Endopine Pty Ltd v Munkberg Pty Ltd
[2007] WASCA 177
•3 AUGUST 2007
ENDOPINE PTY LTD & ORS -v- MUNKBERG PTY LTD & ANOR [2007] WASCA 177
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2007] WASCA 177 | |
| THE COURT OF APPEAL (WA) | 31/08/2007 | ||
| Case No: | CACV:146/2006 | 3 AUGUST 2007 | |
| Coram: | PULLIN JA BUSS JA | 3/08/07 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Extension of time for leave to appeal granted Leave to appeal granted Appeal allowed | ||
| B | |||
| PDF Version |
| Parties: | ENDOPINE PTY LTD LUPIN NOMINEES PTY LTD KAHMIA HOLDINGS PTY LTD LYNDON EDWARD DYSON MUNKBERG PTY LTD SWANSDALE PTY LTD |
Catchwords: | Interlocutory appeal Practice and procedure Application for security for costs Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 1335 Supreme Court (Court of Appeal) Rules 2005 (WA), r 26(1) |
Case References: | The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40 Wilson v Metaxas [1989] WAR 285 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE COURT OF APPEAL (WA) CITATION : ENDOPINE PTY LTD & ORS -v- MUNKBERG PTY LTD & ANOR [2007] WASCA 177 CORAM : PULLIN JA
- BUSS JA
- LUPIN NOMINEES PTY LTD
KAHMIA HOLDINGS PTY LTD
LYNDON EDWARD DYSON
Appellants
AND
MUNKBERG PTY LTD
SWANSDALE PTY LTD
Respondents
(Page 2)
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram : MASTER SANDERSON
Citation : MUNKBERG PTY LTD & ANOR -v- ENDOPINE PTY LTD & ORS [2006] WASC 248
File No : CIV 2302 of 2005
Catchwords:
Interlocutory appeal - Practice and procedure - Application for security for costs - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335
Supreme Court (Court of Appeal) Rules 2005 (WA), r 26(1)
Result:
Extension of time for leave to appeal granted
Leave to appeal granted
Appeal allowed
Category: B
Representation:
Counsel:
Appellants : Mr P Mendelow
Respondents : Ms R J Lee
Solicitors:
Appellants : Haydn Robinson
Respondents : Galic & Co
(Page 3)
Case(s) referred to in judgment(s):
The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40
Wilson v Metaxas [1989] WAR 285
(Page 4)
1 JUDGMENT OF THE COURT: This is an appeal against the order of Master Sanderson dated 3 November 2006 whereby the Master dismissed an application by the appellants for security for costs. This was an interlocutory order and therefore leave to appeal is necessary. The appellants filed a notice of appeal on 10 November 2006, on the incorrect assumption that leave was not required. The appellants did not file an amended notice of appeal seeking leave until 7 December 2006. As a result the appellants seek an extension of time for leave to appeal.
The respondents' claim
2 The respondents' statement of claim alleges that:
(a) the first and second-named appellants ("Endopine" and "Lupin") and the respondents ("Munkberg" and "Swansdale") entered into an agreement in 1998 whereby they agreed to establish a trust to operate a pharmacy service business;
(b) "a trust was established known as [the Depadale Trust] with Gecko [Management Pty Ltd] as its corporate trustee";
(c) Endopine, Lupin, Munkberg and Swansdale applied for units in the Depadale Trust and each was issued with and registered as the holder of 100 ordinary units and 100 special units;
(d) it was a term of the agreements made in 1998 that the profits and/or losses of the Depadale Trust would at all times be shared equally between Endopine, Lupin, Munkberg and Swansdale;
(e) the capital provided to operate Gecko as at 30 June 2002 was a total of $200,000, provided equally in instalments of $50,000 each by Endopine, Lupin, Munkberg and Swansdale;
(f) carry forward losses in the Depadale Trust as at 30 June 2002 were recorded as $45,914;
(g) as at May 2003, Gecko provided services to a total of 54 pharmacies;
(h) for the year ended 30 June 2003, Gecko traded at a profit of $273,826 and after deducting the carry forward losses, a distribution of $227,913 was declared by the directors of Gecko for the period ending 30 June 2003;
(i) the declared distributions were carried in the books of the trust as credits to the beneficiaries' accounts but the funds were retained by Gecko to provide the operating cash flow of Gecko;
(j) Gecko operated the business until 30 June 2004;
(Page 5)
- (k) Gecko, without the consent of the beneficiaries of the Depadale Trust and without disclosing the details of the transaction, acting at the direction of Mr Beeson (a director of Gecko and of Endopine) and Mr Dyson (a director of Gecko and of Lupin) in breach of its duty "to maintain the … assets held by it as trustee", transferred the business and assets of the Depadale Trust on or about 1 July 2004, to the third-named appellant ("Kahmia") or "a trust established with Kahmia as trustee with the sole purpose of benefiting Endopine, Lupin, [Mr] Beeson and [Mr] Dyson or interests related to or associated with them and denying Munkberg and Swansdale the benefit of their investment in the Depadale Trust";
(l) In breach of the provisions of the Depadale Trust Deed, "Gecko failed to call any Annual General Meeting of unit holders or Extraordinary meeting for the purpose of obtaining directions or the consent of unit holders to the disposal of the assets of the Depadale Trust or otherwise";
(m) Mr Beeson in his capacity as director of Gecko, breached his duties as director by "causing Gecko in breach of its duties as trustee to transfer the assets of the Depadale Trust … to confer a benefit on parties related to himself and [Mr] Dyson … including the business conducted by Gecko" and gained an advantage for himself;
(n) Mr Dyson, in his capacity as a director of Gecko, breached his duties in a similar fashion to that alleged against Mr Beeson;
(o) by reason of these matters, Gecko is not a fit and proper person to remain the trustee of the Depadale Unit Trust;
(p) by reason of these matters, Munkberg and Swansdale have suffered loss and damage.
3 The relief claimed in the statement of claim:
(a) against Gecko, is for an order that Gecko be removed as trustee of the Depadale Trust and that another person be appointed as trustee along with injunctions, declarations, consequential orders and equitable damages;
(b) against Kahmia, a declaration that the transfer of the assets of the Depadale Trust including the business of Gecko to Kahmia is void and of no force or effect and consequential or supporting injunctions and orders and equitable damages;
(Page 6)
- (c) as against Mr Beeson and Mr Dyson, an injunction to restrain them from acting as directors of Gecko and other consequential orders and damages;
(d) and as against Endopine, Lupin and Kahmia, a declaration that the transfer of the assets of the Depadale Trust is void, along with supporting injunctions and other consequential orders and damages.
4 The defence filed on behalf of the appellants pleads out more details of the dealings between the parties than appears in the statement of claim. The defence pleads:
(a) that on or about 3 September 2003, Mr Hamilton and Ms Pearson, who were then directors of Gecko and who are respectively the natural persons who are sole directors of Munkberg and Swansdale, gave notice to Gecko that they resigned as directors of Gecko; would cease providing services to manage, administer and operate the business with immediate effect; and would cause all pharmacies and related entities over which they had control or influence, to cease as clients of the business operated by Gecko;
(b) by June 2004, Mr Hamilton and Ms Pearson caused all those pharmacies to cease being clients of the business;
(c) in 2004, six other pharmacies that were clients of the business were sold and as a result those pharmacies ceased to be clients of the business then reducing the number of clients of the business to 35, comprising 20 pharmacies and 15 related entities;
(d) on or about 1 September 2004, Mr Beeson and Mr Dyson gave oral notice to Gecko that they would, by 31 January 2005, cease to provide a service to manage, administer and operate the business and cause all pharmacies and related entities over which they had control or influence, to cease as clients of the business and that in consequence, the number of clients of the business would reduce to six, comprising four pharmacies and two related entities and there would be no-one to manage, administer and operate the business;
(e) at September 2004, the business was committed to pay expenses for the lease of premises and equipment and employee entitlements and other expenses, the lease payments exceeding $115,000 per annum plus outgoings in excess of $4000 for lease of equipment per calendar month and employee entitlements of
- approximately $23,000 for sick leave, $28,000 for annual leave and other amounts for leave loadings and long service leave;
- (f) Mr Beeson and Mr Dyson did not have reasonable and proper grounds to believe Gecko could pay the expenses of the business and that for the business to have continued to trade after 31 January 2005, would have amounted to insolvent trading in breach of the Corporations Act and that in consequence Mr Beeson and Mr Dyson were obliged to cause Gecko to stop trading at 31 January 2005;
(g) on or about 24 December 2004, Kahmia agreed with Gecko to assume Gecko's liabilities referred to above, agreed to transfer the business name "Gecko Management" to "Kahmia", to transfer plant and equipment to Kahmia and that Kahmia would employ the persons employed by Gecko and be responsible for their entitlements;
(h) on 31 January 2005, settlement of the transfer agreement was completed and Gecko ceased conducting the business as at 31 January 2005;
(i) the transfer agreement did not provide benefits to the appellants and imposed liabilities on Kahmia in excess of the value of the business name, goodwill and plant and equipment;
(j) pursuant to clauses in the deed of settlement relating to the Depadale Trust, Gecko had the right, power and authority to enter into the transfer agreement and a discretion to exercise all rights to investments comprised in the Trust Fund and that no unit holder had any right with respect to the Trust Fund to attend meetings of shareholders or to vote or take part in, or consent to any corporate or shareholders' motion, or to interfere with or question the exercise or non-exercise by the trustees of the rights and powers of the trustees and that the trustees were entitled to enter into any transaction notwithstanding there may be a conflict of interest;
(k) also pursuant to the settlement deed, Gecko was not responsible for any loss or damage occasioned by the exercise of any discretion or power and that Gecko was entitled as trustee to be indemnified out of the assets of the Trust Fund.
Application for security for costs
5 On 11 January 2007, the appellants sought an order for security for costs pursuant to s 1335 of the Corporations Act. Section 1335 provides:
(Page 8)
- (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
6 The application was supported by an affidavit of Mr Beeson, sworn 10 January 2006 and one of a Mr Hannay, sworn 16 May 2006. Mr Hannay had been employed as accountant for Gecko from July 1998 until January 2001 and from then until 2005 was employed as its Commercial Manager. He gained information during that time from the accountants for the respondents and from Mr Hamilton and Ms Pearson. An affidavit of Mr Hamilton, sworn 11 April 2006, was filed by the respondents in opposition to the application.
The Master's reasons for decision
7 The Master said:
12 The application is brought under s 1335 of the Corporations Act 2001 (Cth). For an order for security to be made, the defendants must establish on credible testimony that if called upon to do so the plaintiffs will be unable to meet any order for security for costs made against them. The first question, then, is what does the evidence establish about the financial position of Munkberg Pty Ltd ('Munkberg') and Swansdale Pty Ltd ('Swansdale').
13 The simple answer is nothing. The defendants rely upon affidavits of Mark John Beeson sworn 10 January 2006 and Duncan Nash Hannay sworn 16 May 2006. Mr Beeson's affidavit goes into some detail as to the nature of the dispute. It also annexes searches of both plaintiff companies. Those searches disclose that both companies are single director, single shareholder corporations. The searches also indicate that annual returns for the 2001/2002 financial years have been lodged but no further information is available. There is nothing to indicate what if any business undertakings the companies have, what if any real estate holdings they have, whether or not they are trustee companies - in short, nothing is said about their financial position. In summary, there is no credible testimony upon which I could conclude that the plaintiffs would be unable to pay the costs of the defendants if the defendants were successful in the action.
14 The position is not assisted by the affidavit of Mr Hannay. Mr Hannay was for a period an accountant and manager of the third defendant. He was responsible for passing on details of expenses and revenues to the accountants for Munkberg and Swansdale. He
- is able to say that neither company carried on business in its own right. Munkberg was trustee for The Miss Trust and Swansdale was trustee for The Swansdale Family Trust. A copy of the 2002 accounts for The Miss Trust appears as annexure MJB12 to Mr Beeson's affidavit. That shows in 2002 the trust earned a profit of $366,464. The balance sheet shows assets of over $1.46 million with liabilities of almost the same amount, with the effect that the net assets of the trust are $10. That balance sheet must, I think, be read with some caution. The assets are said to be a series of loans made to trusts and the liabilities are said to be loans from various trusts. There is no bank debt or other obviously third party borrowings. Overall, given the substantial profit made by the trust, it appears to be in a healthy financial position.
Grounds of appeal
8 The appellants seek leave to appeal on the grounds that:
(a) the learned Master erred in fact in finding that there was no evidence establishing the financial position of the respondents;
(b) the learned Master erred in deciding the application for security for costs should fail.
Whether there was error
9 Clearly the Master did err in findings he made about the evidence, which affected his conclusion that there was no evidence about the financial position of the respondents. For example the Master said that there was "nothing to indicate" what real estate holdings the respondents had. In fact, Mr Hannay's affidavit contains par 21 which reads:
I am informed by Mr Robinson as solicitor for the defendants that on 3 May 2006 he caused searches to be made at the Department of Land Information, Perth to ascertain if the plaintiffs were the registered proprietors of any land and the result of that search as [sic] neither of the plaintiffs are the registered proprietors of any land in Western Australia.
10 The Master also concluded that the Miss Trust of which Munkberg was the trustee "appears to be a healthy financial position". This was also an error. The balance sheet of the Miss Trust as at 30 June 2002, revealed net assets of $10. The gross assets consisted only of cash or receivables and these were matched by liabilities to the same amount (less $10). The Master said that there was no bank debt or other obvious third party borrowings but that observation about lack of any such creditors does not mean that the trust was in a "healthy financial position" in 2002. Munkberg is a company with $1 share capital and Mr Hannay's affidavit
(Page 10)
- reveals in par 12, that between July 1998 and June 2004, Munkberg did not carry on business in its own right and acted only as trustee for the Miss Trust, and that trust was used only as a conduit for the passing of income from Gecko and its related entities to beneficiaries of the Miss Trust. Mr Beeson's affidavit which confirms the facts pleaded in the defence, reveals that Kahmia took over Gecko's business and Gecko's liabilities. Mr Hannay's affidavit reveals that as at 30 June 2005, the liabilities of Gecko exceeded its assets by $60,645 and as at 16 May 2006, its liabilities exceeded its assets by $149,587. Mr Hannay also deposes that if Kahmia had not agreed to take over certain liabilities of Gecko, then the deficiency of assets against liabilities would have been further increased.
11 Mr Hannay also deposed that Swansdale did not carry on business in its own right and was used "only as a conduit for the passing of income from Gecko and its related entities to the beneficiaries of that trust." Mr Hannay also deposed that the respondents distributed all income received from Gecko and that the net assets of both trusts have always been nominal. This was sufficient and uncontradicted credible testimony which should have led the Master to conclude that there was reason to believe that the respondents would be unable to pay the appellants in the event of a costs order being made against them.
12 The respondent submitted that this showed the position in 2004 but not at the time of the application for security. In my opinion the evidence was sufficient to require the Master to conclude that there was reason to believe that the respondents would be unable to meet a costs order. The inference to be drawn from all of the evidence is that the respondents have continued in the same financial manner as in 2004.
13 The grounds of appeal have therefore been made out.
Leave to appeal
14 Leave to appeal is required because the Master's decision was interlocutory. In general, an applicant must demonstrate that the decision was wrong, or at least attended with sufficient doubt to justify the grant of leave and that substantial injustice would occur if the decision were left unreversed: Wilson v Metaxas [1989] WAR 285 at 294. These requirements are not rigid nor exhaustive requirements and leave may be granted if in all the circumstances it is in the interests of justice to grant leave. See The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40 at 56 - 57.
(Page 11)
15 As set out above, the decision was wrong and substantial injustice would occur if the decision were left unreversed. As a result, leave to appeal should be granted.
Extension of time in which to appeal
16 The appellants' solicitor wrongly concluded that the appeal was against a final order. If he had been correct, then the appeal was instituted in time, but the application for leave was filed outside the 14 day time limit for appeals against interlocutory orders. The respondent does not point to any prejudice that might be suffered if an extension were granted and raises only the merits of the appeal as a relevant consideration.
17 As a result, an extension of time should be granted to cover the late filing of the amended appeal notice.
The respondents' notice of contention
18 The respondents sought leave to file a notice of contention out of time. The notice of contention reads:
The Respondents contend that the decision of Master Sanderson should be upheld on the further ground that in the exercise of the court's discretion security of costs should not be awarded against the Respondents. The Respondents rely on the following factors:
1. The Appellants have admitted that, when directors of the trustee company, they caused clients of the business to cease using the business and use another entity related to them. The issue in the action will be whether the Appellants' actions give rise to a liability to the Respondents;
2. It is the Appellant's conduct which has deprived the Respondents of an income stream, and so has been the cause of any reason to believe that the corporation will be unable to pay the appellants' costs and may stifle the action; and
3. the directors of the Respondents have indicated a willingness to put up directors' guarantees up to a specified amount.
Further, the Respondents contend that any security for costs awarded should not be in the sum of $223,076.00, as such sum is excessive and in any event security may be awarded in stages.
19 Although this was filed out of time, the appellants did not point to any prejudice that would be suffered if leave were granted to allow the notice of contention to be entertained. Leave should therefore be granted.
(Page 12)
20 Points 1 and 2 in the notice are in effect a contention that it is the appellants' conduct which has caused the respondents to be unable to pay the appellants' costs if the appellants should succeed in their defence. In fact, there is no evidence to support this contention. The onus is on the respondents to lead evidence in support of it. The parties, via the affidavits filed on either side, seem to agree that the relationship between Endopine, Lupin, Munkberg and Swansdale, commenced to break down in 2003 when Ms Pearson and Mr Hamilton resigned as directors of Gecko. Mr Hamilton, in his affidavit, says that as a result of the disputes between the four board members, Ms Pearson and he "took away the book keeping of our own business interests away [sic] from Gecko as a result of dissatisfaction with the service that was being provided by Gecko, and the denial of access to our own records, in or about September or October 2004". This was followed by action by Mr Beeson and Mr Dyson to give notice that they would cause all of their pharmacies and related entities to cease as clients of Gecko. The respondents submit that if the business could not be run at a profit it is strange that Kahmia would take over the business of Gecko. The respondents' counsel suggested that the business did therefore remain of some value. This is speculation and speculation is not sufficient for the respondents' purposes. They have provided no evidence to support the contention.
21 Point 3 of the contention would seem to be a point in favour of the appellants' application, not against it.
22 The notice of contention must therefore be dismissed and the Master's orders should be set aside.
Exercise of discretion
23 That decision requires this Court to determine the application anew. As already stated above, there is credible testimony which gives rise to reason to believe that the respondents will be unable to pay costs if the defence succeeds. Taking into account the apparent merits of the respondents' claim and the appellants' defence, each of which appears to be reasonably arguable, the respondents' poor financial position, the fact that the respondents' directors are willing to assist the respondents in providing security for costs, and the appellants' solicitor's draft bill of costs (including the estimated length of the trial), the respondents should provide security in the sum of $100,000 with liberty to the appellants to apply to increase that amount.
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