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Federal Court of Australia |
Last Updated: 20 March 2003
Gartner v Ernst & Young [2003] FCA 152
MICHAEL JOHN GARTNER, ALICE WINIFRED GARTNER, TYNSKI PTY LIMITED (ACN 008 162 123), NORSBAY PTY LIMITED (ACN 008 205 687), FRESREND PTY LIMITED (ACN 008 179 990), GARTNER FARMS PTY LIMITED (ACN 086 128 880), AUSVINE VITICULTURAL MANAGEMENT PTY LIMITED (ACN 007 184 901), GARTNERS' VINICULTURE MANAGEMENT PTY LIMITED (ACN 080 534 989), SKYBAY PTY LIMITED (ACN 008 163 782), VAMTOWN PTY LIMITED (ACN 008 061 407), MJ GARTNER PTY LIMITED (ACN 077 644 181) v ERNEST & YOUNG, ERNST & YOUNG CORPORATE FINANCE PTY LIMITED (ACN 003 599 844), NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)
S 189 of 2002
MANSFIELD J
14 MARCH 2003 (CORRIGENDUM 18 MARCH 2003)
ADELAIDE
IN THE FEDERAL COURT OF AUSTRALIA |
|
SOUTH AUSTRALIA DISTRICT REGISTRY |
S 189 OF 2002 |
BETWEEN: |
MICHAEL JOHN GARTNER FIRST APPLICANT ALICE WINIFRED GARTNER SECOND APPLICANT TYNSKI PTY LIMITED (ACN 008 162 123) THIRD APPLICANT NORSBAY PTY LIMITED (ACN 008 205 687) FOURTH APPLICANT FRESREND PTY LIMITED (ACN 008 174 990) FIFTH APPLICANT GARTNER FARMS PTY LIMITED (ACN 086 128 880) SIXTH APPLICANT AUSVINE VITICULTURAL MANAGEMENT PTY LIMITED (ACN 007 184 901) SEVENTH APPLICANT GARTNERS' VINICULTURE MANAGEMENT PTY LIMITED (ACN 080 534 989) EIGHTH APPLICANT SKYBAY PTY LIMITED (ACN 008 163 782) NINTH APPLICANT VAMTOWN PTY LIMITED (ACN 008 061 407 TENTH APPLICANT MJ GARTNER PTY LIMITED (ACN 077 644 181) ELEVENTH APPLICANT |
AND: |
ERNEST & YOUNG FIRST RESPONDENT ERNST & YOUNG CORPORATE FINANCE PTY LIMITED (ACN 003 599 844) SECOND RESPONDENT NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) THIRD RESPONDENT |
JUDGE: |
MANSFIELD J |
DATE: |
14 MARCH 2003 |
PLACE: |
ADELAIDE |
Please note the following change:
1. On the Orders page amend the ACN number of the 10th Applicant, Vamtown Pty Limited, to show ACN 008 061 407.
2. On p 1 of the judgment amend the ACN number of the 6th Applicant, Gartner Farms Pty Limited, to show ACN 086 128 880.
I certify that this is a true copy of the Corrigendum herein of the Honourable Justice Mansfield. |
Associate:
Dated: 18 March 2003
Gartner v Ernst & Young [2003] FCA 152
CORPORATIONS - authority of directors to institute proceedings in name of company after appointment of receivers - mortgagee appointed receivers and managers to a group of companies - directors brought proceedings in the name of companies against third parties - application by third parties to dismiss proceedings as proceedings not authorised by receivers and managers - whether directors possess authority to bring proceedings on behalf of companies in receivership - whether prior consent to proceedings from receivers is necessary - whether such consent can only be given where receivers had secured a satisfactory indemnity to protect assets subject of receivership.
Trade Practices Act 1974 (Cth), ss 51AA, 52, 82
Corporations Act 2001 (Cth), s 420
Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 136 ALR 733 - cited
South Australian Asset Management Corporation v Sheahan (1995) 16 ASCR 45 - followed
Gough's Garages Ltd v Pugsley [1930] 1 KB 615 - followed
Georgiadis v Australian and Overseas Telecommunications Corporation [1994] HCA 6; (1994) 179 CLR 297 - followed
Hawkesbury Development Co. Pty Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782 - cited
Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 108 FCR 77, [2001] FCA 173 - applied
Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 1 QB 814 - applied
Town and Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (O'Loughlin J, 19 July 1991, unreported, [1991] FCA 459 - referred
Bank of New Zealand v Essington Developments Pty Ltd (1991) 9 ACLC 1041 - cited
Re Geneva Finance Ltd (Receiver and Manager Appointed); Quigley v Cook (1992) 7 WAR 496 - considered
Cook v Northoak Holdings Pty Ltd (Receiver and Manager Appointed) [1998] WASCA 110 - considered
Brooklands Motor Co. Ltd (In Receivership) v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1993] MCLR 448 - followed
MICHAEL JOHN GARTNER, ALICE WINIFRED GARTNER, TYNSKI PTY LIMITED (ACN 008 162 123), NORSBAY PTY LIMITED (ACN 008 205 687), FRESREND PTY LIMITED (ACN 008 179 990), GARTNER FARMS PTY LIMITED (ACN 086 128 880), AUSVINE VITICULTURAL MANAGEMENT PTY LIMITED (ACN 007 184 901), GARTNERS' VINICULTURE MANAGEMENT PTY LIMITED (ACN 080 534 989), SKYBAY PTY LIMITED (ACN 008 163 782), VAMTOWN PTY LIMITED (ACN 008 061 407), MJ GARTNER PTY LIMITED (ACN 077 644 181) v ERNST & YOUNG, ERNST & YOUNG CORPORATE FINANCE PTY LIMITED (ACN 003 599 844), NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)
S.189 of 2002
MANSFIELD J
14 MARCH 2003
ADELAIDE
IN THE FEDERAL COURT OF AUSTRALIA |
|
SOUTH AUSTRALIA DISTRICT REGISTRY |
S.189 OF 2002 |
1. The application by the first and second respondents for the proceedings brought by the third to eleventh applicants to be dismissed is refused.
2. The notice of motion of the first and second respondents is otherwise adjourned to a date to be fixed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA |
|
SOUTH AUSTRALIA DISTRICT REGISTRY |
|
BETWEEN: |
MICHAEL JOHN GARTNER FIRST APPLICANT ALICE WINIFRED GARTNER SECOND APPLICANT TYNSKI PTY LIMITED (ACN 008 162 123) THIRD APPLICANT NORSBAY PTY LIMITED (ACN 008 205 687) FOURTH APPLICANT FRESREND PTY LIMITED (ACN 008 174 990) FIFTH APPLICANT GARTNER FARMS PTY LIMITED (ACN 080 534 989) SIXTH APPLICANT AUSVINE VITICULTURAL MANAGEMENT PTY LIMITED (ACN 007 184 901) SEVENTH APPLICANT GARTNERS' VINICULTURE MANAGEMENT PTY LIMITED (ACN 080 534 989) EIGHTH APPLICANT SKYBAY PTY LIMITED (ACN 008 163 782) NINTH APPLICANT VAMTOWN PTY LIMITED (ACN 008 061 407) MJ GARTNER PTY LIMITED (ACN 077 644 181) ELEVENTH APPLICANT |
AND: |
ERNST & YOUNG FIRST RESPONDENT ERNST & YOUNG CORPORATE FINANCE PTY LIMITED (ACN 003 599 844) NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) THIRD RESPONDENT |
JUDGE: |
MANSFIELD J |
DATE: |
14 MARCH 2003 |
PLACE: |
ADELAIDE |
1 By application filed on 13 August 2002, the applicants seek:
(a) declarations that the first respondent and the second respondent (together, the accountants) contravened ss 52 and 51AA of the Trade Practices Act 1974 (Cth) (the TP Act), and damages against the accountants under s 82 of the TP Act and for breach of contract, negligence, and equitable compensation; and
(b) declarations that the third respondent (the bank) also contravened ss 52 and 51AA of the TP Act, and damages against the bank under s 52 of the TP Act and for equitable compensation, together with declarations that each of the applicants has validly rescinded certain loan facility agreements, guarantees, mortgages and debentures granted by them to the bank and for restitution, and alternatively orders under s 87 of the TP Act setting aside those instruments and consequential orders.
2 On 23 September 2002, an amended statement of claim (the statement of claim) was filed.
3 The accountants applied by motion under O 9 r 7(1)(a) of the Federal Court Rules (the Rules) to set aside the application and the statement of claim insofar as they relate to the accountants, and alternatively for orders under O 20 r 2 or pursuant to the inherent power of the Court dismissing the application of the third to eleventh applicants (the Gartner companies) insofar as they relate to the accountants, or striking out the application and the statement of claim pursuant to O 11 r 16 of the Rules. The applicants acknowledge that the statement of claim will require further significant amendment. They do not seek to defend it in its present terms. Consequently, the parties are agreed that in a practical sense the statement of claim will be struck out and the applicants given leave to file and serve a fresh statement of claim. The accountants also now accept that the statement of claim (as it has been amended) is expressed in a way which enlivens the jurisdiction of the Court. Their original claim was that the jurisdiction of the Court had not been invoked. That claim is no longer pursued. The motion is now maintained only against the Gartner companies for an order dismissing the proceedings as they relate to the accountants.
4 On 9 August 2002 the bank appointed Bruce Carter and John Hart (the receivers) as receivers and managers of each of the Gartner companies. On 9 August 2002, according to the statement of claim and the evidence, the bank also appointed the receivers as receivers and managers of Gartner Wines Pty Ltd (Gartner Wines). On the same date an administrator was also appointed to Gartner Wines. The proceedings were instituted some four days later. The receivers did not instigate, or authorise the instigation of, the proceedings by the Gartner companies.
5 The substantive point of the accountants is that the Gartner companies did not have the authority to commence the proceedings against them, and so the application itself should be set aside.
6 I do not think it is necessary to determine precisely the power which the Court has been asked to exercise in considering the motion. In Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 136 ALR 733 at 738 (Cell Tech), Lindgren J expressed the view that the grounds upon which the power given by O 9 r 7(1) may be exercised are not stated, but that an application which invites consideration of whether the Court's coercive power should be exercised in relation to a particular party by nothing more than the filing and service of the application may enliven consideration of the exercise of that power. In this matter the attack is not upon the statement of claim of itself, but upon the circumstances in which the proceeding came to be instituted. The accountants have adduced evidence in support of their application. The evidence has not been put in issue. I do not discern, in the particular circumstances of the case, that the relevant principles are different whether one applies O 9 r 7(1) or O 20 r 2 of the Rules. See generally the discussion by Lindgren J in Cell Tech at 738-739. The conditional appearance filed by the accountants has become unconditional in relation to the first and second applicants, and if the application to dismiss or strike out the claim against the Gartner companies is unsuccessful, it will become unconditional against those applicants also: see O 9 r 6(2).
7 To understand the context of the application, it is desirable to refer briefly to the statement of claim. My description of the allegations is severely abridged, so as to recite only the gist of the allegations to the extent necessary to address the issue now arising on the motion.
8 The first and second applicants carried on a partnership farming business on a property at Coonawarra in the south-east of South Australia. In 1996, the farming activities were extended to viticulture. The Gartner companies are all part of what is defined as the "Gartner Family Group" including the first and second applicants, all being in a general sense under the control of the first applicant. Each of the Gartner companies are involved in the viticulture industry, again in a general sense for the Gartner Family Group.
9 By early 2001, the first applicant, on behalf of the Gartner Family Group, was considering the development of a winery. The proposed vehicle for the project was Gartner Wines. One option was to acquire an existing winery through a developer which would then lease it back to Gartner Wines. As a result of contact from an officer of the accountants (the statement of claim treats them in substance as acting together), the accountants were retained by the Gartner Family Group as its accountants to advise about how best to proceed to develop the winery. In about May 2001, in reliance upon the advice of the accountants, the applicants and Gartner Wines decided that Gartner Wines would not pursue the acquisition of an existing winery, but would itself construct the proposed winery and would secure the necessary finance (including refinance of the existing indebtedness of the first, second and third applicants) for construction of the winery and for working capital through a bank, to be secured by the assets of the Gartner Family Group. The decision to expose the assets of the Gartner Family Group by offering them as security for the proposed finance for the winery was also made relying on the advice of the accountants given between May and November 2001 about the best way to move forward with the development of the winery. On 11 October 2001 the bank by letter offered finance to the Gartner Family Group. The offer was accepted.
10 On 23 November 2001, Gartner Wines and the Gartner Family Group entered into and then drew down a financing facility with the bank. The finance provided was in various ways made available to the first, second, third and eleventh applicants, and to Gartner Wines, and was guaranteed by the Gartner companies. In support of the finance, guarantees were given by each of the applicants and supported by security given to the bank, in the case of the Gartner companies (other than the eleventh applicant) by a debenture granted on 23 November 2001 duly registered pursuant to ss 263 and 265 of the Corporations Act 2001 (Cth) on 3 January 2002. The eleventh applicant had, for the purpose of its activities as trustee of the MJ Gartner Family Trust pursuant to a trust deed dated 25 July 1997, already granted a debenture to the bank on 31 July 1997, and that debenture became the vehicle by which it supported its guarantee of the financing facility.
11 Each applicant was aware in November 2001 that the finance facility offered and accepted was not sufficient for the total funding required by the Gartner Family Group. There was a projected shortfall of funds in excess of $3 million needed to complete the project. The additional funding was subsequently sought from the bank in early 2002 but was refused. The proposed development did not proceed as planned, and subsequently the bank on 9 August 2002 appointed the receivers to each of the Gartner companies and to Gartner Wines. That action followed the applicants, by notice to the bank given on 8 August 2002, rescinding or purporting to rescind the loan facility agreement and the various securities and guarantees.
12 The applicants allege that they engaged the accountants to advise them about the proposed winery development, and that they participated in the "group financing option", that is by borrowing from the bank secured by mutual guarantees and by the debentures given by each of the Gartner companies, only by reason of representations made and advice given by the accountants. They further allege that they accepted the financing arrangement proposed by the bank, being aware of the shortfall on projected funding needs, only by reason of representations made and advice given by the accountants and by the bank. They allege that the representations made were misleading and deceptive, and that the advice given was negligent and in breach of the retainer with the accountants, so the loss they have suffered is recoverable from each. In addition, as noted, they seek to set aside the various security instruments. It is not necessary to refer in detail to the representations alleged, or the advice allegedly given. What is clear is that, if the finance facility agreement and the various security documents were validly rescinded on 8 August 2002 as claimed, the appointment by the bank of receivers and managers to the Gartner companies on 9 August 2002 was itself without proper foundation and so was invalid.
13 As I have noted, the present point raised by the accountants is simply the authority of the Gartner companies to have instituted the proceedings. The accountants do not claim that the directors of each of the Gartner companies did not authorise the institution of the proceedings. The point they make is that, by reason of the appointment of receivers and managers to each of the Gartner companies a few days before the institution of the proceedings, the directors no longer had the power or authority to institute the proceedings for and in the name of each of the Gartner companies.
14 The bank did not wish to be heard on the motion, save to put before the Court the attitude of the receivers and managers of each of the Gartner companies. It is demonstrated by the affidavit of Bruce Carter, one of the receivers and managers, sworn on 7 October 2002 and a subsequent affidavit of John Hart, the other receiver and manager, sworn on 1 November 2002. The receivers and managers were not consulted by the directors of any of the Gartner companies before the proceedings were commenced, or in relation to the prosecution of the proceedings, at least to the period of time up to 7 October 2002. Nor did they receive any indemnity from the directors of the Gartner companies or from any other source on behalf of the Gartner companies in respect of the costs of these proceedings in the event that costs are awarded against the Gartner companies. They were not informed of the proceedings being, or about to be, instituted until told by solicitors for the bank on 13 August 2002. On 16 August 2002, the bank through its solicitors informed the solicitors for the applicants:
"We note to the extent that any of the companies who are named as applicants are in receivership, that your clients did not seek the authority of, nor the prior approval of the receivers to the commencement of these proceedings.We are instructed to point out to you that under no circumstances do any of the directors of those companies have any authority to pledge any asset of a company or incur any liability in respect of the proceedings. To the extent that they purport to do so, the [bank] reserves all rights against those directors."
The attitude of the receivers and managers, and of the bank, on the other hand does not demonstrate that the receivers and managers at any time have requested that they be given any such indemnity. Nor does it demonstrate that the receivers and managers, or the bank, have formally objected to the institution and maintenance of these proceedings by the Gartner companies through their directors. They have in fact reached an agreement with the applicants for the sale of certain assets subject to the issue of validity of their appointment as receivers and managers (an issue alive because of the purported recission of the various debentures) which includes terms that:
. the applicants will consent to the issue of liability of the bank being heard separately from other issues, and expeditiously, in the proceedings, and
. the applicants will make no application to adjourn the proceedings or the hearing of any scheduled trial other than as a result of any substantial procedural default on the part of the bank.
Those terms are part of an agreement recorded in a letter from solicitors of the bank to solicitors for the applicants dated 15 October 2002.
15 The receivers and managers do however continue to assert that the causes of action which the Gartner companies have pleaded against the accountants are choses in action and assets of the Gartner companies, which are subject to a fixed charge in favour of the bank. They have not yet formed a view as to the merits of the causes of action, that is as to the value of the choses in action. To the extent to which they have value, the receivers and managers indicate they may wish to gather in those assets and realise their value for the benefit of the bank as the secured creditor. They assert that they:
"... do not concede that the directors of the [Gartner companies] have the power to cause them to attempt to realise the Assets, and if they were realised, to deal with the realised proceeds without reference to the first ranking fixed charge they have granted to the [bank]."
Their position is that they wish to preserve to the extent possible their rights as receivers and managers of the Gartner companies in the event that the accountants succeed in their application, and so avoid any estoppel or other legal impediment which would prevent them from causing the Gartner companies to realise the assets comprising the choses in action, which are the subject of these proceedings, at a later time. Their concerns have been met by the accountants by an acknowledgment on the part of the accountants given in open Court in the following terms:
"[the accountants] acknowledge that a setting aside or dismissal of the Application brought by the third to eleventh applicants on the basis of a want of authority does not constitute an issue or other estoppel against the third to eleventh applicants, if the receiver and manager or any administrator and/or liquidator of the third to eleventh applicants determine to prosecute an action against [the accountants] on the basis of the facts as pleaded. This acknowledgment in no way is intended to suspend the period/s of limitation applicable to any of the applicants."
16 Each of the debentures granted by the Gartner companies is in relevant respects in identical terms. The "mortgaged property" is the whole of the undertaking and assets and property of each of the Gartner companies. The charge is a fixed charge on all the present and future estates and interests of each of the Gartner companies in its assets, including:
"personal property not referred to above which is not acquired for disposal or consumption in the ordinary course of, and for the purpose of carrying on, the ordinary business of the Mortgagor" (cl 4.1(k))
A floating charge is created over the remainder of the mortgaged property that is not subject to the fixed charge. The floating charge crystallises, so as to become a fixed charge, inter alia upon the bank giving a written notice fixing the charge, or upon the bank appointing a receiver to the Mortgagor. In either event the fixing of the charge operates immediately and automatically.
17 The evidence indicates, and I find, that the bank gave notice fixing the charge in each instance on 6 August 2002, and appointed the receivers to each of the Gartner companies on 8 or 9 August 2002. Hence, subject to the issue as to whether the several debentures granted by each of the Gartner companies was validly rescinded on 8 August 2002, the floating charge under each of the debentures became fixed prior to the institution of the proceedings on 13 August 2002.
18 Again, subject to the issue as to the effectiveness of the purported recession of the several debentures, the issue is as to the legal consequences of the appointment of the receivers and the fixing of the charge in relation to each of the Gartner companies.
19 I accept that the choses in action which the Gartner companies are pursuing against the accountants in this action are assets of each of the Gartner companies which fall within the definition of "mortgaged property" in the debentures and that, if the several debentures have not been rescinded, they are now subject of the fixed charge granted by the several debentures: see South Australian Asset Management Corporation v Sheahan (1995) 16 ASCR 45 at 53 (Sheahan). Indeed, senior counsel for the applicants did not contend to the contrary. I also accept that, by virtue of the terms of each debenture, the receivers would be entitled to bring the present proceedings in the name of each of the Gartner companies, again subject to the several debentures not having been validly rescinded: Gough's Garages Ltd v Pugsley [1930] 1 KB 615 at 621; Georgiadis v Australian and Overseas Telecommunications Corporation [1994] HCA 6; (1994) 179 CLR 297 at 303-305, and 311-319; and Sheahan at 52. Again, senior counsel for the applicants did not contend to the contrary.
20 The proposition of the accountants through senior counsel is that, by virtue of the terms of the several debentures, the receivers hold the power to decide whether to bring proceedings such as the present against the accountants in the name of the Gartner companies to the exclusion of the directors. In a more refined way, it is put that the directors had no authority to institute these proceedings against the accountants in circumstances where:
(a) they had not obtained the prior approval of the receivers to do so (and the receivers cannot give the approval after the proceedings have been commenced) at least where it is not claimed that the receivers had unreasonably refused to institute the proceedings;
(b) they had not, prior to the institution of the proceedings, provided to the bank an external indemnity satisfactory to the bank in respect of the costs which might be awarded against the Gartner companies so that the assets available to the bank under the several debentures might not be reduced to the extent of any adverse costs orders.
21 It is clear that the debentures confer upon the receivers very wide management powers over the Gartner companies following their appointment. Their powers include all the powers of each of the Gartner companies through their directors, as well as the powers conferred by law on mortgagors, mortgagees and receivers, including the power to carry on and manage all or any part of the business of each of the Gartner companies. Clause 17.4(m) of each debenture empowers the receivers to:
"... take, defend, compromise or appeal and to give any undertaking or security and incur costs and expenses relating to any proceedings ..."
in the name of each of the Gartner companies.
22 In addition, the receivers are empowered by s 420(1) of the Corporations Act 2001 (Cth) to do all things necessary or convenient to be done in connection with, or incidental to, the obtaining of the objectives for which they are appointed, subject to any relevant limitation in the debenture under which they are appointed. There is no relevant limitation in any of the several debentures granted by the Gartner companies. Section 420(2) expressly empowers receivers to carry on the business of the mortgagor, to bring proceedings in the name of the mortgagor, and to appoint solicitors to act for the mortgagor.
23 It is clear, therefore, that subject to the validity of the appointment of the receivers (which, in turn, depends upon whether the several debentures were validly rescinded before their appointment), the receivers under the several debentures granted by the Gartner companies had, and have, the right to institute and conduct proceedings in the name of the Gartner companies against the accountants in respect of the causes of action alleged. It is also clear that, subject to whether the several debentures have been validly rescinded, the causes of action are assets of each of the Gartner companies subject to the several debentures.
24 I do not, however, accept the next step in the accountants' argument. The argument is that in those circumstances the power to bring and maintain such proceedings in the name of the Gartner companies is exclusively that of the receivers, so that the power to do so could not be exercised by any directors of the Gartner companies except with the express prior consent of the receivers; and secondly that such consent could only be given if the receivers had secured a satisfactory indemnity for any costs liability incurred in so doing, so that the assets the subject of the several debentures were not exposed to the risk of diminution in the event of an adverse costs order.
25 The second of those two conditions in any event seems to me to express a restriction or limitation on the power of the receivers, rather than a limitation on the power of the directors. It should be a matter for the receivers as to the terms in which they might consent to the directors bringing such proceedings. Nothing has been identified, or is apparent to me, as to why the receivers powers should be so circumscribed. If the receivers act inappropriately in the eyes of their appointor, they may be removed and replaced. There may be good reasons why the receivers may consent to the institution of proceedings without a full indemnity for costs. There is plainly room for debate about what is, or may be, a satisfactory indemnity. There may be issues as to whether any security to support the indemnity should be sought, and if so as to the nature and extent of the security. Those are matters which, in my view, are matters for the judgment of the receivers. I do not see that persons in the position of the accountants have a legitimate interest in intruding into such commercial judgments. Nor do I see any reason to extract from the terms of the several debentures, or from the Act, any legal requirements for imposition of the second of those two conditions upon the directors of the Gartner companies in relation to the receivers, or in relation to the bank, as a necessary term of any consent given by the receivers to the directors authorising the directors of a company in receivership (such as the Gartner companies) to institute proceedings of the present nature in the name of the company.
26 Senior counsel for the accountants referred to a number of authorities on the extent to which the appointment of a receiver by the holder of a charge over the assets of a company supersedes the authority of the directors of the company. They are generally discussed in Equity Doctrines & Remedies, Meagher Gummow and Lehane, 3rd ed (1902), Butterworths at [2848]-[2852], 711-715 - the text has not materially changed in the 4th ed (2002), at [28-245] - [28,260], 933-937. As the learned authors point out, there is little early authority on the topic. Their review of the authorities commences with a passage from the decision of Street J in Hawkesbury Redevelopment Pty Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782, at 790 (Hawkesbury).
27 Sackville J in Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 108 FCR 77, [2001] FCA 173 (Deangrove) was required to consider those authorities and others. The company in receivership through its directors had commenced action against its financier for misleading conduct allegedly leading to it accepting a particular offer of finance, without the consent of the receivers. The receivers had been appointed by the financier under a debenture granted by the company securing its indebtedness to the financier. The financier challenged the validity of the institution of the proceedings in the absence of any consent from the receiver. I respectfully adopt his Honour's analysis of the authorities at 84-87, [30]-[39]. It would serve little purpose to repeat it in this judgment. His Honour concluded at 87 [40]:
"In my view, the authorities clearly support the proposition that, where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder, qua debenture holder, are not prejudiced: O'Donovan, Company Receivers and Administrators (2nd ed, 1992), at [8.30]. The entitlement of the directors reflects the fact that, as Street J observed in Hawkesbury Development, at 210, it borders on the absurd to contemplate that a receiver would institute proceedings in the name of the company challenging the very debenture to which he or she owes office. It is almost as absurd to contemplate the receiver instituting proceedings against the debenture holder or chargee claiming damages for misleading and deceptive conduct or breach of duty. In any event, an action conducted by the receiver against his or her appointor is likely to encounter a variety of practical difficulties: Kerr on Receivers (2nd Cum Supp to 17th ed, 1997), at 77."
In that matter, the issue as to the need for an indemnity was not a live one. The company in receivership had offered an appropriate indemnity, apparently through a shareholder.
28 It is clear that the grantee of a debenture, or the receiver appointed by the grantee, may insist upon an appropriate indemnity where the directors of the company in receivership have consent as to, or are entitled in law to, bring proceedings against the debenture holder to ensure the interests of the debenture holder in that capacity are not prejudiced. But each of the cases referred to by his Honour arose where the debenture holder was itself being sued, and insisted upon the indemnity. I do not think the cases recognise, or seek to impose, an obligation upon the directors of a company to which a receiver has been appointed, independently of the rights which the debenture holder has and wishes to assert under the debenture, to provide such indemnity. I have expressed my reasons for that view in [25] above.
29 In the present matter, the receivers have not explicitly consented to the institution of the proceedings against the bank. In the light of the decision in Deangrove, and the cases referred to including Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 1 QB 814 at 819, 821 (Newhart), such consent is not necessary. I think, on the evidence, the receivers apparently neutral attitude on that aspect reflects a proper understanding of the authorities. The evidence indicates also that they have not sought, or have not yet sought, any indemnity from the directors or shareholders of the Gartner companies in respect of the proceedings, be they against the bank or against the accountants. In my view, that is a matter for their commercial judgment. It is clear that they have identified the issue as to the recission of the several debentures as significant. There is an agreement to seek to have the Court hear and determine that issue first and separately. If the Gartner companies succeed on that aspect of the matter, they will be free to pursue the claim against the accountants (and any damages claim against the bank) through the directors. If, on the other hand, the debentures remain in force, the receivers may then seek (and, on the authorities as I comprehend them, would be entitled to) an indemnity of the nature discussed. Such considerations reinforce my conclusion that the issue of whether any indemnity should be provided to the bank at the present time is a matter for the receivers in the present circumstances, rather than one imposed as a matter of law and independently of the wishes of the receivers and the bank in the light of the terms of the several debentures and the Corporations Act.
30 In Town and Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd [1991] FCA 459 O'Loughlin J also expressed the matter in terms of commercial judgment on the part of the receiver. He said at [27]:
"This call for indemnity can arise in cases such as Newhart Developments Ltd v Co-operative Commercial Bank Ltd (1978) 1 Q.B. 814, where it was held that the powers given by a debenture holder to a receiver of a company, which enabled him to realise the company's assets and carry on the business for the benefit of the debenture holder, did not thereby divest the directors of the company of their power to pursue a right of action. However, where the directors exercise such a right, it must be recognised that the company is put at risk in the event of the attempted enforcement of the right being unsuccessful. In such circumstances it may be prudent on the part of the receivers and it may be appropriate on the part of the Court to require directors to give some form of indemnity."
31 In the present matter, the proceedings against the accountants fall into a different category of case than those considered in Deangrove. That is simply because they are not against the financier which appointed the receivers under a debenture. In Deangrove, Sackville J said at 87-88 [43]:
"It is unnecessary to consider in what other circumstances, if any, the directors of a company in receivership are entitled to commence and maintain proceedings in the name of the company. Nor is it necessary for present purposes to determine how conflicts between the directors and receivers in the conduct of litigation might be resolved (a question to which ss 424 and 1321 of the Corporations Law might be relevant). It is enough to hold that the present case is covered by Newhart Developments: see Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed, 1992), at [2851]."
32 I find, in relation to that aspect of the proceedings, that the receivers were not aware of the proceedings before they were instituted. However, the receivers became aware of the proceedings within a few days of their institution, and have taken no steps to direct the directors of the Gartner companies to bring them to an end, nor to seek any indemnity on behalf of the bank to ensure its interests are not jeopardised. I infer from the evidence that, at the present, the receivers consent to the proceedings against the accountants being maintained by the Gartner companies through the directors. The consent was not given before the proceedings were instituted. However, since learning of the proceedings the bank first expressly asserted the directors had no authority to pledge any asset of any of the Gartner companies. Subsequently, the receivers have asserted that the choses in action being pursued in the proceedings are assets of the Gartner companies subject to the debentures, but they have not sought to direct the Gartner companies by their directors to stop pursuing the causes of action against either the accountants or the bank. In fact they have apparently come to some agreement as to how the Court should be asked to further hear the proceedings, namely by determining the effectiveness of the purported rescission of the debentures first and separately. Those matters led me to infer the consent of the receivers to which I have referred, at least for the time being. It may be the intention of the receivers, if the validity of the debentures is upheld and depending upon their assessment of the strength of the claims, to later step in and take over the conduct of the claims against the accountants. Whatever their reasons, in my judgment they presently consent to the Gartner companies, through their directors, maintaining the proceedings against the accountants.
33 In the particular circumstances, I do not consider that there is any rule of law which prevents the directors from having instituted the proceedings against the accountants and from maintaining them.
34 The proceedings include a claim for a declaratory affirmation that the several debentures granted by the Gartner companies to the bank have been validly rescinded. If such an order is made, the present objections of the accountants must fall away. It is obviously more convenient that, provided the interests of the putative debenture holder are not prejudiced, the claim against the accountants should be able to proceed at this point rather than await the determination of the status of the debentures. The determination of the status of the debentures may take some time to finally resolve, including (if it arises) the hearing of any appeals. Whilst the status of the debentures is a live issue, in my view the Gartner companies through their directors are not disentitled in law from bringing and maintaining the proceedings against the accountants. It is a matter for the receivers, and the bank to take such action as they wish to ensure the interests of the bank as debenture holder are not prejudiced. There may otherwise be a hiatus, and possibly a lengthy hiatus, during which the Gartner companies are unable to proceed against the accountants through their directors and where the receivers are unwilling to do so in the name of the Gartner companies whilst the status of the instruments appointing them is uncertain.
35 That, of course, does not disentitle the accountants from seeking to protect their interests by an application for an order for security for costs. Indeed, the fact of the purported appointment of the receivers to the Gartner companies may be a relevant consideration to whether security for costs should be ordered, and if so in what terms: see e.g. Newhart at 514.
36 More importantly, however, it must be remembered that the several debentures between the Gartner companies and the bank are creatures of contract, albeit the power of receivers are contained within the Act. The objectives of receivers are to preserve, recover and realise the assets the subject of the debenture in order to satisfy the debt secured by the debenture: Bank of New Zealand v Essington Developments Pty Ltd (1991) 9 ACLC 1041.
37 Where the directors of a company in receivership, with the knowledge and consent of the receivers, are maintaining proceedings in the name of the company against a third party, it may be inferred (as I infer) that the maintenance of those proceedings is not considered by the receivers for the time being as inconsistent with the fulfilment of their objectives. In Newhart Shaw LJ at 819 explained:
"But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name of the company. It does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge."
38 In Hawkesbury, Street J at 790 said:
"A valid receivership and management will ordinarily supersede, but not destroy the company's own organs through which it conducts it affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management."
39 Once it is accepted that the appointment of receivers does not, as a matter of law, bring to an end all capacity of the directors of a company to fulfil their functions, then in my view the relationship to which Street J referred is to be determined between the receivers and the directors of the company. In the event of dispute, it will be for the Court to resolve. There is no such dispute in this matter. The receivers do not assert that their rights under the several debentures, or as granted by statute, are being exercised by the directors or that their legitimate objectives are being or may be jeopardised by the Gartner companies through their directors having instituted, and presently maintaining, the proceedings against the accountants. In Re Geneva Finance Ltd (Receiver and Manager Appointed); Quigley v Cook (1992) 7 WAR 496, Owen J at 51 said:
"The task is to look at the effect which the exercise of power will have on the receiver's functions rather than to concentrate on the identification and delineation of the residual duties reposed in the director ...It is difficult to see why a director should be prevented from taking a step which he believes to be in the interests of the company unless that step would, in the reasonable opinion of the receiver, prejudice the proper administration of the receivership."
There is here no apparent clash between what the directors regard as being in the best interests of the Gartner companies and what the receivers regard as being in the best interests of the bank, as their appointor. So long as that position is maintained, I do not consider that the directors can be said to have no power in law to have instituted and to maintain the proceedings against the accountants. If there were such a clash, its resolution would depend upon the terms of the several debentures, the terms of appointment of the receivers, and their statutory powers. But, in my judgment, the accountants are not entitled to the order they seek, which in effect assumes such a clash, in the present circumstances. If permitted to do so, they would be seeking to take advantage indirectly of contractual arrangements between the Gartner companies and the bank where, as between those parties, there is no relevant disputation at present.
40 I am also not persuaded that the failure of the directors of the Gartner companies to seek the consent of the receivers to the institution of the proceedings necessarily means that they were instituted without power, and that the absence of power in the directors at that point is now irredeemable. It may be observed that Newhart involved the institution of proceedings by the directors in the name of the company without the consent of the receivers. See also Cook v Northoak Holdings Pty Ltd (Receiver and Manager Appointed) [1998] WASCA 110 per Steydler J (with whom Kennedy and Heenan JJ agreed) where his Honour said, in the context of an application for costs against a solicitor personally for instituting proceedings on the instructions of directors after the appointment of a receiver:
"Quite apart from anything else the appointment of the receiver in this case did not necessarily divest the directors of the first respondent of the power to institute an action on behalf of the first respondent and thereafter pursue it against, inter alia, those who were the holders of the debenture pursuant to which the receiver had been appointed. (See Newhart Developments Ltd v Co-operative Commercial Bank Ltd (1992) 7 WAR 496 and Sun-Life Properties Pty Ltd v Chellaston Pty Ltd (1993) 10 ASCR 476 at 480-1)."
41 My conclusion is, I think, consistent with the approach of Thomas J in Brooklands Motor Co. Ltd (In Receivership) v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1993] MCLR 448. It is the only other case of which I am aware in which a third party has, in effect, sought the benefit of the debenture between the guarantor and the debenture holder. It was held that the directors of a company had a residual power to commence proceedings in the name of a company to enforce a financing agreement accepted by the managing director after the appointment of receivers by an earlier financier. The receivers had not been consulted about the proposed proceedings, but upon learning of them they did not seek to intervene in them. They had received an acceptable indemnity in respect of the costs exposure of the company in the event the proceedings were unsuccessful. Thomas J at 451 expressed the principle in the following way:
"The power to bring proceedings under a debenture does not divest the directors of the company of their residual power to institute proceedings where to do so would not prejudicially impinge on the debenture holder's interests by threatening or imperilling the assets which are subject to the charge. It is the receivers who have the responsibility for ensuring that this is not the case One may go further and agree with Shaw LJ, in the Newhart case, at p 901, that it is indeed incumbent upon directors to commence a proceeding where that course is appropriate and in the best interests of the company."
42 His Honour recognised the principle is subject to the qualification that the receivers, if they require it, are entitled to an indemnity against any liability for costs incurred by the company. In that case, the receivers were apparently "disinterested" in the proceeding, and his Honour assumed therefore that the debenture holders' interests were protected. Thus he said at 452:
"In other words, it must be accepted that the receivers, having full regard to their obligations to the debenture holder, do not consider that the proceeding will be prejudicial to their principal. Bridge Wholesale Acceptance cannot take advantage of the legal principle as if the receivers were in fact opposed to or concerned about the proceeding."
See also Blanchard and Gedge, The Law of Company Receiverships in Australia and New Zealand, 2nd ed 1994, Butterworths at 226.
43 For those reasons, I consider that the application to dismiss the proceedings of the Gartner companies against the accountants should be refused. The notice of motion of the accountants will otherwise be adjourned to a date to be fixed.
44 Senior counsel also drew my attention to the fact that the sixth and eighth applicants have been placed into administration under Part 5.3A of the Act from 14 October 2002. The power of the directors was thereby suspended in relation to those companies: s 437C(1). It is unclear whether those applicants have sought the approval of the administrator to continue to conduct these proceedings on their behalf under s 437C(1A). In my view, it is appropriate to give the solicitors for the sixth and eighth applicants the opportunity to present to the Court such information as they may be advised on that score, or as to the stage of the administration, before ordering that the proceedings by the sixth and eighth applicants be stayed.
I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. |
Associate:
Dated: 13 March 2003
Counsel for the Applicant: |
Mr JN Wells QC with Mr JM Cudmore |
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Solicitor for the Applicants: |
Cosoff Cudmore Knox |
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Counsel for the First & Second Respondents: |
Mr AS Sullivan QC with Mr IC Robertson |
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Solicitors for the First & Second Respondents: |
Kelly & Co. |
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Counsel for the Third Respondent: |
Mr M Hoffmann with Mr S Evans |
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Solicitor for the Third Respondent: |
Finlaysons |
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Date of Hearing: |
1 November 2002 |
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Date of Judgment: |
14 March 2003 |
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/2003/152.html