FEDERAL COURT OF AUSTRALIA

Thomas International Ltd v Humantech Pty Ltd (No 2) [2015] FCA 1517

THE COURT ORDERS THAT:

1.    The defendants pay the plaintiff’s costs of the hearing on 6 and 9 November 2015.

2.    Save for the costs payable pursuant to order 1 made today and any previous orders for costs, there be no order as to costs of the proceedings to date.

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

REASONS FOR JUDGMENT

(REVISED FROM THE TRANSCRIPT)

1    On 9 November 2015, I ordered that the four defendant companies be wound up in insolvency for the reasons that I then gave: Thomas International Limited v Humantech Pty Limited [2015] FCA 1333. Thomas International Limited has today applied for orders that the former administrators and present liquidators of the companies personally pay the costs of the proceedings, on the ground that they acted in their former office unreasonably in both the preparation of their report dated 15 June 2015 required by s 439A of the Corporations Act 2001 (Cth) and in the conduct of the administration.

2    Thomas argued that first, the administrators had endorsed and supported the proposal for the deed of company arrangement when they should have known it was not a bona fide proposal and, in fact, amounted to an abuse of the provisions of Pt 5.3A of the Act instituted by the then controlling mind of the defendants, Johann Schutte. Secondly, Thomas contended that the administrators endorsed and supported the proposal for the deed when it was not in the best interests of the creditors. Thirdly, Thomas submitted that the administrators had persisted in resisting Thomas’ claims for relief, including under s 600A of the Act, to set aside the resolution of the creditors approving the deed in circumstances where they should have appreciated that the relief it sought would have been granted in any event and that the companies would be wound up.

Background

3    Mr Schutte had put a proposal for the deed to the administrators on 12 June 2015. The report was completed on 15 June 2015, for the meeting to be held on 23 June 2015.

4    These proceedings commenced immediately after the creditors of the companies resolved, on 23 June 2015, that each should enter into the deed. The deed was a single deed of company arrangement between all four companies and all of their creditors. In the report, the administrators opined under s 439A(4)(b)(i) that it would be in the creditors’ interests for all companies to enter into the deed. The report said that this would result in the payment to the pooled body of the four companies’ creditors of a dividend then estimated to be worth about 17 cents in the dollar payable over the period of about two years.

5    According to the material put before the creditors, one of the companies, Assessment Centre Technologies Pty Limited (ACT), had agreed to sell what was known as the OCEAN software to a company that was described as an independent purchaser in New Zealand which would pay the purchase price by instalments over the two year period. The report disclosed that a company apparently related to the administrators had valued the OCEAN software as being worth about $335,000. The report disclosed that about 10% of the purchase price was to be paid on exchange of contracts and the balance by equal monthly instalments over two years, and that a registrable security would be taken in New Zealand over the OCEAN software to ensure that the instalment payments would continue to occur.

6    As events later transpired, the purchaser appears to have been related to Mr Schutte and or controlled by him, notwithstanding that on 29 May 2015 he disposed of the 99 of the 100 issued shares that he held. Mr Schutte also resigned as a director on that day. The other share was held by the acquirer of the 99 shares and continuing director, Norman Kachelhoffer.

7    Thomas complained that the report was significantly lacking in analysis of the potential actions that could be brought by a liquidator against Mr Schutte as the sole director of each of the companies and in relation to the proposed transaction with the New Zealand purchaser. The circumstances in which the deed came to be proposed to the creditors were as follows.

8    At the 23 June 2015 meeting of ACT’s creditors, the chairperson, who was one of the administrators, David Solomons, tabled a search of the New Zealand purchaser, Assessment Centre Technologies International Limited. He stated that he did not believe it to be a related entity. He told the meeting that previously, Mr Schutte had been a director and shareholder of that company. The minutes recorded that a discussion then took place between Mr Solomons and Thomas’ solicitor, Ms Shannon Platt, concerning the purchaser and then recorded:

The Chairperson discussed the issue within the DOCA proposal: the proposal to convert debts of related entities of the group of companies to equity through the issuing of redeemable preference shares.

9    When Thomas commenced these proceedings on 26 June 2015, it provided the administrators with an unsealed copy of the originating application and affidavit in support. On 3 July 2015, the then solicitors for the administrators asked Thomas’ solicitor to serve them with sealed copies of those documents and a statement of claim, and proposed an urgent final hearing of the matter on 13 or 14 July 2015 so that they could ascertain their and the companies’ position before the expiry of the 15 day period prescribed in s 444B of the Act for the companies to execute the deed.

10    The matter came before Nicholas J, who was then the docket judge, on 10 July 2015, when his Honour made orders for the preparation of the matter for hearing. He noted the undertaking of the administrators that until 48 hours after the proceedings and any appeal had been heard and determined, they would not execute the deed, granted a corresponding extension of the period in which the companies could execute the deed and stood the matter over to 10 August 2015 for further directions.

11    Following his Honour’s orders of 10 July 2015, these proceedings proceeded by way of points of claim and other evidence. The administrators promptly conceded in their points of defence filed on 24 July 2015 that Mr Schutte previously had been interested in the New Zealand purchaser. However, they pleaded, on the basis of what they then appear to have known, that he had ceased both his shareholding and directorship on 29 May 2015. They also admitted that some of the voting in the creditors meetings would have been affected had the votes of Mr Schutte or companies related to him not been counted. Thus, there was a prima facie basis on which the Court might set aside the resolutions approving the entry into the deed under s 600A of the Act.

12    On 10 August 2015, his Honour stood the proceedings over to 14 September 2015 for further directions. In the meantime, these and the other proceedings were progressed towards hearings.

13    On 17 August 2015, the administrators came into possession of some disturbing information. Mr Schutte and his then solicitor attended a meeting with the administrators and disclosed emails from Mr Kachelhoffer dated 26 June 2015 and 9 July 2015 that suggested that Mr Kachelhoffer was not acting as a person independent of Mr Schutte in relation to the conduct of the New Zealand company’s operations and that he now declined to continue to do so. The email chain indicated that Mr Schutte was an addressee and was aware of those matters. The email chain included a statement that ACT had developed the OCEAN software. Nonetheless, at the meeting on 17 August 2015, Mr Schutte informed the administrators that the OCEAN software was not owned by ACT at all but was owned by him and that ACT only owned the right to use the software in Australasia.

14    On 23 August 2015, Mr Schutte emailed the administrators, stating that:

… there is no longer a proposal from an independent New Zealand company to purchase rights of [ACT] arising out of the DOCA. Accordingly, there would appear to be no utility in pursuing a DOCA where that purchaser is no longer interested.

15    He said he was prepared to propose a new deed of company arrangement. Without-prejudice discussions then occurred between the administrators, Mr Schutte and his lawyers for some time on the basis of Mr Schutte’s email of 23 August 2015. There he also said that a South African company associated with him would purchase the Australasian access rights to use the OCEAN software for $70,000. That sum would be paid in cash upfront, rather than over 24 months, and all the material components of the proposed new deed of company arrangement would remain in a similar form to that of the current deed. These included, but were not limited to, agreeing to convert Thomas International Management Systems (SA) Pty Limited’s claim for about a million dollars to preference shares and that two other foreign companies, apparently also controlled by Mr Schutte or his associates, would agree not to participate in the proposed deed of company arrangement. He said that he anticipated that this would result in a proposal returning at least 55 cents in the dollar to the companies’ creditors, without taking into account any fees that the administrators should be paid.

16    In those circumstances, it is understandable that the administrators brought affidavit evidence of these developments and the new proposal before Nicholas J on 14 September 2015 and informed his Honour that, if the new proposal were to proceed, the Court would have to make an order varying the application of Pt 5.3A under s 447A of the Act, so as to enable further meetings of the companies’ creditors to take place to consider it.

17    On 14 September 2015, Nicholas J ordered that the hearing of the application concerning the change of events and the new proposal be provisionally listed for three days, to commence on 21 October 2015.

18    As I explained in my reasons of 9 November 2015 (Thomas [2015] FCA 1333), events subsequently caused the administrators to change their attitude to the companies continuing to carry on business. By 3 November 2015, they were no longer prepared to carry on the businesses of the companies in administration. On that day they caused them to cease to do so and terminated the employment of their employees. Late in the afternoon of 6 November 2015, they applied to me to wind the companies up. I granted an adjournment over the weekend to allow parties time to further negotiate and subsequently, on 9 November 2015, ordered that the companies be wound up in insolvency by the Court for the reasons I gave.

Thomas’ submissions

19    Thomas argued that, at least from the time of the meeting of 17 August 2015, the administrators should have realised that what was asserted by Mr Schutte was not bona fide. Indeed, Thomas went so far as to submit that they should have been aware from the outset that the use of Pt 5.3A by Mr Schutte and the companies was an abuse of the provisions of the Act and that there was never any bona fide proposal to be pursued. It contended that the administrators had failed to set out in the report the detail necessary to constitute a report that satisfied the requirements of disclosure in the Act.

20    Thomas contended that the administrators gave inadequate consideration, including in the report, to the security position in New Zealand in respect of the payment proposal for the OCEAN software, and that creditors should have been advised of that position. It contended that there was no proper explanation in the report as to why all the companies’ assets and liabilities should be pooled or why there should be a single dividend to creditors of all four companies of the kind I described in Thomas [2015] FCA 1333 at [12] namely:

* the above figures are estimations only and any change in recoveries or proof of debts received may materially change this figure.

21    Thomas argued that the administrators had not given the creditors of ACT any, or any adequate, explanation in the report of the reasons why the administrators were recommending they should receive, not 36 cents in the dollar for that company’s assets, but 17 cents as a shared distribution with the creditors of the other three companies.

22    Nonetheless, the majority of the creditors of ACT, by number and volume, voted in favour of that company entering into the deed. That was so notwithstanding that, apart from Mr Schutte and his associate, Don Stander, having about $25,000 worth of claims admitted to proof for the purposes of voting, all the other creditors at the meeting, except Thomas, also voted in favour. Their claims were worth about $16,000. Thomas had sought to be admitted to proof for about $120,000, but the administrators, in a decision that was not challenged in the proceedings, admitted Thomas to proof for $1 on a contingent claim. Thus, all creditors, independent of Mr Schutte and his associates with the residual claims in ACT, except Thomas, were in favour of receiving a dividend lesser in value and spread over time than they may have received were ACT liquidated.

23    Thomas also argued that the administrators had unreasonably resisted its claims for setting aside the creditors’ resolutions that the companies execute the deed, and that windings up be ordered. It submitted that it was plainly contrary to the interests of the creditors of ACT as a whole for the deed to be executed and that the transaction for the sale of the OCEAN software had not been properly investigated.

Consideration

24    Thomas’ arguments attacking the conduct of the administrators reflected its pleaded allegations on the substantive issues in these proceedings. However, those issues have not been heard or determined. Rather, these proceedings unfolded in the way they did in early November 2015 because the administrators were no longer prepared to be personally liable for debts incurred by them in carrying on the business of each of the four companies in administration. They did this in circumstances where they had incurred, but not been paid, professional fees of over $720,000. Thus, there has been no substantive determination, or investigation by trial, of the allegations that Thomas made in the proceedings, and on which it relied in support of its allegation that the administrators acted unreasonably in the various ways for which Thomas contended.

25    In a case where there are competing considerations, the power to order costs under s 43 of the Federal Court of Australia Act 1976 (Cth) is one that is ultimately exercised in a way that reflects a broad judgment of what justice requires: Gray v Richards (No. 2) (2014) 315 ALR 1 at 2 [2] per French CJ, Hayne, Bell, Gageler and Keane JJ; see also Apotex Pty Limited v Les Laboratoires Servier (No. 5) (2015) 324 ALR 549 at 551–553 [5]-[14] where I considered the principles.

26    McHugh J discussed the principles applicable to cases in which a party seeks an order for costs where the issues have not been heard or determined in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624, where he said:

When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties [Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201]. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided.

27    As McHugh J pointed out, there are some exceptions to such a situation, including where a defendant had acted unreasonably in exercising or refusing to exercise a power and the plaintiff had had no reasonable alternative but to commence the proceeding. He said, (at 186 CLR 625):

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. (emphasis added)

28    The test involves considering whether the party commencing the proceedings acted reasonably in doing so and the opponent acted so unreasonably that it would be proper to order the opponent to pay some or all of the initiating party’s costs: Lai Qin 186 CLR at 625

29    Slightly different or additional considerations may apply when a person in the position of an administrator or liquidator is said to be personally liable for costs in the litigation. The principle is that a liquidator is generally entitled to an indemnity from the assets of the company, although that may be denied to him or her if the liquidator has acted unreasonably. Ordinarily, in the absence of unreasonable conduct by a liquidator, the company in liquidation will be ordered to pay the costs if it is a defendant, or the court will order that the liquidator’s liability for costs be limited to the amount of assets of the company available for that purpose. However, where the liquidator acts unreasonably in defending the litigation, he or she may be made personally liable for costs, and the same principles apply to administrators under Pt 5.3A of the Act, as Hodgson JA, with whom Ipp and Basten JJA, agreed held in Silvia v Brodyn Pty Limited (2007) 25 ACLC 385 at 395 [51]-[55]; see also Kirwan v Cresvale Far East Limited (in liq) (2002) 44 ACSR 21 at 84 [259] per Giles JA with whom RP Meagher JA agreed; Huntley Management Limited v Timbercorp Securities Limited (No. 2) [2010] FCA 623 at [10]-[12] where I also applied the same principles.

30    I am not persuaded that this is a case in which it is appropriate to make an order against the administrators personally. There has been no trial on the merits. The issues that Thomas wished to agitate against them in the substantive pleaded case cannot be determined on an application such as this. The circumstances have not been explored in a trial. An order of the kind sought by Thomas would also involve significant imputations against the competence and integrity of the administrators. In all of the circumstances, I am not satisfied that it is appropriate that I should make such an order without any examination or consideration of the whole of the facts.

31    In my opinion, the administrators were entitled to put to the creditors of the companies the original proposal for a deed of company arrangement. Whether or not that proposal was put before them in a report that complied strictly with the Act is not a matter that can be determined summarily on a costs application such as this and I do not propose to do so. Moreover, as soon as the administrators became aware of the challenge to the deed they sought to have that matter brought before the Court and determined as quickly as possible. I see nothing in the material before me to suggest that they have been responsible for any delay in that occurring. The administrators caused the companies to file defences and other material that they were obliged to provide both in these proceedings and the related proceedings brought by Thomas, seeking to vindicate what it alleges to be its rights to intellectual property used by the companies, other companies associated with Mr Schutte and him personally.

32    When the administrators became aware first of the problems with the sale of the OCEAN software and Mr Schutte’s new proposal, for what appeared to be a far better return to creditors of 55 cents in the dollar than had been proposed previously, they appear to have acted appropriately and not in any way unreasonably, at least on the material before me, first, in pursuing without prejudice negotiations to explore the viability of the new proposal and, secondly, in putting all of that material before Nicholas J on 14 September 2015 when his Honour vacated an earlier order that set that issue down for trial provisionally on 21 October 2015. Events in the meantime overtook that position. The parties agreed by consent that both proceedings would be referred to mediation. The mediation was delayed on a number of occasions and only commenced yesterday before the Honourable Kevin Lindgren QC and is, I am told, part heard.

33    In those circumstances, I see nothing unreasonable in the administrators continuing to carry on the business while they, in their commercial judgment, thought it proper to do so. Mr Solomon’s evidence is that they secured a contract with Toyota that generated revenue of about $700,000 for the benefit of the companies. That contract came to an end around the time that the administrators considered that they should cease carrying on the businesses.

34    There is nothing in the material before me to show that the administrators’ conduct of carrying on the business during the period that they did contributed in a material way to any deterioration of, or adverse effect on, the assets or liabilities of the companies in administration, save that necessarily, in conducting their offices, they incurred a significant amount of fees, which I am informed from the bar table they have not been paid.

35    In all the circumstances I see no basis on which I should grant Thomas an order that the now liquidators personally pay any of the costs incurred by the companies in administration while they were in administration or otherwise.

36    As I have explained, it is not possible to come to a view about the rights and wrongs of the allegations that Thomas brought to set aside the deed. When the administrators came to the view that they were not prepared to be personally liable for the companies’ debts, the administration could not continue and they, quite properly, applied to the Court for relief. I considered that the preferable form of relief was to order that the companies be wound up by the Court in insolvency and to appoint the administrators as liquidators so that they would be officers of the Court rather than having a default position under Pt 5.3A of the Act where they would be treated as having been appointed by the creditors.

Conclusion

37    In my opinion, the appropriate order to be made as to costs in the proceedings is that there be no order as to costs, other than that the companies pay the plaintiff’s costs of the hearing on 6 and 9 November 2015.

Associate:

Dated:    2 February 2016

SCHEDULE

NSD 751 of 2015

ASSIGNMENTS ON CONTRACT INT PTY LTD (FORMERLY KNOWN AS THOMAS INTERNATIONAL (AUSTRALIA) PTY LTD) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 103 702 978

Second Defendant

ASSESSMENT CENTRE TECHNOLOGIES PTY LTD (SUBJECT TO DEED OF ARRANGEMENT) ACN 142 139 743

Third Defendant

JCS HUMAN DYNAMICS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 121 807 752

Fourth Defendant

ANTHONY DE VRIES

Fifth Defendant

DAVID SOLOMONS

Sixth Defendant