PARK & ANOR V. LANRAY INDUSTRIES PTY LTD & ORS [2010] QSC 82

QUICK FACTS

• The plaintiffs who were the liquidators of the company in liquidation brought an action in their own name rather than as “the liquidators for the company” against the defendants.
• Their claims were based on unjust enrichment, uncommercial and voidable transactions.
• The defendants challenged the capacity in which the plaintiffs brought the proceedings in their own name and also contended that the amended statement of claim filed by the plaintiffs should be struck out.

KEY ISSUE

The key issue in this case was the capacity under which liquidators can bring an action against the defendants – either in their own name or in the name of the company?

SUBMISSIONS AND FINDINGS

CONCLUSION

The Court gave leave to the plaintiffs to make necessary amendments to the claim to reflect the several capacities in which they could sue the defendants.

LESSON

The Act entitles the liquidator of a company to bring legal actions in the name of and on behalf of a company. Therefore if the liquidators wish to sue on behalf of the company then they have to bring an action in the name of the company, the liquidators as individuals are incompetent to sue on behalf of the company.

In this case, the court offered the plaintiffs an opportunity to rectify the defect. However, it is not clear whether this opportunity will be afforded on all such occasions. Plaintiffs therefore should be careful about bringing claims in the right legal capacity as recognized by the law.

One of the many roles of a liquidator is to try and recover payments made by creditors to the insolvent company, particularly those which can be considered to be either unfair or voidable.

However, the Corporations Act 2001 may require the creditor to recompense monies or assets in certain circumstances. One such circumstance occurred in Cunningham v Commissioner of Taxation [2010] QDC.

FACTS

This case involved a claim regarding payments of money received by the Commissioner of Taxation, the defendant, totaling $143,173 for a discharge of tax liabilities, on behalf of the company in liquidation.

In the liquidator’s attempt to recover the above sum, he relied on:

·         section 588FF of the Act claiming an unfair preference and;

·         section 588FE claiming voidable transaction

THE LAW

What is an unfair preference?

According to section 588FF an unfair preference occurs when a creditor has received more from a debtor before liquidation than that creditor would otherwise have received during the process of winding up.

Section 588FE considers such transactions as voidable when the company is insolvent.

What happens next?

The liquidator, also the plaintiff of the company in liquidation, will request the court to unwind the transaction in such cases, even if it includes the Commissioner of Taxation. In turn, the Commissioner may demand an indemnity from the directors of the company in respect of loss and damages it will suffer, should the liquidator’s claim succeed. The underlying principle for unwinding a preference is to uphold the equality of distribution among creditors. This is the classic ‘pari passu’ principle.

ORDERS THAT CAN BE GRANTED

Under section 588FF the courts may grant certain orders if satisfied that a transaction is voidable because of section 588FE. It can direct the amount to be paid back to the company, either in its entirety or partially. This also applies to company property that has been transferred under such transactions.

WHAT TO LOOK OUT FOR

In this case, although the defendant denied that the transaction was voidable and an unfair preference, he did not extend any defense under the Act. The liquidator was able to prove that the company was insolvent at the time the payments were made to the defendant.

The court, based on the facts, decided to grant an order for the return of the entire sum.

The Act sets out defenses that are available to creditors who have received an unfair preference. In order to rely on the defense, a creditor must prove that valuable consideration was given; he acted in good faith and; there was no reason to suspect insolvency. If creditors cannot prove any one of these, then the defense fails. The burden of proving these defenses lie with the creditor but the liquidator has the right to challenge any defense.

Australian Securities and Investments Commission v Citrofresh International Ltd (No 2) [2010] FCA 27 will serve as a wake up call to directors of Australian companies.  Or will it?

Earlier this year, ASIC was successful in obtaining judgment against the former Managing Director and CEO of Citrofresh International Limited. The former Director of Citrofresh, now Paragon Care Limited, was pulled up on three counts:

•    Misleading and Deceptive conduct
•  Breach of Duty of Care and Diligence
•   Wrongful reliance on third party consultants

The Director was involved in drafting and approving an ASX announcement in connection with his Company’s products. Under section 1041H of the Corporations Act, the Federal Court found that the announcement was misleading and deceptive. The Court held that this announcement was linked to a financial product or service, although remote, it was enough to invoke s.1041H.    

Duty of Care and Diligence

Following a breach of the above section, holding the Director liable for dishonoring the duty of care and diligence was inevitable. Goldberg J was very clear when explaining what this duty entailed. His Honor stated that under section 180 of the Act, the test of a reasonable man was used - directors and officers are expected to demonstrate the same level of care and diligence that a reasonable person would, in the same position.

Wrongful reliance on third party consultants

The Director in defending himself argued that he relied on two consultants hired by the Company. These consultants advised and assisted with the drafting of the announcement. According to the Director, the liability here should have been reduced or removed.

The Court did not accept this argument. Both consultants lacked the technical and scientific expertise required in this matter. This logic raises the operation of section 189 of the Act. Under this section, directors cannot release themselves from their statutory duties by relying on third parties who lack the required know-how or skills.

Australian companies have recently witnessed a spate of similar cases involving misleading and deceptive conduct and breach of the duty of care. Directors, managers and officers occupying fiduciary positions must familiarize themselves with their statutory duties and the repercussions for a breach.