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In re Kawa Pty Ltd [1990] PGNC 101; [1990] PNGLR 523; N934 (19 December 1990)

N934

PAPUA NEW GUINEA
[NATIONAL COURT OF JUSTICE]

IN THE MATTER OF THE COMPANIES ACT (CH NO 146) AND IN THE MATTER OF KAWA PTY LTD (IN LIQUIDATION)

Waigani
Registrar Newell

14 August 1990
16 August 1990
19 December 1990

COMPANIES - Winding up - Disclaimer of unprofitable contract - Procedure on - Summons for directions to Registrar - Functions and powers of Registrar - Directions on terms - Companies Act (Ch No 146), s 314.1

COMPANIES - Winding up - Disclaimer of "unprofitable contract" - Two contracts for sale of shares - Whether in best interests of creditors - Companies Act (Ch No 146), s 314.2

Held:

(1) A liquidator who seeks to disclaim an unprofitable contract under s 314 of the Companies Act (Ch No 146), may so apply (ex parte) on summons for directions to the Registrar.

(2) The function of the Registrar on a summons for directions under s 314 of the Companies Act is to give directions in the nature of advice on matters of law or principle or to protect the liquidator against accusations of bad faith, unreasonableness or illegal conduct. There is no power to make binding orders.

Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 14, Re Blackbird Pies (Management) Pty Ltd [1969] Qd R 387 and Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115; 4 ACLC 114, followed.

(3) Where the liquidators sought to disclaim a contract entered into before his appointment, there being a later contract for the same matter entered into by the liquidators on more advantageous terms, the question whether the contract was "unprofitable" was to be determined according to which contract was in the best interests of the creditors of the company in liquidation.

(4) Leave to disclaim should be granted on terms relating to notice to all interested parties.

Cases Cited

The following cases are cited in the decision of the Registrar:

Blackbird Pies (Management) Pty Ltd, Re [1969] Qd R 387.
Blackbird Pies (Management) Pty Ltd (No 2), Re [1970] QWN 14.
Dekala Pty Ltd (In liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664; (1988) 6 ACLC 131.
Sanderson v Classic Car Insurances Pty Ltd (1986) 10 ACLR 115; 4 ACLC 114.
Wilson v Wallani [1880] UKLawRpExch 8; (1880) 5 Ex D 155.

Summons for directions

This was a summons to the Registrar issued pursuant to s 51 and s 53 of the Companies Rules by the liquidator of Kawa Pty Ltd (In liquidation) for directions to disclaim (under s 314 of the Companies Act (Ch No 146)) a contract dated 9 October 1989, by Kawa Pty Ltd and Gavera Rea as vendors with Anton Lee Transport Pty Ltd as purchaser and complete a contract dated 1 July 1990 by Kawa Pty Ltd (In liquidation) with Kekorahi Pty Ltd. The contract with Kekorahi Pty Ltd related to a sale of 550 ordinary K1.00 shares in Koki Heights Pty Ltd (Koki), being 55 per cent of the issued share capital of Koki, but that with Anton Lee Transport Pty Ltd purported to sell all the issued share capital in Koki.

Counsel:

D R Hartshorn, for the liquidator/applicant.
Cur adv vult

20 December 1990

REGISTRAR NEWELL.: This is a summons to the Registrar issued pursuant to s 51 and s 53 of the Companies Rules by the liquidator of Kawa Pty Ltd (In liquidation) for directions to disclaim (under s 314 of the Companies Act (Ch No 146)) a contract dated 9 October 1989 by Kawa Pty Ltd and Gavera Rea as vendors with Anton Lee Transport Pty Ltd as purchaser and complete a contract dated 1 July 1990 by Kawa Pty Ltd (In liquidation) with Kekorahi Pty Ltd.

FACTS

The facts are set out in more detail in the petition dated 10 October 1989 order to wind up the company dated 14 December 1989 and the affidavit of Anthony Laurence Hamilton Birch (liquidator of Kawa Pty Ltd (In liquidation)) dated 14 August 1990, and are, in summary:

A petition dated 10 October 1989 for the winding up of Kawa Pty Ltd (Kawa) was filed in the National Court by the Chief Collector of Taxes on 23 October 1990 as per a notice issued under s 240(2)(a) of the Companies Act for the sum of K210,297.89 by the Chief Collector of Taxes on 31 July 1989 to Kawa.

On 14 December 1989, Kawa was wound-up on the petition of the Chief Collector of Taxes by the Deputy Chief Justice. In his order, amongst other orders, he appointed Anthony Lawrence Hamilton Birch as liquidator (Liquidator) for the purposes of the winding-up.

There are 1,000 ordinary K1 shares in Koki Heights Pty Ltd (Koki), with Kawa owning 550, being 55 per cent of the issued share capital of Koki. Mr Gavera Rea owns 448 shares, and Mr David Rea and Mr D Raho own one share each.

Koki owned Portions 8 and 1,534 (consolidated) Milinch Granville, Fourmile, Moresby under a town subdivision lease (Lease).

Various share offers for all the shares in Koki were received including: K81,000 from Anton Lee Transport Pty Ltd (Lee) and K350,000 (in 1985) from the Public Officers Superannuation Board (POSB) but due to lapse of time in 1988 POSB reduced this to K300,000.

The liquidator asked the lawyer for Lee, in February 1990, whether his client was interested in purchasing the shares in Koki, but no response to this was made until 27 July 1990.

The liquidator, on 29 June 1990, received a 10 per cent deposit on a purchase price of K192,000 for the shares of Koki from Kekorahi Pty Ltd, the contract (Kekorahi Contract) was signed on 1 July 1990, and completion was due to take place on 13 August 1990.

Lee (by hand of Mr D McInnes), on 25 July 1990, informed the Liquidator that it had a contract (Lee Contract) to purchase the share capital of Koki dated 9 October 1989. The lawyer for Lee on 27 July 1990 brought a photocopy of the Lee Contract to the office of the Liquidator who refused to complete it.

The Lee Contract was made on 9 October 1989, with stamp duty of K10 being paid on "24 XI 89" (24 November 1989). The vendors were Kawa Pty Ltd and Gavera Rea and the purchaser was Anton Lee Transport Pty Ltd. The purchase price was to be K78,000, being K33,000 payable to Kawa Pty Ltd and K45,000 to Gavera Rea. The copy contract (annexure "D" to the affidavit of Anthony Laurence Hamilton Birch (Liquidator of Kawa Pty Ltd (In liquidation)) dated 14 August 1990) bears no settlement date on it, neither does it mention or annex the balance sheet (ninth schedule). In addition it purports to sell all the issued share capital in Koki, when in fact Mr David Rea and Mr D Raho (who were not parties to that contract) each had one share.

Subsequently action was taken by Lee against Kawa Pty Ltd (In liquidation) by writ of summons dated 3 August 1990.

PURPOSE OF THE APPLICATION

The Liquidator by summons in this matter dated 14 August sought directions:

1. For leave to disclaim the Lee Contract dated 9 October 1989 between Kawa Pty Ltd and Gavera Rea as vendors and Anton Lee Transport Pty Ltd as purchaser; and

2. To complete the Kekorahi Contract of 1 July 1990.

IS A SUMMONS TO THE REGISTRAR PERMISSIBLE?

Section 51 and s 53 of the Companies Rules (Ch No 146) provide that the Registrar may hear certain matters made by summons to him under s 51 and s 53 of the Companies Rules. I set out below the contents of those sections:

"51. Applications to be made to the Registrar

(1) All applications required or authorized by the Act or these Rules (other than those referred to in Sections 14, 48 and 50) shall be made on summons, and shall be heard and determined by the Registrar who may exercise in respect of every such application any of the powers conferred on the Court or a Judge in relation to such application.

(2) With the consent of all parties, an application under Section 50 may be heard by the Registrar, but failure of any party to seek or give consent does not prejudice his right to costs on a summons before a Judge.

...

53. Summons for directions by liquidator

(1) Where—

(a) a liquidator desires to obtain directions as to any matter in relation to a winding-up; or

(b) an applicant in any proceedings under these Rules desires to obtain directions as to the proceedings to be taken in relation to the application,

he may take out a summons for directions and apply ex parte to the Registrar for directions in relation to the matter or proceedings.

(2) On an application for directions, the Registrar may adjourn the application and direct that notice by advertisement or otherwise of the application be given to such persons or classes of persons as he directs.

Section 14, of the Companies Rules provides that applications under ss 66, 186, 197, 239 & 326 of the Companies Act are to be made by petition and heard in open court;

Section 48 of the Rules, relates to applications by motion in open court under ss 12, 29, 61, 64, 67, 91, 97, 125, 142, 181, 184, 190, 249, 261, 383 (283), 284, 286, 397, & 401 of the Companies Act;

And s 50 of the Rules relates to applications by summons to a judge in chambers under ss 13, 17, 71, 75, 80, 81, 82, 104, 115, 147, 151, 162, 163, 169, 192, 194, 196, 197, 213, 218, 222, 224, 225, 227, 228, 230, 233, 241, 245, 250, 256, 257, 263, 265, 267, 268, 270, 271, 282, 290, 293, 294, 297, 299, 310, 315, 316, 317, 318, 319, 364, 398, 400, 402 and 406 of the Companies Act."

From this it will be seen that the Registrar "shall" hear and determine such matters and exercise all the powers of a court or judge in relation to an application on a summons for directions to seek leave to disclaim under s 314 of the Companies Act (Ch No 146). In seeking the directions of the Registrar by summons a party may apply ex parte to the Registrar.

FUNCTION OF THE REGISTRAR ON A SUMMONS FOR DIRECTIONS

In making my decision I have had regard to the decision of Hanger J in Re Blackbird Pies (Management) Pty Ltd (No 2) [1970] QWN 14 at 35, which shows, following the decision of W B Campbell J on a summons for directions in Re Blackbird Pies (Management) Pty Ltd [1969] Qd R 387, that directions are in the nature of advice to the liquidator, they do not create an order. The most that can be said of them is that they provide leave to do something if the liquidator so wishes.

In Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114 at 116, Young J sets out four classes of cases in which directions can be given to liquidators:

"(a) Guidance to liquidators on matters of law ...;

(b) Questions of legal procedure (eg whether a liquidator should settle curial proceedings, and if so, on what terms);

(c) Whether a liquidator should act on his commercial judgment to postpone a sale because he recognises his legal duty ordinarily requires him to reduce the company’s assets into cash as soon as possible ...; or

(d) Where there are two or more competing purchasers for the company’s property and the liquidator can see that it may be alleged that the liquidator has acted mala fide or in an absurd or unreasonable or illegal way, see Re Bayswood Pty Ltd (1981) 6 ACLR 107 at 113."

In this matter the Registrar is being asked by the Liquidator to give advice (directions) so that the Liquidator will not (using words of Young J in Sanderson (above)) be seen as acting "mala fide or in an absurd or unreasonable or illegal way".

LEAVE TO DISCLAIM — STATUTORY PROVISIONS

Section 314 (Disclaimer of onerous property) of the Companies Act (Ch No 146) provides that:

"(1) Where any part of the property of a company consists of:

(a) an estate or interest in land that is burdened with onerous covenants; or

(b) shares or stock in corporations; or

(c) unprofitable contracts; or

(d) any other property that is unsaleable, or not readily, by reason of its binding its possessor to the performance of an onerous act or to the payment of a sum of money.

the liquidator of the company, notwithstanding the fact that he has endeavoured to sell or has taken possession of the property or exercised any act of ownership in relation to it, may with the leave of the Court or the committee of inspection and subject to this section, by writing signed by him, disclaim the property at any time within 12 months after the commencement of the winding-up or such extended period as is allowed by the Court or the committee.

(2) Where any property referred to in Subsection (1) has not come to the knowledge of the liquidator within one month after the commencement of the winding-up, the power of disclaiming may be exercised at any time within 12 months after he has become aware of it, or within such extended period as is allowed by the Court or the committee.

(3) The disclaimer operates to determine, as from the date of disclaimer, the rights, interests and liabilities of the company, and the property of the company, in or in respect of the property disclaimed, but does not, except so far as is necessary for the purpose of releasing the company and the property of the company from liability, affect the rights or liabilities of any other person.

(4) Before or on granting leave to disclaim, the Court or committee may require such notices to be given to persons interested, impose such terms as a condition of granting leave and make such other order in the matter as the Court or committee thinks just.

(5) The liquidator is not entitled to disclaim if a written application has been made to him by a person interested in the property requiring him to decide whether he will or will not disclaim and the liquidator has not, within a period of 28 days after the receipt of the application or such further period as is allowed by the Court or the committee, given notice to the applicant that he intends to apply to the Court or the committee for leave to disclaim.

(6) In the case of a contract, if after an application is made under Subsection (5), the liquidator does not within the period or further period referred to in that subsection disclaim the contract, he shall be deemed to have adopted it.

(7) On the application of a person who is, as against the liquidator, entitled to the benefit or subject to the burden of a contract made with the company, the Court may make an order rescinding the contract on such terms as to payment by or to either party of damages for the non-performance of the contract, or otherwise, as the Court thinks just, and any damages payable under the order to that person may be proved by him as a debt in the winding-up.

(8) On the application of a person who either claims an interest in any disclaimed property or is under a liability not discharged by this Act in respect of any disclaimed property, and on hearing such persons as it thinks fit, the Court may make an order for the vesting of the property in or the delivery of the property to any person

(a) who is entitled to it; or

(b) to whom it seems just that the property should be delivered by way of compensation for any such liability,

or a trustee for him, and on such terms as the Court thinks just.

(9) Notwithstanding Subsection (8), where the property disclaimed is of a leasehold nature the Court shall not make a vesting order in favour of any person claiming under the company, whether as under-lessee or as mortgagee, except on the terms of making that person:

(a) subject to the same liabilities and obligations as those to which the company was subject under the lease in respect of the property at the date of commencement of the winding-up; or

(b) if the Court thinks fit, subject only to the same liabilities and obligations as if the lease had been assigned to that person at that date.

and, in either event, if the case so requires, as if the lease had comprised only the property comprised in the vesting order.

(10) A mortgagee or under-lessee declining to accept a vesting order on the terms to which it was made subject under Subsection (9) is excluded from all interest in and security on the property, and if there is no person claiming under the company who is willing to accept an order on those terms the Court may vest the estate and interest of the company in the property in any person liable personally or in a representative character, and either alone or jointly with the company, to perform the lessee’s covenants in the lease, freed and discharged from all estates, encumbrances and interests created in it by the company.

(11) A person injured by the operation of a disclaimer under this section shall be deemed to be a creditor of the company to the amount of the injury, and may prove the amount as a debt in the winding-up accordingly.

(12) Where a vesting order is made under this section, the property comprised in it vests, subject to Subsection (13), in accordance with the order in the persons named for that purpose in the order without any further conveyance, transfer or assignment when an office copy of the order is lodged with the Registrar and, where the order relates to land, with the Land Registration Authority.

(13) A vesting order made under this section that relates to land is not effective until all entries that are necessary to give effect to it have been made in the register or record relevant to the land kept by the Land Registration Authority."

THE CONTRACT OF 9 OCTOBER 1989

In seeking leave to disclaim, the Liquidator could be seen as principally coming under s 314(1)(c) (an "unprofitable contract"), in seeking to disclaim within 12 months of the commencement of the winding-up (14 December 1989).

In his affidavit of 14 August 1990, the Liquidator refers to the contract as a "purported contract". In giving the Liquidator leave to disclaim the contract I see no reason to make a finding on whether the Lee Contract is or is not a "purported contract". However I do make the finding that it appears to be an "unprofitable contract" which the Liquidator may be given leave to disclaim. The "Lee Contract" would only result in the payment to Kawa Pty Ltd (In liquidation) of the sum of K33,000, whereas the sale to Kekorahi Pty Ltd K192,000 is clearly much more profitable to Kawa Pty Ltd (In liquidation).

The Liquidator points out in cl 13 of his affidavit of 14 August 1990 that he does not believe that Kawa Pty Ltd and Mr Gavera Rea can perform their obligations under the "Lee Contract", as the accounts were not annexed to the contract, and the vendors (Kawa Pty Ltd and Mr Gavera Rea) could not, as per the terms of the contract, sell 100 per cent of the shares of Koki (as Messrs David Rea and D Raho each held one share). Mr Birch in his affidavit alleges Kawa Pty Ltd (In liquidation) entered into its contract with Kekorahi Pty Ltd for the sale of its shares in Koki in good faith, and not knowing that there was in fact an earlier contract for the sale of the Koki shares (the Lee Contract).

LEAVE TO DISCLAIM

The Liquidator is clearly bringing his summons for directions under class (d) of Young J’s decision in Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114 at 116, where he says that a liquidator can seek directions:

"Where there are two or more competing purchasers for the company’s property and the Liquidator can see that it may be alleged that the Liquidator has acted mala fide or in an absurd or unreasonable or illegal way, see Re Bayswood Pty Ltd (1981) 6 ACLR 107 at 113."

Whilst the provisions relating to disclaimer have been a part of English Statute Law since 1869 (see Wilson v Wallani [1880] UKLawRpExch 8; (1880) 5 Ex D 155), the only recent decision dealing with the meaning of "unprofitable contract" is Dekala Pty Ltd (In liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664; (1988) 6 ACLC 131. In that decision Young J, (at 133) says that: "Under previous Law (see s 296 of the Uniform Companies Act 1961) a liquidator could not disclaim a contract without the consent of the court or a committee of inspection." We in Papua New Guinea are still subject to similar provisions. However whilst that decision lays down that the contract in that instance was "unprofitable" (where a company in liquidation granted an option to purchase a multi-storey block of home units to another company and the liquidator had disclaimed the contract), it lays down no general principles and one is left with the dictionary meaning of "unprofitable", and the article by L W Melville, "Disclaimer of Contracts in Bankruptcy" (1952) 15 Mod LR 28.

Melville suggests that (at 28): "It is probably true to say that unprofitable means, not simply a contract which is a bad bargain, but one the performance of which cannot satisfactorily be carried out by a trustee in bankruptcy." Applying this criteria does not advance us very far in the present instance, as one is dealing here with two contracts for the same matter; one made by the Liquidator, and one made before which the Liquidator says he was not aware of when he made the second contract.

So in this instance we must look at which contract is in the best interests of the creditors of Kawa Pty Ltd (In liquidation). Clearly the contract dated 1 July 1990 by Kawa Pty Ltd (In liquidation) with Kekorahi Pty Ltd is in the best interests of the creditors of Kawa Pty Ltd (In liquidation), and leave must be given to the Liquidator to disclaim the contract dated 9 October 1989 between Kawa Pty Ltd and Gavera Rea as vendors and Anton Lee Transport Pty Ltd as purchaser.

In granting leave to disclaim I have imposed terms as a condition of granting leave and made other orders in the matter under s 314(4).

ORDERS AND DIRECTIONS

The orders and directions I made in this matter on 16 August 1990, were as follows:

1. I hereby grant leave to the Liquidator to disclaim the contract dated 9 October 1989 between Kawa Pty Ltd and Gavera Rea as vendors and Anton Lee Transport Pty Ltd as purchaser, subject to service of a notice of intention to disclaim on the parties to that contract;

2. The notice of intention to disclaim shall state that the Liquidator may disclaim the contract at any time four days after service of the notice of intention to disclaim;

3. Service of the notice of intention to disclaim shall be by way of both personal service on Mr Gavera Rea and service on the registered office of Anton Lee Transport Pty Ltd;

4. If and when the Liquidator in writing disclaims the contract dated 9 October 1989, between Kawa Pty Ltd and Gavera Rea as vendors and Anton Lee Transport Pty Ltd as purchaser, he shall give notice of the disclaimer by:

(a) publication of a notice of disclaimer within one week of the date of the written disclaimer by the Liquidator in the Post Courier newspaper and the Times of Papua New Guinea newspaper; and

(b) by gazettal of a notice of disclaimer in the National Gazette within one month of the date of the written disclaimer by the Liquidator; and

(c) by way of personal service on Mr Gavera Rea and service on the registered office of Anton Lee Transport Pty Ltd of the notice of disclaimer within one month of the date of the written disclaimer by the Liquidator, or such other period as the court may allow;

5. I hereby direct that the Liquidator take such further action in respect of the rescission or completion of the contract of 9 October 1989 between Kawa Pty Ltd and Gavera Rea as vendors and Anton Lee Transport Pty Ltd as purchaser, and the contract dated 1 July 1990 between Kawa Pty Ltd (In liquidation) as vendor and Kekahori Pty Ltd as purchaser, as may seem appropriate after a lapse of four days after publication of the notice of disclaimer in the Post Courier newspaper and service of the notice of disclaimer on the registered office of Anton Lee Transport Pty Ltd;

6. Liberty to apply.

So ordered and directed

_______________

Lawyers for the plaintiff: Gadens Ridgeway.