Iliopoulos v BM2008 Pty Ltd (In Liquidation) [2010] HCATrans 326 (10 December 2010)

Last Updated: 15 December 2010

[2010] HCATrans 326

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M108 of 2010

B e t w e e n -

STEVE ILIOPOULOS

Applicant

and

BM2008 PTY LTD (IN LIQUIDATION) ACN 005 762 685

Respondent

Application for special leave to appeal

FRENCH CJ
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 DECEMBER 2010, AT 11.04 AM

Copyright in the High Court of Australia

MR D.H. DENTON, SC: If the Court pleases, I appear with my learned friends, MR L.M.F. WATTS and MS P. DJOHAN, for the applicants. (instructed by Belleli King & Associates)

MR G.T. BIGMORE, QC: If the Court pleases, I appear with MR D.C. HARRISON, for the respondent. (instructed by Cooper Mills Lawyers)

FRENCH CJ: Yes, Mr Denton.

MR DENTON: Thank you, your Honour. Your Honour, there are, in our submission, two questions which warrant the grant of special leave. We have set out three on page 46 of the application book, but really 1 and 2 are of the same ilk, which is does a shareholder, or a person capable of being a shareholder, lose the right to bring a derivative action under Part 2F.1A of the Corporations Act once a company is placed in liquidation, or should that be considered to be the ordinary rule, subject to exceptional and appropriate cases? The second mentioned there really brings up the conflict, which we want to take the Court to, between the decision of the Court of Appeal in New South Wales and a decision of the Court of Appeal in Victoria.

FRENCH CJ: How do you deal with Justice Finn’s treatment of the asserted causes of action that would have led to the share in the distributable assets that would amount to a counterclaim?

MR DENTON: This is one of the joys of being before the Federal Magistrates Court and before a single judge and we find ourselves seeking special leave before this honourable Court. Justice Finn, his central decision in dealing with our submissions about there being three choses in action available to boost the value of the pool was to say whatever they are they are derivative actions and because of the decision in the New South Wales Court of Appeal in Chahwan you do not get to first base. That is our problem.

FRENCH CJ: But then he went and looked at the actual likely recoverability and so forth, did he not?

MR DENTON: That is our second question that we raise here dealing with Guss v Johnstone or the other decisions of the High Court. He went too far. We had no evidence before him of recoverability because we did not need to have evidence on an application to set aside a bankruptcy notice of our ability to recover in respect of those choses in action. What we did have before his Honour was a statement of claim, which was proposed to be amended in the Federal Court in Western Australia, which set out in great detail, with great respect, what the case was that our client was interested in participating in order to obtain that 25 per cent of the gross expanded pool.

He had that before him and in our submissions before him and in answer to your Honour the Chief Justice’s question that proceeding was on foot as it turns out and, I think, maybe in our submissions here, we have subsequently been granted leave to deliver that amended statement of claim. The real dispute between this side of the Bar table and our side is already on foot in Western Australia. What his Honour did though was he went further than is necessary and, indeed, went further than the authorities allow him to do by then looking at not only the choses in action, but whether we would be able to recover on those choses in action. With the greatest respect, your Honour, we are not required to even have evidence in such an application. We just need - - -

CRENNAN J: But his Honour is only looking at whether the grounds are properly arguable. He is not making any decisions which have finality in relation to the issues.

MR DENTON: It does not have finality, but it does in respect to the bankruptcy notice application to set aside because his Honour made a quantitative decision that you will not be able to recover this amount of money. There was no evidence before him of that and, therefore, his task then became speculative not upon evidence, but “I am not satisfied and there is no evidence before me of the recoverability in say respect of what was the sham factor in the case, the Ataquil case” which we have maintained is of the order of $1.8 million. He said, “Well that is equitable compensation that is going to be a difficult case for you. It is going to be expensive and I am not satisfied at the end of the day there is going to be that money there available for you.”

With the greatest respect, you do not get that far into it in an application to set aside a bankruptcy notice. What you have to show is you have a prima facie case justifying further investigation and we did. It is in Western Australia. His Honour’s decision, really, although Justice Crennan is right, it does not deal with finality but it certainly does when you read it here. His Honour decided, sitting as an appellate court, that those choses of action will not result in money being able to be recovered and with respect insofar as he did that he fell into error and he did not apply the principles of this Court as stated in Guss v Johnstone.

The two issues are related, being his Honour’s decision that what you really have in order to get the pool expanded is you need to have access to a derivative action. For the purposes here, your Honour – we do not agree with that but we are not going to argue it here but then having decided it was a derivative action he went on further and said, “In any event, you are not going to be able to recover this money because there is no evidence before me that you can get this money”. He fell into error there.

So when dealing with that first issue of whether his Honour is right or wrong to apply the decision of Chahwan it is because of that decision, contrasted with the decision in the Victorian Court of Appeal in Malhotra, that there is a divergence of opinions, one very powerful, clearly, from the Court of Appeal in New South Wales of Chahwan which stands for the direct proposition that once a company is in liquidation a derivative action is just not open at all. We say, with respect, your Honours, that that decision is attenuated with sufficient doubt and we say it is actually wrong. We do not need to satisfy your Honour here but we will take you to the reasons as to why we say Chahwan is wrong.

CRENNAN J: It is a decision in which Justice Tobias comprehensively analysed the legislative scheme, looked at secondary materials, looked at all previous first instance authorities.

MR DENTON: He most certainly did, but he did not turn his mind at all to the actual wording of section 237(1) which is in tab 1 of our authorities. Justice Tobias, and therefore the whole Court of Appeal in New South Wales, proceeded on the basis that section 237 was governed by what was contained in subsection (2), but subsection (1), with the greatest respect to that court’s decision, allows a discretion. It says:

A person referred to –

being a qualifying person above:

may apply to the Court for leave to bring, or to intervene in, proceedings.

Subsection (1) is not expressed to be subject to subsection (2). Justice Tobias’ whole approach and treatment of section 237 was concentrating on the lack of any discretion at all being left open to a court under section 237. That is where the point of discrepancy between Victoria and New South Wales arises because in the Malhotra decision, albeit our friends describe it as obiter, but if I could take your Honour to tab 5, it is the very last page of that authority - paragraph 77, the Victorian Court of Appeal says:

In any event –

and we underline the word “ordinarily” -

it is inappropriate to allow derivative proceedings to be brought when a company is in liquidation because it would require the court to permit another to supplant the liquidator as the personification of the company for that purpose.

We ask your Honour to see the footnote there which is expressly approved of Fresh Start, which is a decision of Justice Whelan which I will come to. This next part, though, if the Court pleases, being a recitation of what Justice Gummow said in Scarel’s Case, is also picked up word for word and approved, insofar as it is needed to be, by Justice Tobias. There is no doubt that both in the New South Wales Court of Appeal and the Victorian Court of Appeal that both intermediate courts are saying that this is a correct statement of the law, that is:

The ordinary rule is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide . . . [T]he general proposition is that with the liquidation, both the directors and shareholders in general meeting cease to have authority to institute or continue litigation by the company.

Can I just pause there. Justice Gummow, with the greatest respect, is perfectly right. It is the general proposition that the directors can play no further part. The Court of Appeal in New South Wales erred by really determining that once the liquidation is in place the directors have no part to play at all in the conduct of the company.

However, we refer your Honours to a number of sections in the Corporations Act to make good this proposition that when Justice Tobias and the Court of Appeal in New South Wales says that liquidation ousts directors and directors therefore have no part to play is wrong because the provisions of section 495 - under tab 1 of our indexed section – 495(2), which deals with deals with “Members’ voluntary winding up” - and as it turns out this company here which our friends act for is in members’ voluntary winding-up - subsection (2) states the effect on the director’s powers:

On the appointment of a liquidator, all the powers of the directors cease except so far as the liquidator, or the company in general meeting with the consent of the liquidator, approves the continuance of any of those powers.

Drawing the Court’s attention to that, of course, the New South Wales Court of Appeal did not concentrate on there being a continuing role in certain circumstances for directors.

CRENNAN J: I think what they did rely on was other provisions in the Corporations Act as well as the inherent jurisdiction - - -

MR DENTON: Yes, they do.

CRENNAN J: - - - as giving shareholders or creditors remedies in respect of any liquidator’s failure to bring proceedings.

MR DENTON: Your Honour Justice Crennan is correct, but it is to be recalled that those sections are somewhat limited, more limited than the expansive qualifying persons under Part 2F.1A which was designed, of course – it abrogated the rule in Foss v Harbottle and it increased the number of persons who were able to access, by leave, a derivative action. So we have two different regimes, one inherent, together with those specific parts of the Corporations Act which give control to the liquidator but we are looking at the conduct of the liquidator as opposed to the company itself, which is where a derivative action is quite different to the control of the liquidator, who is an external person.

The other section which we draw the Court’s attention to which is not referred to by the Court of Appeal in New South Wales is section 499(4) which deals with circumstances where you are in a creditor’s voluntary winding-up. Even in those circumstances, the effect of the appointment on powers of directors is:

On the appointment of a liquidator, the powers of the directors cease except so far as the committee of inspection, or, if there is no such committee, the creditors approve –

So once again the Corporations Act allows for and contemplates indeed the continuance of actions by directors even though the company is in liquidation.

CRENNAN J: There has never been any doubt that directors could bring an action, for example, for the removal of a liquidator.

MR DENTON: No, never been any doubt about that at all. That is the residual powers. I am not sure actually whether that is caught up in the Corporations Act but it is certainly governed by the common law of company law that those powers exist in directors. The final section which we have not included, your Honour, is section 471A which has a similar provision where one is in a compulsory winding-up ordered by the court because under subsection (1) of that section, other persons may continue to perform functions for the company “with the liquidator’s written approval”.

Going back to the decision of the Court of Appeal in Malhotra in Victoria that there approved, even as a very powerful obiter, that the law in this State is that in the ordinary case it would be inappropriate to grant leave for a derivative action where you have a liquidator but by citing the decision of Justice Whelan in Fresh Start, which is under tab 11 of our bundle, the Victorian Court of Appeal has expressly approved Justice Whelan’s treatment of what is an extraordinary circumstance which would justify a derivative action being brought when a company is in liquidation.

It gave a green light, speaking colloquially then, to a qualified person under section 236 being able to approach a court in this State to mount a derivative action by leave where a company is in liquidation and the Court of Appeal expressly approved the provision in paragraph [15] of Justice Whelan’s decision on page 330 which, dealing with how one implements what was said by Justice Gummow, his Honour there said:

This conclusion does not, in my view, detract from the cogency of Gummow J’s observations as to what should be the ordinary rule. It ought to be only in an extraordinary case where the court will consider permitting the liquidator’s role to be supplanted in the pursuit of litigation on behalf of the company.

One contrasts the position in Victoria where one may have an extraordinary instance which would allow the liquidator to be supplemented in a - and to bring a proceeding in the name of the company other than through the liquidator or over the liquidator’s opposition. One contrasts that, though, with the position in New South Wales where, as Justice Crennan has already - Justice Tobias went through all of the extrinsic material and came to his conclusion, with which the other courts agreed, that notwithstanding what he had identified to be, I think, eight decisions at first instance which had all gone along in favour of the liquidation not being a bar, he identified three cases that had gone the other way but recognised in paragraph 95 that notwithstanding what has occurred:

The issue is one of general importance and should be resolved by this court.

Your Honours, we point and rely upon that very same principle because there is a discrepancy between Victoria and New South Wales on a point which is of general application in bankruptcy, insolvency, generally, and in corporations law and it is a national issue.

Unless your Honours grant special leave here, this issue will continue to amount to a divergence and will cause a mischief which otherwise this Court could address. Though the issues in this special leave application have arisen out of a bankruptcy – perhaps somewhat unusually – but the interdependence between personal insolvency and corporate insolvency is well marked - where Justice Finn decided that the choses in action were really derivative were contained in paragraphs 27, 34 and 41 of his Honour’s decision but by determining that in any event Chahwan governs the issue and they are not available, for whatever reason his Honour failed to take into account at all the contradictory position which we advance which is in the Court of Appeal in Victoria.

CRENNAN J: Just briefly, in Chahwan his Honour deals with Justice Whelan in Scuteri.

MR DENTON: Yes, he does.

CRENNAN J: If you look at paragraph 122 there are quite detailed reasons for an indication that the observations were erroneous and they turn on looking carefully at section 237(2) and the fact that there is no discretion there.

MR DENTON: There is no doubt there is no discretion in subsection (2).

CRENNAN J: That is right. Where is the error in that analysis?

MR DENTON: There is no error by saying subsection (2) is mandatory. The error is not addressing subsection (1) which is not addressed and cannot be read to be subject to the qualifications in subsection (2). With respect, the Court of Appeal in New South Wales got it right in subsection (2) but insofar as trying to say that Justice Whelan and, therefore Malhotra’s decision is wrong, did not address where the Court of Appeal in Victoria are saying there is a discretion under subsection (1) and in respect of subsection (1) it is only going to be in extraordinary circumstances that leave will be granted to permit a derivative action.

You really have New South Wales concentrating on subsection (2) and seeming to say that, “Look all of these other cases were wrongly decided because they were based upon there being a discretion and subsection (2) does not allow a discretion” but did not address at all subsection (1) which is entirely discretionary.

For our purposes, in this application, if the Court is satisfied, the short point is, is subsection (1) discretionary, then we ought be granted special leave. If subsection (1) is all to be read subject to subsection (2), then the Court of Appeal decision in New South Wales decides that for all purposes section 237 has no discretion whatsoever. With respect, we say that that is just wrong.

FRENCH CJ: Yes, thank you, Mr Denton. Yes, Mr Bigmore.

MR BIGMORE: If the Court please, may I deal briefly with our learned friend’s second point. They concede in paragraph 1 of their application that Justice Finn correctly applied the principles in Guss v Johnstone and other authorities to which he refers at pages 24 and 25 of the application book. There is a dispute between us as to whether or not those principles were properly applied. It is apparent that his Honour understood that he should weigh up considerations of legal and factual merit and in our respectful submission that is exactly what his Honour did. So, from as far as the bankruptcy notice point itself is concerned, his Honour behaved in accordance with authority in considering whether or not there was cross-demand equal or exceeding the amount claimed in the bankruptcy notice.

As to the other point, may I take the Court to page 31 of the application book, paragraph 27 of Justice Finn’s judgment. I will not read it out, but if the Court goes down to the end of the sentence midway through the seventh line, the Court will see that the ratio of his Honour’s decision was that the asserted cross-demand was not a cross-demand that was enjoyed by Mr Iliopoulos against the judgment creditor.

Rather, it was a cross-demand that Mr Dye, as liquidator, could determine that the judgment creditor might bring against a number of people, in this case, Ms Cox, Ataquil and PFL Properties so that Justice Finn’s reference to derivative action, which presumably derived from the fact that our learned friend’s deed of assignment from Mr Sartori mentioned the words, was a distraction. It is at least obiter and certainly adds nothing to the ratio of the decision. That would mean that this Court in contemplating granting special leave would presumably end up with considered dicta which would either follow or not follow the decision of Justice Tobias, agreed in by the other judges of the Court of Appeal, including Justice Bell.

CRENNAN J: It would bear on whether this was suitable vehicle.

MR BIGMORE: We submit that it is not a suitable vehicle. In fact, it is not even on the road. It really is an extraordinary case in which something which might, if I might say so, with respect, is a throwaway line from the appeal judge should become the focus of attention for a grant of special leave. The question our learned friends raise at first instance and before Justice Finn, although it mutated, as Justice Finn said, and still mutates, as we hear today, was a simple question of whether or not the purchased claim against the pool held by the liquidator is sufficient to offset the judgment debt.

On no mathematical analysis was it. The pool remains at around about $5.5 million and we wait to see whether or not Mr Sartori’s assigns are entitled to up to 25 per cent of that pool. On no mathematical analysis could it equal or exceed the judgment debt. As far as the augmentations to the pool are concerned, in our respectful submission, Justice Finn correctly applied the authorities which state that one looks at the claim or the cross-claim as at the date of the hearing and his Honour did that.

As at the date of the hearing it did not include the speculative claims against Cox, PFL Properties or Ataquil and the election to pursue those claims was that of the liquidator. There is no suggestion that there has been an appeal against the liquidator’s decision. The liquidator’s evidence was quite clear that he was not presently disposed to pursue Ms Cox, that he was not disposed at all to pursue Ataquil and as far as PFL Properties was concerned there was evidence that he, at that stage, did not think that there was a debt owing at all.

That was the state of play. There was no scenario where the pool held by the liquidators of BM2008 would be augmented in such a way as to provide an offsetting claim of the nature contemplated by section 40 of the Bankruptcy Act. With respect - - -

FRENCH CJ: I am sorry. Can I just understand the proposition – you referred back to paragraph 27, the “claim belongs to BM not to Mr Sartori”. That is understood. Then there is the question of whether there is a right to bring a derivative action, if there is such a claim.

MR BIGMORE: Yes.

FRENCH CJ: Let us assume for the moment that the Court of Appeal of New South Wales is wrong, then is it at least arguable that Mr Sartori would have had such a right to pursue a derivative action which he could assign to Mr Iliopoulos?

MR BIGMORE: Certainly, your Honour, we assumed that at first instance, we assumed that on appeal and we assume it here.

FRENCH CJ: What is the killer finding there that you are referring to?

MR BIGMORE: The killer finding is that, as Justice Finn says in the first half of paragraph 27, the claims by Mr Sartori or his assigns, and let us say Mr Iliopoulos solely for present purposes - - -

FRENCH CJ: Yes.

MR BIGMORE: - - - those claims are not against the company in liquidation but are claims against Cox, PFL Properties and Ataquil.

FRENCH CJ: Yes. The route to which he says he then has a counterclaim is a presumably contingent entitlement to share in the distribution upon the winding-up of the company by reason of the asserted one-quarter interest.

MR BIGMORE: Yes, but as at the date of these proceedings he first has to achieve the outcome of being entitled to bring a derivative action which on our learned friend’s view involves an exercise of discretion. He then has to pursue those claims and the result has to be that the fruits of those derivative claims fall into the pool and with great respect Justice Finn need only have stopped, without considering whether those claims were derivative or not.

He need not have suggested that Mr Sartori or his assigns were shut out by the effect of Chahwan. He need only have said, “At the present time” and he directed himself correctly in relation to that earlier in the judgment, “At the present time there is no offsetting claim equal to or

exceeding the bankruptcy notice” which was not only his statutory function but the function dictated to him by unchallenged authority which our learned friends concede he correctly identified.

FRENCH CJ: Yes.

MR BIGMORE: Your Honour, unless there were any further questions, we did not intend to delve into the correctness of Chahwan. Our submission is that it is not relevant for present purposes and would lead to an inquiry which may ultimately have no effect upon the bankruptcy notice whatsoever.

FRENCH CJ: Thank you, Mr Bigmore. Yes, Mr Denton.

MR DENTON: As the Court can see, our learned friends are pedalling very quickly to try to say that the ratio of Justice Finn’s decision had nothing to do with derivative actions but as the Chief Justice has already taken our friends back to paragraph 27 it was the kernel of the decision because once his Honour determined in paragraph 27 that he was bound to follow the decision in Chahwan, as he says there, all of our choses of action, no matter what they are, were then ruled out. They were not going to be available to us.

It is very polite of our friends to suggest that perhaps his Honour could have written his judgment a different way and come to a more succinct decision, but his Honour did not do that. His Honour, as we said,

got into the actual assets himself and started weighing up recoverability. Insofar as that has occurred his Honour identified the correct propositions in Guss v Johnstone but then, with respect, ignored them. He must have ignored them because under no circumstances when a court, looking to see whether we had a prima facie case which should go to trial rather than being shut out by the bankruptcy notice, would it allow a court to go on then to deal with recoverability.

So it is very important for our friends to try to persuade the Court that there is no special leave point because derivative actions are not to this issue. It does not matter that this came up as a bankruptcy. Chahwan and Malhotra are at opposite ends and we need to be able to satisfy this Court that really Chahwan, as much as it was researched was still in error, or arguably in error, by ruling out the discretion which the Court of Appeal in Victoria otherwise encourages courts in this State to apply as, yes, they do have a discretion which can be exercised in extraordinary circumstances. If the Court pleases.

FRENCH CJ: Thank you, Mr Denton. The Court will adjourn briefly to consider what course it will take.

AT 11.35 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.39 AM:

FRENCH CJ: The applicant for special leave claims to have a counterclaim, set-off or cross-demand equal to or exceeding the amount of an arbitral award grounding a bankruptcy notice which he seeks to set aside. He relies upon his acquisition, following the arbitral decision, of shares entitling him to one-quarter of the distributable assets of the company which is now in liquidation. The assets are said to include three choses in action, being causes of action which the company has against other parties. These were said to be reflected in what were called derivative actions assigned to the applicant by the same shareholder from whom he acquired the shares.

Justice Finn, on appeal from the Federal Magistrates Court, held that the applicant could not bring derivative actions pursuant to Part 2F.1A of the Corporations Act 2001 (Cth) because the company was in liquidation. Whatever the correctness of that holding, his Honour’s assessment of the uncertainty surrounding the asserted causes of action led him to the conclusion that he was not satisfied that any of them would add to the value of the distributable fund in the sums contended for by the applicant. He was not satisfied that at the time for compliance with the notice the alleged counterclaim, set-off or cross-demand would be equal to or exceed the amount of the judgment debt. His Honour’s conclusions did not depend critically upon any contested principle of law. They were based upon an assessment resting on the evidence before the Federal Magistrate and before his Honour. In our opinion, that renders this case an unsuitable vehicle for the grant of special leave. Special leave will be refused with costs.

The Court will adjourn briefly to reconstitute.

AT 11.41 AM THE MATTER WAS CONCLUDED