Crystal Gate Pty Ltd (Administrators Appointed), Re [2010] QSC 241

SUPREME COURT OF QUEENSLAND CITATION: Re: Crystal Gate Pty Ltd (Administrators Appointed) [2010] QSC 241 PARTIES: URBAN HOMES PTY LTD (applicant/cross respondent) INTERLINK HOLDINGS PTY LTD (applicant/cross respondent) BRIAN MALONEY (applicant/cross respondent) v GERRY COLLINS AND MATHEW JOINER AS LIQUIDATORS OF CRYSTAL GATE PTY LTD ACN 010 967 254 (IN LIQUIDATION) (respondent/not a party to the application) RAJENDRA KUMAR KHATRI AND MICHAEL PELDAN AS FORMER ADMINISTRATORS OF CRYSTAL GATE PTY LTD (IN LIQUIDATION) (cross applicants) FILE NO/S: SC No 9923 of 2006 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 7 July 2010 DELIVERED AT: Brisbane HEARING DATE: 5 July 2010 JUDGE: Chief Justice ORDERS: 1. Order pursuant to s 564 of the Corporations Act 2001 that the liquidators of Crystal Gate Pty Ltd pay, in priority to the claims of all unsecured creditors and the former administrators of the company, the sum of $283,116.14 referred to in this judgment as payable to the present applicants, namely, Urban Homes Pty Ltd, Interlink Holdings Pty Ltd and Brian Maloney; 2. Declare that the former administrators of the company, Messrs Khatri and Peldan, are entitled to $31,701.06 remuneration for their work in that capacity; and 3. Costs reserved. -- 1 of 6 -- 2 COUNSEL: P W Evans for the applicants/cross respondents W P Jiear for the cross applicants SOLICITORS: Piper Alderman for the applicants/cross respondents Hynes Lawyers for the cross applicants [1] CHIEF JUSTICE: The three applicants are unsecured creditors of Crystal Gate Pty Ltd which is in liquidation. On 27 November 2006, Fryberg J ordered that the company be wound up, and appointed Messrs Collins and Joiner as liquidators. The company had been under administration, with Messrs Khatri and Peldan as administrators. The present applicants had sought the liquidation, which the company’s sole director Mr Stockwell and the administrators opposed. Because the company was insolvent, His Honour made the winding up order. A substantial issue was whether the administrators, or the present liquidators, should be appointed as the liquidators. [2] His Honour referred to a number of “dubious transactions” (eg, the sale of the company’s enterprise to an associated entity), the administrators’ failure to investigate those transactions, and the preparedness of the present applicant to provide the funds necessary to facilitate that investigation should the present liquidators be appointed. The Judge was at least implicitly concerned about the association between the sole director Mr Stockwell and the administrators. He found that the administrator Mr Khatri had been untruthful in an important respect, as to his preparedness to investigate the company’s transactions. Under cross- examination, Mr Khatri acknowledged that he had been incompetent. In appointing the present liquidators, the Judge ordered the administrators to pay the applicant creditors’ costs of the winding up application. Those former administrators have an unlimited right of indemnity from the former director Mr Stockwell. [3] The former administrators have established an entitlement to $31,701.06 remuneration for their work as administrators. The applicant creditors, who are the only creditors of the company, do not oppose my declaring, under s 449E of the Corporations Act 2001 (Cth), that the former administrators’ remuneration be set at $31,701.06. [4] The applicants incurred costs in pursuing the application for winding up, in funding a public examination, and in launching and pursuing the proceeding in this court challenging the so-called dubious transactions. It is that proceeding which ended with a mediation yielding $350,000. The costs incurred by the applicant total $252,821.73, including $62,982.62, the costs of the winding up application. Pursuant to the costs order made by Fryberg J, the former administrators paid $39,705.59 to the applicants. [5] This application concerns whether priority should be accorded the liquidators’ payment of $213,116.14, which is that amount of $252,821.73 less the $39,705.59 paid under the order. [6] Because the applicants are unsecured creditors, the payment of their debts would ordinarily be deferred until payment of the costs of the winding up and the costs of the former administrators. That is because of s 556 of the Corporations Act. The applicants rely however on s 564 which provides: -- 2 of 6 -- 3 “564 Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.” [7] The proceeds of the settlement secured through the mediation, being that amount of $350,000, constituted “property…recovered under an indemnity for costs of litigation” given to the liquidators by the applicants, and included some recovered expenses (the public examination costs). The applicants contend that their losses should be recouped from those proceeds with priority over the former administrators because of the risk they assumed in funding the litigation. The applicants do not seek priority for payment of their claims over the entitlement to payment of the liquidators. [8] The applicants advance an additional claim, in the nature of a commission or fee, as consideration for their provision of the financial backup for the proceeding which led to the settlement. A commercial litigation funder would levy a commission or fee of between 20 percent and 50 percent of the gross amount recovered. The applicants peg their claim at 20 percent of $350,000, which is $70,000. There was no evidence of any agreement for the payment of such a fee or commission, but it is a justified claim, akin to a quantum meruit, as compensation for the risk taken by the applicants in putting out their money and exposing themselves to liability, where the return to the liquidators was not insubstantial. [9] The applicants add that amount of $70,000 to the sum previously mentioned of $213,116.14, producing the overall total $283,116.14 for which priority is sought. [10] As well as seeking a declaration as to their remuneration, the former administrators seek a declaration that they are entitled to $38,806.42 “representing the debts and liabilities [they] incurred in the exercise of their functions and powers as administrators…for which they have not yet been reimbursed”. That represents the larger part of the cost of $39,705.59 which the former administrators paid to the applicants under the costs order made by Fryberg J. His Honour was apparently not intending that they should bear those costs personally. They would be entitled to be indemnified in respect of them out of the company’s property (s 443D), and to a lien in respect of them (s 443F). But those entitlements would be subject to any order made according priority to the payment of the amount claimed by the applicants. I was addressed on the basis that if the applicants are granted that priority, then after the necessary payments to be made to the liquidators and the applicants, there will be nothing left for the administrators. I am in these circumstances disinclined to make the further declaration sought by the former administrators. -- 3 of 6 -- 4 [11] The discretion to grant priority under s 564 is broad, and there is authority supporting some liberality in its exercise. That emerges from this passage from the judgment of Brownie J in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294, approved by the Court of Appeal in a subsequent case (2001) 38 ACSR 715: “The last words s 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors. See Re Bavistock (1946) 14 ABC 30, Re Invermee; Ex parte Official Receiver (1974) 36 FLR 187, Re Passmore; Ex parte Official Receiver (in liq) (1984) 56 ALR 181 at 186, Re Kyra Nominees Pty Ltd (in liq) (1987) 11 ACLR 767; 5 ACLC 811 at 819, Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610; 12 ACLC 1071.” [12] The solicitor appearing for the applicants, Mr Evans, summarized these features which he submitted warrant granting the priority sought: “…the Applicants have: a. assumed significant risk; b. paid significant amounts to the liquidator to investigate the sale transaction and to conduct the Stockwell Proceedings; c. been the reason why the liquidators have been able to recover any significant funds in the administration; d. ought be afford priority over the administrators who: i. seek to burden the company with their costs, most of which relate to the application in which they were replaced by the liquidator, instead of seeking to satisfy themselves pursuant to the unlimited guarantee provided by the former director of the company; ii. have not taken any risk, and indeed, have only incurred most of their costs in attempting to prevent their replacement – despite a finding of the court that they had no intention to undertake any substantive action; iii. have admitted incompetence in relation to how they conducted at least some of their functions as the former administrators; iv. have been found by the court to have acted in a manner that was sufficient to warrant the appointment of the liquidators; v. had in fact acted in a manner that, if they had been successful in not being replaced by the liquidators, -- 4 of 6 -- 5 would likely have prevented such recovery ever occurring.” [13] The solicitor for the former administrators, Mr Jiear, made a number of points in response, with which I will deal shortly. Unless they are influential, the applicants should be granted priority for the reasons advanced by Mr Evans. I turn to Mr Jiear’s points. 1. He pointed to disproportion between the amount of the costs in the winding up incurred by the applicants ($62,982.62) and those paid under the order by the former administrators ($39,705.59). The latter sum represents costs assessed on the standard basis. The applicants are however entitled to be reimbursed by the liquidators, from the property of the company, for their “taxed costs” incurred in the proceeding (s 466(2)). That means their actual costs, to be assessed formally as necessary. It does not mean costs which would be payable by one party to another in routine adversarial litigation. 2. Mr Jiear queried the extent of the evidence of an agreement by the applicants to finance the litigation. The applicant Mr Maloney swears that the applicants provided funding to the liquidators for the proceedings, and gives particulars of the amounts provided and the purpose of that provision. The solicitor Mr Evans swears to the effect that no formal signed written agreement ever eventuated. But as Mr Evans submitted it is, under s 564, the actual provision of financial assistance which may put creditors like the applicants into a preferred position. 3. Mr Jiear relied on the absence of evidence of the existence of the retainer from the liquidators to the solicitor who acted in the litigation, and referred to provisions of the Legal Profession Act 2007 (Qld) in relation to costs agreements. The solicitor Mr Evans did in fact act for the applicants and then the liquidators. There is no doubt that he did the work, and was entitled to payment of the fees which form part of the reimbursement sought by the applicants. The former administrators had no right to disclosure of any costs agreement, or to challenge the amount of any fees so payable. I add that I was referred to some extent to the nature of the litigation, and seeing its complexity, sensed no feeling of dismay about the size of the fees claimed and paid. 4. Mr Jiear relied on s 477(2B): any agreement between the applicants and the liquidators for the provision of financial assistance was an agreement which could run for more than three months, so that the liquidators were not permitted to enter into it except, as relevant, with the approval of the court. The public examination process took many months, and the mediation occurred some four months after the liquidation. The answer to this point is the same as made in para 2 above. Section 564 focuses on the actual provision of financial assistance, not any agreement under which it flowed. Whether or not the liquidators breached s 477(2B) is simply by-the-by. 5. Mr Jiear pointed out that there was no evidence that the liquidators had sought assistance from a commercial litigation funder who may have been prepared to levy a commission or fee less than 20 per cent of the return. That is no more than a matter for peripheral speculation. 6. Mr Jiear submitted that I should adopt a pro rata approach, sharing the pool among the applicants and the former administrators, as occurred in Deputy Commissioner of Taxation v Vintage Gold Investments Pty Ltd [2009] FCA 967, para 44. That would not be appropriate here, where the applicants’ -- 5 of 6 -- 6 financial provision was, in terms of material support, solely instrumental in securing the $350,000 which was realized through the mediation; and where by contrast as Fryberg J found, the former administrators would not have challenged any of the dubious transactions, and they actually opposed the appointment, as liquidators, of the only persons to whom the applicants were prepared to direct their funds. If anyone is to be “rewarded” in this, it is the applicants, and as necessary to the exclusion of the former administrators. [14] There will therefore be an order pursuant to s 564 of the Corporations Act 2001 that the liquidators of Crystal Gate Pty Ltd pay, in priority to the claims of all unsecured creditors and the former administrators of the company, the sum of $283,116.14 referred to in this judgment as payable to the present applicants, namely, Urban Homes Pty Ltd, Interlink Holdings Pty Ltd and Brian Maloney. [15] There will also be a declaration that the former administrators of the company, Messrs Khatri and Peldan, are entitled to $31,701.06 remuneration for their work in that capacity. [16] I did not ventilate the issue of who should pay the costs of this application. I reserve those costs, and invite the parties to present written submissions within seven days as to their disposition. -- 6 of 6 --