Supreme Court New South Wales

• Medium Neutral Citation: In the matter of CGH Engineering Pty Ltd [2014] NSWSC 1132
• Hearing dates: Monday, 11 August 2014
• Decision date: 11 August 2014
• Jurisdiction: Equity Division - Corporations List
• Before: Brereton J

Decision

(1) The plaintiff Gary John Hird may bring proceedings in the name and on behalf of the third defendant CGH Engineering Pty Limited (administrator appointed) for the relief claimed in the draft originating process attached to the affidavit of Paul Lesley O'Sullivan sworn 2 July 2014 herein.

(2) Insofar as it is required, the plaintiff have leave pursuant to Corporations Act, s 440D to bring the present proceedings against the third defendant CGH Engineering Pty Limited.

(3) Insofar as it be required the plaintiff have leave pursuant to Corporations Act, s 500(2) to commence and proceed with the current proceeding against the first defendant CGH Mixers Proprietary Limited.

(4) The plaintiff's costs of the present application be costs in the substantive proceedings.

• Catchwords: CORPORATIONS - External administration - voluntary administration - derivative action - whether statutory derivative action available - whether supervisory jurisdiction to permit contributory to sue in name of company administration
• Legislation Cited: (Cth) Corporations Act 2001, s 237, s 440D, s 447D, s 447E, s 500(2), s 511, s 1321
• Cases Cited: Australian Capital Territory Commissioner for Revenue v Slaven [2009] FCA 744; Chahwan v Euphoric Pty Limited [2008] NSWCA 52; 65 ACSR 661; Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189; Griffith Vintners v Aliprandi (1991) 6 ACSR 250; (1991) 9 ACLC 1530
• Category: Interlocutory applications
• Parties: Gary John Hird (plaintiff); CGH Mixers Pty Ltd (ACN 160 861 834); (first defendant); Colin Charles Hird (second defendant); CGH Engineering Pty Ltd (ACN 159 147 592) (third defendant)
• Representation: Counsel: C Ireland (plaintiff); Solicitors: O'Sullivan Saddington Lawyers (plaintiff)
• File Number(s): 2014/200738

Judgment - ex tempore

1 By originating process filed on 8 July 2014, Gary John Hird seeks leave pursuant to (Cth) Corporations Act 2001, s 237, to bring proceedings in the name of the company that is now the third defendant CGH Engineering Proprietary Limited against the first defendant CGH Mixers Proprietary Limited (now in liquidation), and Colin Charles Hird.

2 CGH Engineering was incorporated by the applicant Gary John Hird and his brother the second defendant Colin Charles Hird to exploit commercial opportunities for manufacturing and selling cement mixers. They each held one of the two issued shares in the company. The company entered into a contract with a Malaysian company for the manufacture of the cement mixers. The plaintiff advanced a considerable quantity of funds to the company to fund its operations.

3 Subsequently, the second defendant caused to be incorporated the first defendant CGH Mixers, of which the second defendant is the sole shareholder, holding all ten issued shares in it. The plaintiff found it increasingly difficult to obtain information from his brother as to the affairs of CGH Engineering, and evidence has now emerged that cement mixers are being manufactured and marketed as if they were the product of CGH Mixers rather than of CGH Engineering. The plaintiff wishes the company CGH Engineering to bring proceedings to restrain the sale by CGH Mixers of the cement mixers and to account for any proceeds received.

4 The matter is complicated by the fact that, in circumstances which the evidence does not really reveal, CGH Mixers has gone into liquidation - it is not apparent whether it is a creditors or members winding up - and CGH Engineering into voluntary administration, and where, confronted with difficulties in obtaining information about the company's affairs, the plaintiff resigned as a director of CGH Engineering in late 2013.

5 The plaintiff's solicitor, on 13 May 2014, wrote to the first defendant, seeking undertakings that CGH Mixers would cease selling their mixers and account for the proceedings, and foreshadowing proceedings if those undertakings were not forthcoming. There has been no response to that letter.

6 On 13 June 2014, the plaintiff's solicitor gave notice, pursuant to Corporations Act, s 237(4), of intention to apply to the court for leave to bring proceedings pursuant to Corporations Act, s 237.

7 On 29 July 2014, the plaintiff's solicitor wrote to Jirsch Sutherland, whose Mr Devine has apparently been appointed as administrator of CGH Engineering and liquidator of CGH Mixers. In that letter, the solicitors gave notice that they intended to proceed to seek leave to bring proceedings pursuant to Corporations Act, s 237, and alternatively in the inherent jurisdiction of the court. On 6 August 2014, Mr Devine, in his capacity as administrator of CGH Engineering, responded that he neither consented nor objected to the application.

8 The first question is whether Corporations Act, s 237, is available in the context of a company that has gone into administration but not into liquidation. So far as I am aware, this is not the subject of any decided case, and counsel did not refer to any authority that directly addressed the point.

9 In Chahwan v Euphoric Pty Limited [2008] NSWCA 52; 65 ACSR 661, the Court of Appeal held that, despite a number of earlier authorities to the contrary, Corporations Act, Part 2F.1A has no application to a company in liquidation - whether voluntary or compulsory. To my mind, the considerations that informed that conclusion are equally applicable to the circumstances where the company has gone into voluntary administration. The first is that the mischief which Part 2F.1A was intended to remedy - namely, the restrictions relating to the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189 - indicate that the statutory derivative action be available only in respect of a company as a going concern, and not one that is under the control of a liquidator, because the rule in Foss v Harbottle and its exceptions did not apply and were irrelevant to a company in liquidation [see Chahwan v Euphoric Pty Limited, at [124(c)]]. I do not think it has ever been decided whether the rule in Foss v Harbottle applies to a company in administration, but the reasons why it does not apply to a company in liquidation are equally applicable in the context of voluntary administration. They are elaborated by the following matters.

10 Next, as Tobias JA pointed (at [124(d)]), once the requirements of s 237(2) are satisfied, the court must grant leave, there being no residual discretion. Where a liquidator is in control of a company, it is unsatisfactory that there be a mandatory obligation to grant leave where those requirements are made out. That is equally applicable in the context where a voluntary administrator has been appointed.

11 Next, as his Honour pointed out (at [124(e)], s 237 is concerned with the situation where the company will not itself bring the relevant proceedings, and where the company is in liquidation, that decision can only be made by the liquidator. But under 237(2), nothwithstanding that a liquidator determines not to institute proceedings, if Pt 2F.1A otherwise applies to such a company, and the provisions of s 237 were satisfied, the liquidator's opposition would be irrelevant. That applies equally in the context of an administration.

12 Then, as his Honour pointed out (at [124(g)]), the position of a liquidator and his or her significance in the regime of the Corporations Act as the independent controller of the company, free from the biases and agendas of the directors and shareholders, is not recognised by the provisions of s 237. His Honour thought that the earlier cases had failed to give appropriate weight and significance to the language and intent of s 237(2), and the requirement that leave must be granted if the requirements of that subsection are satisfied - there being no residual discretion - which his Honour considered told strongly against the correctness of those decisions which had held that Part 2F.1A applied to a company in liquidation. Again, that same consideration applies equally in the context of a voluntary administrator. If a bona fide decision of the directors not to bring proceedings should give rise to an albeit rebuttable presumption that it is not in the best interests of the company that leave be granted, it is difficult to see why no such presumption should apply where the decision not to bring the proceedings is that of a liquidator, or an administrator.

13 Next, his Honour noted a submission that it would commonly be the case that a liquidator did not have sufficient funds to bring proceedings on behalf of the company, which might make it more likely that Part 2F.1A should apply to a company in liquidation. But against that, observing that it is not unusual for a liquidator to bring proceedings after being put in funds to do so, or gives appropriate indemnities by shareholders or creditors who request its liquidator to proceed with particular litigation; that detracts from any requirement to construe Part 2F.1A as extending to a company in liquidation. The same considerations apply to a company in voluntary administration.

14 Finally, his Honour referred to the inherent jurisdiction of the Court recognised by McLelland J in Griffith Vintners v Aliprandi (1991) 6 ACSR 250; (1991) 9 ACLC 1530, to authorise the bringing of proceedings by a contributory or creditor in the name of a company in liquidation. His Honour observed that that inherent jurisdiction survives, together with statutory provisions such as Corporations Act, s 1321 to provide a remedy for creditors and contributories. Similarly, Australian Capital Territory Commissioner for Revenue v Slaven [2009] FCA 744, Rares J expressed the view that s 511 was the source of the court's undoubted jurisdiction and power to permit a person other than the liquidator to commence proceedings in the company's name when it is in voluntary liquidation. Provisions equivalent to s 511 are to be found, in the context of a voluntary administration, in ss 447A, 447D and 447E. Those provisions, the court's inherent jurisdiction and its jurisdiction in the supervision of administrators provide sufficient remedy to a person who otherwise might be able to make an application under s 237(1).

15 For those reasons, the better view is that s 237 is not available where a company is in voluntary administration. I do not need for present purposes to consider the position where there is a deed of company arrangement, in which context other considerations may emerge, particularly if a company has been returned to the control of the directors.

16 However, it seems to me that, by analogy with the inherent jurisdiction of the court referred to by McLelland J in Griffith Vintners v Aliprandi, the court has power to order that a contributory of a company in administration be authorised to use the company's name as a plaintiff. The principles which inform the existence and exercise of that power are those referred to in the cases cited by his Honour. The court might well be more reluctant to grant such leave in the context of an administration, because voluntary administration is intended to be a short term arrangement resulting either in its return of the company to the control of its directors or in the proceeding into liquidation. Ordinarily, that consideration might weigh heavily against granting leave during the short duration of a voluntary administration.

17 In this case, however, there are a number of significant considerations that affect that position. The first is the administrator's indication that he neither consents nor objects to the application. The second and more fundamental one is that, as the administrator is both the administrator of the proposed plaintiff and the liquidator of the proposed defendant, it is difficult to see that he would be in other than a particularly awkward if not entirely conflicted position in deciding whether or not to bring the proceedings.

18 In circumstances where the administrator of the proposed plaintiff company is the liquidator of the proposed defendant, it seems to me that the requirement that the administrator is not likely to bring proceedings against the company is a conclusion that I can comfortably draw, fortified by the liquidator's non objection to the application.

19 If it were necessary to consider the matters that arise under s 237, I would be satisfied that the applicant brings the proceedings in good faith; that it is in the best interests of the company that leave be granted; that there is a serious question to be tried; and that the appropriate notice under s 237(2)(e) has been given.

20 The appropriate source of jurisdiction, if a statutory source be required, is s 447E(1), which provides that, if the court is satisfied that the administrator of a company is managing the company's affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members, the court may make such order as it thinks fit. The omission of the administrator to commence the proposed proceedings satisfies that requirement.

21 I am conscious that the administrator has not formally been joined as a party, but the company in administration is a party, and in circumstances where the administrator has indicated that he does not object to the application, I think I can make the order without requiring formal amendment to join the administrator.

22 Pursuant to Corporations Act, s 447E(1), the court orders that:

(1) The plaintiff Gary John Hird may bring proceedings in the name and on behalf of the third defendant CGH Engineering Pty Limited (administrator appointed) for the relief claimed in the draft originating process attached to the affidavit of Paul Lesley O'Sullivan sworn 2 July 2014 herein.

(2) Insofar as it be required, the plaintiff have leave pursuant to Corporations Act, s 440D, to bring the present proceedings against the third defendant CGH Engineering Pty Limited.

(3) Insofar as it be required, the plaintiff have leave pursuant to Corporations Act, s 500(2), to commence and proceed with the current proceeding against the first defendant CGH Mixers Proprietary Limited.

(4) The plaintiff's costs of the present application be costs in the substantive proceedings.

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Decision last updated: 26 November 2014