Insolvency Litigation Fund Pty Ltd v Advanced Communications Technologies (Australia) Pty Ltd
[2004] VSC 228
•2 July 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2017 of 2004
F5669
| INSOLVENCY LITIGATION FUND PTY LTD (ACN 083 043 010) | Plaintiff |
| v | |
| ADVANCED COMMUNICATIONS TECHNOLOGIES (AUSTRALIA) PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 086 856 617) | Defendant |
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JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27, 28 and 31 May | |
DATE OF JUDGMENT: | 2 July 2004 | |
CASE MAY BE CITED AS: | Insolvency Litigation Fund Pty Ltd v Advanced Communications Technologies (Aust) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 228 | |
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Practice and Procedure – receiver to protect property at risk – whether sufficient in the property – present disposal of future rights – whether receiver and manager can confer on creditor priority over debenture holder.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C.C. Macaulay SC with Mr I.R. Jones | Ebsworth & Ebsworth |
| For the Defendant | Mr D.H. Denton SC with Ms My Anh Tran | Herbert Geer & Rundle |
HIS HONOUR:
There are before the Court three applications brought by summons.
v Summons filed on 29 April 2004 on behalf of the plaintiff, Insolvency Litigation Fund Pty Ltd ("ILF") seeking an order for the appointment of a receiver and manager of the defendant, Advanced Communications Technologies (Australia) Pty Ltd ("ACTA").
v Summons filed on behalf of ACTA on 19 May 2004 seeking summary determination of the proceeding or a permanent stay or a strike out order.
v Summons filed on 21 May 2004 on behalf of a non-party, Gideon Rathner, the Deed Administrator of a Deed of Company Arrangement entered into by ACTA. Mr Rathner seeks that he be the person appointed to be the receiver and manager of ACTA. When I indicated that I would not hear counsel on behalf of Mr Rathner in support of the ILF application, counsel on his behalf applied to be joined as defendant to the proceeding. This, too, I refused, reserving to him the possibility of making submissions as to identity of the receiver and manager once it was determined that an appointment should be made.
The debate before me then moved to the principal issue between the parties – the question whether I should appoint a receiver and manager, the subject matter of the first summons.
The Background
Before I turn to these matters it is necessary that I say a little about the very complicated background to the applications.
Over the past years there has been much litigation in this Court, largely concerned with the control of a publicly listed company, Intermoco Ltd, formerly called Australon Ltd. According to David Neil Lockwood, the receiver and manager of ACTA from July 2002 to 5 April 2004, a significant shareholder in Intermoco when he became receiver and manager was Australon Enterprises Pty Ltd ("AEPL"). Its shareholding in Intermoco was AEPL's principal asset. The issued share capital of AEPL was 2,000 shares of which 1,150 ordinary shares (57.5%) were held by ACTA; 500 shares by Newpage Pty Ltd (25%); 100 shares by Springwell (Australia) Pty Ltd (5%); and 200 shares by Asia Infotech Pty Ltd (12.5%).
According to Mr Lockwood, ACTA had other assets, namely a contingent claim against AusIndustry for the reimbursement of certain expenses incurred by ACTA under a research and development grant, certain plant and equipment and certain intellectual property rights in what is called Spectrucell technology.
I have mentioned that Mr Lockwood was appointed receiver and manager of the assets of ACTA in July 2002. In fact, the management of ACTA on 18 July 2002 passed to Mr Rathner who was on that date appointed as voluntary administrator of the company by resolution of its directors pursuant to Part 5.3A of the Corporations Act. The directors of ACTA at that time were, and still are, Roger Thomas May and his son, Jason Roger May.
On 29 July 2002 Global Communications Technologies Pty Ltd ("GCT") appointed Mr Lockwood and Kenneth Stewart Sellers of the firm Simms Lockwood to be receivers and managers of the property of ACTA. Mr Sellers has subsequently retired. GCT made this appointment as chargee under a debenture charge granted to it by ACTA on 21 December 2001. GCT was owned and controlled by the Mays who were its only directors. On 16 September 2002 Mr J.R. May ceased to be a director of GCT; thereafter his father remained as its sole director.
On 3 December 2001 the then shareholders in AEPL, ACTA, Newpage and Springwell, and AEPL itself, entered into a shareholders agreement which contained provisions as to the rights of each of the shareholders to have a specified number of representatives on the Board of Directors of AEPL[1] and, further, providing that resolutions of the Board in relation to a number of specified matters required a unanimous decision[2]. The Mays were representatives of ACTA on the Board of AEPL, the Newpage representatives were Allen Roberts and Martin Yii, and Graeme Shearer was the person appointed by Springwell as its only director.
[1]cl. 4
[2]cl. 5.3
In 2002 ACTA was being pressed by the Deputy Commissioner of Taxation for alleged taxation liabilities. By proceeding No. 6378 of 2002 the DCT applied to wind up ACTA for non-compliance with a statutory demand, and by proceeding No. 6373 of 2002 she sought to recover the tax from the Mays under directors' demands. In yet another proceeding, No. 6401 of 2002, she challenged the validity of the GCT debenture.
In July 2002 the Mays moved to appoint an administrator and also, through GCT, to appoint a receiver and manager over ACTA. On 27 August 2002 Mr Lockwood on behalf of ACTA entered into a sale deed with Asia Infotech. It should be noted that Asia Infotech is a Singapore based company associated with Mr Yii, the nominee of Newpage on the AEPL Board. Under this sale deed, ACTA agreed to sell to Asia Infotech its 1,150 shares in AEPL for $6M, subject to certain conditions.
On 13 September 2002 the parties to the DCT proceedings entered into a Deed of Settlement under which GCT was to pay to the DCT $1,750,000 by three instalments in consideration for which the DCT would discontinue proceeding No 6401 of 2002 wherein it sought to set aside the GCT debenture charge, proceeding No 6378 of 2004 wherein it sought to wind up ACTA and would consent to the dismissal of proceeding No 6373 of 2002 wherein she sought to recover the company's tax liability from the directors. The Deed contained other provisions which are of no present concern. Pending the payment of the consideration sum, the three proceedings were to remain inactive.
The time for making the payments to the DCT under the Deed of Settlement was fixed by reference to the expected receipt by ACTA from Asia Infotech of the consideration for the sale of the shares. Between 18 September 2002 and 31 October 2002 ACTA received from Asia Infotech a total of $3M from which two instalments were paid to the DCT, totalling $870,000.
Meantime, on 26 September 2002, the creditors of ACTA at its second meeting under Part 5.3A resolved that ACTA execute a Deed of Company Arrangement and this was done on 17 October 2002 with Mr Rathner appointed as the Deed Administrator. The Deed contained a moratorium clause and, in clause 7, provision for the establishment of a fund for the payment pro rata of creditors. A component of this fund was to be the sum of $3.25M to be paid by the Mays and GCT by 28 February 2003 of which a minimum of $2.45M was to be received from the proceeds of the sale of the shares to Asia Infotech.[3] By cl. 2.3 of the Deed of Company Arrangement, the creditors agreed that, subject to the receivership, control and management of ACTA would revert back to the directors upon the execution of the Deed.
[3]cl. 7
On 1 February 2003 ACTA gave to Asia Infotech notice of determination of the Sale of Shares Agreement on the basis that Asia Infotech had failed to comply with the condition precedent to the sale. ACTA took the position that, in that event, it was entitled to retain the $3M paid. In response, Asia Infotech commenced proceeding No 4542 of 2003 against ACTA seeking orders that the provisions of the sale agreement relied upon by ACTA as supporting its entitlement to retain the $3M were void as a penalty ("Asia Infotech proceeding").
In March 2003 ACTA filed a counterclaim in the Asia Infotech proceeding against Asia Infotech, Newpage and Springwell seeking orders which would enable it to have access to the underlying principal asset of AEPL, its shares in Intermoco. Newpage, in turn, filed on 16 May 2003 a counterclaim against ACTA and AEPL.
For the purposes of resisting the claim of Asia Infotech in the Asia Infotech proceeding and of prosecuting its counterclaim, ACTA sought and obtained litigation funding from ILF, the present plaintiff. According to Mr Lockwood the amount obtained from ILF for this purpose was $622,573.52. This was pursuant to two funding agreements dated respectively 28 February 2003 and 11 April 2003 and a variation to the second funding agreement in May 2003. The Mays say that they did not know the terms of these funding arrangements and that they did not consent to them.
The Asia Infotech proceeding was tried and, on 16 December 2003, judgment was given in favour of ACTA, so that the sale agreement was terminated and ACTA was found to be entitled to retain the $3M paid to it by Asia Infotech. Asia Infotech has filed a Notice of Appeal but this has not yet been determined.
Meantime, by Deed of Settlement dated 22 May 2003, the parties to the Asia Infotech proceeding agreed to settle their disputes in the claims and the counterclaims. The terms of this deed are marked as confidential. It is sufficient for my purposes that the deed, by cl. 2, provides for a selective capital reduction by AEPL under which AEPL would cancel ACTA's shares in consideration of a distribution to ACTA of part of its proportional entitlement to AEPL's Intermoco shares. The deed also provides that AEPL would sell sufficient of its Intermoco shares to satisfy certain creditors, principally, loans from GCT, Newpage, Springwell and ACTA.
Finally, and most important for present purposes, the Asia Infotech settlement deed contained the following provision:
"2.4From the date of this deed until the date of the distribution of ACTA's Net Entitlement in accordance with clause 2.2, ACTA may require AEPL to make available immediately a number of Intermoco Shares requested by ACTA (not exceeding in aggregate 70% of [ACTA's Proportionate Entitlement to the Net Intermoco Shares]) for the purpose of providing third party security for any loan or other financial accommodation provided to ACTA. For the avoidance of doubt:
(a)AEPL will not accept any liability for such loan or other financial accommodation beyond the provision of the Intermoco Shares as security;
…
(c)the terms of the third party security must provide that the relevant Intermoco Shares may be distributed to ACTA in accordance with clause 2.2 and that, upon AEPL effecting that distribution, AEPL will be released unconditionally from all of its obligations under the third party security, and …"
The next event is a very controversial one. By share transfer dated 10 November 2003 AEPL transferred to "Global Investment Fund Pty Ltd < Roger T. May Family A/C >" 60,000,000 shares in Intermoco for a stated consideration of $3.6M. The transfer is apparently signed by the Mays. The circumstances giving rise to this transfer are in dispute as is the authority of AEPL or Board of Directors to effect it. The transferee, GIF, is a company of which Mr R.T. May became the sole director on 11 February 2003. It is, I understand, contended on behalf of GIF and the Mays that the transaction was made pursuant to cl. 2.4 of the Asia Infotech Deed of Settlement which is set out above.
In proceeding No. 2100 of 2003 Newpage and Springwell sought and on 16 December 2003 obtained interim and on 22 December 2003 interlocutory injunctions restraining GIF from dealing with these Intermoco shares ("GIF proceeding"). AEPL and ACTA were included in this proceeding as defendants. By a third funding agreement dated 22 December 2003, ACTA and Mr Lockwood obtained limited funding from ILF for the conduct of the GIF proceeding. On 16 January 2004 Newpage and Springwell filed their statement of claim in the GIF proceeding and on 23 January 2004 Herbert Geer & Rundle, acting on behalf of GIF and the Mays, filed their defence and counterclaim.
By the end of January 2004 relationships between the Mays and Mr Lockwood had deteriorated. They had sought from him details of the costs and expenses of his receivership and were dissatisfied with his responses. On 12 February 2004 Mr Lockwood swore an affidavit in which he estimated these costs and expenses at more than $1.5M. He says, too, that the only substantial asset of the receivership was the shareholding of ACTA in AEPL and that the only asset of AEPL was its shareholding in Intermoco. He said that he had no available funds with which to participate in the GIF proceeding and that his appointor, GCT was either unwilling or unable to pay his outstanding fees or to provide the funds for this purpose. This last statement is, perhaps, not surprising for his affidavits suggest that his view was that the transfer of the 60,000,000 shares to GIF was not authorised.
On 18 February 2004 Herbert Geer & Rundle advised Mr Lockwood that they had been instructed by the Mays, as directors of ACTA to act for it in defending the GIF proceeding. Accordingly, they filed a notice of change of solicitor and a defence which, broadly speaking, conformed with the position adopted by the Mays.
Notwithstanding this, Middletons, instructed by Mr Lockwood on behalf of ACTA, filed a further defence on 5 April 2004 in which the position adopted was that the 60,000,000 should be returned to AEPL.
Later, at 11.05 a.m. on the same day, GCT revoked the appointment of Mr Lockwood as receiver and manager of ACTA, effective immediately.
The Receivership Application
The claim made in this proceeding by writ filed on 29 April 2004 seeks a declaration that ILF has an equitable charge over that part of AEPL's shareholding in Intermoco as is to be distributed in specie to ACTA pursuant to the Asia Infotech Deed of Settlement and over part of the resolution sum as defined in the funding agreements. The application for the appointment of a receiver is brought by summons filed on the same date in order to protect the entitlement of ACTA to the shares of Intermoco or to the shares in AEPL pending resolution of the proceeding.
The opposition of ACTA puts in issue a number of matters which I will deal with under the following headings:
·ILF has no present proprietary interest in any asset of ACTA;
·Any interest of ILF is subject to the interest of GCT as chargee;
·The funding agreements are champertous and, for that reason, void or not to be enforced;
·ILF is in breach of the funding agreements and does not therefore approach the Court with clean hands;
·Whether the interest of ILF is in jeopardy;
·Balance of convenience and general discretionary considerations.
Before I turn to these matters, I remark that the parties were in agreement that I should approach this application with some caution and in the light of the principles discussed in National Australia Bank Ltd v Bond Brewing Holdings Ltd[4]. I bear in mind, too, that, as an interlocutory application, it is not my function to determine the many disputes between the parties; it is to form a view as to whether and to what extent there is a prospect of success having regard to the fact that it is for ILF as applicant to satisfy me that the orders sought should be made.
[4][1991] 1 VR 386
The present interest of ILF
There are three funding agreements. Each of them has been subjected to textual criticism and in important respects they do not sit easily together. The parties to the agreements in each case are Mr Lockwood, ACTA and ILF.
By cl. 6.3 of the first funding agreement dated 28 February 2003, it is provided:
"6.3Subject to clause 6.4 [Mr Lockwood] and [ACTA] disposes to ILF a share of the Resolution Sum which share is to be calculated and remitted to ILF in the following manner on Resolution …"
Clause 6.4 has no application in the events that have occurred.
Clause 4.2 of the second funding agreement dated 11 April 2003 is in similar terms:
"4.2[Mr Lockwood] and [ACTA] disposes to ILF a share of the Resolution Sum which share is to be calculated and remitted to ILF in the following manner on Resolution …"
The expressions "Resolution Sum" and "Resolution" are defined in the first funding agreement, but they are varied by cl. 5 of the second funding agreement so that, for the purposes of both agreements, they are given the following meanings:
"Resolution"
When [Mr Lockwood] receives the Resolution Sum
"Resolution Sum"
The amount or amounts received by [ACTA] or GCT (whether in money or money value of a benefit) in respect of the Shares whether by way of capital reduction, transfer of shares in Intermoco or any other manner, excluding the 3 million sum already received as at 31 January 2003
"Shares"
[ACTA's] shares in AEPL and shares held by AEPL in Intermoco Ltd.[5]
[5]"Shares" in the first funding agreement was defined as "[ACTA's] share, in AEPL or any in specie distribution to [ACTA] by AEPL of its Intermoco Ltd shares".
Clause 5 of the second funding agreement is in these terms:
"5.0 THE RESOLUTION SUM
5.1The definitions of 'Resolution' and 'Resolution Sum' in the First Funding Agreement are varied so as to be the same as the definitions of those terms in this Agreement.
5.2If the Resolution Sum comprises or includes shares in Intermoco Ltd, ILF may elect to receive an assignment of ILF's share of the shares in Intermoco Ltd, rather than wait to receive its share of the proceeds from the sale of those shares.
5.3If the Resolution Sum comprises money as well as shares in Intermoco Ltd and/or any other non-monetary benefit:
5.3.1ILF may elect for its percentage of the Resolution Sum to be paid from the monetary component of the Resolution Sum (to the extent of the money) starting with the first monetary component;
5.3.2If ILF elects to be paid from the monetary component pursuant to clause 5.3.1, then the value of the Resolution sum in relation to the Intermoco Ltd shares will be calculated on the average closing price of the Intermoco Ltd shares on the 3 days preceding Resolution and in relation to any other benefit, on the monetary value of that benefit.
5.4The First Funding Agreement is amended by inserting into that Funding Agreement clauses in the same terms as clause 5.2 and 5.3 of this Agreement."
On behalf of ILF it was put that, by cl. 6.2 of the second funding agreement and, indeed, by cl. 4.2 of the first funding agreement, ACTA effected an immediate disposition of future property, that is, the fruits of the litigation if and when received. The contrary position contended for on behalf of ACTA was that, on its proper construction, the clauses create only a contractual right in ILF against Mr Lockwood and ACTA with respect to an uncertain share of an uncertain amount of possible future property. In these circumstances, no property interest in ILF is created until the subject matter of the contract comes into existence and is received by ACTA.
The matter is a little more complicated by the failure of the funding agreements to specify the circumstances in which the amount or amounts referred to in the definitions of Resolution Sum are to be received by ACTA. In their submissions, counsel for ILF identified these circumstances as being the entitlement of ACTA under the Asia Infotech Deed of Settlement. These may be a parcel of Intermoco shares distributed in specie to ACTA under the selective capital reduction contemplated by cl. 2.2(b) of the deed, or ACTA's share of the proceeds of the sale by AEPL of the Intermoco shares, or some other benefit or chose in action acquired by ACTA under the terms of settlement of the Asia Infotech proceeding.
So understood, the interest of ILF is indeed a fragile one. It cannot depend upon the receipt by Mr Lockwood of any of the fruits of the litigation or of the Asia Infotech Deed of Settlement for he has, by his removal, lost any right to this. The entitlement of ACTA is dependent upon a complicated capital reduction by the AEPL shareholders which may never be undertaken. I would be very reluctant to take the serious step of appointing a receiver over the property of ACTA to protect rights of such a nature.
The supervening rights of GCT
The point here is that, by a fixed and floating charge granted by ACTA to GCT dated 21 December 2001, the property in question when received by ACTA is ipso facto fixed with the charge. Accepting that Mr Lockwood as agent for ACTA was empowered to enter into the funding agreements, he is not authorised by his appointor GCT to subordinate its rights to that of ILF.
The answer of ILF is that the legal costs of the receiver are part of the costs of the receivership and that the funding costs must be seen in the same light. Under the receivership agreement made between GCT and Mr Lockwood, the receiver is entitled to be reimbursed for all moneys expended by him in the course of his responsibilities and duties as receiver and manager and, by cl. 10, his entitlement to payment is secured by a lien upon the assets of ACTA in his actual or constructive possession. This does not give to Mr Lockwood the power to give to his creditor or to a creditor of ACTA priority over the rights of the debenture holder, at least without the consent of that debenture holder. The evidence of the giving of this consent appears to be little more than that the Mays were aware that funding was provided by ILF pursuant to some funding arrangement. It may be that, if this is further explored, there may be enough to amount to a consent to the priority of the fund provider, but this is not apparent on the evidence before me.
The funding agreements are champertous
The contention of GCT is that the funding agreement are champertous. It is established that such agreements are not considered champertous when made by a liquidator or an administrator. In Hawke v Efrat Consulting Services[6], Branson J applied this principle to a receiver. Although the matter before her Honour was upon an ex parte application, I am not prepared to dissent from her conclusion, especially on an interlocutory application.
[6][1999] FCA 412
Clean hands
On the evidence before me I would not deny ILF relief on this basis.
Jeopardy to ILF interests
Three points were made in support of a submission that the interests of ILF would be in jeopardy if no receiver were appointed.
First, in the GIF proceeding ACTA would support the Mays and GIF on the false basis that the share transfer was lawful and authorised by AEPL. Two things must be said about this. First, I cannot at this level determine the falsity of the position adopted by the Mays and GIF. Second, the contrary position will doubtless be presented to the Court with energy by the plaintiffs, Newpage and Springwell. It is said that they might settle the action. It seems to me that this is their right if they were so minded. In the meantime, the position with respect to the 60,000,000 shares is protected by my injunction.
Second, the entitlement of ILF to the fruits of the Asia Infotech Settlement Deed may be defeated if ACTA were to discharge or vary the deed in a way which had the consequence that no Resolution Sum comes into existence. For the reasons I have mentioned, this prospect would not move me to take the affairs of ACTA out of the hands of its directors.
Third, the order of Hansen J in the Asia Infotech proceeding which entitles ACTA to retain the $3M paid by Asia Infotech is presently subject to appeal. It was suggested that ACTA as respondent to the appeal might abandon the benefit of that order or in some way permit it to be reversed on appeal. To my mind this is a commercial risk which ILF must accept.
Discretionary Matters
It will be apparent that I see little reason to grant the order sought by ILF. If it were ultimately to turn upon a question of discretion or on the balance of convenience, I would also refuse the order. The evident prejudice to ACTA far outweighs the risk that ILF might lose a right of any real value.
It would appear from the foregoing that the appropriate order should be that the application be refused with costs. Nevertheless I will hear counsel further if some alternative order is sought.
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