G & a Taylor Pty Ltd v Peninsula Castings Pty Ltd

[2010] SADC 102

DISTRICT COURT OF SOUTH AUSTRALIA

(Civil: Interlocutory Application)

G & A TAYLOR PTY LTD v PENINSULA CASTINGS PTY LTD

[2010] SADC 102

Reasons for Decision of His Honour Judge Clayton

30 July 2010

EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - INJUNCTIONS TO PRESERVE STATUS QUO AND PROPERTY PENDING DETERMINATION OF RIGHTS - MAREVA INJUNCTIONS

Application for freezing order restraining the orderly finalisation of defendant's business refused.

District Court Civil Rules 2006 6R 247(2)(a), 6R 247(d), referred to.
Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208; Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513; Robmatjus Pty Ltd & Anor v Violet Home Loans Australia Pty Ltd [2007] VSC 165; De Wei Zhen v Min Zhi Mo & Ors [2008] VSC 300; Ron Medich Properties Pty Ltd v Bentley Smythe Pty Ltd (No 3) [2009] FCA 335; Deputy Commissioner of Taxation v Gashi [2010] VSC 120; Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158; Halsbury's Laws of Australia paras 325 - 800, 325 – 2885; Laws of Australia paras 15.8.750 - 15.8.790, considered.

G & A TAYLOR PTY LTD v PENINSULA CASTINGS PTY LTD
[2010] SADC 102

1. This application raises the question of whether a freezing order should be made to prevent the defendant company, which has ceased trading, from continuing with the orderly finalisation of its business.

2. The owner of the defendant company is Mr S L Jesson. He purchased the company which carried on the business of the foundry in 2007. In an affidavit sworn 17 July 2010 Mr Jesson said that he purchased the shares in the defendant company for $100,000, that the bulk of the amount paid represented the value of forward orders and that he paid nothing for the 20-year-old plant and equipment.

3. In this action, which was commenced in June 2009, the plaintiff claims damages for the alleged breach of contract pursuant to which the defendant supplied fan blades to the plaintiff in November 2003. The action is consequential upon one of the blades braking in February 2008. Three other blades broke subsequently. It would seem that the fans had been in use for about five years before the alleged defect was discovered. The plaintiff claims a total of $103,913.80 plus other unspecified damages, interest and costs. Clause 10 of the proposed freezing order requires payment of the sum of $200,000 into Court.

4. The financial statements of the defendant for the year ended 30 June 2009 are annexed to an affidavit of Mr Jesson sworn 19 July 2010. The accounts for the year ended 30 June 2010 have not yet been prepared. In his affidavit Mr Jesson states that acting upon the advice of his accountants he made a decision that the defendant company could not continue to trade without the risk of trading whilst insolvent. He said that as a result of the dispute with the plaintiff both the plaintiff and other customers had ceased using the defendant company's services and there was a drop in earnings to such an extent that the company was not covering expenses on a month by month basis.

5. The defendant’s accounts show that for the financial year ended 30 June 2009 the company incurred a loss of approximately $40,000. During that year Mr Jesson had to contribute approximately $40,000 to the company's activities. The company laid off staff. Mr Jesson did not have the ability to continue making financial contributions and on 30 June 2010 the defendant ceased trading. At the date of his affidavit the defendant had $2,140.34 in its bank account. Mr Jesson said the company had not generated any profit for many months.

6. After the company ceased trading Mr Jesson commenced the closure of the business. His affidavit states that the defendant has not attempted to dissipate any assets to frustrate the plaintiff. He said that the defendant company has not had any assets of value for many years and that the only asset of substance was the goodwill based on the income that the company was able to generate, not hard assets such as plant and equipment. The only fixed assets of the company which are of any substance are two motor vehicles, both of which are subject to finance. Mr Jesson said the goodwill of the business has been eroded over the last few years and no other substantial customers have replaced the plaintiff. The defendant made the decision to cease trading on the advice of its accountants to avoid trading in an insolvent manner.

7. Mr Jesson personally owns the land on which the business was conducted. When he purchased the business he borrowed all of the purchase price for the land and owes approximately $400,000 to a bank. He has advertised the land for sale.

8. The agent for the sale of the land advised Mr Jesson to clean up the land. His affidavit said that he removed the "contents" of the premises at a cost of $3,000. He said that the contents were mainly rubbish and old disused equipment used by the foundry over the last 20 years. The nature of the contents is confirmed by photographs which are evidence.

9. The defendant has no product liability insurance and is faced with the contingent liability to the plaintiff.

10. The profit and loss statement for the year ended 30 June 2009 shows that for the 12 month period the company had a net operating loss of $37,048 with accumulated losses at the end of the financial year totalling $40,173. The balance sheet as at 30 June 2009 shows a deficit of $20,171.

11. The current liabilities included trade creditors of $11,653, ATO $791, superannuation payable $9,143 and GST $6,172. The non-current liabilities of $39,862, which had reduced from $48,314 the previous year, relate to motor vehicles and a loan from Mr Jesson.

12. The plaintiff seeks a freezing order restraining the defendant from disposing of its assets. The remaining assets appear to be the vehicles which are subject to finance, perhaps some plant and equipment, trade creditors and whatever cash there may be.

13. It is common ground that the defendant has ceased trading.

14. It is clear that if the plaintiff succeeds in the action the defendant would not have the ability to fully satisfy the judgment. If the financial situation of the company was frozen at the present time and the plaintiff did receive a judgment for a sum approximating the amount of its claim, the assets of the defendant would have to be shared by all of the creditors. After the priority creditors had been satisfied the amount left for other unsecured creditors would be minimal.

15. Rule 247(2)(a) provides that the court may make a freezing order for the purpose of preventing the frustration or inhibition of the courts process by seeking to meet a danger that a prospective judgement of the court will be wholly or partly unsatisfied. Rule 247(d) provides that the court may make a freezing order against a prospective judgement debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a prospective judgement will be wholly or partly unsatisfied because the assets of the prospective judgement debtor are disposed of, dealt with or diminished in value. The granting of relief is discretionary.

16. Rule 247 follows a uniform rule recommended by the Harmonisation Committee. Previously a similar result to the freezing order could have been achieved by a Mareva order.

17. I am satisfied that the plaintiff has a good arguable case. The first requirement for a freezing order is therefore satisfied.

18. I am also satisfied that there is a danger that a prospective judgement will be wholly or partly unsatisfied. That must follow from the fact that the defendant's assets have a value which is far less than the amount of the claim. I am also satisfied that there is a danger that the prospective judgement will be partly unsatisfied because the assets of the defendant have been disposed of dealt with or diminished in value. The second requirement for an order is also satisfied.

19. The fact that the defendant may be attending to the orderly closure of its business in good faith is inconsequential for the purpose of making that finding. What is important for this purpose is the effect of the defendant's actions, not the intention of the defendant. However the fact that the defendant is acting in good faith in the ordinary course of business is a matter which may be relevant to the balance of convenience.

20. The court retains a discretion as to whether a freezing order should be made and the court must consider the balance of convenience in the same way that it does when considering whether to make an interlocutory injunction. Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208 at 214 and 215, Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513, Robmatjus Pty Ltd & Anor v Violet Home Loans Australia Pty Ltd [2007] VSC 165, De Wei Zhen v Min Zhi Mo & Ors [2008] VSC 300, Ron Medich Properties Pty Ltd v Bentley Smythe Pty Ltd (No 3) [2009] FCA 335, Deputy Commissioner of Taxation v Gashi [2010] VSC 120. Halsbury's Laws of Australia paras 325-800, 325-2885, Laws of Australia paras 15.8.750-15.8.790.

21. The test to be applied when considering the balance of convenience was described by Kitto, Taylor, Menzies and Owen JJ in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 in the following terms:

    The second inquiry is directed to this aspect of the matter. It is whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.

22. At the same time one must not overlook the purpose of a freezing order, that is, to ensure that a potential judgment debtor does not render the judgment nugatory by the disposition of its assets.

23. The defendant's assets have not been accurately identified. I have assumed that the only assets are two motor vehicles, some plant and equipment of minimal value and perhaps some cash. Any assets which may have been previously distributed are beyond the reach of a freezing order.

24. If the only conduct of the defendant was to sell chattels for the purpose of converting them into cash and that cash was retained it is hard to see how the plaintiff would be prejudiced. The plaintiff did give an undertaking that pending determination of this application that it would retain the proceeds of the sale of any physical assets. I asked plaintiff's counsel whether such an undertaking might be a way of resolving the plaintiff's application pending trial. Counsel responded that if the assets have not been sold the plaintiff wants to stop the sale.[1] The plaintiff seems to fear that there might be a sale below value. I observe that the conduct of the defendant and Mr Jesson has been honourable and there is no reason to doubt their bona fides.

    [1]    T p 3 l17, p 9 l14.

25. One difficulty is that I do not know exactly what plant and equipment remains. It occurred to me that storing the remaining plant and equipment pending resolution of the action might present a difficulty having regard to the fact that Mr Jesson proposes to sell the real estate where it is currently stored. That difficulty has been resolved by the plaintiff offering to pay the storage costs. Presumably that would include any transport costs.

26. The plaintiff's claim has not yet been listed for trial. It could be some time before a trial takes place and judgment is handed down. It seems to me that it would be inappropriate to restrain the sale of the plant and equipment pending the trial. The plant and equipment and motor vehicles are not going to increase in value and may depreciate. For that reason the balance of convenience does not favour an order preventing the sale of the plant and equipment and motor vehicles. This is not a case where the plaintiff claims some interest in the plant and equipment in specie. The plaintiff’s only interest is to maintain the fund from which a judgement could be satisfied.

27. The defendant's case is that it would like to continue with the orderly disposal of the remaining assets of the business. Having decided to cease trading and sell the real estate one can understand why the defendant might want to finish tidying up its affairs.

28. Should the other creditors and Mr Jesson have to wait until the plaintiff's action against the defendant has been resolved before their debts can be satisfied? If the defendant's funds were paid to other creditors, including Mr Jesson, and the payments amounted to a preference, the plaintiff would have the benefit of the insolvency legislation. The balancing exercise involves weighing up whether the plaintiff should be placed in a position where it might have to resort to insolvency provisions against whether the other creditors should be paid what is owing to them in the ordinary course of business. Why should the other creditors have to wait until a contingent claim is determined?

29. If the defendant is deprived of the means to pay its other creditors they will of course retain their rights to pursue payment. A freezing order would not suspend the rights of the other creditors. If the defendant cannot pay the other creditors pending determination of the plaintiff's claim that would have the effect of providing a benefit to the plaintiff at the expense of the other creditors. It would also be at the expense of the defendant's ability to finalise its business in an orderly fashion. The basic question is whether a person such as the plaintiff, with a chose in action against the defendant, should have the right to prevent payment in the ordinary course of business to other persons. That is what the freezing order sought in this case contemplates, but the court must consider the balance of convenience.

30. An important consideration is that the value of the company's net assets would appear to be minimal and even if the other creditors were ignored and all of the assets were paid to the plaintiff those assets would not go very far towards satisfying the claim which has been foreshadowed by the plaintiff. The practicalities of the situation are that a freezing order would appear to be of minimal monetary benefit to the plaintiff.

31. If it had been established that the defendant was intentionally divesting itself of assets for the purpose of rendering any judgement obtained by the plaintiff nugatory then the balance of convenience would favour a freezing order. However the plaintiff has not established that the defendant is doing anything other than attending to the orderly finalisation of its business in the ordinary course. There is no evidence that the defendant is acting for the purpose of frustrating the claim of the plaintiff.

32. The evidence establishes that Mr Jesson was advised by his accountants as to the consequence of trading whilst insolvent. For that reason he decided that the company should cease trading. He then set about disposing of the assets of the company which were no longer required. The sale of the business was advertised in the newspaper. It was the advertisement that drew the plaintiff's attention to the sale. The evidence does not establish that the assets of the defendant are being disposed of for the purpose of defeating any judgement in favour of the plaintiff.

33. In considering the balance of convenience and the exercise of the courts discretion I have had regard to the circumstances in which the assets are being disposed of and the relatively minor value of the assets in comparison to the amount claimed by the plaintiff. I have had regard to the prejudice to other creditors. It is also relevant to consider the application in the context that the plaintiff's claim relates to goods supplied by the defendant in 2003 and the alleged defect in the fan blades did not manifest itself until 2008. The Statement of Claim alleges that 115 fan blades had been supplied in 2003. The plaintiff's claim is that two of the 115 fan blades broke in 2008 and another two broke in March 2009.

34. The relative apparent strength of each party's case may be of relevant matter when considering the balance of convenience. Ron Medich Properties para 21 referring to McLelland J in Appleton Papers at 215.

35. The potential benefit of a freezing order to the plaintiff is minimal compared with the likely inconvenience to the defendant which would result from a restriction on its ability to wind up its business in an orderly way. The prejudice to other creditors in having payment of their debts deferred is at least as significant as the possible prejudice to the plaintiff. The plaintiff must satisfy me that the balance of convenience is in favour of the order which it seeks. It has not done that.

36. A freezing order should not be so wide as to prevent a defendant from paying his debts. Lunn's Civil Procedure South Australia, PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158.

37. I have come to the conclusion that the balance of convenience does not favour making a freezing order.

38. The plaintiff's application is dismissed.