Gulf Conveyor Systems P/L v A C Whalan & Company P/L

[1993] FCA 858

GULF CONVEYOR SYSTEMS PTY LIMITED and GLADSTONE INDUSTRIAL SUPPLIES PTY
LIMITED v. A C WHALAN AND CO PTY LIMITED and ROBERT CHARLES WHALAN
No. G751 of 1992
FED No. 858
Number of pages - 10
Practice And Procedure - Corporations - Mortgages

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
EINFELD J

CATCHWORDS

Practice And Procedure - Application for leave to cross claim - allegation that mortgagee sale a "sham" because purported purchaser was a front for mortgagee - whether a cause of action disclosed - standing of creditor to cross claim against a third party to enforce or protect rights of debtor - whether "just" or "convenient" to allow the cross claim

Corporations - Personal liability of directors for debts incurred by the company - deemed inability of company to pay its debts - deemed cessation of business

Mortgages - Purchase by mortgagee of mortgaged goods

Corporations Law ss 588G, 589, 592

Federal Court Rules O5 r8

Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344

Sharrment v Official Trustee (1988) 82 ALR 530

Re La Rosa ex parte Norgard v Rocom Pty Ltd (1990) 93 ALR 571

Scott v FCT (No. 2) (1966) 40 ALJR 265 at 279

Macquarie Bank Ltd v Fociri Pty Ltd (1990) 27 NSWLR 20

Foss v Harbottle (1843) 2 Hare 461

Pitcairn Investments Pty Ltd and Local v Birwick March Pty Ltd and Marwick French J unreported 2 April 1993

HEARING

SYDNEY, 16 June, 2 July 1993

#DATE 25:11:1993

Counsel and solicitor for the applicants: D.L. Williams instructed

by Abbott Tout Russell Kennedy

Counsel and solicitor for the respondents: M.S. Jacobs QC and P.C.

Tomasetti instructed by Gregory J. Halpin

Counsel and solicitor for Colin William Benjamin:

G.E. Underwood instructed by Gadens Ridgeway

Counsel and solicitor for Chester Maintenance Management Pty Ltd:

D.J. Hammerschlag (on 16 June 1993) N.A. Cotman (on 2 July 1993) instructed by Parish Patience

JUDGE1

EINFELD J By an application filed on 6 October 1992, the applicants Gulf Conveyor Systems Pty Ltd (Gulf) and Gladstone Industrial Supplies Pty Ltd (Gladstone) sue the respondents A. C. Whalan and Co Pty Ltd (the Whalan Co) and its principal director Robert Charles Whalan (Whalan) (together called "the Whalan interests") under the federal Trade Practices Act and the Fair Trading Acts of Queensland and New South Wales for damages for misleading and deceptive conduct and for declaratory and other relief. At relevant times Gladstone was a wholly owned subsidiary of a company (Divelo Pty Ltd) 50% owned by the Whalan Co and 50% by another company (Narbel Pty Ltd) which was controlled by Colin William Benjamin (Benjamin) who was also a director and shareholder of Gulf. Whalan was at relevant times a director of Gladstone.

1. The applicants' case as pleaded in the amended statement of claim filed on 28 April 1993 is this. Over some two years prior to 31 January 1992, Gulf had been selling, leasing or otherwise supplying conveyor belts and other equipment to Gladstone for fees amounting to more than $350,000 which Gladstone has not paid. One of the pieces of equipment was a vulcaniser important to Gladstone's operations. In June 1990 Gulf agreed to assign to Gladstone its interest in the vulcaniser under a hire purchase agreement. By this agreement Gladstone was to pay Gulf the costs and expenses Gulf had previously incurred in this connection (approx. $44,000) and to take over the instalments under the hire purchase agreement. In September 1991 Gladstone gave Gulf a floating charge over all its assets as security for the payment of the moneys owed. Gladstone also owed money to the Whalan Co for goods supplied and services rendered and on the same date it also gave that company a floating charge over its assets as security for this debt. By agreement between Gulf and the Whalan Co, these charges were generally to rank equally except that in certain circumstances not now relevant they would rank proportionately to the respective debts at the time of recovery.

2. In late 1991 Gulf agreed to purchase the Whalan Co's shares in Gladstone for $60,000. In and in connection with this agreement, the Whalan interests allegedly made certain representations concerning the financial situation of Gladstone which were misleading, deceptive or false. They are also said to have acted in breach of contract, breach of fiduciary duty and breach of the Corporations Law including by Whalan personally under section 592 thereof.

3. By April 1992, Gladstone owed Gulf more than $450,000 and demand was made for the payment of this sum. When the money was not paid, Gulf appointed a receiver to take possession of Gladstone's assets including the vulcaniser, some stock and the right to recover moneys owing to Gladstone. At that time Gladstone owed the National Australia Bank about $98,000 in respect of moneys lent, of which Whalan had guaranteed the repayment. The bank has called on the guarantee but the debt has not been paid. Gladstone has ceased to trade.

4. Although the Whalan Co is allegedly not entitled to exercise any powers under its charge because in fact it was in debt to Gladstone, i.e. it owed more to Gladstone than Gladstone owed to it, the applicants say that in May-June 1992 the Whalan Co, purportedly acting under its charge, took possession of the vulcaniser and other items of stock from Gladstone's premises without Gulf's permission. Following extensive correspondence between the respective solicitors, the Whalan Co returned the vulcaniser and perhaps the other removed stock on 9 July 1992 but the applicants allege that substantial losses were incurred while the vulcaniser was out of their possession. Gulf auctioned the vulcaniser and other property of Gladstone on 7 October 1992. The defence was filed on 24 May 1993, and cross claims were also then filed by the Whalan interests against the applicants. The details of these pleadings are not now relevant.

5. By motion filed on 24 May 1993, the Whalan interests seek leave under Order 5 rule 8 of the Federal Court Rules to bring cross claims against Gulf, Chester Maintenance Management Pty Ltd (Chester) and Benjamin. All the cross claims are out of time but no party objects to their filing on this account. Leave is not otherwise necessary for filing the cross claim against Gulf. Chester and Benjamin oppose the application for leave to file the cross claims against them.

The Claim against Chester
7. The cross claims against Chester and Gulf are virtually identical but it is convenient to deal with them separately. Despite an assertion in argument on behalf of the Whalan interests that the whole matter was really quite simple and obvious, the original cross claim was substantially amended during and as a result of argument and had to be amended again on two or three other occasions during the hearing. The amended cross claim is still pleaded clumsily at best but as I see it, the claim appears to be something like this. At the instance and insistence of Gulf, the auction sale of Gladstone's assets on 7 October 1992 was held "at short notice" and "in one line" for the deliberate purpose of frustrating any buyer other than Chester purchasing the vulcaniser. Vincent Thomas Perrott (Perrott), a director of both Gulf and Chester but purporting to act for Chester, bid $300,000 for the goods. In fact Perrott was acting for Gulf which actually funded Chester with the purchase price and took a charge over Chester's assets as security. Hence the transaction is said to have been a sham designed to mislead the creditors of Gladstone including the Whalan interests into believing that the sale was to a purchaser (Chester) at arm's length from Gulf when in fact Gulf itself was the true purchaser. It was originally alleged that Gulf conspired with Chester to purchase the goods from itself as mortgagee in possession at less than market value thus depriving Gladstone's creditors of moneys to which they would otherwise have become entitled and had access. The amended cross claim deleted the conspiracy charge but continued, so it was argued, to be based on fraud, unspecific and unparticularised except as the alleged sham. A false pretence was mentioned but the offence of false pretences involves more than a mere falsity.

1. The thesis of the amended cross claim continues that upon the return of the goods by Gulf for a true arm's length sale, Gulf would no longer be a secured creditor because its charge has now expired and it would only rank with other unsecured creditors such as the Whalan Co which would therefore recover all or most of what was owing to it, and Whalan himself who would be released from or cleared of any liability to pay Gladstone's debts personally.

2. The amended cross claim seeks an order setting aside the auction sale or, by further amendment, declaring it void, a new sale and a distribution of the amount obtained, an accounting of the profits made by Gulf and, by still further amendment, damages.

3. Chester advanced three arguments for refusing leave:
   

1. No cause of action is disclosed and the pleading is therefore futile

2. The Whalan Co has no standing to seek the relief in question which if at all would only be available to Gladstone

3. It is neither "just" nor "convenient" to join Chester within the meaning of Order 5 rule 8

1. As to the third proposition, it is explained that in respect of another part of this dispute, Chester has paid into Court the sum of $50,000. The Whalan Co only claims to be a creditor of Gladstone for approximately $35,000, and is therefore allegedly protected as against Chester without the cross claim. Moreover the claim, being brought in June 1993, comes eight months after the sale and there is no explanation for the delay. However, this case has been beset by delays, inefficient and excessive interlocutory processes and a multiplication of obfuscation and complexity, not very much of which has been either 'just' or 'convenient'. In the circumstances, I think that if there is an arguable cause of action, however weak or ethereal, it would not be appropriate to consign the amended cross claim against Chester to separate litigation. Despite the impressive damages figures periodically mentioned in despatches, the case has always struck me as beset with more than its fair level of emotion and irrationality, and as in truth having minimal real or realisable financial impact on any of the parties.

2. The question of standing is also vexed and largely turns on what is actually being alleged by the Whalan interests. In the quest to find the answer to this conundrum, the proposed amended cross claim is not much help. Despite the several attempts to plead what is said in the submissions to be a relatively straightforward claim, the amended cross claim against Chester is still significantly unclear. The present edition is at once prolix and incomplete.

3. Nevertheless, for the purpose of these summary-type proceedings, it is necessary to assume that the fundamental facts alleged by the Whalan interests can and will be proved if the amended cross claim proceeds. On this basis what the Whalan interests apparently seek to establish is this:
   

1. The auction was deliberately set up by Gulf and Chester to make it appear as an arms length sale when it was not.

2. This is demonstrated by a number of facts to be proved, including:

(a) it was called at short notice -- although the apparently undisputed facts are that the goods were first possessed on 30 April 1992, those removed by the Whalan Co in May-June were returned on 9 July and the auction was held on 7 October;

(b) the auctioneer was instructed to sell the goods "in one line" only -- the intent being to dissuade other potential purchasers who were only interested in the vulcaniser, although there is little evidentiary support for this intent having succeeded;

(c) although a director of both Gulf and Chester, Perrott's presence at the auction as a bidder, when Gulf was allegedly prevented by law from being a purchaser, made it appear that he was representing Chester. This was a pretence because he was in fact representing Gulf;

(d) Gulf paid or provided the money for Chester's apparent purchase of the goods at the auction, Chester having no genuine business interests which could make use of the goods. Although it took as security a charge for $400,000 over Chester's assets, the claim presumably is that repayment was never contemplated although this is not pleaded.

3. This sham was set up by Perrott on behalf of Chester and Benjamin on behalf of Gulf.

4. From the standpoint of the Whalan interests, the result of the sham was to deprive them of the opportunity of recovering any of its debt from Gladstone or in the case of Whalan personally, payments by Gladstone of debts to others which otherwise he has been or might be called upon to pay.

1. There is an allegation that the goods were sold at an undervalue in that the vulcaniser was said to be worth $180,000 and the rest of the goods $240,000, but nothing to suggest that anyone would have purchased or wanted to purchase all the goods, separately or together, for those sums. More importantly there is no allegation that anyone directly suffered as a result of the suggested fraud. It seems only to be asserted that the Whalan interests may suffer if the sale is not invalidated and another sale conducted at market value -- and only then, it seems, if the goods are sold for a much higher sum than $300,000. There is no allegation as to the present condition or even whereabouts of the goods but it is alleged that Gulf has been using or leasing the goods for profit since it regained possession of them. Gulf's charge having now expired, it is alleged that the goods will revert to Gladstone upon the invalidation of the sale. This will supposedly permit Gladstone to recover some moneys to repay its debt to Gulf and others, including presumably the National Australia Bank as a result of which Whalan will be released from his guarantee to the bank and from any liability for Gladstone's debts pursuant to section 592 of the Corporations Law. It is also said that for itself the Whalan Co will also be able to recover its debt from Gladstone of about $35,000.

2. There are a number of obvious weaknesses in these assertions. One concerns the effluxion of Gulf's charge upon which the Whalan interests rely for their claim that a resale would advantage their financial situation. The agreement for the charge provided that it would lapse on 31 October 1992 if there was no prior agreement between Gulf and Gladstone for its extension. If the auction was void ab initio for fraud, as alleged, the agreement for the charge may be susceptible to variation or rectification so that the charge can now be extended. If the Whalan interests had moved to challenge the sale at the time, it is not unlikely that the charge would have been extended. It should be said that a solicitor for the Whalan interests attended the sale and became aware of the financial arrangements for the purchase of the goods sold.

3. Moreover, the case is entirely speculative. These goods presumably have a shelf life. Even if they all still exist and are in good condition, it is quite possible that their present value is no greater and may be less than was achieved at the auction even if only because of their increased age and use. There is certainly nothing to suggest, and it is not alleged, that the market value of the goods will so exceed the indebtedness of Gladstone as to make available sufficient funds to pay Gulf, the Whalan interests and the National Australia Bank in full.

4. There are other problems for the case as well. Whether the sale was a true sham poses quite a serious question. In Sharrment v Official Trustee (1988) 82 ALR 530, Justice Lockhart said at 537:
   

A "sham" is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.

1. Justice French said in Re La Rosa ex parte Norgard v Rocom Pty Ltd (1990) 93 ALR 571 at 579:
   

The task of penetrating the outward form of a transaction to determine its true nature and the difficulties of finding criteria by which such judgments may be made have occupied many pages of the law reports. And although some broad guidelines have emerged, the task of the court has always been to examine the particular circumstances of the impugned transaction. In Scott v FCT (No. 2) (1966) 40 ALJR 265 at 279, Windeyer J identified as the relevant question whether the parties entering into the ostensible transaction "meant it to be their transaction or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front ... concealing their real transaction".

1. In other words, a sham is or includes a pretence that an event or fact occurred when in reality it did not; or that it did not occur when in reality it did. In the context of this case, the allegation is that despite contrary appearances, Chester did not but Gulf did purchase the goods in question. The amended cross claim says in this respect that Perrott, a director of both companies, purported to but did not in fact act for Chester and that he intended "for Chester and for Gulf" that the transaction should be a sham. That these assertions are virtually unintelligible is, however, overshadowed by one powerful fact above all others. If Chester was the bona fide purchaser, the transaction was a perfectly proper arm's length dealing which is impregnable to attack. So much, as I understand it, is agreed. If on the other hand Gulf was in truth the purchaser, Chester cannot be liable to anyone and therefore a party to the proceedings. It is worth observing that in an affidavit of Whalan of 20 May 1993, he says that he was told at the auction and presumable believed that Chester was the purchaser. Depending on the evidence, that may conflict with his argument that Gulf was the purchaser.

2. On these principles it is questionable that the Whalan interests are alleging a true sham at all but assuming that they are, the real issue for present purposes is whether, in the absence of an allegation of fraud (and the alleged conspiracy having been dropped, there is such an absence despite the contrary argument advanced), and for what purpose Chester can and should be joined. Neither the original nor the amended cross claim sought any relief from Chester. Indeed no damages were sought at all. When I pointed out that anomaly in argument, a further amendment was sought, and for the purposes at least of argument granted, to seek an order "that Gulf and Chester pay such damages as the cross claimants might have suffered". However, if the purported sale to Chester is set aside on the grounds that as a sham, it was actually a sale to Gulf, and that the sale to Gulf should then be invalidated as illegal -- and although originally conceded by Chester, the proposition of illegality was later disputed when Chester had a change of counsel -- Chester can be liable for no damages. It can certainly not be made the subject of any of the other orders sought in the amended cross claim. And if no proper relief is sought or available against it, and the substance of the claim is that at the auction Chester undertook no obligations legally enforceable against it, it is manifestly not a proper party in the action.

1. As that is the conclusion I have reached, there is no need to decide the question of standing but I entertain a significant doubt that an unsecured creditor has standing to set aside a transaction between its debtor and a third party unless perhaps the transaction was intentionally set up to defraud the creditor and the creditor was defrauded in fact. Whalan personally is only at best a contingent creditor. It is very difficult to see how he in particular gets standing on that basis. See Foss v Harbottle (1843) 2 Hare 461; Scarel Pty Ltd v City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344; Pitcairn Investments Pty Ltd and Local v Birwick March Pty Ltd and Marwick, French J unreported 2 April 1993.

2. It is also not necessary to decide whether Gladstone itself would have the right to sue Gulf over this matter or whether the Whalan interests could proceed in another way or whether the Whalan contention is correct that the purchase by Gulf of the goods was illegal and void (as distinct from voidable) because a mortgagee cannot in law purchase the property it seized from the mortgagor. The Whalan interests actually contended that Chester should be joined in the action because it claims ownership of the goods. The amended cross claim makes no such assertion and Chester did not make this claim either in evidence or argument. It seems to have been a late loose thought and cannot be a basis for joining Chester.

3. It was further argued that a finding that there was no sale at all would not be binding on Chester if it was not a party. However, when I pointed out that the amended cross claim did not seek a declaration that there was no sale, the Whalan interests sought another amendment to add a request for such a declaration. But even if granted, this amendment would not solve the problem. Success for the Whalan interests in this aspect of the litigation depends, as is conceded, on the establishment that the auction was a sham. As Chester does not ask to be joined in the action to resist that claim, and in fact opposes joinder, the Whalan interests as creditors of Gladstone cannot validate or reinforce their position in relation to Gladstone's debt by impugning the actions of Chester and Gulf or by taking responsibility for arguing or promoting Gladstone's or Chester's interests.

4. The motion for leave to file the amended cross claim against Chester will be dismissed with costs.

The Claim against Benjamin
25. Once again this so-called "simple" claim brought by Whalan personally has had to be significantly amended during argument. It arises in this way. One of the claims in the amended statement of claim is against Whalan as a director of Gladstone under section 592(1) of the Corporations Law. This section provides:

592(1) Where:

(a) a company has incurred a debt before the commencement of Part 5.7B;

(b) immediately before the time when the debt was incurred:

(i) there were reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or

(ii) there were reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and

(c) the company was, at the time when the debt was incurred, or becomes at a later time, a company to which this section applies;

any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred contravenes this subsection and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt.

1. The applicants allege that between 24 September 1990 and 31 January 1992, Gladstone purchased or leased goods from Gulf and incurred debts for their cost in excess of $400,000. They say that each time a debt was incurred, there were reasonable grounds to believe that Gladstone could not pay. Gladstone has ceased to carry on business and still owes Gulf the amount involved. Gulf therefore claims this sum from Whalan under section 592(1). The amended cross claim against Benjamin says that if Whalan is held liable to Gulf under that provision for Gladstone's debts, Benjamin as Whalan's co-director of Gladstone is bound by section 592, or should be ordered, to pay half the amount.

2. There is some dispute about whether Benjamin was a director of Gladstone at the relevant time, even on the extended definitions now provided by the Corporations Law. This dispute is not able to be resolved summarily because the matter involves facts to be proved. Hence Benjamin argued that assuming he was a director at relevant times, he cannot be liable because Whalan cannot be liable to Gulf. The success of the argument is, ironically, in the interests of Whalan who would thereby escape liability to Gulf and others for Gladstone's debts. The contention is based upon section 589 of the Corporations Law (which appears in Part 5.8 of the Law) and the majority decision of the New South Wales Court of Appeal in Macquarie Bank Ltd v Fociri Pty Ltd (1990) 27 NSWLR 20. This decided that a company can only be deemed unable to pay its debts under the relevant statute if there is unexecuted process against it.

3. Subsection (1)(f) of section 589 provides inter alia that section 592 applies to a company that has ceased to carry on business or is unable to pay its debts. Subsection (3) provides inter alia that for the purposes of Part 5.8, a company is deemed to have ceased to carry on business if and only if the Australian Securities Commission (ASC) has written to the company about the matter and not received a reply within one month that it is functioning. Subsection (4) states inter alia that for the purposes of Part 5.8, a company is "deemed to be unable to pay its debts if and only if execution or other process issued on a judgment, decree or order of a court .... in favour of a creditor of the company is returned unsatisfied in whole or in part". Subsection (4) has subsequently been replaced by a new provision so that a company is now solvent if and only if able to pay all debts as and when they become due and payable. New section 588G(1) and (2) now makes provision inter alia that a director in office when the company incurs a debt becomes liable for the debt or a penalty if the company is insolvent, that there are reasonable grounds for suspecting that this is so, that the director is or a reasonable person in a similar position would be aware of such grounds, and yet the director fails to prevent the company from incurring the debt.

4. It is common ground that at any relevant time when Benjamin and Whalan were directors of Gladstone, the company had no unsatisfied process against it. Benjamin says that Gladstone therefore cannot be found to have been unable to pay its debts, and neither Whalan nor Benjamin can be held liable for their payment. The acceptance of this argument would mean that the section 592 claim against Whalan in the amended statement of claim would have to be struck out.

5. Whalan argues that by section 589(1), section 592 applies to any company which has ceased to carry on business. As prescribed by section 589(3), this will be deemed to have occurred to Gladstone after 4 April 1993 if the allegations in paragraph 80 of the amended statement of claim are proved, viz. that the ASC had made an unanswered written assertion of cessation to Gladstone more than a month earlier. In that event, section 592 will apply to Gladstone. In other words, if the applicants can prove the circumstances prescribed by section 592 as alleged in the amended statement of claim, then subject only to Whalan's establishment of a defence under section 592(2), the applicants should succeed against Whalan who will then have a strong cross claim against Benjamin. In these circumstances, Fociri will be irrelevant to this case because it dealt with the alternative provision of the then New South Wales equivalent of section 589 (1)(f), viz. inability to pay debts as defined or "deemed" by the then New South Wales equivalent of former section 589(4). This argument is that the alternatives in section 589(1)(f) are truly disjunctive and either may be chosen as relevant to the circumstances. The contrary argument is that the conceptual kinship between being "unable to pay its debts" in section 589(1)(f) and "not be able to pay all its debts as and when they become due" in section 592(1)(b)(i) and (ii) makes only the part of section 589(1)(f) relating to inability to pay debts relevant to this case.

6. In my opinion, Whalan's position is fully arguable. On what is in substance a summary strike out application, it is not appropriate to resolve the competing arguments finally and definitively. Even if it is relevant to do so, it is also not appropriate for a single Judge of this Court in an interlocutory application to attempt to pass finally on the majority decision in Fociri of Gleeson CJ and Cripps JA with President Kirby in strong dissent. The true construction of the statutory scheme must still be regarded as open in this Court, including the question whether the "deeming" provisions are the only ways to determine whether a company is solvent or insolvent. In my opinion, as the cross claim is not hopeless and as the argument for relief it seeks is respectable and may succeed, leave must be given to file the cross claim against Benjamin subject to any other preliminary objections he wishes to raise which have not yet been argued. I will hear argument as to the costs of the motion.

The Claim against Gulf
32. There was no objection to the filing of the amended cross claim against Gulf except for its form, Gulf submitting that it is defective and inadequately pleaded and that if it is not repleaded it should be struck out. I agree that it should be further amended so as to clarify what is being claimed. However, for my part I have had some difficulty in comprehending the need for a cross claim at all in that at least the relief sought against Gulf in the amended cross claim seems likely to be determined in and by Gulf's primary claim against the Whalan interests. In case this view is wrong, and to avoid unnecessary cost and delay later, I will allow the amended cross claim to be filed. The parties should consult on the form it should take.

1. The parties will bring in minutes of the orders that should be made to give effect to these decisions. The costs of the motions against Gulf and Benjamin will be reserved until the next directions date, already fixed, at 9:30am on Thursday December 2 1993.