Australian Competition and Consumer Commission v Top Snack Foods Pty Ltd

[1999] FCA 1618

FEDERAL COURT OF AUSTRALIA

Australian Competition & Consumer Commission v Top Snack Foods Pty Ltd [1999] FCA 1618

INJUNCTIONS – application for continuation of Mareva injunction – whether third party a potential judgment debtor – whether third party may be obliged to contribute to the funds or properties of the judgment debtor to help satisfy judgment against judgment debtor – discretionary considerations

EQUITY – trustee entitled to indemnity against personal liabilities for debts incurred in the discharge of his trust – indemnity continues after termination of trusteeship – availability of indemnity to creditors of trustee by subrogation

Cardile v Led Builders Pty Ltd (1999) 162 ALR 294 applied
Led Builders Pty Ltd v Eagle Homes Pty Ltd (1997) 78 FCR 65 cited
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 followed
Dimos v Dikeakos Nominees Pty Ltd (1996) 68 FCR 39 followed
Re Johnson (1880) 15 Ch D 548 cited

Justice B H McPherson “The Insolvent Trading Trust” in Essays in Equity, edited by P D Finn 1985

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v
TOP SNACK FOODS PTY LTD & ORS

NG 782 OF 1996

TAMBERLIN J
SYDNEY

19 NOVEMBER 1999

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 782 OF 1996

BETWEEN:

AUSTRALIAN COMPETITION & CONSUMER COMMISSION
APPLICANT

AND:

TOP SNACK FOODS PTY LTD
(ACN 064 180 801)
FIRST RESPONDENT

GEORGE MANERA
SECOND RESPONDENT

NICHOLAS KRITHARAS
THIRD RESPONDENT

SELINA MANERA
FOURTH RESPONDENT

ADWAY HOLDINGS PTY LTD
(ACN 054 201 857)
FIFTH RESPONDENT

NICK KRITHARAS HOLDINGS PTY LTD
(ACN 663 464)
SIXTH RESPONDENT

JUDGE:	TAMBERLIN J
DATE:	19 NOVEMBER 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. There is currently in force a Mareva order against a non-party in this proceeding, namely Gatsios Holdings Pty Limited (“Gatsios”).

2. On 7 November 1997, the Court granted a Mareva order restraining Gatsios until determination of the proceedings or further order from dealing with certain of its assets. Some additions were made to this order on 16 December 1997.  Following judgment on the substantive issues in this proceeding, four of the respondents (excluding Selina Manera) were ordered to pay to the applicant (“ACCC”) an amount of $406,129.79.  The Court also ordered the judgment debtors to pay the applicant’s costs including any reserved costs.  On 26 August 1999, the Court ordered that the existing orders continue against Gatsios until further order.

3. The ACCC now seeks a continuation of the Mareva orders against Gatsios.  This is opposed by the respondents.

4. The respondents oppose the application on the ground that Gatsios is not a party to this proceeding.  The sole director of Gatsios is Mr Anastasios Gatsios.  He is a trustee of an entity known as the K N Trust, which has as its primary beneficiary Mr Dimitrios Kritharas. Mr Dimitrios Kritharas is not a party to the proceedings.  Two of the three general beneficiaries of the K N Trust are the children of Mr Nicholas Kritharas, and a third is the Nick Kritharas Family Trust for which Nick Kritharas Holdings Pty Ltd (“N K Holdings”) is the trustee.  Mr Nicholas Kritharas is the third respondent and together with his wife controls  N K Holdings,  the sixth respondent.  That company has a paid up capital of $100.

5. The respondents submit that no cause of action has been pleaded against Gatsios and therefore the injunction cannot be supported on the principles recently applied by the High Court in Cardile v LED Builders Pty Ltd (1999) 162 ALR 294. In that case the Court emphasised the need for caution in granting Mareva injunctions against third parties. The United States Supreme Court has recently held that the grant of such relief was not “historically unavailable from a Court of Equity”: see Grupo Mexicano de Desarollo S.A v Alliance Bond Fund Inc (US Supreme Court, 17 June 1999).

6. The respondents claim that a concession was made by the applicant in its application for injunctive relief, for which reasons were published on 7 November 1997, that it was necessary for the applicant to amend its pleadings to spell out the precise cause of action against Gatsios. They submit therefore, that because no cause of action has been pleaded against Gatsios, the Mareva order should not be granted.

7. I do not accept the submission on this basis.  The need for pleadings against Gatsios, discussed in the judgment of 7 November 1997, was in relation to an application by the ACCC to add Gatsios as a respondent to this proceeding.  The Mareva relief however was granted against Gatsios and others on the basis of the history of the matter and the evidence before the Court, from which it was satisfied that there was a real danger that the assets of the respondents would be diminished or totally dissipated.

8. In accordance with the decision of the High Court in Cardile, the respondents admit that Gatsios holds or has a power of disposition over assets of the judgment debtor.  They submit however that the accounts of the K N Trust in evidence demonstrate that it earned income from sources other than Top Snack Foods, which is the business name under which the infringing conduct was conducted.  These independent sources of income are said to be unrelated to the activities of Top Snack Foods which led to the judgment debt.  Accordingly, it is submitted that it is inappropriate in light of the High Court’s decision in Cardile to continue the Mareva injunction.

9. As the corporate and trust arrangement is somewhat complex, I set out below a diagram which illustrates the relative corporate entities and trusts.

   
   

10. Top Snack Foods Pty Ltd is the first respondent.  The Top Snack Foods partnership is comprised of N K Holdings and Adway Holdings Pty Ltd (“Adway”), the fifth respondent.  N K Holdings and Adway each hold fifty percent of the units in Top Snack Foods Unit Trust and fifty percent of the units in Top Snack Enterprises Unit Trust.  The business was conducted by N K Holdings and Adway as trustees for two trusts.  In the case of Adway it was the Manera Family Trust and in the case of N K Holdings it was the K N Trust.  The ACCC submissions proceed on the basis that N K  Holdings was at all material times the trading trustee of the K N Trust and also trustee of the Nick Kritharas Family Trust.

11. In cross-examination, Nick Kritharas conceded that one of the reasons Gatsios was substituted for N K Holdings as trustee of the KN Trust was that he had been served with the application and Statement of Claim in these proceedings.  He later elaborated his answer in re-examination and said that once his father understood that he was involved in legal proceedings, he became very angry and said that he no longer wanted him to have anything to do with the family assets.

    The Cardile decision

12. When the current Mareva orders were made in 1997, the Court proceeded on the basis of the decision of the Full Federal Court in Led Builders Pty Ltd v Eagle Homes Pty Ltd (1997) 78 FCR 65, the decision on appeal in Cardile.  Special leave to appeal from that decision was granted and the High Court recently reconsidered the relevant principles applicable to Mareva orders against third parties. After canvassing relevant authorities, the Court (Gaudron, McHugh, Gummow and Callinan JJ) expressed the principles in these terms (at p 312):

    “In our opinion such an order may, and we emphasise the word ‘may’, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:

    (i)the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including ‘claims and expectancies’, of the judgment debtor or potential judgment debtor; or

    (ii)some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.”

13. The Court also pointed out that the application of these principles involved “discretionary elements”. The Court made reference to  discretionary considerations at p311, such as whether the applicant has proceeded diligently and expeditiously; whether a money judgment has been recovered in the proceedings; whether proceedings are available against the third party; why, if some proceedings are available, have they not been taken and whether the grant of relief should be conditional on an undertaking by the applicant to commence and ensure, so far as is possible, the expedition of such proceedings.  In relation to this latter point the Court said “[i]t is difficult to conceive cases where such an undertaking would not be required.”  The ACCC has indicated that it would be prepared to give such an undertaking if an order were made.

14. The submission of the ACCC as to how these principles apply in the present case proceeds as follows.  At all material times, N K Holdings controlled the K N Trust and the Nick Kritharas Family Trust.  Upon notification by the ACCC on 17 May 1996 of the likely institution of proceedings, and more particularly on the institution of proceedings,  Nick Kritharas, through N K Holdings, took steps to deal with trust assets so that they would not be available to the ACCC as a judgment creditor in the principal proceeding.    It is said that the only reason that Gatsios became trustee was to further this course.  In my view, there is evidence to support a conclusion that one of the principal reasons behind the substitution was to achieve this result. 

15. It is then said that N K Holdings is without assets.  The evidence indicates that it has a paid up capital of $100 and there is no indication or suggestion that it would be able to meet a judgment debt of $406,000 plus costs in the order of several hundred thousand dollars.  Next it is said that the liability of N K Holdings for the judgment debt and costs cannot be satisfied, and that it will be wound up and a liquidator appointed at the suit of ACCC.  In view of the conclusion expressed above, this is in my view a likely result.

16. The ACCC then points out that the judgment debt and costs arose out of N K Holdings’ trading activity as a trading trust on behalf of the K N Trust.  As trustee of that trust, N K Holdings has a right to be indemnified from the trust assets of the K N Trust for the judgment debt and costs.  Upon winding up and appointment of a liquidator, the ACCC would be entitled by way of subrogation to the rights that N K Holdings had against the trust assets, and that therefore Gatsios as trustee of the assets would have to deliver them.

17. In support of the submission that the trustee is entitled to indemnity for liabilities incurred in carrying out the trust business, the ACCC cites the following well known passage from OctavoInvestments Pty Ltd v Knight (1979) 144 CLR 360 at 367:

    “We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute.  It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: … However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: … The charge is not capable of differential application to certain only of such assets.  It applies to the whole range of trust assets in the trustee’s possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business: …”

18. The Court (Stephen, Mason, Aickin and Wilson JJ) proceeded to express the view that the interests of the trustee in respect of his right to be indemnified would be preferred to the interest of the beneficiaries under the trust for whose benefit the business was being carried on.  See also Dimos v Dikeakos Nominees Pty Ltd (1996) 68 FCR 39 at 43, as to the preference for the trustee’s indemnity, continuation of the indemnity after termination of the trusteeship and availability of the indemnity to a liquidator of the trustee company.

19. As pointed out by Justice B H McPherson in his chapter on “The Insolvent Trading Trust” in Essays in Equity, edited by P D Finn 1985, the authorities recognise that creditors may have an indirect claim against the assets by way of subrogation to the right of indemnity or lien of the trustee himself.  As creditors of the trustee, they are entitled to the benefit of that right and so it can be said that they are in place of the trustee who is entitled to the indemnity.  The authority cited is Re Johnson (1880) 15 Ch D 548 at 552.

20. In my view, the line of reasoning advanced for the ACCC in the circumstances of this case correctly represents the position.  The entitlement of the ACCC involves a process enforceable by the Court which is available to the ACCC as a judgment creditor against the judgment debtor, whereby Gatsios may be obliged to contribute to the property of N K Holdings to satisfy the judgment.  In relation to the exercise of discretion by the Court, nothing has been placed before me to indicate that the relevant circumstances have changed so as to warrant revocation of the order.  It is only now, upon the findings in this matter and the establishment of the judgment debt, that it is appropriate for the ACCC to proceed to recover the judgment debt from the assets of the trust.  I am therefore satisfied that the order should be continued subject to two qualifications.  First, that it should be a condition of continuance that ACCC give an undertaking to proceed as expeditiously as possible with proceedings for recovery of the judgment debt against the assets of the trust.  Second, it seems to me that the present order may be too wide in that it refers to all assets of Gatsios rather than simply those which are comprised in the K N Trust.

21. At this stage I will not make any orders.  I direct the ACCC to bring in Short Minutes to give effect to these reasons, dealing in particular with the questions relating to possible modification of the orders and of the undertakings which I understand the ACCC is prepared to provide.  The Short Minutes should also deal with the question of costs.

I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Associate:

Dated:             19 November 1999

Counsel for the Applicant:	I D Faulkner
Solicitor for the Applicant:	In house solicitors
Counsel for the Respondent:	L A Muston
Solicitor for the Respondent:	Conway Leather Shaw
Date of Hearing:	26 August 1999
Date of Judgment:	19 November 1999