Humphris v Jenshol
[1997] FCA 1053
•15 OCTOBER 1997
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - Director’s duties - whether director used, transferred or appropriated asset to the disadvantage of company - asset consisted of a substantial number of existing customer connections to a telecommunications service - whether asset of any value.
EQUITY - breach of fiduciary duties - remedy - time for election between damages and account of profits.
PRACTICE AND PROCEDURE - Mareva injunction - whether Mareva injunction may be continued after judgment for the purpose of assisting execution.
Corporations Law: s 232, s 474, s 483
Stewart Chartering Ltd v C & O Managements SA [1980] 1 WLR 460, applied
Jackson v Sterling Industries Ltd (1987) 162 CLR 612, applied
Phipps v Boardman [1967] 2 AC 46, applied
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, cited
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, applied
Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, applied
Commonwealth Bank of Australia v Smith (1991) 42 FCR 390, cited
Chan v Zacharia (1984) 154 CLR 178, cited
Brady v Stapleton (1952) 88 CLR 322, applied
Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514, considered
MICHAEL HUMPHRIS (IN HIS CAPACITY AS LIQUIDATOR OF MIDCHARM PTY LTD) (IN LIQUIDATION) & MIDCHARM PTY LTD v MAX SAMUEL JENSHOL & JUSTICE TELECOMMUNICATIONS PTY LTD
VG 3185 of 1997
GOLDBERG J
MELBOURNE
15 OCTOBER 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG 3185 of 1997 ) GENERAL DIVISION )
BETWEEN: MICHAEL HUMPHRIS (IN HIS CAPACITY AS LIQUIDATOR OF MIDCHARM PTY LTD) (IN LIQUIDATION) (ACN 063 784 083)
First Applicant
andMIDCHARM PTY LTD (IN LIQUIDATION)
(ACN 063 784 083)
Second ApplicantAND: MAX SAMUEL JENSHOL
First Respondent
andJUSTICE TELECOMMUNICATIONS PTY LTD (ACN 075 748 186)
Second Respondent
JUDGE: GOLDBERG J PLACE: MELBOURNE DATE: 15 OCTOBER 1997
REASONS FOR JUDGMENT
Introduction
On 27 June 1997 upon application by the first applicant as liquidator of Midcharm Pty Ltd I ordered that warrants be issued to the first applicant (“the liquidator”) pursuant to s 530C of the Corporations Law authorising him to search for and seize all property and books of the second applicant, Midcharm Pty Ltd (“Midcharm”) in the possession of the respondents and I granted ex parte orders in a “Mareva” form restraining the respondents from dealing with their assets until 4.15 pm on 30 June 1997. Those warrants were executed and the liquidator obtained a number of documents and records of Midcharm. The liquidator had applied for the issue of the warrants and the Mareva injunction because he was not satisfied he had received all books and records of Midcharm and was concerned about the possible dissipation of Midcharm’s assets. After an appearance was entered by the respondents those orders were extended pending the hearing and determination of this proceeding.
Background
On 20 May 1997 Midcharm was wound up by order of the Federal Court and Mr Humphris was appointed as its liquidator. At the time of the winding-up order Midcharm was carrying on business from premises at 194-198 St Kilda Road, St Kilda and was trading under the registered name of “Justice Telecommunications”. The management of Midcharm up to that time, had been carried on by the first respondent (“Mr Jenshol”), an undischarged bankrupt since November 1994. Midcharm had been incorporated on 3 March 1994 as a shelf company. In February 1995 Constantinos Zikos, Andrew Leonard Dunner and Mr Jenshol were appointed as directors of Midcharm. Mr Jenshol ceased to be a director on 1 January 1997 as required by the Australian Securities Commission because he was a bankrupt. However Mr Jenshol continued to manage Midcharm up to the time of its winding‑up.
Midcharm carried on the business of reselling telephone services. Some of those services were provided by Telstra and it was on Telstra’s application that Midcharm had been wound up. Another company with which Mr Jenshol was involved was Justice Telecommunications Pty Ltd, the second respondent, which carried on its business from the same premises as Midcharm. According to Mr Jenshol the second respondent has carried on the business of mobile telephone sales, the supply of internet facilities and the provision of international telephone call back facilities. One of the core issues in the proceeding is whether a business arrangement with Emerson Communications LLC (“Emerson”) in the United States of America for the supply of international telephone call back facilities was entered into by or on behalf of Midcharm or the second respondent.
The international telephone call back system worked in the following way. Customers in Australia who had signed up for this service were able to access a special telephone number in the United States of America provided by Emerson which gave them access to the United States telephone network and the ability to make cheaper international calls from Australia to other countries. Emerson issued interim and final invoices to Midcharm on a monthly basis in respect of all telephone calls. Midcharm’s obligation to pay Emerson for the telephone calls made by Midcharm’s customers was in no way dependent or conditional upon Midcharm being paid by the customer. The liability to pay Emerson rested with Midcharm. Emerson also produced bills for each individual customer which recorded the international calls made by that person using the call back facility. These bills were sent to Midcharm who then forwarded the bills to the individual customers and collected the payments..
On 6 June 1997 the liquidator received a letter from the solicitors acting for Emerson claiming that Emerson was a creditor of Midcharm in the sum of US$330,449.79 (A$430,273.16) as at 28 May 1997 for telephone services provided. It became apparent to the liquidator that Emerson had sent invoices to Australia to be passed on to the retail customers using Emerson international call back services but that the invoices had been taken or used by the second respondent which was being paid monies in respect of the supply of the Emerson services but not accounting for them to the liquidator. The invoices for April and May 1997 had been delivered to the business premises of Midcharm on 26 May 1997.
The liquidator had not been able to find any reference to the existence of this business in the records of Midcharm which he had received but in early June 1997 he started to receive cheques from customers of Midcharm in payment of accounts rendered to them for call back services. Some of those accounts were on the heading of “JusTel” with the address 194‑198 St Kilda Road, St Kilda, the same address as the business premises of Midcharm.
The liquidator says that Midcharm entered into the relevant agreements with Emerson. The respondents deny this claim but their position as to who was the contracting party with Emerson has varied and is confusing. The respondents say in their defence that the second respondent entered into the agreements which were current at the date of the winding‑up order and that the second respondent was entitled to the property in the invoices received from Emerson and any money received from the customers to whom the invoices were rendered. This position was maintained in affidavits by Mr Jenshol but in cross‑examination he said that the Emerson agreements had been entered into with him personally. In final addresses counsel for the respondents submitted that I should find that the business carried on with Emerson was Mr Jenshol’s personal business and not Midcharm’s business. For the reasons to which I shall refer I reject that submission.
With whom did Emerson Communications LLC contract and who carried on the telecommunications business?
There are in evidence before the Court three written agreements with Emerson. The first agreement is described as an “International Switchless Call Back Services Agreement” undated but expressed to commence on 14 February 1996. It is expressed to be made between Emerson and Justice Telecommunications. The signed agreement was sent to Emerson by Mr Jenshol under cover of a letter dated 14 February 1996 on the letterhead of:
Justice Telecommunications
Midcharm Pty Ltd Trading as
Justice Telecommunications
ACN No 063 784 083
By the agreement Emerson agreed to provide Justice Telecommunications with certain telecommunications facilities and to provide it with calling and billing details to enable it to bill its customers. Persons using Emerson’s services were to be customers of Justice Telecommunications and Justice Telecommunications was obliged to pay Emerson for the use made of Emerson’s services by Justice Telecommunications’ customers. It then sent bills to its customers who paid it for their use of the Emerson services. On 14 February 1996 the second respondent was not in existence; it was not incorporated until 27 September 1996. Subsequent to the execution of this agreement Mr Jenshol wrote to Emerson in February, April, August and September 1996 on the letterhead of:
Justice Telecommunications
Midcharm Pty Ltd Trading as
Justice TelecommunicationsACN No 063 784 083
in relation to matters arising under, or relating to the implementation of, the agreement.
On 3 October 1996 Emerson wrote a letter addressed to Mr M Jenshol Midcharm Pty Ltd trading as Justice Telecommunications in relation to “14 February 1996 International Switchless Service Agreement” in which it set out the terms on which Justice Telecommunications was to pay its outstanding account. Mr Jenshol signed the letter under the statement “I confirm the above variation to the Agreement”. On 10 October 1996 Mr Jenshol signed a form of Guarantee and Indemnity dated 3 October 1996 in favour of Emerson whereby he guaranteed to Emerson the performance by Midcharm trading as Justice Telecommunications of its obligations under the International Switchless Services Agreement made on or about 14 February 1996 between Emerson and Midcharm Pty Ltd trading as Justice Telecommunications as varied by letter dated 3 October 1996.
The first reference to Justice Telecommunications Pty Ltd, the second respondent, in the correspondence and documentation between the parties, is a letter from Justice Telecommunications Pty Ltd to Emerson on 8 November 1996 in relation to money due to Emerson and the telecommunication services it was providing. The only agreement under which money was due to Emerson at this date and the only agreement under which telecommunication services were being provided by Emerson at this date was the agreement entered into between Emerson and Midcharm trading as Justice Telecommunications on or about 14 February 1996. The correspondence shows that by February 1997 there was a dispute between the parties to that agreement as to the amounts due and payable to Emerson by Midcharm under that agreement.
In the course of cross-examination Mr Jenshol denied that Midcharm was a party to the 14 February 1996 agreement and asserted that Midcharm was not carrying on any business in relation to the provision of Emerson telecommunication services to customers of Midcharm. He said that the business with Emerson was carried on by himself. That evidence was inconsistent with, and contrary to, the allegations in his defence and contrary to what he had said in his affidavits. In particular in his affidavit of 14 July 1997 although he had denied that the call back business of Midcharm had been operated by the second respondent he had said that:
“Prior to February 1997 Midcharm Pty Ltd did its own billing for services provided by Emmerson (sic). The system would be that tapes for billing were sent from America to Australia and their accounts were prepared by a billing vender (sic) on behalf of Midcharm.”
He then said:
“The only business Midcharm was ever involved with was the call back business of Emmerson (sic) and Telstra.”
This evidence was consistent with the documentation to which I have referred.
Mr Jenshol said in a later affidavit (22 July 1997) that up to late June 1997 he had always regarded any income from Emerson customers “as rightly belonging” to the second respondent, that Midcharm appears on the guarantee dated 3 October 1996 in error and that he was guaranteeing the second respondent. I do not accept that evidence. It is contrary to the documentation and as the second respondent was only incorporated on 27 September 1996 that evidence cannot be correct.
I am satisfied on the evidence that as at the beginning of February 1997 the business arrangement with Emerson was being conducted by and on behalf of Midcharm under an agreement entered into between Emerson and Midcharm in February 1996 which was varied in October 1996.
On 6 February 1997 two further agreements were entered into between Emerson and Midcharm trading as Justice Telecommunications. One, described as a “Customer Agreement” commenced as follows:
“This Customer Agreement (“Agreement”) is entered into this 6th day of February 1997 between Emerson Communications, L.L.C. (“Emerson”), a Washington State company, Midcharm Pty Ltd (ACN# 063784083) trading as Justice Telecommunications (“Justice”), a State of Victoria company and Max Jenshol (“Guarantor”) collectively referred to as “the Parties” ...”
The purpose of the agreement is recited as being:
“... to resolve all significant billing, cash payment, rate issues and related matters for the period February 14, 1996 through December 31, 1996.”
These matters had arisen under the earlier agreement between Emerson and Midcharm. The agreement made provision for the billing of customers of Justice Telecommunications using Emerson’s services and provided for Emerson to credit Midcharm with $2,500.00 to compensate it for billing errors caused by inaccurate billing data furnished to Applied Solutions, Midcharm’s billing service. Throughout the agreement the contracting parties were referred to as “Emerson” and “Justice” but in the agreement the expression “Justice” was the definition or expression used for Midcharm trading as Justice Telecommunications.
The other agreement entered into on 6 February 1997 described as a “Service Agreement” commenced as follows:
“This Service Agreement (“Agreement”) is entered into this 6th day of February 1997 between Emerson Communications, L.L.C. (“Emerson”), a Washington State company and Midcharm Pty Ltd (ACN# 063784083) trading as Justice Telecommunications (“Customer”) a State of Victoria company, collectively referred to as “the Parties” ...”
The agreement was expressed to supersede:
“the existing agreement dated February 14, 1996, between Emerson and the Customer ...”,
“the Customer” being Midcharm.
By the beginning of 1997 Mr Jenshol was having difficulties with the bills being received from Emerson. The company which processed them, Applied Solutions, was having difficulties with the data supplied and there is correspondence relating to these difficulties. It is not necessary for present purposes to analyse these details in any way other than to note that they existed, that monies were outstanding and due and payable to Emerson and that in the customer agreement of 6 February 1997 Emerson credited Midcharm with $2,500.00 to compensate it for inaccurate billing data.
Mr Jenshol contends that the second respondent carried on a business separate and distinct from that previously carried on by Midcharm and that the two agreements dated 6 February 1997 should have been entered into between Justice Telecommunications Pty Ltd and Emerson.
In an affidavit affirmed on 14 July 1997 Mr Jenshol said that in the two agreements of 6 February 1997 there was an error and that in fact those agreements should have been made between the second respondent and Emerson. In evidence in chief he said “the only business in which Midcharm was ever physically involved was the Telstra business”. However, this evidence is not consistent with, and indeed is quite contrary to, the sequence of events which occurred after 14 February 1996. It is also inconsistent with his affidavit of 14 July 1997. I am satisfied that the evidence shows that the two agreements of 6 February 1997 were related to, and covered, the business arrangement which had existed since February 1996 between Emerson and Midcharm. Their terms are to that effect and I can find no basis in the evidence which supports Mr Jenshol’s assertion that there was an error and that in fact those agreements should have been made between the second respondent and Emerson. Any such agreement at that time would have constituted or resulted in a disposition of a significant business connection of Midcharm.
In a further affidavit affirmed 22 July 1997 Mr Jenshol says that “It is clear from the written documentation that Midcharm Pty Ltd appears on the Emerson Communications documentation although I maintain that this is an error.” All the documentation between the parties demonstrates that there is no such error. In a further affidavit affirmed 31 July 1997 Mr Jenshol says “At all times prior to the Application I believed the business agreement with Emerson was with Justice Telecommunications Pty Ltd and not with Midcharm”. There is no objective evidence which supports that belief. In addition, for the reasons to which I shall refer I do not accept Mr Jenshol as a credible witness, and I am not prepared to accept that Mr Jenshol in fact held that belief, especially having regard to his evidence in cross‑examination that the Emerson agreements had been entered into with him personally.
Mr Jenshol’s evidence in relation to the identity of the contracting party with Emerson was quite unsatisfactory. It changed from time to time and was quite inconsistent with all relevant documentation. I can place no reliance on Mr Jenshol’s evidence. He gave his evidence in an unsatisfactory manner. Frequently he would not respond to questions put to him in cross‑examination and on numerous occasions he either answered “no comment” to questions which were susceptible of a simple answer or would not answer the question. I can only infer from these answers that Mr Jenshol was not prepared to face up to reality or give a truthful answer. There are many examples of such answers and I will only refer to three of them. The first exchange was as follows:
Q:So what you say is the Telstra business was carried on by Midcharm; is that correct?
A:That’s correct.
Q: You accept that, do you not?
A: Yes.
Q:You said that this morning. But you see, I suggest to you that you did not have any other company that was carrying on the business name Justice Telecommunications as at February 1996?
A: I don’t want to answer that one.
The following exchange also occurred:
Q:Now I suggest that what you did with the Emerson customers was transfer them over to Avirnex; that is correct is it not?
A: No comment.
Q:You took them away from Midcharm and in effect gave them to Justice Telecommunications Proprietary Limited; that is what happened, is it not?
A: No comment.
Q:The benefit under the Avirnex contract accrued to Justice Telecommunications Proprietary Limited, did it not?
A: No comment.
Q: No benefit has been obtained from (sic) Midcharm from that contract?
A: No comment.
Q: Well the answer is yes, is it not?
A: No comment.
The third exchange related to the use of a barter services card by members of Mr Jenshol’s family as a contra for services rendered to Midcharm. Mr Jenshol said that his children did not use the card and the exchange was as follows:
Q:... So it is not correct is it, to say that the use of the card by members of your family was a contra for wages and commissions earned by them for services provided?
A: No comment
HIS HONOUR: What do you mean by no comment Mr Jenshol?
A: Because I feel I’m being intimidated by this type of questioning
HIS HONOUR: The question is a proper one. I direct you answer the question.
A: Well I don’t wish to answer the question.
At other stages in Mr Jenshol’s cross‑examination objection was taken by his counsel that he should not be compelled to answer certain questions put to him on the ground that the answer may tend to incriminate him but no such objection was taken in respect of any of the questions to which I have referred.
In the course of cross‑examination Mr Jenshol’s evidence as to the identity of the contracting party with Emerson changed. He continued to maintain that it was not Midcharm but said that he believed the Emerson contract was with himself. I do not accept that evidence; it is quite inconsistent with all relevant documentation, in particular his guarantee of 3 October 1996.
Mr Jenshol’s inconsistency continued because at another point in his cross‑examination he also agreed that he never in his own right carried on business as Justice Telecommunications. If he did not, then by whom or on whose behalf were the agreements entered into and the correspondence sent? There can only be one answer - Midcharm. Mr Jenshol would not accept this proposition, yet it was obviously the only conclusion certainly before 27 September 1996 (and also in my view after that date). When shown a letter dated 8 April 1996 on Justice Telecommunications letterhead (which also showed Midcharm trading as Justice Telecommunications) the following exchange occurred:
Q: Do you see the date of that letter?
A: Yes, I do.
Q: Who was Justice Telecommunications?
A: Who was Justice Telecommunications?
Q: Yes, who was Justice Telecommunications?
A: Well it wasn’t Midcharm
Q: Who was it?
A: Well I don’t know (who) it was then, but it was not Midcharm.
Q: But you signed the letter?
A: Yes I did.
Q:You say it was not Midcharm, is that correct? That is your answer? Is that correct?
A: I beg your pardon?
Q: It was not Midcharm?
A: No, it was not Midcharm.
Q: And it was not you personally?
A:Well it was me personally but it was an unregistered business name, if that’s what you’re trying to get at.
Q:No, I am not trying to get at anything. I am asking you what your evidence is, because I thought you said a moment ago that Justice Telecommunications was not yourself; that was not your personal business?
A: Well, I can’t answer that.
This evidence showed a refusal by Mr Jenshol to face up to the reality that the contracting party with Emerson, according to the documentation, could only be Midcharm. Mr Jenshol continued to maintain throughout cross‑examination that the contracting party with Emerson was himself. For example when referred to a letter of demand by Emerson’s solicitor on 23 January 1997 to Midcharm for $132,893.00 Mr Jenshol said that Emerson was owed the money not by Midcharm but by himself.
His evidence as to when he changed his name and whether it was before or after he was made bankrupt was evasive, as was his evidence as to whether Justice Telecommunications was a name used by Midcharm. He denied that Midcharm used that name yet it is abundantly clear from all the documentation that this denial is patently wrong. He then said that he did not know whether Justice Telecommunications was a business name used by Midcharm. That answer was not candid nor, in my view, truthful having regard to the correspondence and documents he had signed. Mr Jenshol signed several contracts and a guarantee and wrote many letters in which the text or letterhead referred to Midcharm trading as Justice Telecommunications. Mr Jenshol’s assertion on several occasions that he was being subjected to intimidation by cross‑examining counsel was wholly without foundation. On each occasion that he claimed he was being intimidated the question asked was a proper question, was asked in an appropriate non‑intimidatory manner and was susceptible of an answer.
I therefore find that all the agreements entered into with Emerson were entered into by and with Midcharm. The nature of these agreements was such that they comprised either valuable or potentially valuable commercial assets and property of Midcharm. Although there had been difficulties in billing and sending out invoices to customers there were a substantial number of customers who had entered into agreements with Midcharm who wished to use international telecommunications facilities and who would generate commissions and revenue for the party who procured those telecommunications services for them. Although Emerson terminated its contractual arrangements with Midcharm either on 17 April 1997 or, at the latest, 27 May 1997 the fact remains that there was available to Midcharm a substantial customer association from which it could derive a commercial advantage if it sought and obtained alternative telecommunications facilities.
However Midcharm made no attempts to procure such alternative facilities and such alternative facilities as were obtained were procured by the second respondent with Avirnex Communications Australia Pty Ltd (“Avirnex”). This occurred through the actions of Mr Jenshol who at all relevant times was managing Midcharm’s business and the business of the second respondent.
Was there an appropriation of Midcharm’s business?
On 25 February 1997 the second respondent entered into a distributorship agreement with Avirnex whereby the second respondent was appointed as an authorised distributor of Avirnex telecommunications services. Mr Jenshol says that the services to be provided by Avirnex were superior to those provided by Emerson because Avirnex could supply facilities for telephone calls within Australia whereas Emerson could only supply facilities for international telephone calls. For the reasons to which I will refer this issue does not bear upon whether Mr Jenshol breached such duties as he owed to Midcharm. Under the distributorship agreement, Avirnex was to pay the second respondent commissions based on the revenue derived from the telephone calls made by customers signed up by the second respondent. The second respondent could appoint sub-distributors but their commissions were to be paid by the second respondent.
The question arises as to why the Avirnex agreement was entered into with the second respondent and not with Midcharm. At the time it was entered into the Emerson agreement with Midcharm was still current and operative. Mr Jenshol was managing and running both companies. By the date of the Avirnex agreement there was a substantial dispute between Midcharm and Emerson as to the monies due to Emerson and two days before Mr Jenshol signed the agreement with Avirnex for the second respondent in his capacity as “general manager” the solicitors for Emerson had written to Midcharm and Mr Jenshol making demand that US$132,983.00 due to Emerson be paid by 1 February 1997. It is not clear whether that letter was received before the Avirnex distributorship agreement was signed by Mr Jenshol but correspondence from Emerson to Mr Jenshol prior to that date and in particular on 15 January 1997 made it clear that Emerson was seeking payment of in excess of US$130,000.00 by 1 February 1997. Further since August 1996 Midcharm owed Telstra $94,827.00 for telephone calls made and had also been in debt to Sitel Communications Inc another American service provider for at least $118,000.00 for international telecommunications services provided. Mr Jenshol claimed to have a set-off or counterclaim against these amounts but both service providers had been looking for payment since August 1996.
Mr Jenshol was clearly in a position of conflict as between the interests of Midcharm and the interests of the second respondent in relation to procuring customers for the Avirnex telecommunication services. Midcharm was carrying on the business of procuring customers for national and international telecommunications facilities with Telstra and Emerson; why procure the second respondent to enter into the distributor agreement with Avirnex? It was put to Mr Jenshol in cross‑examination that as at February 1997 Midcharm was in financial difficulties and it was for that reason that the Avirnex agreement was made with the second respondent. Mr Jenshol denied this proposition and said by way of explanation that he had been talking to Avirnex “for the last 2½ years”. That response, however supports the proposition put by counsel for the applicants because the second respondent was only incorporated on 27 September 1996 at which time Midcharm’s financial difficulties had become apparent. I am satisfied on the evidence that a significant motivation for Mr Jenshol to have the secondnamed respondent enter into the Avirnex agreement was the fact that Midcharm was experiencing financial difficulties. Midcharm was the vehicle used by Mr Jenshol for the provision of telecommunication services prior to the incorporation of the secondnamed respondent and it was the logical vehicle to use for the Avirnex agreement.
In the events which occurred the service agreement with Emerson was terminated by Emerson on 17 April 1997 or at the latest on 23 May 1997. It is apparent from the evidence that by 26 April 1997 Mr Jenshol was writing to customers of Emerson on the letterhead of Midcharm informing them that “your access number for call back will be changing”. The letter sent to customers in substance provided for the transfer of the customers’ business from using the Emerson facilities to using the Avirnex services. Mr Jenshol said that Avirnex sent out the letters but this occurred with his agreement and he gave Avirnex a list of people to whom Avirnex could send the letters. The respondents submitted that the services being offered by Avirnex could not be supplied by Emerson and that in any event Emerson had terminated its agreement. For reasons to which I shall refer this is no answer to the claim that the transfer of the customers from Emerson to Avirnex occurred as a result of a breach of the duty which Mr Jenshol owed to Midcharm and that the second respondent was privy to this breach of duty.
The respondents submit that even if the agreements in relation to the provision of telecommunication services by Emerson were entered into with Midcharm, there is no property or ownership of the customer lists or business which Midcharm has derived from the use of the Emerson telecommunication services and that the “ownership” of the clients who contracted with Midcharm for the provision of the Emerson telecommunication services remained with the agents who procured that business with Midcharm. The respondents then submit there was nothing improper about the transfer of the customers using the Emerson facilities to Avirnex.
The respondents, in support of this submission, relied upon a Telecommunications Agency Agreement entered into between the second respondent and Sangar Services Pty Ltd on 15 October 1996 which provided that the second respondent would pay the agent a commission on the value of the telephone calls placed by the agent’s customers with the second respondent. The agreement provided that all “clients” introduced to the second respondent by the agent who were signed up as subscribers to the second respondent’s services would be “deemed to be the customer of the Agent”. The agreement also provided that “All clients remain the property of the agent”. The evidence discloses that well over 1000 customers were signed up by Midcharm to use the Emerson facilities, that well over 2000 customers were signed up by the second respondent to use the Avirnex services and that approximately 958 customers using the Emerson facilities have transferred to using the Avirnex services. Mr Jenshol said that more than 3000 individuals and business entities had registered for access numbers with Emerson.
The respondents claim that some of the transferring Emerson customers have made little or no use of the Avirnex services but this is not relevant to the issue whether the transfer of those customers to Avirnex by the second respondent at the instigation of Mr Jenshol was in breach of the duty which Mr Jenshol owed to Midcharm to which breach the second respondent was privy. The applicants’ case is that Mr Jenshol transferred what was loosely called the Emerson business to the second respondent for no consideration or, in the alternative, Mr Jenshol appropriated the Emerson customers and caused them to enter into alternative arrangements with Avirnex at the suit of the second respondent. There is no evidence that any customer initiated or at any stage requested a transfer. Nor is there any evidence that any agent of Midcharm requested Midcharm to transfer the business of any customer introduced by it to Midcharm to Avirnex. Indeed there is no evidence of the terms upon which Midcharm entered into any agreement with agents to procure customers for Midcharm’s business with Emerson. Accordingly, the respondents’ submission that the customers introduced to Midcharm by agents of Midcharm belong to the agents and at no time were the “property” of Midcharm does not have any factual basis to support it. Even if the agents of Midcharm did have the right to move customers from Midcharm to another service provider there is no evidence that any agent exercised that right. Rather the evidence points to the conclusion that it was Mr Jenshol who decided to move the customers. The fact that Mr Jenshol sought to transfer customers from the Emerson facilities to the Avirnex services and the fact that the second respondent would derive commissions and revenue from the use made of the Avirnex services by the customers who use them is evidence, in my view, of the potential value of the business connection between the Emerson customers and Midcharm. The interests of Midcharm were disregarded by Mr Jenshol when the Emerson customers were transferred to the Avirnex services and there was accordingly a breach of duty owed by Mr Jenshol to Midcharm in procuring or being a party to that transfer.
Was there a breach of fiduciary duty?
The respondents’ submission that the customers introduced to Midcharm belonged to the introducing agents misconceives the nature of the complaint made by the liquidator. Midcharm may have obtained the business of the customers for the use of the Emerson telecommunication facilities from agents but once that business was obtained the fact that such customers had signed up with Midcharm became a valuable asset of Midcharm which Mr Jenshol could not use or appropriate to the disadvantage of Midcharm whilst he was managing its business: cf Phipps v Boardman [1967] 2 AC 46, 127. It was open to any such customer to withdraw its, his or her, custom from Midcharm and therefore from Emerson subject to such contractual obligations into which they may have entered; it was similarly open to any agent to withdraw a customer’s business consistently with the customer’s instructions and subject to any contractual obligations which might apply. However, it was not open to Mr Jenshol as defacto manager and director of Midcharm to take away that business and give it to the second respondent with whom he was associated for the purpose of establishing business with another provider of telecommunication services such as Avirnex.
As defacto manager and director of Midcharm Mr Jenshol owed a duty to Midcharm to act honestly in the exercise of his powers and the discharge of his office of such defacto manager and director. He was also obliged to exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances: s 232 Corporations Law. For the purposes of s 232 of the Corporations Law Mr Jenshol was an “officer” of Midcharm because he was an “executive officer” of Midcharm. Section 9 of the Corporations Law defines “executive officer” in relation to a corporation as meaning:
“a person, by whatever name called and whether or not a director of the body or entity, who is concerned, or takes part, in the management of the body or entity.”
Mr Jenshol’s own evidence and the documentary evidence shows that Mr Jenshol was concerned in and took part in the management of Midcharm.
He also owed a fiduciary duty to Midcharm not to profit from the position he occupied with, and in relation to, Midcharm. In particular he was not entitled to take away the customer connection and business relationship it had established with Emerson. Mr Jenshol was a director of Midcharm until he resigned on 1 January 1997. Thereafter he acted as a director of Midcharm and was in effective control of it and its business until the order was made to wind it up. In such circumstances I have no doubt that Mr Jenshol occupied a fiduciary position in relation to Midcharm and owed it a fiduciary duty in relation to the activities he conducted for it and on its behalf. A helpful statement of the relevant principle is found in the judgment of Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. His Honour was in the minority on the issue whether there was a fiduciary relationship between the parties but his statement of principle at 96 ‑ 97 is relevant to the issues in this case. His Honour said:
“The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46, 127), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions ‘for’, ‘on behalf of’, and ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
It is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed ...”
The relevance of this statement of principle is that it exposes the problem for Mr Jenshol brought about by the conflict between him acting for and on behalf of Midcharm and acting for and on behalf of the second respondent: see Phipps v Boardman (supra, 126 ‑ 127); Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. There is no doubt that his interests and duties in relation to each company conflicted and that, as a result, he abused the confidence reposed in him by Midcharm.
It is no answer to say that Midcharm may not have been able to have taken advantage of the commercial opportunity which the second respondent obtained through the activities of Mr Jenshol. It is sufficient that the second respondent obtained that commercial advantage as a result of the activities of Mr Jenshol in breach of the fiduciary duty he owned to Midcharm: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 144; Warman International Ltd v Dwyer (1995) 182 CLR 544, 558; Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110, 138. The consequence is that as the second respondent, through Mr Jenshol, was privy to and participated in the breach of fiduciary duty by Mr Jenshol it, as well as Mr Jenshol, is liable to account to Midcharm in respect of the benefit it received as a result of that breach: Barnes v Addy [1874] LR 9 Ch App 244, 251 ‑ 252; Natural Extracts Pty Ltd v Stotter (supra, 138); Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378.
It is not clear whether Mr Jenshol himself has profited or will profit from the transactions and engagements entered into by the second respondent. However that does not absolve Mr Jenshol from liability for breach of the fiduciary duty he owned to Midcharm. His liability in that context arises from the conflict of interest which arose as a result of him acting for and representing, and indeed managing, the business affairs of Midcharm and the second respondent. In Chan v Zacharia (1984) 154 CLR 178 Deane J said at 199:
“Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee.”
This aspect of a fiduciary’s obligation was further explained by the Full Court of the Federal Court, comprising Davies, Sheppard and Gummow JJ in Commonwealth Bank of Australia v Smith (1993) 42 FCR 390 at 392:
“Not only must the fiduciary avoid, without informed consent, placing himself in a position of conflict between duty and personal interest, but he must eschew conflicting engagements. The reason is that by reason of the multiple engagements, the fiduciary may be unable to discharge adequately the one without conflicting with his obligation in the other. Thus, it has been said, after ample citation of authority, that where an adviser in a sale is also the undisclosed adviser of the purchaser, an actual conflict of duty arises: Finn, ‘Fiduciary Obligations’, pp253‑254.
In such a case, it is not to the point that the fiduciary himself may not stand to profit from the transaction he brings about between the parties. The prohibition is not against the making of a profit (though many cases of breach of fiduciary duty involve the wrongful acquisition of a profit, rather than the infliction of a loss) but of the avoidance of conflict of duties, something described in forceful terms by Lord Cozens‑Hardy MR in Moody v Cox and Hatt [1917] 2 Ch 71 at 81‑82”.
(See also Queensland Mines Ltd v Hudson (1978) 18 ALR 1, 4, Chan v Zacharia (supra, 198); Gemstone Corporation of Australia Ltd v Grasso (1994) 13 ACSR 695, 699 ‑ 700. News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410, 538 ‑ 540; Warman International Ltd v Dwyer (supra, 557)).
The consequence of Mr Jenshol’s breach of fiduciary duty is that he is liable to account to Midcharm in respect of any profit or benefit he has obtained as a result of that breach and he is constructive trustee of any such benefit for Midcharm: Hospital Products Ltd v United States Surgical Corporation (supra, 107 ‑ 110). A similar obligation is imposed upon the second respondent because it has been an accessory to, and beneficiary of, Mr Jenshol’s breach of fiduciary duty. For all intents and purposes Mr Jenshol was the second respondent and his state of mind and actions are to be attributed to the second respondent with the result that the second respondent has a liability to account to Midcharm as constructive trustee in respect of such benefits as it received from its commercial connection and arrangements with Avirnex: Royal Brunei Airlines Sdn Bhd v Tan Kok Ming (supra, 393).
The respondents contend that the business with Emerson was not profitable, that there had been substantial problems with Emerson in relation to its billing of customers and that the customer connection with Emerson was in effect worthless. They also say that Emerson had terminated its agreement in relation to the provision of the telecommunication services on 17 April 1997 whereas the liquidator relies upon a letter from Emerson dated 27 May 1997 which is after an order was made for the winding‑up of Midcharm. However, the evidence discloses that Midcharm, through Mr Jenshol, was inviting customers it had signed up for Emerson to transfer their business to Avirnex well before 17 April 1997. In my opinion this was effectively a misappropriation of a significant part of Midcharm’s business connection brought about by Mr Jenshol’s breach of the fiduciary duty he owed Midcharm. The fact that there may have been problems with Emerson in relation to the manner in which it prepared its bills for its customers does not entitle Mr Jenshol or anyone else on behalf of Midcharm to transfer its business connection to another company. I ask the question rhetorically - why did not Mr Jenshol procure Midcharm to enter into the relevant commercial arrangement with Avirnex? The answer probably is that in or about February 1997 Midcharm was under financial pressure from both Emerson and Telstra. There had been a demand made upon Midcharm on behalf of Emerson and Midcharm was having difficulty paying the Telstra bills. The second respondent entered into an agreement with Avirnex dated 25 February 1997 and against the background of Midcharm’s financial difficulties I infer that this was done by Mr Jenshol for the purpose of maintaining a telecommunication business in a company different from the one experiencing financial difficulties. It is not insignificant that the second respondent has for some time been without an appointed director.
In his affidavit affirmed 14 July 1997 Mr Jenshol denied “that the call back business of Midcharm has been operated by Justice Telecommunications Pty Ltd”. It is apparent from that affidavit that Midcharm had some commercial arrangement with Emerson. Mr Jenshol says that “the only business Midcharm was ever involved with was the call back business of Emerson and Telstra”. He says that Midcharm’s call back business with Emerson had then ceased when the Emerson agreement came to an end but according to the evidence, Emerson terminated that arrangement by letter on 17 April 1997 or on 27 May 1997. Mr Jenshol denies that Midcharm has ever conducted any business in selling mobile telephones and accessories, web page publishing, internet access or the other various activities carried on by Justice Telecommunications.
Shortly before Midcharm went into liquidation it notified customers that they should, in effect, transfer their business from Emerson to Avirnex. For example, in a letter dated 27 April 1997 with the letterhead:
“Justice Telecommunications
Midcharm Pty Ltd
Justice TelecommunicationsA.C.N. 063 784 083”
Mr Jenshol on behalf of Justice Telecommunications advised Mr H Wu that his access number for call back would be changing, which in effect involved a change from using the Emerson network to using the Avirnex network.
I am satisfied on the evidence that Mr Jenshol procured or caused the Emerson business, that is to say the arranging of customers to use Emerson telecommunication facilities, to be taken over by the second respondent and placed with Avirnex. I accept the evidence of Mr Peters (from the liquidator’s office) that approximately 958 customers who have contracted to use Avirnex Telecommunications services were hitherto customers of Emerson procured or arranged by Midcharm. Although Mr Jenshol resigned as a director of Midcharm on 1 January 1997 as a result of the intervention of the Australian Securities Commission, he says that he “ran” Midcharm and that without him Midcharm would have had no business at all. He also said that he was “chiefly responsible for operating the business” carried on by Midcharm and also “responsible for generating that business”. The documentary evidence amply corroborates this evidence. Mr Jenshol signed all relevant agreements and wrote most of the correspondence Midcharm sent to Telstra and Emerson.
Orders were claimed in the alternative pursuant to Div 2 of Pt 5.7B of the Corporations Law setting aside what was said to be the transfer of the Emerson business and the Avirnex business from Midcharm to the second respondent. However, there was no transfer of those businesses or any transaction between the companies as such. Rather, there was a misappropriation of Midcharm’s business connection with Emerson and the establishment of the business connection with Avirnex by the second respondent which was procured and came about as a result of Mr Jenshol’s breach of duty to Midcharm of which the second respondent had knowledge and in which it participated. The orders which I propose to make render it unnecessary for any orders to be made pursuant to Div 2 of Pt 5.7B of the Corporations Law. However, it is appropriate to make a vesting order pursuant to s 474 of the Corporations Law subject to such considerations as arise as a result of the appointment of a provisional liquidator to the second respondent on 7 August 1997.
I am also satisfied that Mr Jenshol did not act honestly in the exercise of his powers and the discharge of his duties as an executive officer of Midcharm nor did he exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances. He gave away Midcharm’s business connection with Emerson to the second respondent for no consideration. He says, in effect, that that business connection was worthless. Yet he procured the second respondent to enter into an agreement with Avirnex dated 25 February 1997 for the provision of telecommunication services and procured customers Midcharm had arranged to use Emerson’s telecommunication services to transfer to Avirnex with the result that commission was, or was able to be, generated for the second respondent. This business was not procured for and entered into with Midcharm. At the time of the Avirnex agreement Midcharm was under substantial pressure from Telstra and Emerson. Mr Jenshol said cross‑claims were available against the demands of Telstra and Emerson but they were not actively pursued other than by being asserted in correspondence. As I have already found Mr Jenshol placed the business with the second respondent because he was concerned about the financial difficulties being experienced by Midcharm. Mr Jenshol denied this proposition but I do not accept his denial. His evidence in many areas was unreliable and not credible and he demonstrated on 16 July 1997 in a voice mail message to Avirnex that he was prepared to move customers away from the second respondent if he could not get the Mareva orders removed or discharged.
There is little doubt that the respondents have received or dealt with money paid by Emerson customers which should have been paid to and received by Midcharm. The respondents were proceeding on the basis that the second respondent was entitled to receive the money paid in respect of the Emerson bills and in their defence they say that the second respondent issued the bills in respect of the Emerson business to Emerson customers in Australia and that the money received and receivable belonged to the second respondent. At this stage I am not determining any issue of quantification of any loss suffered by the applicants or the quantum of damages to be assessed as there is inadequate information before the Court in respect of which any assessment can be made. Mr Jenshol says that after the Avirnex agreement was entered into with the second respondent all new customers for telecommunication services entered into an agreement with Avirnex and not Emerson. Mr Jenshol also says that money received from Emerson customers was banked to the credit of the second respondent because he believed that company was entitled to the money. Accordingly, there must be an enquiry as to what amounts were received by the second respondent in respect of the Emerson customers. There will similarly have to be an enquiry as to the customers who used the Avirnex services as the effect of Mr Jenshol’s breach of duty and the second respondent’s participation in it is in my view to make the second respondent a constructive trustee of its business connection with Avirnex for and on behalf of Midcharm.
Appropriation of money due to Midcharm
Midcharm also carried on the business of supplying Telstra telecommunication services to customers and it was Midcharm’s inability to pay its outstanding debt to Telstra which brought about its liquidation. The applicants claim that payments made by Telstra customers to Midcharm have been appropriated by the second respondent. This was not seriously denied by the respondents. The liquidator produced records which showed that payments made by customers of the Telstra telecommunications services had been paid into the bank account of Narit Nominees Pty Ltd. This was a family company associated with or controlled by Mr Jenshol. He said that the account of this company was used to pay all business expenses incurred by all of the companies and businesses which operated out of the offices of 194‑198 St Kilda Road which included Midcharm and the second respondent. I am satisfied on the evidence before me that money paid by customers of Telstra should have been paid into Midcharm’s bank account but, at the instigation of Mr Jenshol, were paid to the second respondent or paid into the bank account of Narit Nominees Pty Ltd. The liquidator’s enquiries as to the amounts involved are not yet complete and the determination of the amounts involved will have to be the subject of further enquiries. However Mr Jenshol acknowledged that $18,068.25 due to Midcharm was paid in to the bank account of Narit Nominees Pty Ltd.
The evidence is clear that funds belonging to Midcharm have been misappropriated and deposited through the agency of Mr Jenshol with or into bank accounts of the second respondent and Narit Nominees Pty Ltd. Insofar as there has been an intermingling of Midcharm’s funds with funds of either the second respondent, Mr Jenshol, Narit Nominees Pty Ltd or any other person associated with any of them, then the whole of the intermingled funds are held as trust property in trust for Midcharm: Hospital Products Ltd v United States Surgical Corporation (supra, 109 ‑ 110); Zobory v Federal Commissioner of Taxation (1995) 129 ALR 484, 489. The qualification to this proposition is that if Mr Jenshol or the second respondent can establish that any particular part of the intermingled funds are not the property of or held in trust for Midcharm then such part can be excised or excluded from the imposition of a trust on it: Brady v Stapleton (1952) 88 CLR 322; 336; Warman International Ltd v Dwyer (supra, 561). Although Narit Nominees Pty Ltd is not a party to this proceeding the Midcharm funds it received came to it through the actions of Mr Jenshol so he is liable to account to Midcharm in respect of those funds.
Midcharm had made arrangements for its customers to be able to pay part of their accounts by “barter” points. A barter points scheme involves a business, joining such a scheme, earning barter points by selling its products and services to fellow members of the scheme who pay in barter points. The barter points so earned can be spent purchasing products and services from other members of the scheme. Midcharm had entered into barter schemes or arrangements with a number of barter agencies. A list of eight barter agencies was tendered in evidence and Mr Jenshol said that Justice Telecommunications the business had dealt with each of them. There is no doubt that payments were made by customers using Telstra telecommunications facilities by way of barter points and that these barter points are property which belonged to Midcharm. For example, there was tendered in evidence a statement from a barter agency Credex Australia which showed numerous transactions paid for in barter points commencing in early 1996. Although the statement from the barter agency relates to Justice Telecommunications Pty Ltd, that company was only incorporated on 27 September 1996 so that the relevant transactions must relate to Midcharm. Not all the persons paying in barter points were Telstra customers but the liquidator has identified a number of transactions by at least 49 Telstra customers which were paid for in barter points to the value of approximately $51,000.00.
The respondents denied that there had been any conversion of payments received from Telstra customers whether in cash or by barter points and said that such barter points as may have been available as a result of the operation of the barter schemes were forfeited on the liquidation of Midcharm. However, there is no evidence in respect of any agreement with any barter agency which shows that such a situation would arise. The only terms and conditions of trading with any barter agency which were tendered in evidence were those of Credex Australia Pty Ltd. Clause 9 of its terms and conditions of trading provided that the barter system agreement could be terminated by Credex Australia Pty Ltd by notice in writing if Midcharm was put into liquidation. There was no evidence that any such notice in writing had been given.
The liquidator also produced some pay‑in slips in respect of the account of Narit Nominees Pty Ltd with the Commonwealth Bank of Australia which showed payments being credited to that account in respect of cheques given by persons and companies who were shown to be customers of Telstra procured by Midcharm. Mr Jenshol questioned, or did not know, whether these payments related to the business of telecommunications services but in the absence of any evidence to the contrary I am satisfied that a number of these payments were made in respect of Telstra telecommunications services provided by Midcharm. There was also in evidence a cheque from Just Paper Products dated 23 May 1997 payable to Justice Communications for $200.00 which had been endorsed by Mr Jenshol “please pay Narit Nom P/L”. The pay‑in slip for this amount shows that the cheque was credited to the account of Narit Nominees Pty Ltd with the Commonwealth Bank of Australia on 30 May 1997. This cheque and its proceeds belonged to the liquidator and should not have been endorsed to Narit Nominees Pty Ltd or paid into its bank account.
In their defence the respondents allege that if there has been a conversion of payments by cash or barter points otherwise due to Midcharm then Mr Jenshol and his family were entitled to reimbursement by way of payments or use of barter points for wages and commissions due to them and for expenses paid for and on behalf of Midcharm. There was no evidence that there was any employment or other contractual arrangement between Mr Jenshol and any member of his family with Midcharm. Midcharm had never been registered as a group employer with the Australian Taxation Office and had not been registered for payroll tax purposes with the Victorian State Revenue Office. It was apparent from a number of the barter agency statements tendered in evidence that barter points had been used by Mr Jenshol and members of his family for personal purposes. For example, there were purchases from clothing organisations such as “Shrimps Clothing” and “M & E Clothing Alterations”. Mr Jenshol claimed that these points may have been used for the purchase of uniforms or clothing for staff. There was no evidence that any staff of Midcharm used uniforms and in my view, at best, Mr Jenshol was speculating as to the use of the barter points. As I have noted earlier his evidence in many respects was not credible and I am satisfied that the barter points to which I have referred were used by Mr Jenshol for the purchase of goods for personal use and not for the use of Midcharm. However, I am not able to reach such a conclusion in respect of all of the barter points which had accrued for the benefit of Midcharm and which were used to acquire goods or services on its barter accounts. There will have to be an enquiry as to what barter points were used for acquisitions of goods and services by Midcharm and which were not.
What orders should be made?
The respondents filed a cross‑claim in which they allege that the Emerson agreement had been entered into with the second respondent. I have already concluded that that allegation is without foundation. They also sought damages in respect of correspondence sent by the liquidator to Avirnex and customers of the second respondent in July 1997 but no submissions were made in respect of that relief and in any event, in my view, the claim made was without foundation. Insofar as the cross‑claim was brought by Mr Jenshol, no consent by his trustee was obtained to the bringing of the cross‑claim and so it is incompetent: s 60 Bankruptcy Act.
The applicants, as part of the relief claimed, seek a continuation of the Mareva injunction and contend that the Court has jurisdiction to continue such an injunction after judgment for the purpose of assisting execution. In Stewart Chartering Ltd v C & O Managements SA [1980] 1 WLR 460 Robert Goff J said at 461:
“The purpose of a Mareva injunction is to prevent a defendant from removing his assets from the jurisdiction so as to prevent the plaintiff from obtaining the fruits of his judgment; from this it follows that the policy underlying the Mareva jurisdiction can only be given effect to if the court has power to continue the Mareva injunction after judgment in aid of execution”.
In Orwell Steel (Erection and Fabrication) Ltd v Asphalt and Tarmac (UK) Ltd [1984] 1 WLR 1097 Farquharson J held that the Court had power to grant an interlocutory injunction between final judgment and execution and there was no logical reason why a Mareva injunction should not be used in aid of execution.
In Jackson v Sterling Industries Ltd (1987) 162 CLR 612 Deane J, referring to Stewart Chartering Ltd v C & O Managements SA (supra) expressed the view that it was arguable that the general interlocutory power to make orders preventing a defendant from disposing of his assets so as to defeat the judgment obtained in an action extended to the making of an ancillary order after judgment to protect the efficacy of execution. His Honour appeared to accept that s 23 of the Federal Court of Australia Act was the source of the power of the Federal Court to grant a Mareva injunction and said at 623:
“As a general proposition, it should now be accepted in this country that ‘a mareva injunction can be granted ... if the circumstances are such that there is a danger of (the defendant’s) absconding, or a danger of the assets being removed out of the jurisdiction or disposed of within a jurisdiction, or otherwise dealt with so that there is a danger that the plaintiff, if he gets judgment, will not be able to get it satisfied’: per Lord Denning MR, Rahman (Prince Abdul) v Abu-Taha [1980] 1 WLR 1268 at 1273 quoted with by approval by Street CJ in Ballabil Holdings [1985] 1 NSWLR at 160”.
(See also Deputy Federal Commissioner of Taxation v Winter (1988) 88 ATC 4144.)
The applicants submitted that there was evidence before the Court which warranted the continuation of the Mareva order as there was a real risk that the respondents, particularly Mr Jenshol, might dispose of assets properly belonging to the applicants. It was submitted that Mr Jenshol had a propensity to deal with property to avoid his creditors. The applicants relied upon the fact that Mr Jenshol was an undischarged bankrupt and had been involved in the management of companies. They relied upon the fact that on 19 March 1997 he transferred a property to a company controlled by his wife, that he had caused Midcharm to transfer its property and assets to the second respondent and that he had taken for his own use and otherwise converted money due to Midcharm. In this respect they relied upon the concession that the respondents had made that $18,068.25 being the total of the amounts being paid into the Narit Nominees Pty Ltd account received from Emerson customers had in effect been misappropriated from Midcharm. The respondents’ response to this was that expenses of the business were being paid from that account. However, that does not diminish the submission that assets of Midcharm may be at risk.
There was also evidence that cheques had been written on the account of Narit Nominees Pty Ltd on 1 and 10 July 1997 which were payable to cash and were signed by Mr Jenshol which had been presented for payment and paid in breach of the Mareva orders I made on 30 June 1997. Mr Jenshol claimed that the cheque dated 1 July 1997 had in fact been written out earlier and had been post‑dated. He said that this cheque had been given to his wife in repayment of amounts she had provided a few days earlier for expenses of Midcharm. I find this explanation difficult to accept but having regard to the consequence of any such finding I do not make any finding on it at the present time. The Narit Nominees Pty Ltd cheque book from which these cheques had been made out was tendered in evidence but the chronological sequence of the entries on the cheque butts did not assist in the resolution of this matter as there was no consistency in the dates nor could I determine the sequential nature of their drawing. It is sufficient to say that this issue does give rise to a serious concern about the disposition of assets by Mr Jenshol. Mr Jenshol’s initial explanation why he did not write the name of the payee on the cheque dated 1 July 1997 was “because the guy wanted cash”. He said he borrowed the money “off him”. A short time later he said that the person to whom he gave the cheque was his wife. In relation to the cheque dated 10 July 1997 Mr Jenshol said it was not written out on 10 July 1997 but he would not say when it was written out.
Perhaps the most significant evidence relied upon by the applicants for the continuation of the Mareva orders was the voice mail message received by Avirnex from Mr Jenshol on 16 July 1997 at 5.19 am. The voice mail message was in the following terms:
“Hi Geoff. It’s Max Jenschol calling here from Melbourne.
I spoke to Tony yesterday and he said you had a call from the liquidator. I think he has informed you of what we are doing and what we are proposing. I’m to have some further substantial answers to what you are going to do and how you want to assist me or if you are going to assist me otherwise we will have to swap our customers over and put them into another new company name.
The liquidator has absolutely no rights to AVIRNEX or Justice TeleCommunications Pty Ltd. This situation has been brought about by Telstra and I am happy to fill you in with the legalities or details. I will be having a hearing with the Liquidator today regarding this mareeba (sic) injunction. However if it is going to be a case of us losing it then we will just transfer our customers over. They don’t belong to them now but we need to know when you can set the new situation up. Obviously we need to have those details very shortly.
So I look forward to hearing from you and I will be available until about 9.15‑9.30 say - or after about 12‑1 o’clock today. Thank you. Have a good day.
It’s Max Jenschol if you didn’t know.
Avox No 92200715Thank you.”
Mr Jenshol prevaricated when asked if he had left the message recorded in the voice mail. He did not deny doing so. He said the voice mail text “possibly” recorded something he had said and after much pressing he agreed he had left the message.
What Mr Jenshol said in the voice mail must be understood in the light of what earlier occurred. On 30 June 1997 I had made an order by consent in the following terms:
The Respondents and each of them be restrained until 4.15pm on 16 July 1997 or further order whether by themselves, their servants or agents, or otherwise from transferring, dealing with, charging, diminishing, mortgaging, assigning or disposing of any of their assets including without limiting the generality thereof any real property, shares, choses in action or money standing to the credit of any bank account or operating from any bank account save and except that the first Respondent may make use of the sum of $600 per week in respect of his ordinary living expenses.
That order was to be reconsidered on 16 July 1997 at a further directions hearing before the Court. On 16 July 1997 the order made on 30 June 1997 was extended and a further order was made restraining the respondents from taking any steps to transfer the business of former customers of the Emerson call back business to any other call back service provider. The terms of the voice mail are such, and they were not denied by Mr Jenshol, as to raise a serious concern that unless restrained Mr Jenshol will take steps to render any judgment of this Court worthless.
However, there are further matters upon which the applicants rely. The second respondent has been managed by Mr Jenshol for some considerable time although it has had no directors appointed to it. It is also apparent that the Emerson bills for March and April 1997 were sent out to Emerson customers after the order for the winding‑up of Midcharm had been made on 20 May 1997. They were received by Mr Jenshol on 26 May 1997 and although Mr Jenshol said that the accounts were sent out prior to 26 May 1997 I cannot accept that evidence and I reject it especially having regard to the delivery dockets in evidence which showed that the May and April invoices were received at 194‑198 St Kilda Road, St Kilda on 26 May 1997 and 2 June 1997. When the delivery docket for the delivery on 26 May 1997 was put to Mr Jenshol as contradicting his evidence that the invoices were sent out in early May the following exchange occurred:
Q: Well, this document contradicts that, does it not?
A: I’ve got no idea.
Q: Well, it does, does it not?
A: Well, I don’t make any comment about it.
Q:Well, I suggest to you that you sent the March and April accounts that you refer to in your affidavit, paragraph 5, out after 20 May 1997? That is correct, is it not?
A: No comment.
Mr Jenshol said he did not have any proof of date but he knew it was early May. I reject that evidence in the light of the delivery dockets.
Finally, the applicants rely upon the fact that monies belonging to Midcharm have been mixed in, and intermingled, with other monies in the bank account of Narit Nominees Pty Ltd.
Having regard to the matters to which I have referred and consistently with the principles to which I have referred I am quite satisfied that it is necessary and desirable that the Mareva injunction be continued after the delivery of this interlocutory judgment to enable damages to be assessed and enquiries and accounts to be made and taken to ensure that any final order obtained by the applicants is not rendered nugatory and worthless.
It follows from these reasons that the applicants are substantially entitled to the relief to which they seek with two qualifications. The first is that on 7 August 1997 a provisional liquidator of Justice Telecommunications Pty Ltd was appointed and he was given the powers referred to and described in s 472(4) of the Corporations Law. Section 471B of the Corporations Law provides:
“While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:
(a)a proceeding in a court against the company or in relation to property of the company; or
(b)enforcement process in relation to such property;
except with the leave of the Court and in accordance with such terms (if any) that the Court imposes.”
Accordingly, I consider it appropriate that I hear from the provisional liquidator and the parties before finalising and making any orders against the second respondent.
The second qualification relates to the form of the applicants’ claim for relief. They seek a declaration that the benefit of the Avirnex contract and monies received by the respondents from customers of the Avirnex business are held on a constructive trust for the applicants, as well as seeking damages, equitable compensation and an account of profits. It is not clear what is the basis of the claim for damages but the other remedies are open to the Court to award having regard to my findings and reasons save that the issue of election arises. The general principle is that an applicant must choose or elect between alternative and inconsistent remedies and cannot have both. The appropriate time to require the election to be made is at the time of judgment when the Court is asked to make orders. This issue was considered recently by the Privy Council in Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514. At 521 Lord Nicholls, delivering the judgment of the Privy Council said:
“The law frequently affords an injured person more than one remedy for the wrong he has suffered. Sometimes the two remedies are alternative and inconsistent. The classic example, indeed, is (1) an account of the profits made by a defendant in breach of his fiduciary obligations and (2) damages for the loss suffered by the plaintiff by reason of the same breach. The former is measured by the wrongdoers’ gain, the latter by the injured party’s loss.”
In this context the reference to “damages” is more accurately described as a claim for equitable compensation for loss suffered as a result of breach of trust but for present purposes I do not need to consider the distinction between damages awarded by common law courts and the equitable remedy of compensation awarded by a Court of Chancery for breach of equitable obligations.
Thus, consistently with authority and principle the applicants should, upon publication and consideration of these reasons, make an election as to which remedies, to the extent of their inconsistency with other remedies claimed, they wish to pursue. With those qualifications I turn to the relief claimed by the applicants.
The applicants submitted the following relief should be granted:
A declaration that the documents, books, records or things of Midcharm in the possession of the respondents are the property of Midcharm. A declaration in these terms should be made.
A declaration that the following items and matters have been and are property of Midcharm, namely:
(a)the right to receive monies from the retail customers who were customers of Emerson under agreements dated 14 February 1996 and 6 February 1997 between Midcharm and Emerson;
(b)the right to receive monies from retail customers of Avirnex under an agreement dated 4 March 1997 between Avirnex and Midcharm;
(c)the right to receive payment from customers of Midcharm in relation to its Telstra reselling business;
(d)cash, cheques and barter points paid or payable to the respondents from customers in relation to the business of Midcharm with Telstra;
(e)the current balances of money and barter points in the accounts in the name of Justice Telecommunications and Justice Telecommunications Pty Ltd with the relevant barter agencies to the extent that such balances reflect barter points paid or made available by customers of Telstra, customers of Emerson and customers of Avirnex.
A declaration should be made in these terms that the items and matters have been the property of Midcharm but whether a declaration should be made that the items and matters are the property of Midcharm depends upon which remedy the applicants elect to pursue. If they wish to claim an account of profits the declaration will be in a different form to that which will be made if they elect to claim damages, or more appropriately equitable compensation. In any event a declaration should be made that the items and matters are the property of Midcharm to the extent that they have not yet been received by either of the respondents.
An order that the property referred to in paragraph 2 vest in the provisional liquidator of the second respondent. The form of this order should await the applicants’ election.
Orders under Div 2 of Pt 5.7B of the Corporations Law in relation to the transfer of customers of Midcharm of Emerson to Avirnex. Subject to hearing from the applicants I did not understand this relief to be pressed having regard to the other relief sought.
An order that the respondents be restrained until further order whether by themselves, their servants or agents, or otherwise from transferring, dealing with, charging, diminishing, mortgaging, assigning or disposing of any of their assets including without limiting the generality thereof any real property, shares, choses in action or money standing to the credit of any bank account save and except that the first respondent may make use of the sum of $600.00 per week in respect of his ordinary living expenses. Consistently with my reasons and subject to hearing from the provisional liquidator an order should be made in this form.
Without derogating from the generality of the foregoing paragraph 5, the respondents be restrained until further order whether by themselves, their servants or agents or otherwise from:
(a)transferring, dealing with or otherwise disclosing any monies standing to the credit of any barter scheme or arrangement or any bank account of them or either of them or under their control;
(b)taking any steps to transfer the business of the customers of the former Emerson or the current Avirnex business which customers are to be specified;
(c)communicating in any way with any former customer of the Emerson business or the current Avirnex business which customers are to be specified;
Consistently with my reasons and subject to hearing from the provisional liquidator an order should be made in the terms of sub‑paragraphs (a) and (b). Sub‑paragraph (c) is cast too widely in its terms and I will give the parties the opportunity to make further submissions in relation to it.
An order that the first respondent within seven days deliver up or cause to be delivered up to the applicants care of their solicitors, Mallesons Stephen Jacques, Rialto, 28th Floor, North Tower, 525 Collins Street, Melbourne, an affidavit sworn or affirmed by him setting out:
(a)the name and address of any bank, building society or other financial institution at which there is an account in the name, or under the control of, the first respondent and the second respondent or either of them, together with the number of such account and the balance therein at the date of service of notice of this order upon them or either of them;
(b)the name and address of any person or persons indebted to the respondents or either of them, at the date of service of notice of this order upon them or either of them, and the amount of the debt or debts owed by such person or persons;
(c)an itemised inventory of any business assets owned by the respondents, or either of them;
(d)an itemised inventory of any other property, whether real or personal, owned by the respondents or either of them, or in respect of which the respondents or either of them have or has an interest;
(e)in respect of any of the property referred to above, whether it has been given as security for any debt and, if so, the nature of the security and the debt so secured;
(f)listing and describing all barter arrangements or schemes with which they have any involvement;
(g)describing all dealings with or on behalf of Avirnex including a list of all payments made by Avirnex;
(h)stating and describing when hard copy Emerson bills were delivered to the respondents or either of them from Emerson, when they were then re‑billed and what funds in respect of payments of those bills have been received and what has happened to those funds;
(i)in respect of the period from 23 May 1997 to the date of swearing or affirming the affidavit stating and describing the source of funds used to pay into each deposit in respect of the Narit Nominees Pty Ltd Commonwealth Bank account and in respect of what liability that deposit relates to and as to any debits or withdrawals stating and describing each cheque drawn and naming the payee thereof;
(j)in respect to the period from 18 July 1997 to the date of swearing the affidavit stating and describing all payments received by the first respondent and the second respondent including the source of the payments and the liability in respect of which the payment is made.
I will give the applicants and the first respondent the opportunity to make submissions on the scope and extent of this order.
An order that the first respondent forthwith deliver up to the applicants:
(a)any customer lists in his power possession or custody relating to the Emerson call back business or the Telstra re‑billing business;
(b)any cheques in his power, possession or custody relating to the Emerson call back business or the Telstra re‑billing business.
Consistently with my reasons an order should be made in this form.
A declaration that the benefit of the Avirnex contract and all monies received by the respondents from customers of the Avirnex business and from Avirnex are held on a constructive trust for the applicants. Subject to the consequences of the applicants’ election a declaration should be made in this form.
An order pursuant to s 483 of the Corporations Law requiring the first respondent to pay, deliver, convey or transfer to the applicants any money, property or books in his hands to which Midcharm is prima facie entitled. Consistently with my reasons an order should be made in this form.
An order that Mr Jenshol pay damages to the applicants to be assessed in respect of his breach of duty to Midcharm in accordance with these reasons. An order in these terms will depend on the applicants’ election.
An order that Mr Jenshol pay equitable compensation to the applicants to be assessed in accordance with these reasons. An order in these terms will depend on the applicants’ election.
However before finally making any declarations or orders in any of these terms I will give the parties and the provisional liquidator of the second respondent the opportunity to make submissions as to the appropriate form of the declarations and orders to be made.
I propose, subject to such further submissions as may be made, to order further that the cross‑claim of the respondents be dismissed, that the respondents pay the applicants’ costs of the proceedings to date including reserved costs and that the further hearing of the application be adjourned to a date to be fixed for the purpose of making orders and giving any directions as to the assessment of damages or equitable compensation consistently with these reasons.
I certify that this and the preceding forty-three (43) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg
Associate:
Dated: 15 October 1997
Counsel for the Applicant: Mr P Cawthorn Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: Mr G Rice Solicitor for the Respondent: Efrons Solicitors Date of Hearing: 4, 5, 6 August 1997 Date of Judgment: 15 October 1997
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