsecured creditors.

Moved by: Mr Michael Lardis

Abstained: The chairperson as general proxy for Hostplus Superannuation Fund and Rest Superannuation Fund

Against: Nil

Resolution: Carried by the majority.

8    On 7 May 2013, Mr Free proposed forms of deeds of assignment of the choses in action by letter to lawyers for each of the directors. The deeds were in the same form and related to claims which the Company may have against Mr Lakis (to be assigned to Mr Lardis) and against Mr Lardis (to be assigned to Mr Lakis) respectively for breach of directors’ duties owed under the Corporations Act. In each case, the consideration stated was $1 (clause 2) and the assignment was an absolute assignment (clause 3(a)). The deeds contained an indemnity to the Company by the assignee for goods and services tax (clause 6) and in relation to the warranty that the assignee had disclosed any promise, representation or undertaking upon which he relied in entering the deed (clause 4(d)).

9    Mr Free swore an affidavit on 9 September 2013 which was read in these proceedings and Exhibit SF1 to the affidavit was tendered and marked accordingly. In the affidavit at [19] and [20], Mr Free says that in considering how to deal with the dispute between Mr Lardis and Mr Lakis and the potential claims for breaches of directors’ duties, he took into account:

    As at 11 April 2013, on the available information, there were sufficient funds to pay creditors in full and funds to make a distribution to the directors.

    Proceedings for breach of directors’ duties had the potential to deplete the funds significantly and eat into the funds available for distribution to creditors.

    ASIC did not intend to take action and did not seek further action from Mr Free.

    Justice Black made findings about the conduct of each of the directors to justify that there may be potential causes of action against the directors. However, those actions were inherently a dispute between the director-shareholders.

    Mr Free could see no reason why creditors should be burdened with the costs of a director-shareholder dispute in circumstances where creditors would otherwise be paid in full.

    Any further funds received into the liquidation would be distributed to the shareholders and it was therefore not appropriate to seek significant consideration for the assignments as this would mean each director-shareholder would, in effect, be paying themselves or each other for the benefit of taking the assignment.

10    On 24 May 2013, Mr Lakis’ representatives proposed some amendments to the draft deeds: (1) requiring the Company to sign documents and perform acts required to give effect to the deed; and (2) clause 10 which acknowledged Mr Lakis’ right to retain damages recovered in any proceeding or settlement in relation to the Company’s claims against Mr Lardis.

11    Mr Lardis objected to the deeds on a number of grounds canvassed in correspondence between legal representatives for Mr Free and Mr Lardis: see [30]-[37] below.

12    On 27 June 2013, Mr Free distributed to creditors a dividend of 100 cents in the dollar of amounts admitted as debts and at that date there were funds for distribution to Mr Lardis and Mr Lakis as shareholders.

Applications

13    On 26 July 2013, Mr Lardis applied to this Court under s 1321 and s 477(6) of the Corporations Act for review of Mr Free’s decision to assign to Mr Lakis the Company’s chose in action against Mr Lardis in respect of alleged breaches of directors’ duties owed to the Company under the Corporations Act. Mr Lardis also sought injunctions restraining Mr Free from entering into any assignment of the choses in action and leave to commence proceedings in the name of the Company against Mr Free to restrain entry into an assignment. The application was set down for hearing on 24 to 26 March 2014.

Directions hearing

14    A directions hearing was held on 5 March 2014 to determine readiness of the matter to proceed to hearing. A statement of agreed issues was handed up and Mr Lardis filed in Court an amended application which sought declarations that: (1) for Mr Free to propound the deed of assignment of claims against Mr Lardis to Mr Lakis constituted (within s 536 of the Corporations Act) a failure by Mr Free to perform his duties faithfully and a failure to observe the provisions of s 477(2A) and s 477(2B); and (2) entry by Mr Free into a deed of assignment with Mr Lakis of the chose in action the Company may have against Mr Lardis requires approval of the Court or a resolution of the creditors pursuant to s 477(2A) or alternatively s 477(2B).

Statement of agreed issues

15    The statement of agreed issues provided (as written):

1.    Whether the Defendant as liquidator of Amazon Pest Control Pty Ltd (the Company) is able, in conformity with his statutory and common law obligations, to enter into Deeds of Assignment on the terms set out in the proposed Deeds of Assignment at pages 84 - 96 and 98 - 110 of Exhibit SF1 to the affidavit of Stewart Free sworn on 9 September 2013 (the Proposed Deeds).

2.    Whether:

a.    the decision of the liquidator to enter into the Deeds of Assignment constitutes a breach of his statutory and common law duties;

b.    the said decision should be reversed, or alternatively modified under s 1321 of the Corporations Act (“the Act”);

c.    the propounding of the Proposed Deeds constitutes a failure by the Liquidator to:

i.    faithfully perform his duties; or

ii.    observe a requirement of the Act;

within the meaning of Section 536 of the Corporations Act 2001 and, if so, what action should the Court take pursuant to the said section.

d.    The plaintiff is otherwise entitled to relief under s 1324 of the Act.

3.    Whether, at the meeting of creditors held on 26 April 2013, the creditors resolved that:

a.    the Liquidator be authorized at his discretion, to compromise debts owed to the company in excess of $100,000

b.    the Liquidator be authorized to assign the choses in action for an amount of $1 only on the basis of the creditors receiving 100c in the dollar distribution.

4.    Whether the minutes of the meeting of creditors held on 26 April 2013 accurately reflect the events that occurred at the meeting.

5.    Whether entry into the Proposed Deeds constitutes a compromise of a debt to the Company within the meaning of section 477(2A) of the Corporations Act 2001.

6.    Whether any of the obligations imposed on a party to the Proposed Deeds may, according to their terms, be discharged by performance more than 3 months after the Proposed Deeds are entered into, so as to require leave under Section 477(2B) of the Corporations Act 2001.

7.    Assuming meetings of creditors of the Company held on 26 April 2013 resolved that the liquidator be authorised in his discretion, pursuant to section 477(2A) of the Corporations Act 2001, to compromise debts owed to the company in excess of $100,000:

a.    did that resolution, by its terms, in fact authorise the liquidator’s to enter into the Proposed Deed;

b.    If the answer to a is “yes”-whether approval by a meeting of creditors under section 477(2A) could and did lawfully authorise the liquidator to enter into an arrangement if that constituted a breach of the liquidator’s common law and statutory duties (see 1 and 2 above) or if leave is required under Section 477(2B) of the Corporations Act; and

c.    if the entry by the liquidator into the Proposed Deeds would constitute a breach of the liquidator’s duties, whether any such breach is capable of ratification?

8.    Whether leave to enter into the Proposed Deeds is required pursuant to Section 477(2B) of the Corporations Act 2001.

Section 477(2A) and s 477(2B)

16    Section 477(2A) and s 477(2B) provide:

(2A)    Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than:

(a)    if an amount greater than $20,000 is prescribed—the prescribed amount; or

(b)    otherwise—$20,000.

(2B)    Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created ) if:

(a)    without limiting paragraph (b), the term of the agreement may end; or

(b)    obligations or a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.

17    In the course of the directions hearing Mr Condon SC, who is counsel for Mr Lardis, pointed out that the Report to Creditors considered at the creditors’ meeting on 26 April 2013 indicated that prima facie Mr Lardis owed the Company $411,058, while after negotiations with Mr Lakis about the amount of his loan account with the Company, Mr Free had accepted an amount of $117,330 in full settlement of his loan account. Although Senior Counsel did not concede that $411,058 was owed by Mr Lardis, he said it pointed to a lack of symmetry between the possible claims against Mr Lardis and Mr Lakis. The deeds of assignment proposed absolute assignments for a nominal consideration of $1 so that the assignee would get the whole benefit of the claim. However, as equal shareholders in a solvent company, had the Company prosecuted the claim or received full consideration for the assignment, each shareholder would receive on a winding up a one half share of the net proceeds of the claim or the consideration paid for the assignment comprised in the surplus for distribution to contributories.

Concession

18    At the commencement of the hearing on 24 March 2014, Mr Condon advised the Court that Mr Lardis now conceded that a resolution of creditors had been passed on 26 April 2013 authorising compromise of debts owed to the Company in excess of $100,000 pursuant to s 477(2A) of the Corporations Act and therefore no witnesses would be called in Mr Lardis’ case. He tendered pages 20-54 and 60-113 of Exhibit ML1.

19    Mr Salama, Counsel for Mr Free, sought and was granted leave to file in court an application for approval by the Court under s 477(2B) of clauses 4(d) and 6 of the draft deeds of assignment: see [8] above in relation to the subject matter of those clauses. In his affidavit affirmed on 21 March 2014, Mr Free said that having been provided with the plaintiff’s submissions on 13 March 2014, it became apparent to him that clauses 4(d) and 6 may be interpreted as extending the obligations of the parties beyond three months. Mr Free said that the clauses were pro forma and not essential for the effectiveness of the deeds. Had Mr Lardis given notice of objection to these clauses, Mr Free said he would have removed them because of their pro forma nature and said that Mr Lardis had been given ample opportunity to request this.

20    I raised with the parties some issues and enquired whether, in the events which had transpired, they wished to have an opportunity to negotiate a compromise about the deeds of assignment rather than proceed with the hearing immediately. The issues were:

    As the Company is solvent and the order that it be wound up was made because of the failure of the relationship between the directors who are also the sole shareholders, Mr Free’s position that they should have carriage of disputes between them was understandable. There is a public benefit in dissolving expeditiously companies whose reason for being has ended.

    The issue raised at the directions hearing by Mr Condon SC set out at [17];

    Comments of Black J at [8]-[11] and [21] of his judgment in the winding up proceedings. If successful claims are made against Mr Lardis or Mr Lakis on the basis that personal expenses of one or more of the directors have been paid by the Company and recorded in its books as expenses of its business, it is possible that the Deputy Commissioner for Taxation (DCT) may have claims that he would wish to make in relation to the proceeds of prosecution of the choses in action. It is not clear why those claims should be defeated by an absolute assignment even though all current creditors (which included the DCT for $12,572.48) have been paid out and those creditors (including the DCT) had been given an opportunity to fund litigation based on disclosures in the Report to Creditors concerning possible breaches of directors’ duties.

    The second and third issues did not arise in Cant, Re Novaline Pty Ltd (in liq) [2011] FCA 898 (Novaline) because the net proceeds realised on prosecution of the choses in action in that case were to be paid to the company and therefore available for payment to any creditors who might emerge and to be distributed to contributories according to law.

Compromise

21    On 25 March 2014, the parties advised the Court that they had reached a compromise as to the form of the deed of assignment and that the only issue now between them was as to costs. Revised draft deeds were tendered, and the deed to which Mr Lakis would be a party is Exhibit A and the deed to which Mr Lardis would be a party is Exhibit B.

22    Clause 3 of the deeds was amended to read:

3.    Assignment

(a)    Subject to clause 3(b), the Company assigns to [name of director], from and including the Effective Date, the Company’s Rights subject to the following terms:

(i)    any claim to enforce the Company’s Rights must be filed within 12 months of the Effective Date, failing which the Company’s Rights will be extinguished; and

(ii)    The proceeds of any judgment or order for any other financial compensation in favour of [name of director] or any sum paid to him on account of any compromise (in all cases for damages, an account of profits, compensation or otherwise, but not including any costs orders) shall be paid to the Company to be distributed according to law.

(b)    On the Effective Date, the Company will execute and serve the Notice of Assignment.

23    Clause 10 of the draft deed propounded by Mr Free was deleted. That clause had been proposed by Mr Lakis’ lawyer and it confirmed the right of the assignee to retain damages recovered in any proceeding or settlement in relation to the assigned claims (see [10] above).

24    Similarly to the deed under consideration by North J in Novaline, Exhibit A and Exhibit B provide for proceedings for prosecution of the chose in action to be commenced within 12 months and for the net proceeds of any successful claim to be paid to the Company. Differently from Novaline, there is no provision for the liquidator to supervise the conduct of any litigation and there is provision for the Company’s claims to which the deeds relate to be extinguished if no enforcement action is taken within a 12 months period.

25    I accept the submissions put by Senior Counsel for Mr Lardis that the Court should not be concerned that there is no provision for the liquidator to supervise the litigation because, unlike the case in Novaline, in this case each director is being assigned claims against the other. I am also unconcerned that any right which is not prosecuted within 12 months be extinguished. It is in the public interest that the winding up and dissolution of companies not be unnecessarily prolonged and that costs of a liquidator not be unnecessarily incurred. All creditors had been given notice of the possibility of these claims, of the possibility of assignment of the claims and the opportunity to provide funding for investigation or litigation but no creditor had made any proposal for funding. It is also in the public interest, and the interest of the individual litigants, that the occasion for disputes between parties to a failed relationship be limited, especially where, as in this case, it is the failure of the relationship which has caused the winding up of a viable business.

26    For the reasons set out at [14]-[22] in Novaline, I am satisfied that Mr Free has power under s 477(2)(c) to assign to one director a chose in action relating to claims against the other director for breach of a statutory duty and that each director-shareholder has a sufficient commercial interest such that there should be no bar to the assignment to them of a bare right to litigate with the net proceeds of the litigation being returned to the Company.

27    For these reasons I made orders on 27 March 2014 giving approval to Mr Free under s 477(2A) and s 477(2B) to enter into deeds in the form of Exhibit A and Exhibit B.

Costs

28    As the parties have reached agreement on a form of deeds of assignment, the only issue left between them is whether any costs order should be made, and if so, what that order should be.

29    Both parties relied on the correspondence between their lawyers to support their positions.

Correspondence relating to deeds of assignment

30    Mr Lardis’ lawyers wrote to Mr Free on 23 May 2013:

    The first half of the letter takes issue with the validity of expense claims against Mr Lardis referred to in the Report to Creditors. While acknowledging that a liquidator has power under s 477(2)(c) of the Corporations Act to assign statutory causes of action, the letter queried how the liquidator satisfied the requirements necessary for the assignment.

    The letter cited Novaline as authority that the Court would not approve any deed of assignment which would lead to frivolous or oppressive litigation and contended that the assignments would lead to such litigation.

    It noted that no Court approval had been obtained.

    It asserted an obligation on a liquidator to ensure a claim had merit before assigning it, that it was inappropriate to assign a chose in action without provision for proper consideration back to the Company for the assignment and that the liquidator must give due consideration to counterclaims.

This letter was copied by Mr Lardis’ lawyers to Mr Free’s lawyers on 4 June 2013, noting that there had been no response to it.

31    On 10 June 2013, Mr Free’s lawyers responded:

    They noted that at the creditors’ meeting on 26 April 2013, Mr Lardis indicated his consent to the assignment and enclosed a copy of the minutes of the meeting which recorded Mr Lardis as moving the motion authorising the liquidator under s 477(2A) to compromise debts in excess of $100,000 and that the resolution was passed. They asserted that there was therefore no requirement for Court approval.

    They denied that the liquidator had an obligation to conduct an investigation and, having regard to an “overarching duty … to act in the best interests of the creditors”, stated Mr Free’s opinion that burdening creditors with the costs of an investigation when they would otherwise receive 100 cents in the dollar was imprudent and in breach of the liquidator’s obligations.

    They denied that the assignment would open Mr Lardis to vexatious litigation and asserted that cross claims could be dealt with under the assignments. Having regard to Black J’s comments in the winding up proceedings and documentation provided by the directors, Mr Free thought there was sufficient reason to allow the directors the opportunity to litigate their outstanding matters.

    The letter invited Mr Lardis’ comments on the deed. It stated that if Mr Lardis sought to challenge the decision to assign the chose in action to Mr Lakis, Mr Free would seek costs on an indemnity basis.

32    By an email of 25 June 2013, Mr Lardis’ lawyers said that their client had proper grounds to oppose the assignments which they would put in a letter but in the meantime stated that :

    Mr Lardis denies that he consented to the assignments at the creditors’ meeting on 26 April 2013; and

    The assignments require Court approval under s 477(2B) and any application must be served on Mr Lardis.

33    By an email of 25 June 2013, Mr Free’s lawyers responded:

…court approval is only required under s477(2B) if there will be outstanding obligations under the agreement that will extend more than 3 months. As the deeds of assignment are final assignments of causes of action, and the obligations of all parties to each other under the terms of the deeds will be discharged upon the execution of the respective deeds, it is my client’s position that s477(2B) does not apply.

34    On 26 June 2013, Mr Lardis’ lawyers wrote:

     “In response to your assertion that the approval of the Court pursuant to s 477(2B) is not required”, they referred to Novaline at [5]. The letter noted that Novaline involved the assignment of a cause of action by the company against one of two directors and the “court held that in those circumstances the assignment is to continue for more than three months so that court approval is necessary under s 477(2B). Leave under the section is required”.

    The assignment proposed by Mr Free is “unjustifiable and constitutes a breach of [Mr Free’s] duties to the Company and [Mr Lardis]” and (as written):

1.    [Mr Free], as liquidator of the company, owes a duty to [Mr Lardis] as a contributory of the company in and for the purposes of the winding up: see for example Re Southern Cross Airlines Holdings Ltd (1988) 16 ACLA 1393 at 1399.

2.    The proposed assignment arises where all the creditors of the company have been paid in full and the balance of the company’s assets would all be divided between the shareholders. The effect of the deed is to direct the entirety of any proceeds of the cause of action to Mr Lakis on payment of one dollar.

3.    In short the assignment involves an appropriation of [Mr Lardis’] statutory right to one half of the proceeds.

4.    In cases where an assignment of a cause of action by a liquidator has been approved the deed of assignment has contained provisions that protect the interests of all shareholders. In Re Cant (2012) 85 ACSR 31 at [7], for example, the deed of assignment provided that the proceeds of the claims net of any legal expenses would be paid to the company and thereafter distributed equally to the two directors as the only shareholders of the company and also provided for the liquidator to have some measure of control over the litigation and to be provided with copies of legal advices and any terms of settlement. That is not the case here.

    They asserted again that the assignment would lead to vexatious litigation on the basis that the fact that Mr Free was prepared to allow the assignments for $1 indicated his assessment that the choses in action were valueless and because “it is plain that Mr Lakis is actuated by a desire to harass and damage” Mr Lardis.

35    On 9 July 2013, Mr Free’s lawyers responded that:

    They did not accept that the liquidator must obtain s 477 (2B) Court approval to the proposed assignments. While they agreed that s 477(2B) Court authority was required in the Novaline case, they argued that it was distinguishable because Novaline involved an assignment under which the proceeds would be paid to the company in liquidation before being distributed and the liquidator would be kept informed throughout and participate in decision making as to whether any settlement offer was acceptable. The assignment proposed by Mr Free required no further participation by him, and neither Mr Free nor either of the directors has any outstanding obligation after the deeds are executed. The term of the agreement is completed immediately. An application to the Court for approval would be an unjustified expense.

    As the assignments had been approved at the creditors’ meeting, even if s 477(2B) did apply, it was satisfied by the creditors’ resolution.

    Mr Free intended to proceed with the assignments and allowed Mr Lardis an opportunity to accept the assignment to him by 12 July 2013.

36    On 12 July 2013, Mr Lardis’ lawyers responded that:

    The basis on which Mr Free’s lawyers sought to distinguish Novaline was not sustainable: the decision of the Court in Novaline was that approval was required because the assignment was to continue for more than three months. Mr Lardis’ lawyers asserted that factors such as the requirement to pay the proceeds to the Company and that the proceedings would be supervised by the liquidator were factors which went to the exercise of the Court’s discretion to grant the approval. The letter goes on to say:

The factors that you are pointing to as reasons why Court approval is not required, namely that the assignment is on terms that allow the assignee to keep the whole of the proceeds of any claim and therefore supervision by the liquidator is unnecessary, together with the lack of any consideration for the assignment, are among the reasons why our client opposes the assignment and requires your client to seek Court approval and asserts a right to be heard on any such application.

    The assignments were not approved at a creditors’ meeting and approval of the proposed assignments was not included as an agenda item in any notice of meeting to creditors. Proceeding with the assignments without Court approval, where there was no demonstrable advantage to the company or its shareholders, is not appropriate conduct by a liquidator and it “suggests that you are acting other than in the proper interests of the company”.

37    Ultimately, on 12 July 2013, Mr Free’s lawyers wrote to Mr Lardis’ lawyers undertaking not to proceed with the deed of assignment to Mr Lakis for 14 days, but indicating that Mr Free would do so if Mr Lardis did not initiate an application to the Court by 4 pm on 26 July 2013. Neither deed had been executed at the time of the hearing.

Relevant law

38    Where a case terminates before the end of a hearing, the Court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial and it will usually be the case that there is no order as to costs. Where the parties’ conduct in prosecuting or defending proceedings has been reasonable, no order should be made, but a failure to act reasonably may provide a basis for an order. Having regard to the discretionary nature of costs orders and the general rule that the successful party is entitled to his or her costs, there can be a distinction between cases where one party effectively surrenders and cases where it cannot clearly be said that one party simply won. The Court should take into account the objective circumstances and not the subjective motive of the party seeking to discontinue: see One.Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 at [5]-[6] per Burchett J and the cases there cited and in particular Re Minister for Immigration and Ethnic Affairs, Ex parte Lai Qin (1997) 186 CLR 622 at 624 per McHugh J; see also Ibrahim v Peri Australia Pty Ltd [2013] NSWCA 328 at [16]-[19] per Beazley P.

39    There is a well-established distinction drawn by the courts between the position of liquidators as plaintiffs and defendants and the general rule is that a liquidator who is acting as such and is a defendant in proceedings will be entitled to recourse to the assets of the Company to satisfy any order against him or her: Re Wilson Lovatt & Sons Limited [1977] 1 All ER 274 (Wilson Lovatt). At 285, Oliver J explained the rationale for this:

I think that a review of the authorities does disclose that a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established, and indeed it seems me to be a perfectly reasonable one. I cannot at the moment see why it should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the extent of the assets in his hands. I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or a personal representative who institutes proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator, and the authorities which point that way seem to me, if I may say so respectfully, to be completely reasonable.

I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies. It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise.

40     In Silvia v Brodyn Pty Limited [2007] NSWCA 55 (Silvia v Brodyn), after quoting the passage above, Hodgson JA (with whom Ipp and Basten JA agreed) summarised the principles in relation to costs orders against a liquidator at [51]-[54] as follows:

51    The liquidator would generally be entitled to an indemnity from the assets of the company, although that may be denied if the liquidator has acted unreasonably: In Re Silver Valley Mines (1882) 21 Ch.D. 381.

52    If proceedings brought against the liquidator are successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability. This is in accordance with the passage from Re Wilson Lovatt quoted above, and is supported by Re Bonang Gold Mining Co. Limited (1893) 14 NSWLR (Equity) 262, Re Beuna Vista Motors Pty. Limited (In Liquidation) [1971] 1 NSWLR 72, Irons v. Merchant Capital Limited (1994) 116 FLR 204 at 209-10, and Kirwan v. Cresvale Far East Limited (In Liquidation) [2002] NSWCA 395, (2002) 44 ACSR 21. I generally agree with the discussion of the authorities by White J in Mendarma Pty. Limited (In Liquidation) (No.2) [2007] NSWSC 99 at [13]-[34].

53    The result indicated by those authorities may be achieved by ordering that the company in liquidation pay the costs (if the company is also a defendant), or by ordering that the liquidator’s liability for costs be limited to the amount of assets of the company available for that purpose.

54    However, if the liquidator has acted unreasonably in defending the litigation, the liquidator may be made personally liable: In Re Beddoe [1893] 1 Ch. 547; Mead v. Watson; Re Network Welding Pty. Limited (In Liquidation) (No.2) [2001] NSWSC 809.

41    In AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2013] NSWSC 332, Rein J accepted that on the facts of that case the liquidator should not be treated as a defendant because he had effectively instigated proceedings and he should be ordered to pay costs. See also Hypec Electronics Pty Ltd (in liq) v Mead [2004] NSWSC 731 (Hypec Electronics) at [87] per Campbell J citing the dictum of Vaughan Williams J in Re London Metallurgical Company [1895] 1 Ch 758 at 763 and International Cat Manufacturing Pty Ltd (in liq) v Rodrick (No 2) [2013] QSC 307 at [6].

Submissions on behalf of Mr Lardis

42    Mr Condon SC submitted that Mr Free should be ordered to pay Mr Lardis’ costs of the application and he should not be entitled to recourse to the assets of the Company. In support of that submission he raised the following matters.

43    In his letter of 23 May 2013, Mr Lardis’ lawyer raised the need for Court approval and drew attention to North J’s decision in Novaline. He also raised the inappropriateness of the assignment being made for nominal consideration if the claim against either of the directors had merit.

44    In the 10 June 2013 letter of Mr Free’s lawyers, Mr Free effectively put the onus on Mr Lardis to restrain entry into the assignments.

45    In his email of 25 June 2013, Mr Lardis’ lawyer drew attention to the need for Court approval of the assignments under s 477(2B), which Mr Free’s lawyer refused to accept in her email of the same date. Mr Condon suggests that this demonstrates the wisdom of North J’s comments in Novaline about the appropriateness of a liquidator seeking directions from the Court where an assignment is contested.

46    In his letter of 26 June 2013, Mr Lardis’ lawyer raised squarely the question of the appropriateness of the proposed assignment because it “involves an appropriation of [Mr Lardis’] statutory right to one half of the proceeds” of any claim as a shareholder in a solvent company which is being wound up. He pointed out that the assignment approved in Novaline contained provisions which protected the interests of all of the shareholders. Mr Free’s lawyers’ response on 9 July 2013 deals with the question of whether s 477(2B) Court approval is required, but does not deal with the issue of substance that the absolute assignment proposed for a consideration of $1 deprives Mr Lardis of any share in the proceeds which he would receive as a contributory in the winding up of a solvent company. Mr Condon noted that the paragraph of the Report to Creditors cited at [5] above demonstrates that Mr Free envisaged that the claim against Mr Lardis could be valued, but no steps were ever taken to do so. However, Mr Lakis would, on a distribution, get his share of the $117,330 he had paid in relation to his loan account out of the surplus remaining in the Company. There is no evidence that Mr Free adverted his mind to the likely lack of symmetry in the exposure of Mr Lardis and Mr Lakis.

47    Mr Lardis’ lawyers’ letter of 12 July 2013 also squarely raises the issues referred to in [46] above. Mr Condon accepted that Mr Lardis’ lawyers never named specific clauses of the proposed assignment which they considered offended against s 477(2B) but this letter did raise the statement by North J in Novaline at [5] concerning the desirability of a liquidator seeking directions where an assignment of a debt is opposed. The letter goes on to point out that the very reasons why Mr Free’s lawyers say Novaline should be distinguished so that Court approval is not required (for instance, that the assignments are absolute and therefore do not require a liquidator’s supervision) are the things Mr Lardis complains of (because they destroy his capacity to share in the proceeds of any claims against him as a shareholder). They are the things which mandate that the liquidator should seek directions before proceeding.

48    Mr Free has acted on a false premise that there are no creditors to be prejudiced just because 100 cents in the dollar has been paid as a dividend to creditors in respect of known claims. The possibility of claims by the DCT (having regard to Black J’s reasons in the winding up proceedings) demonstrates that an absolute assignment of the claims was never appropriate.

49    Mr Free’s lawyers’ letter of 12 July indicated that Mr Free would proceed to sign the deed of assignment of the chose in action against Mr Lardis to Mr Lakis unless Mr Lardis served an application to the Court in relation to it by 4 pm on 26 July 2013. This effectively put Mr Lardis in the position of defendant. Mr Condon accepted that Mr Free, as defendant, is acting in the course of his duties as a liquidator.

50    Last, Exhibits A and B are fundamentally different from the deeds of assignment propounded by Mr Free on a take it or leave it basis in his lawyers’ letter of 12 July 2013. The amendments predominately address Mr Lardis’ complaint that the original draft deeds deprived him of his right to a share in the surplus assets of the Company on a winding up to the extent that the proceeds of any action against him or the value of the chose in action assigned should be comprised in that surplus.

Submissions on behalf of Mr Free

51    Mr Salama submitted that: (1) the appropriate order as to costs was that Mr Lardis pay Mr Free’s costs but failing that, (2) each party should pay its own costs and Mr Free should have recourse to the assets of the Company for the reasons set out in Hypec Electronics at [86] and Silvia v Brodyn at [52]; however, if the Court decided that the appropriate order was that Mr Free should pay Mr Lardis’ costs, then (3) the appropriate order would be that costs would be limited to the extent that Mr Free is able to recover them from the assets of the Company. Mr Free should not be personally liable for costs for the reasons set out in Wilson Lovatt at 285.

52    Mr Salama submitted that the serious allegations concerning Mr Free’s conduct made in Mr Lardis’ application filed on 26 July 2013 required Mr Free to defend the action. Claim 2 a) was for a declaration that entry into the deed of assignment with Mr Lakis would constitute negligence and fraud on the power by Mr Free. The amendment made to the application with the leave of the Court on 5 March 2013 made a further claim for a declaration that Mr Free’s conduct in propounding the assignment constituted a failure to faithfully perform his duties and a breach of s 477(2A) or s 477(2B) of the Corporations Act. This was another serious claim concerning Mr Free’s conduct and it was the first time that the application alleged breaches of s 477(2A) or s 477(2B).

53    Further, it was only when Mr Free read the plaintiff’s submissions served on 13 March 2014 that it became clear that a basis of the plaintiff’s complaint concerning possible breach of s 477(2B) was that clause 4(d) (indemnity concerning “no representations” warranty) and clause 6 (GST indemnity) of the deeds of assignment might be construed as having an operation which went beyond three months. Mr Free would have removed these pro forma provisions from the deeds had Mr Lardis raised the issue on any of the occasions that he had been invited to comment on the draft deeds since the draft deed was first sent to Mr Lardis on 5 May 2013.

54    Although Mr Condon made much of the difference between Exhibits A and B and the deeds of assignment as originally propounded, it is clear from the plaintiff’s application that Mr Lardis’ challenge was to Mr Free’s authority to enter into deeds of assignment. Mr Lardis had consistently denied that he had moved the resolution to approve the assignments for the purposes of s 477(2A) at the creditors’ meeting on 26 April 2013. This issue was still in contention when the plaintiff’s submissions were served on 13 March 2014 and Mr Lardis conceded for the first time at the commencement of the hearing on 24 March 2014 that he moved the resolution and that it had been passed.

55    Pausing there, the letter from Mr Lardis’ new lawyers on 23 May 2013 primarily dealt with complaints about matters arising in the Report to Creditors. While it mentions North J’s decision in Novaline, it does so in the context of Mr Lardis’ stated concerns that the assignments would give rise to vexatious litigation which was a discretionary consideration in the Novaline case. Mr Free’s lawyers’ response on 10 June 2013 addressed these concerns by pointing out that a resolution approving the assignments had been passed on 26 April 2013 and Mr Lardis had moved it, the assignments would permit Mr Lardis to pursue any available cross claims that he had, that the liquidators “overarching duty” was to act in the best interests of creditors and they should not be burdened with the costs of investigating possible breaches of directors duties when the creditors would otherwise receive 100 cents in the dollar. The deeds of assignment allow those claims to be pursued without the additional cost imposed by the liquidator pursuing them. Mr Lardis was invited to make any comments that he wished.

56    Although Mr Condon also made much of the fact that the Novaline decision was the subject of Mr Lardis’ lawyers’ letter of 26 June 2013, it is still written in a context that Mr Lardis denied that an approval resolution had been passed on 26 April 2013. It is in this letter that it is put for the first time that approval is required to the assignment under s 477(2B), but there is no identification as to any specific provisions of the deeds which may require this approval. That was done for the first time on 13 March 2014. It was open to Mr Lardis to propose amendments to the deed at any time but he never elected to do that.

57    Mr Free’s lawyers’ letter of 9 July sought to demonstrate that there were no ongoing obligations under the proposed deeds and therefore they did not require approval under s 477(2B) and that was a basis for distinguishing the Novaline case. This letter contains a final request for comments and if there is a “put up or shut up” element to the language it needs to be understood in the context that Mr Lardis had been offered a number of opportunities to comment but instead appeared to deny that the liquidator had authority to enter into any form of deed and continued to deny that an authorising resolution under s 477(2A) had been passed on 26 April 2013. That position is also confirmed in the emails of 25 June between the lawyers.

58    While Mr Lardis says that he is the effective defendant because he had to come to court or the deed of assignment would have been signed, Mr Lardis at all times until the commencement of the hearing denied that a resolution had been passed on 26 April 2013 which authorised the liquidator to enter into the deeds of assignment. If the terms of those deeds were unsatisfactory, for instance because of the lack of symmetry between the potential value of the outstanding claims against Mr Lardis and Mr Lakis, it was at all times open to Mr Lardis to suggest the amendments which have now been made in Exhibits A and B. There was no need for the liquidator to deal with the claims concerning the asymmetry of possible claims in the face of Mr Lardis’ denial of the liquidator’s authority to enter into deeds of assignment without court approval.

Submissions in reply on behalf of Mr Lardis

59    Mr Condon accepted that details of Mr Lardis’ case in relation to s 477(2B) were provided late in the day. However, even if clause 4(c) and clause 6 of the original draft deed of assignment had been excised, there would still have been a controversy about the unfairness of the propounded assignments to Mr Lardis.

60    No authority was provided to the Court which supports the form of the deed propounded by Mr Free because there is none. In his affidavit, Mr Free set out the considerations which he took into account (see [9] above) and it is apparent that he did not assess the value of the possible claims against Mr Lardis as he suggested he would do at Section 6.5 of the Report to Creditors. It was not appropriate to assign the choses in action for a nominal consideration not only because this would deny any creditor that emerged recourse to the true value of those assets, but because it would also deny contributories their rights to share in the value of a fully realised surplus on a winding up. The right course was for Mr Free to seek directions from a court.

61    In relation to the agreed statement of issues: although at the commencement of the hearing Mr Lardis abandoned his contentions that approval had not been obtained pursuant to s 477(2A) to the assignment of the choses in action at the creditors’ meeting on 26 April 2013, the question of whether s 477(2B) court approval was required superseded that point. The resolution did not refer to a particular form of deed. It is not now necessary to determine whether or not the deeds propounded by Mr Free constituted a “compromise”. There remains the question of whether Mr Free acted consistently with his duties in propounding deeds in the form which he did on 7 May 2013. The assertion in the pleadings is that Mr Free acted beyond power – that is what is meant by “fraud on the power” – not that he acted fraudulently.

Consideration

62    Subject to the issue of whether Mr Free should be entitled to recover his costs out of the assets of the Company, I consider that this is a case in which it is not appropriate to make an order as to costs.

63    It was only at the commencement of the hearing that Mr Lardis resiled from his contention that a resolution authorising the liquidator to compromise debts in excess of $100,000 by the assignment of the Company’s cause of action against the directors for $1 had not been passed at the creditors’ meeting on 26 April 2013. That position was unsustainable but it informed the correspondence which preceded Mr Lardis’ application to the Court on 26 July 2013. It remained a live issue in the Statement of Agreed Facts filed in early March 2014. I accept Mr Salama’s submissions that Mr Lardis’ case was substantially framed by the contention that Mr Free had no authority to propound the deeds and approval of the Court was required under s 477(2B), without specification of the clauses in the draft deeds of assignment which might have required such approval until submissions were filed in March 2014 preparatory to the hearing. This is so even though Mr Lardis only sought to amend the application filed on 26 July 2013 on 5 March 2014 to make claims based on s 477(2A) and s 477(2B).

64    I accept Mr Free’s observation that the deeds could have taken effect without the draft clauses 4(c) and 6 and his evidence that he would have been willing to make those deletions had Mr Lardis sought that amendment. Further, while it is not necessary for me to decide the point, I do not consider that Novaline is, as contended in the correspondence, authority for the proposition that Court approval would be required to an absolute assignment of a chose in action because it would require the discharge of obligations by performance more than three months after the deeds are executed: the factual situation in Novaline was different from an absolute assignment which is complete once notice has been given to the debtor.

65    Having said that, the correspondence from Mr Free’s lawyers failed to address the complaint clearly made by Mr Lardis’ lawyers on 26 June 2013 and 12 July 2013 that the result of the absolute assignment was to deprive Mr Lardis of a share in the proceeds of any successful claims against him or a share in the consideration for the true value of the right being assigned which he would obtain as a contributory in the distribution of surplus upon the winding up of a solvent company. I accept Mr Condon’s submission that this controversy would have remained even if Mr Lardis had specified clauses 4(d) and 6 of the draft deeds of assignment as the provisions which required creditor or Court approval under s 477(2B).

66     Mr Free’s consideration that the deeds allow director-shareholders to pursue claims against each other after creditors have been paid out fully for admitted debts has attraction in the context where it was disputes between the director-shareholders which led to the winding up of an otherwise viable company. It is not a productive use of a liquidator’s time to be involved in disputes of that kind once creditors have been paid out. It will be for another Court to decide whether absolute assignment of such claims would amount to distribution of the surplus without leave of the Court as might be required under s 485 or s 488 of the Corporations Act or whether it is part of antecedent steps before surplus is determined; this issue was raised in submissions but not argued.

67    However, Mr Free’s reasoning that the directors would have shared any consideration paid for an assignment of the chose in action so the consideration should only be nominal ignores the fact that the claims may have different values and as contributories, Mr Lardis and Mr Lakis should not lightly be deprived of the benefit of that value. Nor should creditors who may emerge before a final distribution of surplus be deprived of that value. In the circumstances of this case there is a real issue as to whether Mr Free should have had regard to the asymmetry between the prima facie amount of the unsatisfied claims against Mr Lardis and Mr Lakis. Even though the terms of the deeds of assignment were literally the same their practical impact may well have been quite different. It is true that Mr Free may not have been able effectively to value the claims against Mr Lardis or Mr Lakis without their co-operation and taking into account the costs of prosecuting claims and possible defences, it may be that the assignments are only worth the nominal consideration proposed. Having regard to the difficulty of valuation, it is possible that Mr Lardis would have had difficulty making out his claims against Mr Free without making admissions which are not in evidence as the Report to Creditors states a prima facie amount owing by Mr Lardis but it also notes that he disputes that amount and has asserted circumstances which might give rise to effective defences.

68    Accordingly it is not clear that either of Mr Free or Mr Lardis must have been successful in defending or prosecuting this application if the application had been fully argued at a hearing. I consider that Mr Free was justified in proposing assignment of the possible causes of action as an alternative to the claims not being pursued (for lack of funding) and he had an arguable case that the assignment had been approved at the creditors’ meeting under s 477(2A), although Mr Lardis appeared at all times (until the hearing) to argue that there had been no creditors’ approval and that this could not be done without the approval of the Court. Exhibits A and B do address the issue which, by late June 2013, appeared to be Mr Lardis’ substantial concern that the form of assignment denied him participation as a contributory in the surplus of the Company which comprises proceeds of any litigation against him for breach of directors’ duties.

69    Is Mr Free entitled to an order that his costs be costs in the liquidation of the Company? Mr Lardis has argued that he is the effective defendant because Mr Free said that he would sign the deed of assignment with Mr Lakis unless Mr Lardis approached the Court. Although there is some force to this argument, had Mr Free approached the Court for approval under s 447(2A) or s 447(2B) in the conduct of his duties as a liquidator (as Mr Lardis argued that he should do), it is likely that his costs would have been costs in the liquidation. I do not consider Mr Free’s conduct lacking in good faith or sufficiently unreasonable to deny him indemnity from the assets of the Company. I will therefore order that Mr Free’s costs be costs in the liquidation.

Conclusion

70    Both counsel submitted at the hearing that it was not for his client to propose amendments to the deeds of assignment as the issues became clearer. I disagree: it was open to both to propose amendments to the deeds to the effect now adopted in Exhibits A and B, albeit that Court approval would have been required to the adoption of that form, as there are now no creditors available to approve Mr Free entering into deeds which now have substantive requirements which may occur more than three months after the deeds are executed. Either party’s argument for an award of costs would have been substantially more persuasive had either attempted to avoid adversarial proceedings by proposing amendments. I note that Mr Free did ask Mr Lardis for any comments on a number of occasions and that he did accommodate comments made by Mr Lakis. The course adopted by agreement between the parties avoids the need for final determination of the application and it is substantially congruent with the assignment considered by North J in Novaline which protects the interests of creditors and contributories. This is a preferable course to absolute assignment of claims unless the claims have been valued and consideration reflecting that value is obtained or there are some other factual circumstances justifying the assignment in that form.

Associate:

Dated:    31 March 2014