Labraga v Pomfret

[2005] NSWSC 973

CITATION:	Labraga v Pomfret; Highland v Labraga [2005] NSWSC 973
HEARING DATE(S):	13, 14 and 15 July 2005 [then written submissions]
JUDGMENT DATE :	29 September 2005
JURISDICTION:	Equity Division
JUDGMENT OF:	Young CJ in Eq
DECISION:	2063/05: Plaintiff not entitled to equitable charge. Order that second defendant be wound up; 2466/05: Grant of probate revoked; first plaintiff appointed administratrix cta.

CATCHWORDS:	CORPORATIONS [219]- Winding up- Small proprietary company- Provisional liquidator appointed- Breakdown in relationship between directors- Mistrust between directors sufficient to wind up on just and equitable ground. EQUITY [32]- Charge- Specific performance of agreement to create charge- Director of company loaned personal funds to company- Director asserted that loan secured by equitable fixed and floating charge over company's mortgage book- Whether conversations between directors created agreement- Whether mortgage book too variable an asset to attract fixed charge- Discussion of whether specific performance may be granted where content of purported agreement too vague. SUCCESSION [104]- Revocation of probate- Executors were business partners of testator- Executors not co-operating- Estate not fully administered- Testator taken to consent to any conflict arising because of appointment of business partners as executors- Testator's choice of executors not lightly set aside- Borderline case- Revocation granted where one of two executors removed and no real opposition to revocation or choice of new administrator.
LEGISLATION CITED:	Corporations Act 2001 (Cth) ss 266, 461(1)(k), 513A
CASES CITED:	Bridge Wholesale Acceptance Corporation (Australia) Ltd v Burnard (1992) 27 NSWLR 415 Buxton v Lister (1746) 3 Atk 383; 26 ER 1020 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 Hordern v Hordern [1910] AC 465 Jackson v Richards [2005] NSWSC 630 Joseph v National Magazine Co Ltd [1959] Ch 14 Mavrideros v Mack (1998) 45 NSWLR 80 Morgan v Macrae [2001] NSWSC 1017 National Provincial & Union Bank of England v Charnley [1924] 1 KB 431 Palmer v Carey [1926] AC 703 Rodick v Gandell (1852) 1 De GM & G 763; 42 ER 749 Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 Thomas v Mackay Investments Pty Ltd (1996) 22 ACSR 294 Tito v Waddell (No 2) [1977] Ch 106 Vyse v Foster (1874) LR 7 HL 318 Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280 Wilson v Furness Railway Co (1869) LR 9 Eq 28 Wilson v Northampton & Banbury Junction Railway Co (1874) 9 Ch App 279
PARTIES:	2063/05 Julio Cesar Labraga (P) Philip Edward Pomfret (D1) Exception Holdings Pty Limited (D2) Exception Finance Pty Limited (D3) 2466/05 Penelope Louise Highland (P1) Philip Edward Pomfret (P2) Julio Cesar Labraga (D1) Nowhere In Particular Pty Limited (D2)
FILE NUMBER(S):	SC 2063/05; 2466/05
COUNSEL:	2063/05 M Ashhurst (P) G K Burton SC (D1) 2466/05 G K Burton SC (P) M Ashhurst (D1)
SOLICITORS:	2063/05 Cordato Partners (P) Dibbs Abbott Stillman (D1) 2466/05 Dibbs Abbott Stillman (P) Kemp Strang (D1)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

YOUNG CJ in EQ

Thursday 29 September 2005

2063/05 - LABRAGA v POMFRET
2466/05 – HIGHLAND v LABRAGA

JUDGMENT

1 HIS HONOUR: These two proceedings, which were heard together, arise out of problems within a group of companies which include Exception Holdings Pty Ltd.

2 At all material times between 1999 and March 2003, three gentlemen, sometimes through family trusts controlled by them, had equal equity interests in these companies. The three gentlemen were Richard Highland, Julio Labraga and Philip Pomfret.

3 Richard Highland died in March 2003. On 18 November 2003, probate of Mr Highland's will was granted to Mr Pomfret and Mr Labraga.

4 Exception Holdings Pty Ltd ("Holdings") is the holding company of the following entities:

(a) Exception Finance Pty Ltd ("Finance");

(b) Exception Commercial Pty Ltd ("Commercial");

(c) Exception Developing Pty Ltd ("Developing"); and

(d) Exception Advertising Pty Ltd ("Advertising").

5 Messrs Pomfret and Labraga are directors of Holdings and Finance, Mr Labraga is the sole director of Commercial, Mr Pomfret is the sole director of Developing and Advertising. However, Advertising went into administration on 21 April 2005 and has since gone into liquidation. It is clearly insolvent.

6 The group pursues a variety of businesses which one would not at first sight have thought could be operated together. However, this came about because of the diverse backgrounds of the various members.

7 Prior to 1996, Messrs Highland, Pomfret and Labraga, together with a Mr Cumberland, established businesses known as the "Two Lands Group". Messrs Highland and Cumberland were shareholders in a health care advertising firm. Mr Labraga was a member of a firm providing accounting and finance services and Mr Pomfret was the director of a company involved in property and insurance services. Mr Cumberland left Two Lands in 2000 and the other three gentlemen restructured the group and incorporated Holdings. As part of that restructure Finance, Advertising and Developing changed their names to their present names. Commercial was incorporated in 2002.

8 Developing has become inactive but has an income stream. Thus the active subsidiaries are Finance and Commercial which are superintended by Mr Labraga. Finance engages in a mortgage origination business and for that purpose owns a mortgage book. Commercial is in the same line of territory but a different market.

9 When Mr Highland died, Mr Pomfret took charge of Advertising but, as I have said, this company has now failed.

10 There have been disputes between Messrs Pomfret and Labraga which have boiled over into litigation, not only the present two proceedings, but also a series of other proceedings, one of which, No 3316/05, will be the subject of a separate judgment delivered the same day as this judgment.

11 In proceedings 2063/05 (the Company Proceedings), Mr Labraga is the plaintiff, Mr Pomfret, Holdings and Finance are the defendants. Mr Labraga seeks an order that Holdings be wound up, a declaration that the defendants agreed to grant Mr Labraga a first ranking fixed and floating charge over the mortgage book owned by Finance in exchange for Mr Labraga advancing $400,000 to Holdings with an order that that agreement be specifically performed. He also seeks a declaration that in respect of any charge provided the plaintiff should rank pari passu with any charge to which the estate of Richard Highland is entitled.

12 In proceedings 2466/05 (the Estate Proceedings), Mrs Highland and Mr Pomfret seek to revoke the grant of probate of Mr Highland's will to Messrs Pomfret and Labraga on the basis that the present regime has proved unworkable.

THE COMPANY PROCEEDINGS

13 The Company Proceedings were initiated by summons filed on 23 March 2005. This was amended more than once, the latest version being filed on the first day of the hearing, 13 July 2005.

14 On 19 May 2005, Barrett J gave judgment in an application by Mr Labraga for the appointment of a provisional liquidator of Holdings. His Honour considered it was appropriate to make such an appointment and appointed Michael Joseph Patrick Ryan of Taylor Woodings provisional liquidator on that day.

15 I can do no better than repeat the findings of fact and factual backgrounds set out in Barrett J's judgment and I will summarise what appears in paras 9 and following of his Honour's judgment.

16 In March 2003 Holding's indebtedness to the Westpac Banking Corporation ("Westpac") on an overdraft account reached $1.5 million. In September 2004, Westpac sued Messrs Labraga and Pomfret both personally and as executors of Mr Highland as well as Mrs Highland, upon alleged guarantees of Holding's indebtedness.

17 A plan was developed for paying Westpac from the funds available in Mr Highland's estate and funds available to Mr Labraga from a line of credit.

18 The estate made available about $890,000 and Mr Labraga made available $400,000 which he borrowed at interest from an external source. These funds were lent to Holdings. It would appear to have been agreed that Holdings would pay Mr Labraga interest equivalent to that he had to pay to the external lender. Mr Labraga says he left it to Mr Pomfret to arrange security for those advances to Holdings. Mr Pomfret held a general power of attorney from Mr Labraga. Indeed, Mr Labraga also held a general power of attorney from Mr Pomfret. Mr McCabe, the company solicitor, was given instructions in relation to a grant of security by Holdings to the estate, but he says he received no instructions to prepare a security in favour of Mr Labraga.

19 Shortly after this, in early December 2004, Mr Labraga went on what he called extended leave. Mr Pomfret considered that Mr Labraga had resigned. In mid-February 2005, Mr Labraga told Mr Pomfret he expected to return in mid-March. Mr Pomfret replied that Mr Labraga had resigned and his monthly drawings and expense account payments had been stopped. However, eventually Mr Pomfret said that he would be happy to have Mr Labraga back in the business.

20 The arrangement that the parties had was that they would draw monies from the business and that their expense accounts would be paid. By March 2005, Mr Labraga was drawing $9,000 a month, Mr Pomfret $12,000 a month, plus $6,000 additional payments. It became clear from the evidence that really the business could not afford this amount of withdrawal of funds, but the "partners" had become used to having the sort of lifestyle that needed that sort of money to support it.

21 Mr Labraga complained that Mr Pomfret had arranged for security to be given by Holdings to the estate, but not in relation to his advance of $400,000. Mr Pomfret said that his agreement that Mr Labraga was to have security was conditional on two things: (1) Mr Labraga signing documentation confirming that he will fulfil his obligation to pay one-third of the company's liability on departure so that the amount advanced would be washed up against one-third of his share of the company's liability on leaving the company; and (2) mortgage security being provided also to Mrs Highland and Mr Pomfret for monies they had previously advanced to the business.

22 On his return Mr Labraga could not access the business premises as the entry code had been changed. Mr Pomfret said this had been done when another employee had left while Mr Labraga was away.

23 During February and March 2005, Mr Labraga's monthly payments and automatic debit to the company account for expenses were not made nor were payments of interest on Mr Labraga's loan made. Mr Labraga asked Mr Pomfret to remedy these problems and also to execute his charge. Mr Labraga also became aware of a clause in the estate's mortgage allowing creation of a prior ranking security of up to one million dollars and says that as an executor he never agreed to this.

24 Mr Labraga gave notice calling a meeting of directors for 17 March 2005 for Holdings and all its subsidiaries. Mr Pomfret said he was not available at that time and suggested alternative times. Mr Labraga went into Mr Pomfret's electronic diary and challenged his assertion that he was not available. A meeting eventually took place on 4 April 2005.

25 In the meantime, Mr Labraga had sent an email to Mr Walmsley, the financial controller, stating that he, Labraga, was to be the sole bank signatory and that this had been agreed to by Mr Pomfret. On the same day, Mr Pomfret sent an email to Mr Walmsley saying that Pomfret, Labraga and a Mr Encina, a senior management employee, were to be the authorised signatories, with any two to sign.

26 On 1 April 2005, Mr Pomfret asked Mr Labraga to sign a cheque for $13,000 to the Australian Tax Office, as Mr Encina had declined to sign it. Mr Labraga refused because he said he was given no supporting documentation. Mr Pomfret then sent the cheque to the Australian Tax Office bearing his signature alone and the bank, contrary to its mandate, paid it. This resulted in a letter from Mr Labraga's solicitors to the bank demanding that no cheques be paid unless carrying two signatures.

27 At the meeting of 4 April, there was a dispute as to who would be chairman. Eventually the parties decided to proceed without a chairman. Some financial information was presented, but there were accusations and counter accusations about who should have done what on the accounting front. Mr Labraga proposed that an administrator be appointed to Advertising because it was insolvent, but Mr Pomfret said he needed time to digest the financial information and this was agreed to. By 6 April 2005, the financial information showed that Holdings ostensibly was in quite a parlous financial position. However, the summary information did not properly differentiate between the several companies in the group.

28 On 12 April 2005, there was another directors' meeting. It ended up in impasse. The key employees became sick of this and on 18 April 2005, three of the most senior resigned, including Mr Encina. Another, Ms Sye, in her resignation letter, referred to non-payment of superannuation for three quarters. During April and May the partners exchanged emails with personal insults, expressions of distrust and minute dissecting of the supposed rights and wrongs of past events and also discussed how they were going to pay creditors.

29 On 9 May the Australian Tax Office served a statutory demand on Holdings in respect of a debt of $336,501.84 for unpaid PAYG instalments. On 12 May 2005, Mr Pomfret proposed a regime of payment by instalments to the Australian Tax Office which sent a letter in reply confirming that it was in negotiation with him.

30 On 11 May 2005, Holdings received a request for payment from Fuji Xerox for $141,534.27 relating to hire of equipment.

31 On 26 May 2005, Nicholas J, ex parte, wound Holdings up. However, there was a slip in the order and on 30 May 2005, Barrett J, pursuant to the slip rule, formally pronounced the order for winding up. An application was then made to set aside that order on the basis that it had been made in the absence of a party and that came before McDougall J who heard the matter on 10 June 2005, and on 7 July 2005, for the reasons which his Honour then gave, set the winding up order aside and stood the matter over for hearing in the Corporations List. His Honour, however, remarked at para 50 of his judgment that the real dispute in the winding up proceedings was as to solvency.

32 The Company Proceedings and the Estate Proceedings came on for hearing before me on 13, 14 and 15 July and thereafter by written submissions. Mr Ashhurst of counsel appeared for Mr Labraga, and Mr Burton SC appeared for Mr Pomfret and Mrs Highland.

33 I will first deal with the Company Proceedings and when I have finished with them, turn to the Estate Proceedings.

34 Before going into the submissions in the Company Proceedings, I should note two further matters of fact. First, on 8 July 2005, Campbell J appointed a provisional liquidator to Finance on the application of Mr Ryan, the provisional liquidator of Holdings. Secondly, in Exception Holdings Pty Ltd v Albarran in proceedings 3316/05, I held on 30 June 2005, that although Mr Albarran had purportedly been appointed receiver of Holdings under a power in a deed of charge in favour of the estate, the charge was void because of s 267 of the Corporations Act 2001. Since then there have been further proceedings in that matter and a stay of the order that I made was granted and as I said earlier, a final decision in that matter will be handed down contemporaneously with the decision in the present cases.

35 In his outline of submissions, Mr Ashhurst said that the case essentially involves two core issues, namely: (1) whether the defendants agreed to grant to the plaintiff a first ranking charge over the mortgage book owned by Finance in exchange for Mr Labraga advancing to Holdings $400,000; and (2) whether Holdings should be wound up on the just and equitable ground or in the alternative, in insolvency.

36 The first problem that occurred to me was whether, even if there was a valid charge, if Holdings were wound up there was any purpose at all in deciding the question of fact as to whether a charge had been granted. I will briefly explore this.

37 Under s 513A of the Corporations Act 2001 (Cth) the winding up in this case will date from the day I deliver my reasons and make the order (assuming I do so). If such an order is made, then s 266(1) of the Corporations Act will make the charge void as against the liquidator unless notice in respect of the charge was lodged (i) within the relevant period; or (ii) at least six months before the date of the order for winding up. The relevant period is 45 days or such time as the Court extends under s 266(4).

38 It is thus not apparent that winding up would be any definitive answer to the claim for a charge. Accordingly I need to deal with both matters raised by Mr Ashhurst.

(1) Was there a charge?

39 The facts are in fairly short compass. I have already set out the background facts from Barrett J's judgment appointing the provisional liquidator. I do not need to repeat these.

40 Mr Labraga says in para 21 of his affidavit of 23 March 2005 that in or about September 2004 he and Mr Pomfret had a conversation in words to the following effect:

"Pomfret: We are going to need to raise more money to pay out Westpac. We can use the money held by the Estate. We will use the money from your line of credit. I can't put any money in because of my Family Law issues. The money borrowed will be repaid within three years. Holdings can pay the Estate a bank overdraft rate on the monies borrowed from it which is more than it would get than if we left the money in the bank. The interest payable with respect to your line of credit can be paid by Holdings until the principal is repaid.

Labraga: If Holdings borrows money from the Estate it should provide security over the Book. I am happy to have joint security with the Estate. Holdings can pay interest on my line of credit as long as it is repaid within three years as I don't want this kind of debt hanging over my head forever.

Pomfret: The line of credit will be repaid within three years. Why is there a need to give security? Our word has always been enough.

Labraga: I trust you but the way the business is going I don’t want to feel out of control. The only way I will agree to this is if security is given to the Estate and myself over the Book and the line of credit being repaid within three years.

Pomfret: Okay. We will also have to borrow on the properties owned by the Estate in Penrith and Kingswood so that Westpac is fully paid out. That way all of our guarantees will be released and there is no chance of Westpac calling up the loan and coming after us. I will have Terry draw up the documents."

Terry was a reference to Terry McCabe, the solicitor for Holdings.

41 Mr Labraga then said he had a further conversation with Mr Pomfret in November 2004, such as the following:

"Pomfret: I've been thinking. We should transfer the Book out of Finance and into Valecure, that way it's protected from the creditors of the Exception Companies. I will speak to Terry about preparing the necessary documents and we will need to sign a new deed with the funder in Valecure's name.

Labraga: So my security and the security for the estate's loan will now be from Valecure?

Pomfret: Yes. I will need to speak to Terry about this."

42 Valecure is a company owned by Messrs Labraga and Pomfret and the estate via their family trusts.

43 On 19 October 2004, $808,000 of the estate's Westpac monies were electronically transferred to Holdings' bank account. In November 2004, a further $385,000 was transferred from the estate to Holdings by finance secured on properties owned by the estate at Penrith and Kingswood. The balance of the Westpac loan was paid by Holdings from its working capital so that Holdings' facilities with Westpac were fully paid out.

44 On about 24 November 2004, Mr Labraga refinanced his residence and he paid out $344,000 to Valecure and $56,000 to Westpac to be held by it on term deposit as security for the lease of premises 4/99 Stanley Street, Darlinghurst. Of the $344,000 paid into the account of Valecure, $300,000 was transferred to Holdings on 1 December 2004. Mr Labraga says that of the $44,000 in Valecure's account, $35,000 was abstracted by Mr Pomfret to buy a BMW motor car. Mr Labraga says he agreed to this on the basis that the car would then be refinanced by way of lease and the monies returned to Valecure's account, but that never happened.

45 Mr Pomfret, in his affidavit DA28 of 12 July, denies that the conversation of September 2004 to which Mr Labraga deposed took place, but says he does recall he had a conversation around August 2004 to the following effect:

"Labraga: Perhaps the estate could pay out Westpac. The estate could make a one third contribution to the company.

Pomfret: If the estate pays out Westpac then they would have to be given security for paying out the loan.

Labraga: Okay."

46 Mr Pomfret denies that the conversation of November 2004 took place. He also denies the conversation of 18 November was in the form or to the effect as stated by Mr Labraga.

47 Mr Pomfret says that the conversation took place in Cook Park or Phillip Park. There was conversation about Mr Labraga feeling worn out and perhaps quitting. Mr Pomfret then said:

"You know what's amazing. I've been sitting here listening to your reasons for quitting and you haven't mentioned the stuff up you made in the business with the Bank."


Labraga: "I know I stuffed up, I can't face it, it’s a big hole and I sometimes feel like I can't get out of it. I'm in a really bad space."

Pomfret: "Don't quit, take some time off and see how you feel … ".

48 Mr Pomfret said that the conversation then moved to a table outside Bill and Tony's on Stanley Street and then continued:

"Labraga: I don't understand why you don't want to give me security for my loan.

Pomfret: I don't understand why you would want security for the loan. We have never been given security for any money we've put into the business, why should you be given security?

Labraga: I want to protect my money if anything goes wrong with the business. I want to make sure we get it back.

Pomfret: What about Richy's money, what security was he given for the money he put in, what about Harry Highland, what about your parents, what about the hundred grand I put in, where is my security. I don't feel comfortable about this.

Labraga: Why don't you trust me to give me the security?

Pomfret: Don't play that game, it says more about your issues with trust that you are asking for security … You have mortgage finance experience. Why didn't you ever suggest that Richy get security for his loan to the company, you were happy for him to put the money in unsecured at the beginning, you have been happy drawing money from the business over the years, what about him having security. Why are you now all of a sudden asking for security for your money?

Labraga: I just want security to feel comfortable that I'll get my money back if something goes wrong.

Pomfret: What about Rich, why haven't you suggested to give him security?

Labraga: I don't understand why you don't trust me to give me security.

Pomfret: Mate, you're the one that's talking about walking. You're the guy who just said he wants to quit. It doesn't feel right.

…


Pomfret: … If you leave you have to put in one-third of all liabilities of the Company, all creditors, leases, the loans, the loan for the estate and two years later the company will pay you one-third of the valuation of the business as at the date of your departure. Do you acknowledge that you owe one third of all liabilities in the company if you leave? … This is where we see what you are really made of whether all the commitments you have made and the things you have said are just words or whether you stand by what you have said, so do you acknowledge that if you leave you have to put in one-third of all the liabilities of the company?

Labraga: Yes.

Pomfret: Well if you are prepared to sign a document confirming that then I am pre pared to look at you having some form of security.

Labraga: What over?

Pomfret: We can look at that later but it could be over Valecure Pty Ltd.

Labraga: Why Valecure?

Pomfret: Mate, you're talking about leaving. If it's lent to Valecure then at least we both control the loan. I said we could look at it later so let's just confirm what we've agreed. I will consider giving you some form of security for your loan on the basis you sign a document that confirms that you will contribute one third of all liabilities, all leases, creditors, loans and other liabilities on leaving the business if you leave the business. We can make it as at 31 December then two years later the company would give you one third of the asset value as per an independent valuation as at 31 December 2005. You know the deal, it's the same agreement we fought Cumberland for two and a half years.

Labraga: I don't understand why I should sign a document like that, why don't you just take my word?

Pomfret: Mate, you're the one who just said he wants to quit and therefore break his word, I'm sorry but at this point your word doesn't carry a lot of weight with me. We can get Terry to draw up some documents for us to take away and consider and provided we are both happy with them we can sign them."

49 One thing appears quite clear and that is that of the $400,000 Mr Labraga obtained, only $300,000 found its way to Holdings. Of the other $100,000, $56,000 was retained by Westpac in a separate account as a guarantee for the lease of the premises from which the various businesses traded. However, that lease was held in the name of yet another company, Exception Pty Ltd, co-owned by the three partners but in no way a holding or subsidiary company of Holdings. The final $44,000 is deposited with Valecure.

50 Needless to say, both men were thoroughly cross-examined on their various accounts. Mr Labraga acknowledged that there had been many advances of money or security by Mr Highland Senior (Harry), Mr Highland Junior (Richard, the deceased), Mr Pomfret and himself and no security had ever been given on any occasion. Mr Labraga agreed that the conversation commenced in Cook Park or Phillip Park. He also remembered that the conversation continued at a table outside Bill and Tony's Restaurant in Stanley Street, East Sydney which was near the Exception Group office. However, he denied virtually every part of the conversation related by Mr Pomfret which Mr Burton put to him.

51 Mr Burton cross-examined Mr Labraga on an email he had sent to Terry McCabe on 4 March 2005. This read, so far as is relevant, as follows:

"Late last year we asked you to prepare a charge over Exception Finance Pty Ltd's assets, in particular the mortgage book, in favour of the Estate of Richard Highland and myself to secure the monies advanced to Exception Holdings Pty Ltd by the estate and myself. I have asked Philip how the preparation of those documents is going but have not received a reply."

The answer was:

"I don't recall receiving instructions to prepare a security for your loan I recall a phone call late last year when Philip told me that you had decided to leave the business. I understood that you would be settling with Philip an agreement in relation to the three shareholders being responsible for company debts and that you would meet in the new year to finalise that and your security. I am obviously happy to prepare docs as soon as I get instructions to do so. In January Philip instructed me to finalise the estate's loan and security docs. In keeping with the concerns in regard to a charge over finance causing the loan book to be terminated the charge was prepared over the holding company Exception Holdings. That charge has been stamped at OSR and lodged with ASIC."

52 Mr Burton then asked Mr Labraga:

[T37.11]
"Q. It is the fact, isn't it that you did not give instructions to Mr McCabe to prepare a security for your loan personally? You, personally, did not give those instructions to Mr McCabe?
A. That's right."

There were then questions as to whether he really had any way of knowing whether anyone else gave Mr McCabe instructions. He was then asked, and acknowledged, that Mr McCabe's email was responsive to the question, "Where is my security?" The cross-examiner continued:

"Q. And you read the line that said 'I don't recall receiving instructions to prepare a security for your loan'? You read that, didn't you?
A. Yes.
Q. And according to you, the fact that you obviously thought you were going to receive a security, that concerned you, didn't it?
A. Yes.
Q. You didn't email back to Mr McCabe, did you, saying: I want my security?
A. I don't recall if I did."

53 Mr Labraga conceded that at the time when he lent the $300,000, Westpac had already been paid out.

54 He was also cross-examined on the fact that if he, Labraga, had a security over the mortgage book, then the estate security would be worth much less and how was that consistent with his duty as executor of the estate.

55 Mr Ashhurst cross-examined Mr Pomfret commencing with the discussions in June 2004 that Westpac needed to be paid out and that that would have to happen through the estate and Mr Labraga because of Mr Pomfret's position with his matrimonial problems. Mr Pomfret acknowledged that in mid-2004, Mr Labraga was asking for security in respect of his loan.

56 Mr Ashhurst put to Mr Pomfret [T100.11]:

"Q. I also want to suggest to you that Mr Labraga at that time sought security, the same security, that the estate was receiving, didn't he?
A. At which time?
Q. Right up until he paid the money in November 2004.
A. Mr Labraga had said 'I would like security in relation to my loan'. I can't comment as to whether it was the same security."

At the same page of the transcript Mr Pomfret said that the details of the security were never fleshed out and that the agreement was that security would be given conditional upon Mr Labraga entering into a deed of agreement for contribution on his departure.

57 There was some cross-examination to the effect that if Mr Labraga had actually resigned as Mr Pomfret claimed, why was he not given his pay as an employee on termination and why were his monthly drawings continued until January and then were stopped without notice. The answer to this last point was that it was thought that Mr Labraga's waiting period for his income protection insurance would be something like 60 days.

58 As I think I made clear when Mr Burton was making his final oral submissions, to a certain extent I found the evidence of both Mr Pomfret and Mr Labraga unsatisfactory. Each tended to make speeches rather than answer questions, and each endeavoured to obtain more time to think out the answer by asking for the question to be repeated or put in some other form. The transcript records [T155-156] that Mr Burton submitted that the occasions Mr Pomfret sparred for time were very much less than from Mr Labraga to which my riposte was "Some of the things Mr Pomfret said were just incredible, as I remarked as we were going through. As was Mr Labraga. I wouldn't have much confidence in either of them." That comment must be taken sub modo as it was mainly intended to goad Mr Burton into giving me more particulars of why I should prefer Mr Pomfret to Mr Labraga. As I have said, it is necessary to realise that neither witness was particularly satisfactory, but all I can act on is what witnesses I have and so I must evaluate their evidence in the light of the general surrounding circumstances.

59 I listened intently to the cross-examination of both witnesses. It was clear that neither had any love for the other any more. Although both cross-examinations were searching, I did not consider that either man was greatly troubled by the cross-examination. If I had to make a choice, I would say that Mr Pomfret was not as confident under cross-examination as Mr Labraga, Mr Pomfret sometimes appearing to need a little time for thought.

60 Mr Pomfret's acknowledgment that Mr Labraga had been talking about security for his loan from as early as June 2004 tends to give weight to the Labraga story. On the other hand, the fact that there were no other loans from insiders that were given subject to security and the fact that any security given to Mr Labraga would weaken the estate security, tends to reinforce the Pomfret view.

61 Mr Pomfret's evidence was a little inconsistent with the emails from Mr McCabe. It would seem that he did not give instructions to Mr McCabe until January, whereas he said he had given instructions some time before. It is likely in the factual matrix that when the companies were in trouble, and Mr Pomfret was not putting any money into the salvage exercise, the estate was contributing and getting security, so that it would naturally occur to Mr Labraga that he too should seek security. The evidence shows that Mr Labraga in November 2004 was suffering from some stress and depression. However, there has been no suggestion that his memory of conversations would have been impaired because of this.

62 Both sets of counsel have submitted that their client's version is more logical. Plaintiff's counsel puts that Mr Pomfret's version of events is illogical and inconsistent with contemporaneous events. There was no reason for Mr Labraga to have agreed to Pomfret's proposal, if he in fact made it, if Mr Labraga was in the process of resigning. There was no need for a person resigning to contribute any capital to the company: Mr Labraga could have just refused to loan the money and left. At that time he had no direct exposure to the debts of the company and no reason to accept such liability. Furthermore, Mr Pomfret's claim that there was an agreement that "Terry would draw up some documents" is inconsistent with the fact that he did not in fact instruct Mr McCabe to draw up documents, at least at that time. It is also entirely inconsistent with his later claim that he did not want any formal agreement.

63 On the other hand, Mr Pomfret's counsel says that the conditions laid down by Mr Pomfret were logical in a situation where any advance to Holdings followed the reduction of Mr Labraga's considerable exposure to Westpac via his guarantee over his home and where his continuance with the company and to contribute to meeting its commitments was problematic at the time of the advance. Mr Labraga was actually seeking security for advances of working capital, something which had never ever happened before. It was not similar to the money advanced by the estate, a direct payout of a pressing external lender.

64 It seems to me that the plaintiff's submissions on these matters are more compelling.

65 My assessment is that whilst each man was endeavouring to recollect the conversations, neither has done so completely accurately, and this is understandable seeing that at the time, this matter was probably not to the fore of their thinking. However, although it is only slightly more than a borderline assessment, my view is that I should prefer Mr Labraga's account to that of Mr Pomfret.

66 It follows that as I now turn to the legal questions that arise, I must take as the factual basis the conversations as related by Mr Labraga. Essentially, these are that before the money was lent, Mr Labraga said that he wanted to have a joint security with the estate and for Holdings to pay interest on his line of credit with the debt to be repaid within three years. Mr Pomfret agreed. Does that amount to an equitable charge?

67 Both parties expected that the transaction would be documented by Mr McCabe. There was also discussion in November which indicated that the parties were not even at that time completely sure as to how the transaction would be documented and indeed whether "the book" would remain with Finance or pass to some other company such as Valecure.

68 However, the money was loaned in November at a time when, on the facts as I have found them, there was a mutual expectation that there would be a security.

69 There is some debate as to the sum that was lent. Mr Labraga says $356,000 because this includes the $56,000 to Exception Pty Ltd as security for rent. Mr Pomfret says that that amount should be excluded. I agree with this submission. First, there is no reason why Holdings or a subsidiary should give a security in respect of money it never received, and secondly, the $56,000 is still held in a sort of secure account guaranteeing the bank which guarantees the rent on the other company.

70 Accordingly, the question to my mind is whether there is sufficient evidence to show that there is an equitable security for $300,000.

71 I have already referred to the point that it could well be said that there was no finality as to the nature of the charge.

72 The charge, so plaintiff's counsel says, would be a charge over "the book", the book being a chose in action. As counsel points out, whilst a charge over land must be in writing, there is no such requirement for a charge over a chose in action.

73 Mr Ashhurst for the plaintiff adopts the test laid down by Bankes LJ in National Provincial & Union Bank of England v Charnley [1924] 1 KB 431 at 440, where his Lordship said:

"It is quite clear that no particular form of words is necessary for the purpose of creating a charge. It is enough that the parties have made it plain by the language they have used that it was their intention to create it. But though no definition of the words necessary to constitute a charge can be given, I think it is plain that the contract between the parties must, either expressly or by implication of law, confer on the person in whose favour the alleged charge is given some right of realizing his security."

74 A charge over a mortgage book usually takes effect by an equitable assignment. In Rodick v Gandell (1852) 1 De GM & G 763 at 777-8; 42 ER 749 at 754, Lord Truro LC said that the principle to be deduced from the cases is "that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund; in other words, will operate as an equitable assignment of the debts or fund to which the order refers."

75 This passage was applied by the Privy Council on appeal from the High Court in Palmer v Carey [1926] AC 703 at 706 where their Lordships went on to say:

"An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund."

76 In Jackson v Richards [2005] NSWSC 630 at [19]-[21], White J analysed the cases and made it clear that it was necessary that the fund be kept separate from the other assets of the debtor. Mr Burton for the Pomfret interests says that there is insufficient evidence of any such intention in the present case. The mortgage book of its very nature is a bundle of choses in action which change all the time in the course of the business. Indeed the whole term "the book" is a vague term because there were several mortgage providers.

77 Mr Ashhurst replies that there was specific security nominated, namely the mortgage book, and that is sufficient. It does not matter too much that there might be some uncertainty as to exactly what was covered by this expression and he cites cases such as Bridge Wholesale Acceptance Corporation (Australia) Ltd v Burnard (1992) 27 NSWLR 415, where the Court of Appeal upheld an agreement to grant a legal mortgage on any land then or thereafter held by the guarantor. However, the Court of Appeal in that case did not actually direct its mind to this particular point. In any event, there is a world of distinction between a charge which is to be in respect of particular pieces of property plus any further property that is to be acquired, and a charge which is over a piece of property generally described and the content of which is fluctuating.

78 As I understand it, the term "mortgage book" is a composite way of expressing the right to receive an income stream by way of commission from mortgagees because the company has put business in the mortgagee's direction. As Mr Burton put it, the mortgage book itself is a "moving pond". The book has money coming in from mortgages settling and completing and money going out for mortgages discharged. It is a bundle of choses in action which changes all the time. It is not a bundle that could be separated out in the sense used by White J in Jackson v Richards or in the English Swiss Bank case (Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584) because it is certainly not a fixed asset; it is an asset that changes all the time in the course of business.

79 There are various types of commission paid to the broker, such as Holdings or its relevant subsidiaries, some of which are upfront, some of which are trailing and the quantum depends on the mortgages that are current month by month. As new mortgages are negotiated and old mortgages are paid out, so the rights to receive commissions are either more or less valuable.

80 It is of the essence of an assignment that the property in some sense vests in the assignee and thereafter the control of adding or subtracting from the property is denied to the assignor. Of course, a floating charge breaks this rule but that is a special exception. It seems to me that one cannot easily have a fixed charge on such a volatile asset.

81 It is interesting to note that the charge given to the estate in the document of 27 January 2005 drawn by Mr McCabe is said to be a deed of fixed and floating charge. Clause 5.1 purports to give a fixed charge not on the mortgage book as such, but on nine discrete heads of property including books of account and trade debts and then says, in clause 5.2:

"… this charge is a Floating Charge on any Chargor Property not referred to in clauses 5.1(a) to 5.1(j) above and on any Chargor Property in respect of which the Fixed Charge is ineffective."

I would agree that one has to go to this sort of length in order to provide an enforceable charge.

82 There is no suggestion that the charge to go to Mr Labraga would be a floating charge.

83 When one sees the complexities of the drafting that there was to be a document settled by Mr McCabe, that the property over which the charge is said to exist is fluctuating, that there appears to have been a fixed charge over a changing asset, and the conversation was in very general terms, I cannot be satisfied on the balance of probabilities that the parties did reach an agreement to grant Mr Labraga a charge despite accepting basically the fact of the conversation.

84 Even if I was satisfied, which I am not, that there has been an agreement to give a charge over fixed property and that the parties actually reached the stage of making an enforceable agreement to grant a charge, which I am not, the question would then arise as to whether equity would grant specific performance.

85 Although traditionally the equity text books said that equity did not grant specific performance of an agreement to give a mortgage, cases both ancient and modern make it quite clear that where the money has actually been lent on the faith of a promise to give a mortgage, equity often will grant specific performance; see eg Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280. However, specific performance can only be granted where there is a definite agreement clearly spelling out the parties' bargain. Even if it had been held that the parties did reach the stage of making a formal contract, there is great doubt as to what the terms actually were.

86 It seems clear that even if there is a contract which is enforceable at law, equity may decline to grant specific performance; see eg Spry on Equitable Remedies 6th ed (LBC, 2001) p 105.

87 As long ago as 1746, Lord Hardwick LC in Buxton v Lister (1746) 3 Atk 383, 386; 26 ER 1020, 1022, said:

"Nothing is more established in this court, than every agreement of this kind ought to be certain, fair, and just in all its parts. If any of those ingredients are wanting in the case, this court will not decree a specific performance."

Jones and Goodhart, Specific Performance 2nd ed p 10 have said that courts are nowadays reluctant to conclude that a contract, which is capable of specific performance, is valid at law but not enforceable in equity. However, instances can be found. Thus in Wilson v Northampton & Banbury Junction Railway Co (1874) 9 Ch App 279, a railway company promised a land owner to build "a station" on his land but the Judges in Equity considered that that was too vague to be enforced by specific performance even though there might be damages. See also Joseph v National Magazine Co Ltd [1959] Ch 14 where specific performance was refused of a contract to write an article for a newspaper and the cases reviewed by Megarry J in Tito v Waddell (No 2) [1977] Ch 106 at 321 and following.

88 Of course, in the present case there are factors pointing the other way, that is, in favour of granting specific performance. First, because of the fact that Holdings is either just solvent or insolvent, damages are not an adequate remedy. Secondly, the contract is executed and where there is an executed contract, equity will go almost out of its way to grant specific performance if at all possible; see eg Burnard's case and Wilson v Furness Railway Co (1869) LR 9 Eq 28 at 33. However, had it been necessary for me to decide, I would have had very great difficulties because of the great amount of uncertainty as to the form of any order for specific performance. However, it may have been that the document drafted by Mr McCabe for the estate could have been used as a precedent though I do not consider that there was any agreement that there be any floating charge involved in the arrangement with Mr Labraga.

89 Accordingly, the claim by Mr Labraga for a declaration that he is entitled to a charge in equity fails.

(2) Should Holdings be wound up?

90 I now pass to the second aspect of the case, that is, whether Holdings should be wound up.

91 The plaintiff seeks winding up on alternative grounds, first that it is just and equitable to wind up the company, and secondly, that it should be wound up in insolvency. After I reserved judgment in the present cases, I heard detailed evidence as to solvency in matter 3316/05, judgment of which is being given at the same time as this judgment. That case went into the question of insolvency in far greater detail and it seems to me that it would be inappropriate for me to make findings on the evidence in the Company Proceedings. In any event there is no need to do so as I am of the view that Holdings should be wound up on the just and equitable ground.

92 Section 461(1)(k) empowers the Court to wind the company up if it is of opinion that it is just and equitable to do so.

93 Where there is a small proprietary company with the key shareholders and/or directors being persons who repose trust and confidence in each other rather like the trust and confidence that is imposed in each other by partners, if the Court can see that the relationship has broken down and that the trust and confidence no longer exists, it is often appropriate to wind the company up; see Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 especially at 379 and Thomas v Mackay Investments Pty Ltd (1996) 22 ACSR 294 at 300-1.

94 The plaintiff says that this stage has been reached in the Company Proceedings.

95 I have already summarised what Barrett J said when he put in a provisional liquidator to the company. Those matters go a long way in themselves to show that the relationship between the parties has broken down. I do not have to repeat what Barrett J said, it is on the public record. There is no real denial of any of the factual matters related by his Honour.

96 The facts set out by his Honour show that some of the problems were probably caused by Mr Labraga. For instance, it is almost impossible to accept Mr Labraga's explanation as to why he did not sign the cheque to pay off an instalment of debt owing to the Taxation Office when asked to do so. It would appear to be just complete non-co-operation. Likewise the freezing of a bank account.

97 However, on the other side, Mr Pomfret was also conducting himself in a most unco-operative way. He signed his own signature and issued a cheque well knowing that two signatures were required and Mr Labraga had refused to sign the cheque. He was bringing in a third director to run the company in such a way as would exclude Mr Labraga from meaningful participation. There is also the matter that Mr Pomfret cut off Mr Labraga's drawings. I do not regard this as seriously as doubtless Mr Labraga did because looking at the facts and figures it would seem that excessive drawings by the directors was one reason why these companies were not prospering.

98 However, when one looks at the conduct of Messrs Labraga and Pomfret since Mr Highland died, one can see that there is a tremendous amount of mistrust of the other and manoeuvring to obtain an advantage against the other. That is just the sort of situation that, in a company of this nature means that it cannot continue. Both parties are entitled to have their capital released from the venture.

99 Accordingly, in my view the case has been made out for winding Holdings up on the just and equitable ground.

100 I would assume that the person to appoint as liquidator is Mr Ryan who has been the provisional liquidator. I have some reluctance about this because the evidence that was given in 3316/05 does not inspire me with confidence about Mr Ryan's organisation's Sydney operations. Everything appears to be left to a young accountant who is not an official liquidator (though he is a registered liquidator) and who appears to: (a) receive little supervision from Mr Ryan; and (b) in fact delegates some of his duties which seem to require a principal's experience, to an unqualified clerk. I note that the only registered partners of Mr Ryan are also resident in Western Australia. However, the costs of bringing in someone else at this stage and the fact that the probabilities are that there will be very little cash surplus, if any, at the end of the exercise, means that I should not put too much force on my reluctance.

101 I also maintain some suspicion about Mr Olde, Mr Ryan's Sydney operative, because some material in the other case suggested that Mr Olde tends to favour Mr Labraga because Mr Labraga's new wife is a partner in a firm of solicitors which supplies Mr Ryan's practice with worthwhile business. However, again, this flavour I do not think is sufficient to overcome the other factors.

102 However, I will, at this stage, merely deliver these reasons and let the parties address me as to the identity of the liquidator etc when short minutes are brought in.

THE ESTATE PROCEEDINGS

103 The third aspect of the case is the Estate Proceedings. In proceedings 2466/05, Mrs Penelope Louise Highland, the widow of Richard Highland, seeks an order that the grant of probate of Richard Highland to Mr Labraga and Mr Pomfret be revoked and letters of administration with the will annexed be granted to herself and Mr Pomfret.

104 It is now clear that the estate has not been fully administered.

105 Messrs Pomfret and Labraga are joint executors. It can be seen from what I have already said in the Company Proceedings that they cannot get on together and they have reached the stage where each has disagreed with almost everything the other has done. Furthermore, as can be seen from earlier in these reasons, Mr Labraga has put forward his interest allegedly as having a valid charge which claim was against the interests of the estate.

106 The will is in a peculiar form. Essentially the whole of the estate is held for the trustee of the Highland Family Trust to be held on the trusts set out therein. The trustee of the Highland Family Trust is a company, Nowhere In Particular Pty Ltd, the second defendant to the present proceedings. All the shares in Nowhere In Particular were bequeathed to the executors of the estate.

107 No-one has submitted that the will should not be implemented according to its tenor or that the assets pass otherwise than to the Highland Family Trust. This Trust is a discretionary trust of which Mrs Highland is one of the potential beneficiaries.

108 Initially the sole plaintiff was Mrs Highland, and the sole defendant Mr Labraga. There was an objection that Mrs Highland had no locus standi and Mr Pomfret was added as a second plaintiff. Mr Pomfret and Mrs Highland seek the removal of Mr Labraga and Nowhere In Particular as trustees of the estate and the Highland Family Trust. However, it was realised that the estate was not fully administered and that it was not possible to remove one executor so that the current application is that the grant be revoked with a view to a fresh grant being issued with the will annexed.

109 That the revocation of the grant is the appropriate order follows my decision in Morgan v Macrae [2001] NSWSC 1017, where I gave reasons for that view.

110 Mr Burton SC for the plaintiffs says that the material, which I will briefly summarise shortly, is sufficient to make an order revoking the grants and having Mrs Highland appointed as administratrix cta after the appropriate accounts etc have been taken. He also says that Nowhere In Particular should be removed as a trustee of the discretionary trust and Mrs Highland appointed in its stead.

111 Mr Labraga filed a submitting appearance because he did not consider it appropriate for an executor to be arguing against his removal if the Court considered that there were reasons which would warrant such action. However, he resists any implication that he may have acted otherwise than in accordance with the interests of the estate. Despite the fact that he filed a submitting appearance, Mr Labraga was given leave and took advantage of that leave to file a defence.

112 Each of the executors has acted so as to cause conflict with the other. Mr Pomfret particularly complains that Mr Labraga refused to join in the appointment of a receiver and manager to police the estate's charge and has never given any reason for taking that view, and moreover, he has instigated the appointment of a provisional liquidator which constitutes a clear event of default. He then sought to remove the receiver and manager and supported the provisional liquidator and has applied to the Court for a declaration that he is the holder of a charge of equal value with the estate. He has frozen dealings in the estate bank account. Mr Labraga, in his turn, has said that Mr Pomfret has gone out of his way to prejudice Mr Labraga's position even though he, Labraga, put in a large amount of money to the Exception enterprises, the only source of income for the estate and the surviving partners, whereas Mr Pomfret put in not a penny.

113 If a person appoints his or her business partner executor, then the testator has consented to any conflict of duty and interest that must invariably arise; see Hordern v Hordern [1910] AC 465 at 475. However, as Lord Cairns said in Vyse v Foster (1874) LR 7 HL 318 at 332, courts would nonetheless watch the conduct of an executor as surviving partner rather narrowly.

114 Furthermore, there is strong support in the authorities for the proposition that the testator's selection of executor is not to be lightly set aside.

115 In Mavrideros v Mack (1998) 45 NSWLR 80, the Court of Appeal said that the question is whether the due and proper administration of the estate has been put in jeopardy or has been prevented by acts or omissions of the executor or by matters personal to the executor.

116 In the instant case, there is a difficulty because the beneficiary is a discretionary trust and it is not at all clear whether Mrs Highland will, in due course, receive any of the estate though the probabilities will be that she will receive more than most of the other discretionary beneficiaries, but no-one can say at this stage.

117 I consider this is very much a borderline case. However, the feeling that I get from the submissions of the parties is that Mr Labraga no longer really wishes to waste his time and energy on administering an estate for which he is receiving no thanks at all. Mr Pomfret is quite happy for Mrs Highland to administer the estate. Accordingly, I will revoke the grant. I will order that the executors provide final accounts and refer the matter to the Registrar in Probate both as to the mode in which the accounts should be taken and the formalities of the fresh grant in favour of Mrs Highland as administratrix cta.

118 To a great degree the problems are caused by the deceased making his will in the way that he did making his partners executors, but on the other hand it is the internecine squabbles between Messrs Labraga and Pomfret which have brought about the present problem. Accordingly, in my view there should be no order as to costs in these proceedings.

119 I do not need to go into detail as to whether Nowhere In Particular Pty Ltd should be removed as trustee of the Highland Family Trust as it follows naturally from what I have said about the estate that this should be done.

120 Having given my decision in both matters I will now stand the matter over to Tuesday 11 October 2005 at 9.30 am for short minutes to be brought in.

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