FEDERAL COURT OF AUSTRALIA

White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 5) [2018] FCA 1847

ORDERS

THE COURT ORDERS THAT:

1.    The Interlocutory Process of 25 October 2018, as amended on 2 November 2018, be dismissed with costs.

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

REASONS FOR JUDGMENT

PERRAM J:

1    Mr Chappell and his wife Mrs Chappell, on the one hand, and Mr Hung and Mr Chappell, on the other, were the respective joint owners of two collections of artworks. In September 2017 they engaged Mossgreen Pty Ltd (‘Mossgreen’) to sell the collections at auction. On 9 October 2017, a number, but not all, of the works from both collections were sold at auction. Mr Chappell had the unsold works collected from Mossgreen in mid-November 2017 which, as events transpired, was fortunate.

2    The proceeds of sale of Mr and Mrs Chappell’s collection were $84,033.59 and of Mr Chappell and Mr Hung’s collection, $32,268.54. Although Mossgreen received payments from the purchasers for these sales it has never paid these amounts to Mr Chappell or Mr Hung since it went into administration on 21 December 2017. It subsequently went into liquidation.

3    A large number of innocent people have been harmed by the collapse of Mossgreen. One class of these people are those such as Mr Chappell and Mr Hung who provided goods on consignment to Mossgreen for sale at auction which were successfully sold but without Mossgreen ever paying the vendors the sale proceeds paid to it by the purchasers. For some time in this winding up there has been a significant issue as to whether persons in this class (I will call them the ‘Unpaid Vendors’) are unsecured creditors of Mossgreen or whether, instead, the company holds the cash received from the purchasers on some form of trust.

4    The use of the single expression ‘Unpaid Vendors’ is apt to suggest, perhaps misleadingly, that all of these people stand in precisely the same position. In fact, there are many different factual situations involved in the class. The claims of Mr Chappell and Mr Hung are perhaps amongst the more straightforward. Theirs is governed, most likely, by Mossgreen’s written terms and conditions of sale. These include cl 12(a) which purports to say that Mossgreen’s only liability to the vendor for the purchase moneys is a contractual one. In the same breath cl 12(a) also says that Mossgreen is the vendor’s agent which may seem to cut rather in the opposite direction.

5    The issue of the potential for trust claims to be brought by the Unpaid Vendors against Mossgreen came to a head at complex case management hearings on 8 and 11 May 2018 and was decided on 21 May 2018: White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 3) [2018] FCA 711 (‘Mossgreen (No 3)’). The result of that the hearing was that I reached this conclusion:

‘10    What now exists, therefore, is a three-way tussle (four-way if one counts the priority creditors) over a fund of $2.8 million by sets of parties who all have the right to feel highly aggrieved that they find themselves in this situation at all. The unpaid vendors thought they were selling goods at an auction house and had no reason to believe they would find themselves in a very complicated court case apparently having to argue that they should be paid for what they sold. The Secured Creditor put a lot of money into the Company and took a security interest precisely to protect itself against being involved in disputes such as the present. The liquidators, who had nothing to do with the Company at all until they were appointed administrators, now find themselves fighting for their own remuneration which is normally very rarely in issue in a winding up. In short, one here is faced with a labyrinth with no clear path to resolving the competing claims.

11    The practical choices appear to be between three scenarios:

(a) The parties co-operate to put up a short question as cheaply as possible;

(b) The parties are funded out of the fund to litigate over the fund; or

(c) The parties litigate over the fund but at their own cost.

12    The position of the Secured Creditor makes (a) impossible and I have my doubts as to whether it can be done in a directions suit. Although (b) may simplify the issues at hand, it is potentially very unfair. With the number of parties involved the fund would be quite negatively impacted and the effect would be that the losing parties would have been litigating largely at the expense of the winning party.

13    That leaves only (c). The difficulties with (c) should be frankly acknowledged. Any suit by an unpaid vendor will most likely have to join all of the unpaid vendors to it in order to be properly constituted. Given there are 500 or so of them this may well be a complex undertaking.

14    Further, there may be a real problem if no claims are ultimately made. Any claim will require leave to proceed under s 500(2) of the Corporations Act 2001 (Cth). I propose to grant leave to proceed under s 500(2) to any unpaid vendor who commences a proceeding before 14 August 2018. I will add the assistance of the Court to this extent: any such unpaid vendor may apply to be joined as an interested party to this proceeding and I will permit their claim to proceed by way of points of claim in this proceeding. I will permit the liquidators to provide details of the unpaid vendors to persons interested in making such a claim and to be remunerated out of the fund for that purpose.

15    The matter will otherwise stand over for case management hearing on 18 September 2018. Any party may restore the matter to the list on 7 days’ notice.

16    The directions I make are:

1.     The proceedings be stood over for a case management hearing at 9:30am on 18 September 2018.

2.    The liquidators notify the unpaid vendors of these directions and the Court’s reasons as soon as possible.

3.    The liquidators be remunerated out of the cash funds held for the Company for the costs of complying with Direction 2.

4.    Any unpaid vendor wishing to make a proprietary claim on the assets of the Company apply to this Court in this proceeding by 14 August 2018 for orders that:

(a)    they be joined as an interested party to the proceeding (if not already so joined);

(b)     they be granted leave to commence a proceeding against the Company under s 500(2) of the Corporations Act 2001 (Cth); and

(c)     they be permitted to proceed by way of points of claim within this proceeding.

5.    Any applications made pursuant to Direction 4 will be returnable for directions at 9:30am on 18 September 2018.

6.    The liquidators be at liberty to provide details of the unpaid vendors to any person contemplating acting under Direction 4.

7.    The liquidators be indemnified out of the cash they hold for the Company for the costs of complying with Direction 6.

8.    Any party may approach the Court to have the matter relisted for directions on 7 days’ notice by emailing my associate.’

6    For present purposes, the important order is Order 4 and the deadline of 14 August 2018 set by it. The object of that deadline was to give the Unpaid Vendors a three-month window in which to commence any suit to enforce a trust claim. It was necessary to do this since without a resolution of the trust issues, one way or the other, it was impossible for the liquidators to deal with the cash that they held.

7    As it happened, of the 500 or so Unpaid Vendors, none brought an application by 14 August 2018. When the deadline passed, the liquidators then applied for directions that they would be justified in treating the cash received from purchasers as assets of the company; that is to say, free from any trust interest that might have been asserted by the Unpaid Vendors.

8    That application was heard on Friday 19 October 2018 and judgment upon it is presently reserved. At the hearing three sets of Unpaid Vendors appeared to oppose the making of those orders. These included Mr Chappell and Mr Hung.

9    Following the hearing, Mr Chappell and Mr Hung filed an interlocutory process dated 25 October 2018 which sought orders that they be given leave to proceed against Mossgreen under s 500(2) of the Corporations Act 2001 (Cth) (‘Corporations Act’) and that the time for the bringing of such a claim referred to in Order 4 of 21 May 2018 be extended to the date of the determination of their interlocutory process. Affidavits of Mr Chappell and Mr Hung were filed in support of the application and were read without objection.

10    The application for leave to proceed against Mossgreen was heard on Friday 2 November 2018. With leave, the interlocutory process was amended at the hearing.

11    The application for leave to proceed was opposed by the liquidators and by the secured creditor.

12    In my opinion, the application should be refused. I am prepared to accept for the purposes of argument that Mr Chappell and Mr Hung have an arguable case that they have a trust claim over the proceeds of sale held by the company. That claim is not, perhaps, without some difficulties. These include:

(a)    the terms of Mossgreen’s appointment which appears to put the relationship between the parties on a contractual basis and which may be inimical to the trust now alleged;

(b)    the relationship with other trust claimants, i.e., how are conflicting trust claims over a pool of funds not sufficient to cover all of them to be handled; and

(c)    the absence at this stage, of the other Unpaid Vendors as defendants who would appear to be proper parties particularly in light of (b).

13    However, I am prepared to assume in Mr Chappell and Mr Hung’s favour that these problems can all ultimately be overcome.

14    Section 500(2) of the Corporations Act provides:

‘500 Execution and civil proceedings

…

(2)    After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

…’

15    This is the relevant provision since Mossgreen’s creditors passed a resolution on 4 May 2018 to wind up the company pursuant s 439C(c) of the Corporations Act, thereby rendering the liquidation a creditors’ voluntary winding up: Corporations Act s 9. Whilst there is no doubt that because of this provision they need leave to proceed against Mossgreen because it is being wound up, Mr Chappell and Mr Hung are correct to observe that the principal focus of s 500(2) is on the proof of debt system. That system is designed to ensure that a company in liquidation is ‘not subjected to a multiplicity of actions which would be expensive and time consuming’: Re Gordon Grant and Grant Pty Ltd (1983) 2 Qd R 314 at 316G (‘Re Grant’). Thus, unless leave be granted, a person with a claim against the company will ordinarily be required to lodge a proof of debt rather than sue the company. As McPherson J observed in Re Grant at 317E the structure of leave provisions such as s 500(2) is essentially to erect for the Court a choice between the proof of debt procedure and more formal litigation.

16    When a claim against a company is essentially proprietary in nature, however, this analysis loses some of its force because the question is no longer whether money is owed but rather whether an asset belongs to the company at all. It has, therefore, been said on more than one occasion that this takes trust claims outside the proof of debt system. A corollary of that observation is that ordinarily in trust claims the Court will grant leave (as Gleeson J recently explained in Interleasing (Australia) Limited v Tieman Industries (in liq) [2015] FCA 1120 at [15]).

17    There are two features of the present case which take it outside the ordinary. First, there are hundreds of Unpaid Vendors claims and they attach, if they be valid claims, to the principal asset of the company which is an insufficient pool of cash. Apart from the Unpaid Vendors, there are two other claimants eyeing that pool: a secured creditor and the liquidators who claim a lien in relation to some of their expenses incurred as administrators. I rejected an earlier attempt by some of the Unpaid Vendors and the liquidators to erect a process where a range of representative claims of the Unpaid Vendors would be determined by means of separate questions and the cost of doing so paid for by the company: Mossgreen (No 3) at [8], [12]. I concluded that the only feasible way for the trust claims to be resolved was for the Unpaid Vendors to sue.

18    Secondly, this left open the difficulty that they could not be made to sue and, until the relevant limitation period expired, the liquidators would not be able to deal with the pool of cash as an asset of the company. Whilst even one trust claim remained, the company was effectively in suspended animation.

19    It was in order to end that impasse that I set the deadline that I did. It was my intention, as I think Order 4 makes clear, that any claim by an Unpaid Vendor was to be made by the deadline of 14 August 2018 and, after that date, a grant of leave would be unlikely to be forthcoming.

20    Because of that rather singular background, whilst I accept that the usual position is that trust claimants are granted leave under s 500(2), this is not a usual case.

21    It is within the Court’s power to grant leave notwithstanding all of the above and the breadth of the discretion conferred by s 500(2) cannot itself be confined by the orders made on 21 May 2018. But the considerations I have outlined provide powerful discretionary matters weighing against a grant of leave.

22    Mr Chappell and Mr Hung submitted that they should be granted leave because:

(a)    they had not understood that Order 4 set a deadline but believed it was merely by way of facilitation;

(b)    they did not bring a claim themselves because of the potential costs involved including the possibility of adverse costs orders; and

(c)    they decided to hold off and wait for one of the larger claimants to make a move. Unfortunately, however, no such claimant brought a claim.

23    I accept the truth of this explanation. As to (a), whilst I accept that they did not understand the import of Order 4, I do not think it was reasonable for them not to do so. Paragraph [14] above of Mossgreen (No 3) was clear. As to (b) and (c), I accept that these were entirely rational positions to adopt. They were also, however, deliberate decisions, and in their nature, strategic. As events have transpired, they have turned out to be incorrect decisions. Whilst, no doubt, this is most difficult for them, it is Mr Chappell and Mr Hung who must live with the consequences of their strategic choices, not the other parties involved in this winding up. I do not think that the explanation proffered by them, therefore, provides a reason to relieve them from the deadline I imposed.

24    I have also taken into account the potential seriousness of this conclusion for Mr Chappell and Mr Hung. Although one cannot, for obvious reasons, be sure about this, one possible interpretation of events is that they will lose their property by reason of missing the deadline. If I thought that I could somehow accommodate Mr Chappell and Mr Hung’s case in a way which did not entirely discombobulate the winding up I would seek to do so. Theirs is not, however, the only prejudice. The liquidators will also suffer prejudice if I now permit the claim to go forward. They have made an application for directions that they were and are justified in treating Mossgreen’s assets as company assets. They made the application only after it appeared there were no trust claimants. If that now turns out not to be correct, the expenditure on the directions application will have been wasted. I accept that this prejudice is at the lower end of the scale and could be largely ameliorated by requiring Mr Chappell and Mr Hung to pay those costs as a condition of the grant of leave. But it is indicative of the kinds of problems the delay has engendered.

25    The deadline was set for a purpose. The circumstances are not sufficiently compelling to permit Mr Chappell and Mr Hung to be let back in.

26    The application will be dismissed with costs.

Associate:

Dated:    27 November 2018