Legal Insight Issue 8

Contents:

Pre-Litigation "Reasonable Steps" Delayed Further in NSW

Franchisors Beware

Proceedings Against Liquidators Personally

Liquidator Successfully Seeks Assistance of English Court to Enforce Judgments

Trustee's Right of Indemnity Hard to Displace

The Dangers of Not Appearing at a Hearing

Pre-Litigation "Reasonable Steps" Delayed Further in NSW

We refer to our prior articles regarding amendments to NSW legislation which stipulate that parties to new civil proceedings must take "reasonable steps" before commencing proceedings (subject to transitional arrangements and certain exceptions).

The NSW Attorney-General has further delayed the commencement of these amendments and removed the transitional period. The new "reasonable steps" requirements have now been delayed to 1 October 2012. The effect of the most recent changes is to retrospectively excuse a party from needing to comply with the "reasonable steps" during the transitional period (if they were otherwise required to take such steps).

Similar legislation was enacted in Victoria which has since been repealed. The NSW Government has indicated that it has concerns as to the possible effects of the "reasonable steps" requirements and is awaiting results (whether positive or negative) from the Federal Court's experience (the Federal Courts have enacted a "genuine steps" regime) before committing to the change.

The Australian Competition & Consumer Commission ("ACCC") has recently indicated, via its Small Business and Fair Trading Section, that it is currently targeting, for random audit, franchisors who have had multiple complaints lodged against them or who have a history of non-compliance with the mandatory Franchising Code of Conduct ("Code") (being a mandatory industry code prescribed under the Competition and Consumer Act, previously the Trade Practices Act ("Act")).

The ACCC has a wide variety of powers, which were supplemented in January 2011 to include an investigative power under the Act to conduct audits to check on compliance by businesses with the requirements of mandatory industry codes.

The investigatory power entitles the ACCC to issue a notice for information or documents that a business is required to maintain under the Code. On receipt of such a notice the business has 21 days to comply.

The types of documents that the ACCC is likely to be interested in include: franchise agreements; disclosure documents; lease or fit-out contracts; documents regarding the operations of group marketing funds and documents relating to notices to terminate franchise arrangements.

Obviously, the ACCC will be targeting businesses that are not complying with their obligations under the Code. If it is determined, after compliance with the audit notice, that a business is in substantial breach of the Code, the ACCC may then follow up with formal enforcement action. Breaches that are seen as relatively minor may be able to be resolved administratively by negotiation and/or acceptable undertakings or other conduct such as implementation of compliance and training programmes. More serious breaches may result in legal action being taken against the franchisor.

Needless to say, such notices must be strictly complied with in a timely fashion. Serious offences apply for non compliance and for providing false or misleading information or documents to the ACCC.

If you or your clients receive such audit notices, we recommend that immediate legal advice be obtained.

A recent decision of the Supreme Court of Victoria (Armitage –v- Gainsborough Properties Pty Limited & Anor [2011] VSC 419) considered whether leave is required to commence proceedings against a liquidator personally and, if so, what are the relevant considerations in deciding whether to grant leave; whether delay is relevant and if so, to what degree; and what evidence as to the cause of action needs to be shown. The Court held that leave was required, the applicant must make out "a prima facie case" or a case with "realistic prospects of success" and delay (in this case almost 6 years) is a relevant consideration.

Facts

In April 2004, Mr Abeyratne ("Liquidator") was appointed liquidator of two companies ("Companies"). According to the Liquidator's investigations, the Companies owned specialised painting machinery and a forklift ("Plant"). The Applicant (Mr Armitage) alleged that he owned the Plant as at April 2004, however it is unclear when he first asserted an interest. In May 2004, a third party unsuccessfully sought an injunction restraining the Liquidator from selling part of the Plant. Another third party also asserted ownership of part of the Plant. The Liquidator rejected both third parties' claims and arranged a sale of the Plant. The liquidations of the Companies were completed in late 2007 and both Companies were dissolved in January 2008. Mr Armitage commenced proceedings against the Liquidator in April 2010. In November 2010, the Liquidator passed away. In November 2010, the Court dismissed Mr Armitage's application.

Law

On appeal, the Court held:

1. Mr Armitage must obtain leave to sue a Court appointed liquidator. The rationale for this rule appears to rest mainly in ensuring the integrity of the winding up process, rather than protecting liquidators (although this is another basis for the rule).
2. "the prime facie position is that Mr Abeyratne was acting in the course of carrying out his duties...". This finding was made in rejecting Mr Armitage's argument that leave was not required in the circumstances as the Liquidator "sold" the Plant which was not owned by either of the Companies and therefore couldn't be said to have been acting "in the course of his duties as liquidator".
3. The Court will not permit Court appointed liquidators to be sued unless satisfied there is a prime facie case. Mr Armitage did not adduce sufficient evidence to make out a prime facie case or to show that the prospective claim had realistic prospects of success.
4. A delay of almost 6 years (which was two days prior to the expiration of the limitation period) was relevant in considering whether to grant leave. His Honour gave considerable weight to the unexplained delay as a persuasive factor in refusing leave.
5. If leave was granted, the Liquidator's estate would be required to defend proceedings in relation to events which occurred 6 years earlier and this would cause his estate "significant disadvantage".

Comment

The finding at paragraph 2 above is interesting. For instance, if there was more cogent evidence that the Plant was not owned by either of the Companies, it may be arguable that the liquidator of the Companies was not acting "in the course of his duties as liquidator", and therefore that leave would not be required. This case otherwise confirms the general position that leave is required to commence proceedings against a liquidator personally in respect of actions/omissions in carrying out their duties.

The English Court of Appeal (In the matter of New Cap Reinsurance Corporation Limited (In Liquidation) [2011] EWCA Civ 971) has upheld a first instance judgment of a lower English Court (although making different findings) in holding that the English Court should provide assistance in enforcing Supreme Court of NSW Orders in England.

History

An Australian liquidator commenced proceedings against various Lloyd's Syndicate Companies ("Lloyd's") in respect of voidable transactions between Lloyd's and the Australian company in liquidation ("Company"). Lloyd's did not accept service of the NSW proceedings and did not take part in the NSW proceedings (although they lodged proofs of debt in the liquidation, voted at meetings and corresponded with the liquidator). Notwithstanding this, the NSW proceedings continued after substituted service of the NSW proceedings on Lloyd's.

The Supreme Court of NSW made orders adversely to Lloyd's, including a declaration that two payments made to Lloyd's were voidable and that Lloyd's must repay monies to the Company ("Australian Orders"). The Australian Orders included an order that a letter be sent to "the English court" requesting its assistance to enforce the Australian Orders.

Law

Although the (English) judge at first instance and the Appeal Court judges made different findings, the result was the same; the English court assisted in the enforcement of the Australian Orders in England.

There were three alleged grounds on which the Australian Orders were enforceable in England, being:

1. enforcement at common law by suing in England on the basis of the Australian Orders;
2. registration of the foreign judgment under the Foreign Judgments (Reciprocal Enforcement) Act 1933 (England) ("Foreign Enforcement Act") and consequent enforcement steps under English law; and/or
3. pursuant to the Insolvency Act, 1986 (England) which includes a section that English Courts may provide "assistance" to, inter alia, Australian Courts to enforce their judgments.

The judge at first instance held that orders should be made pursuant to the Insolvency Act and the Australian Orders could also be enforced at common law but orders made in insolvency proceedings were not registrable under the Foreign Enforcement Act.

The Appeal Court held that the Foreign Enforcement Act did apply (and hence the Australian Orders were registrable in England) and the Insolvency Act was also available for English courts to provide "assistance" to enforce the Australian Orders but, as the Australian Orders were registrable, the Foreign Enforcement Act prevented enforcement at common law.

Comment

Notwithstanding the submissions made by Lloyd's that no or insufficient weight was placed on the fact Lloyd's never submitted to the jurisdiction of the Supreme Court of NSW, both the judge at first instance and the appeal judges seem to have placed significant weight on the fact that Lloyd's engaged in substantial correspondence with the liquidator, attended and voted at various meetings in the liquidation and lodged proofs of debt in same. Interestingly, the judge at first instance opined that:

1. Lloyd's were bound by the declarations in the Australian Orders and, accordingly, Lloyd's could not raise defences which they said were defences on the merits which they would have argued if the liquidator had sued Lloyd's in England; and
2. "[I] have little sympathy for [Lloyd's] position. They took their chance and the law has moved against them".

The Appeal Court noted that although the Supreme Court of NSW regarded itself as having jurisdiction over Lloyd's (because the cause of action arose in NSW and substituted service was effected under its Rules), "it does not follow... that the English Court should accept that position".

Readers should note this decision is subject to a further appeal.

The Federal Court of Australia has held (Saker, in the matter of Great Southern Managers Australia Limited (Receivers and Managers Appointment) (In Liquidation) (No.2) [2011] FCA 958) that a trustee has a right of indemnity from the trust assets, notwithstanding that the trustee's liability only arose by virtue of its own mistake.

Facts

A corporate trustee ("Former Trustee") was the responsible entity of several managed investments schemes. Damage was caused to some of the assets of the schemes. The Former Trustee received a payout from an insurer in respect of the damage. The Former Trustee distributed the insurance monies to members of the schemes who had suffered damage only and not to all members of the schemes. The Constitution stipulated that any insurance monies received were to be distributed amongst all members. After seeking advice (subsequent to distributing the insurance monies), the Former Trustee rectified its mistake and distributed in equal shares to all members (by recourse to its own funds). Liquidators were appointed to the Former Trustee. The Former Trustee was replaced by a new trustee ("New Trustee"). The liquidators of the Former Trustee sought directions pursuant to section 511 of the Corporations Act as to whether the Former Trustee was entitled to an indemnity for the money it paid from its own funds to rectify its mistake.

Law

The fundamental question which the Court needed to answer was the proper characterisation of the Former Trustee's error and whether the right of indemnity was lost.

The Court held the Former Trustee did not lose its right of indemnity as the conduct was inadvertent and was not "dishonest or inequitable conduct" or "a violation or culpable neglect of duty". Conversely, the Court said the Former Trustee had acted "promptly and precisely in accordance with the responsible legal advice once the error was detected... it would be inequitable for [the Former Trustee] not to be reimbursed or indemnified..." and that no part of the conduct of the Former Trustee "was such as to disentitle it to its rights to reimbursement or indemnity".

The Court seemed to place weight on the fact that the New Trustee could recoup the amount from the members of the schemes by either pressing the members who had received an overpayment (as the Former Trustee had begun doing), or by deducting from those members future amounts payable under the schemes. The Court said that a failure to allow the Former Trustee's right of indemnity would "result in a windfall gain to [the overpaid members] resulting in an unjust enrichment at the expense of [the Former Trustee] and its creditors."

Comment

This is another example of Australian Courts' steadfast protection of a trustee's right of indemnity (which is a long standing principle in Australian (and English) law). Cases where it has been lost or forfeited are generally only where a trustee's actions/omissions involve a serious or culpable neglect of duty, dishonesty or fraudulent conduct.

The Supreme Court of NSW has upheld orders made by the Consumer, Trader and Tenancy Tribunal of NSW ("CTTT"), following a hearing conducted in the absence of one of the parties. The decision is a stark reminder that there will not necessarily be a denial of procedural fairness/natural justice if a Court or Tribunal proceeds to hear and determine a matter in the absence of one or more of the parties.

Although this case must be confined to its facts, there is an inherent risk (which is so easily avoided) that adverse consequences (potentially devastating) may flow for a party who fails to appear.

In brief:

1. A tenant company leased premises under a two year lease. Relatives of the director of the tenant occupied the premises. A dispute arose regarding water penetration at the premises, resulting in the non-payment of rent and subsequent notice of termination of the lease. Proceedings were commenced by the landlord in the CTTT for orders for payment of the rental arrears, termination of the lease and immediate possession for the landlord. At the first listing date at the CTTT the CTTT proceeded to hear the matter in the absence of the tenant and made orders in favour of the landlord, notwithstanding the tenant had contacted the CTTT by phone and email indicating that the tenant could not attend the hearing. The tenant applied twice for a re- hearing. The CTTT refused both re-hearing applications. The tenant appealed to the Supreme Court.
2. The Supreme Court needed to consider whether the tenant had been given sufficient notice of the hearing and was afforded procedural fairness/natural justice. The Court:
   1. rejected the tenant's evidence, held that it had received adequate notice of the hearing and that it was not denied natural justice/procedural fairness; and
   2. held that the tenant "had no good reason [for failing to appear at the hearing] and proffered no good reason to the [CTTT] in support of ... an adjournment" and, in any event, its appearance at the hearing was unlikely to have effected the outcome.

Comment

It is surprising that the CTTT (a more relaxed, informal and "consumer-friendly" tribunal) made the robust decision to hear the claim in the absence of the tenant, particularly on the first date it was listed and when the tenant had communicated with the CTTT on the morning of the hearing. The lesson is obvious - no matter how small or large a claim is and irrespective of the Court or Tribunal a matter is listed before, a party should always appear, unless they receive legal advice to the contrary.

Hugh & Associates is a Sydney based legal firm with extensive experience in commercial, finance and insolvency law and litigation. If you require legal advice in these areas, we would be pleased to assist you.

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