LED Builders Pty Ltd v Eagle Homes Pty Ltd
[1997] FCA 550
•25 JUNE 1997
FEDERAL COURT OF AUSTRALIA
INJUNCTIONS - Mareva injunctions - Grounds for - Prima facie case - Danger of defendant not paying judgment debt - Evidence on prima facie case admissible on issue of danger
INJUNCTIONS - Mareva injunctions - Against third parties - Principles to be applied - Prima facie case - Danger of defendant not paying judgment debt - Need for control over or proprietary interest in third party’s assets
Copyright Act 1968 (Cth) s 36
Corporations Law 1989 (Cth) ss 588FB, 588FC, 588FE, 588FF
Evidence Act 1995 (Cth) s 136
Income Tax Assessment Act 1936 (Cth) s 160AQF
Conveyancing Act 1919 (NSW) s 37A
LED Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 35 IPR 215, discussed
Jackson v Sterling Industries Ltd (1987) 162 CLR 612, applied
Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, applied
Atlas Maritime Co SA v Avalon Maritime Ltd (The Coral Rose) [1991] 1 Lloyds’ Law Reports 563, distinguished
Atlas Maritime Co SA v Avalon Maritime Ltd (No 3) [1991] 1 WLR 917, distinguished
Clark Equipment Credit of Australia Ltd v Como Factors Pty Ltd (1988) 14 NSWLR 552, applied
Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91, considered
Winter v Marac Australia Ltd (1986) 6 NSWLR 11, distinguished
Coxton Pty Ltd v Milne (New South Wales Court of Appeal, 20 December 1985, unreported), distinguished
LED BUILDERS PTY LIMITED (ACN 002 351 957) v EAGLE HOMES PTY LIMITED (ACN 002 800 115)
NG 817 of 1993
LED BUILDERS PTY LIMITED (ACN 002 351 957) v EAGLE HOMES PTY LIMITED (ACN 002 800 115)
NG 862 of 1994
EMMETT J
SYDNEY
25 JUNE 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 817 of 1993 ) No. NG 862 of 1994 GENERAL DIVISION )
BETWEEN: LED BUILDERS PTY LIMITED
(ACN 002 351 957)
ApplicantAND: EAGLE HOMES PTY LIMITED
(ACN 002 800 115)
Respondent
JUDGE(s): EMMETT J PLACE: SYDNEY DATED: 25 JUNE 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
Eagle Homes Pty Limited be restrained, until further order, from disposing of or dealing with any of its money, property or other assets, other than for the following purposes:
(a)to protect the copyright of its housing plans (other than plans relating to these proceedings) by the commencement and prosecution of proceedings against infringement of the same;
(b)to commence and prosecute any other proceedings which it may be advised to bring;
(c) to defend any other proceedings which may be brought against it;
(d) to meet its taxation liabilities;
(e) to comply with statutory requirements to which it is subject;
(f) to satisfy any judgment for the payment of money in these proceedings;(g)to enable it to pay and to continue to a pay its reasonable costs of defending these proceedings; and
(h) to meet its normal accounting fees and other expenses incurred in relation to the day to day conduct of its business and management of its affairs.
Eagle Homes Pty Limited pay the costs of the amended notice of motion dated 12 June 1997.
Notice of motion dated 22 May 1997 for orders against Ultra Modern Developments Pty Limited (ACN 069 518 770), Paul Cardile and Lucy Cardile be dismissed.
Cost of the notice of motion dated 22 May 1997 be reserved for further argument.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 817 of 1993 ) No. NG 862 of 1994 GENERAL DIVISION )
BETWEEN: LED BUILDERS PTY LIMITED
(ACN 002 351 957)
ApplicantAND: EAGLE HOMES PTY LIMITED
(ACN 002 800 115)
Respondent
JUDGE(s): EMMETT J PLACE: SYDNEY DATED: 25 JUNE 1997
REASONS FOR JUDGMENT
Each of the applicant (“LED”) and the respondent (“Eagle Homes”) is a company carrying on the business of building project homes. LED brought proceedings against Eagle Homes under the Copyright Act 1968. After a hearing which lasted five days, Davies J declared that Eagle Homes had infringed LED’s copyright in floor plans for certain of LED’s project homes (see LED Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 35 IPR 215). LED elected for an account of profits rather than damages. The proceeding for the taking of accounts will be fixed for hearing some time later in the year.
THE PRESENT APPLICATIONS
Pending that further hearing, LED has made two separate applications for “Mareva” orders. The first is against Eagle Homes and the other is against Ultra Modern Developments Pty Limited (“Ultra Modern”) and Paul Cardile and Lucy Cardile (“Mr and Mrs Cardile”). In the second application LED also seeks an order for the joinder, as respondents in the proceedings, of Ultra Modern and Mr and Mrs Cardile (“the Prospective Respondents”).
Mr and Mrs Cardile are the only shareholders of Eagle Homes and Mr Cardile is presently its only director. Eagle Developments Australia Pty Limited (“Eagle Developments”) is the only shareholder of Ultra Modern. There is no evidence as to the identity of the shareholders or directors of Eagle Developments although I am prepared to draw the inference that that company is controlled by Mr and Mrs Cardile.
An affidavit of Trevor John Vella, which will be relied on by Eagle Homes in the proceeding for the taking of accounts, indicates that the lowest sum which would be recovered by LED is $196,982. An alternative hypothesis postulated in Mr Vella’s affidavit indicates that the profits could amount to as much $444,619. The claim by LED is for a sum substantially greater than both of those sums.
A balance sheet of Eagle Homes as at 30 June 1996 indicates that, as at that date, Eagle Homes had total assets of $556,343 but that its total shareholders funds were $32,735. Included in the liabilities shown in that balance sheet are shareholders loans of $241,712. Thus, on the assumption that any judgment in favour of LED would rank pari passu with all other liabilities, including shareholders loans, LED will not recover in full the amount of any judgment which it obtains following the taking of accounts.
LED contends in these applications that certain matters referred to below give rise to an inference that Mr and Mrs Cardile, who control Eagle Homes, are of a disposition to take steps which would deprive LED of access to assets which would satisfy a judgment. LED says that, therefore, there is a danger that LED will not be able to have any judgment satisfied by reason of assets of Eagle Homes and the Prospective Respondents being disposed of or otherwise dealt with in some fashion.
The order sought by LED against Eagle Homes is that Eagle Homes not, until further order, dispose of or deal with any of its money, property or other assets, other than for the following purposes:
“(a)to protect the copyright of its housing plans (other than plans relating to these proceedings) by the commencement and prosecution of proceedings against infringement of the same;
(b)to commence and prosecute any other proceedings which it may be advised to bring;
(c)to defend any other proceedings which may be brought against it;
(d)to meet its taxation liabilities;
(e)to comply with statutory requirements to which it is subject; and
(f)to satisfy any judgment for the payment of money in these proceedings.”
The only issue before me as between LED and Eagle Homes concerns the purposes for which Eagle Homes may dispose of or deal with its assets. Eagle Homes has proffered an undertaking to the Court that it will not, until further order, dispose of or deal with any of its money, property or other assets other than for the above purposes together with the following additional purposes:
“(a)to enable [Eagle Homes] to pay and to continue to pay its legal, accounting and other costs in defence of these proceedings and any appeal therefrom;
(g)to meet its normal accountancy fees and other expenses incurred in relation to the conduct of its business and the management of its affairs.”
In the second application, LED seeks orders that Ultra Modern and Mr and Mrs Cardile be restrained, until further order, from disposing of or dealing with any of their money, property or other assets, other than for the following purposes:
“(a)to enable them to pay and to continue to pay the reasonable legal expenses of defending these proceedings and any appeal therefrom;
(b)to protect the copyright of the first respondent’s housing plans (other than plans relating to these proceedings) by the commencement and prosecution of proceedings against infringement of the same;
(c)to commence and prosecute any other proceedings which the first respondent may be advised to bring;
(d)to defend any other proceedings that may be brought against the first respondent;
(e)to meet the first respondent’s taxation liabilities;
(f)to comply with the statutory requirements to which the first respondent is subject;
(g)to meet the first respondent’s normal accountancy fees;
(h)to pay ordinary and proper business expenses bona fide incurred by the second respondent; and
(i)to pay the ordinary living expenses of the third and fourth respondents.”
That application is opposed by the Prospective Respondents.
THE RELEVANT PRINCIPLES
The remedy of a Mareva order is discretionary. Further, it is not a substitute for the law of insolvency (see the joint judgment of Wilson and Dawson JJ in Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 618). Thus, a plaintiff is not entitled to be placed in a preferred position as regards other creditors of a prospective judgment debtor nor otherwise to be given preferential treatment in relation to the affairs of the prospective judgment debtor.
In addition to any other considerations which may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant and, secondly, a danger that, by reason of the defendant’s absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied (Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321,326 and 327).
In the present case, the ingredient of a prima facie cause of action is satisfied by the declaration which has already been made by Davies J. That is to say, LED has already established that it has a good cause of action against Eagle Homes and that it will be entitled, prima facie, to recover a substantial judgment against Eagle Homes in the vicinity of $200,000 at least.
On the other hand, no independent cause of action is asserted against the Prospective Respondents although a claim under section 37A of the Conveyancing Act 1919 (NSW) has been foreshadowed in respect of the matters referred to below. A claim under section 37A is not so much a cause of action as a means whereby property which previously belonged to a debtor can be revested in that debtor for the benefit of the creditors of the debtor. In the present case, therefore, any claim against the Prospective Respondents is dependent upon the liability of Eagle Homes to LED. I shall return to section 37A below.
Eagle Homes has made clear its intention to appeal from the decision of Davies J. The orders made so far are interlocutory and no appeal as of right presently lies. I have not been taken to the questions which arose before Davies J but it was not suggested by LED that such an appeal would be vexatious or frivolous. That is a consideration which may be relevant to the exercise of the discretionary power to order a Mareva injunction.
THE BASIS FOR THE APPLICATIONS
There are two matters which give rise to the applications. The first is the declaration and payment of two dividends by Eagle Homes. The second is the winding down of the business conducted by Eagle Homes and the commencement of a substantially similar business by Ultra Modern. LED contends that those matters give rise to an inference that those responsible for the conduct of the affairs of Eagle Homes have denuded it and will continue to denude it of assets in order to deprive LED of the benefit of any judgment which it may obtain in the proceedings.
The Dividends
Accounts of Eagle Homes demonstrate that during the year ended 30 June 1994, a dividend of $400,000 was declared by Eagle Homes and paid by book entry crediting shareholders loan accounts. Those accounts also demonstrate that during the year ended 30 June 1996, a further dividend of $800,000 was declared and paid by crediting shareholders loan accounts.
There is some dispute as to precisely when the dividends were declared and paid and the evidence is not conclusive as to that question. Minutes of a directors meeting of Eagle Homes indicate that the dividends of $400,000 and $800,000 were declared on 1 July 1993 and 1 July 1995 respectively. Both Mr and Mrs Cardile are shown as being present although, as I have said, Mr Cardile is presently the only director. I have not seen the memorandum or articles of association of Eagle Homes and the application proceeded on the basis that the declarations of dividend were valid, as a matter of company law.
LED contends that there is material from which an inference should be drawn that the dividend of $400,000 was not in fact declared until after the commencement of the proceedings. There are two matters which are said to give rise to the inference. The first is that, while the 1996 tax return of Eagle Homes includes a reference to the $400,000 dividend, the franking account which is part of the tax return and which is required to include all dividend transactions occurring during the year, does not refer to the dividend. It refers only to dividends paid in 1989 and 1991 of $17,890 and $133,370 respectively. The return did not have to be lodged until March 1995 and could have been lodged later. It is possible, so it is argued, that the discrepancy in the omission of reference from the franking account is indicative that when that document was prepared, there had been no dividend declared.
Reliance is also placed on section 160AQF of the Income Tax Assessment Act 1936 (Cth). It is said that, under that section, a declaration of dividend must be made before the day on which the dividend is paid. The general ledger of Eagle Homes shows that the dividend was paid on 1 July 1993, that also being the date of the minute of the meeting of directors declaring the dividend. However, the entry in the general ledger of the payment of the dividend is out of date order with other payments and receipts in the ledger although it is conceded that that is of little assistance as to when the credits to the shareholders loan accounts were made. Notwithstanding that those discrepancies were foreshadowed in an affidavit filed on behalf of LED on 16 May 1997, no attempt was made on behalf of Eagle Homes to explain how the discrepancies arose. Further, it appears inherently unlikely that a dividend in respect of the year ended 30 June 1994 would be declared on 1 July 1993.
There was a significant increase in sales of Eagle Homes from 1992 to 1993 from $3.348 million to $7.243 million. That increase could justify a change in dividend policy to the extent of a declaration of a dividend far in excess of anything in any preceding year. Nevertheless, I consider that there is sufficient material to justify an inference being drawn that the decision to declare the dividend was prompted by the commencement of the proceedings by LED. It is of course a serious matter to conclude that a document was brought into existence which purported to record a meeting as having taken place on a day earlier than the day on which it did take place. Further, I have not had the advantage of oral evidence from either Mr and Mrs Cardile or any of those who might have been responsible for preparation of the accounting records and other records of Eagle Homes. Accordingly, it is difficult to make any finding as to the credit of Mr and Mrs Cardile.
However, I am only concerned to determine whether that there is a danger that the dividends were motivated by the desire to ensure that assets of Eagle Homes were not available to meet a judgment in favour of LED. For the purpose of this application, I would be prepared to conclude that that was a motivation for the declaration of the dividend of $400,000.
The dividend of $800,000 was declared, on any view, after commencement of the proceedings. It too is evidenced by a minute of a meeting of the directors of Eagle Homes. Similar considerations to those outlined above in relation to the first dividend were relied upon as suggesting that the declaration and payment of the dividend in fact occurred a considerable time after 1 July 1995.
The hearing did not commence until 4 March 1996. Judgment was given on 29 July 1996. It would be significant if the decision to declare a dividend were made after the hearing and even more significant if made after judgment. Generally, for the reasons which I have outlined above in relation to the first dividend, I would be prepared to draw the inference that the second dividend was also prompted by a desire to remove assets from Eagle Homes which would otherwise be available to satisfy a judgment in favour of LED.
The Business of Eagle Homes and Ultra Modern
Ultra Modern was incorporated on 22 May 1995, some 19 months after the commencement of the proceedings in October 1993. On 6 June 1995, less than three weeks after that incorporation, Eagle Homes registered the business name “Eagle Homes” and, on the same day, Ultra Modern became registered as the proprietor of the business name. In October 1995, Ultra Modern obtained a builders licence. Those who are responsible for the affairs of Eagle Homes are now responsible for the affairs of Ultra Modern.
The plans used by project home builders become obsolete after a period of several years. From October 1995, Ultra Modern has offered homes for sale built according to new plans which had not been used before that time. Eagle Homes, on the other hand, has continued to offer for sale homes built according to then existing plans. It has not since that time offered for sale homes built according to new plans. The result has been a significant drop in the level of sales made by Eagle Homes and a consequential decrease in its profits since 1995 when compared previous years.
In the proceedings before Davies J, Mr Cardile was asked about the circumstances relating to the winding down and offered no explanation which would prevent adverse inferences being drawn. In the absence of any evidence before me from Mr and Mrs Cardile offering any explanation I am prepared to draw the inference that the decision to incorporate Ultra Modern and to ensure that all future business in relation to new designs be channelled through Ultra Modern was undertaken so that future profits would not be available to satisfy any judgment in favour of LED. That inference is reinforced by other findings made by Davies J. One of the issues before Davies J was whether or not the drawings of Eagle Homes had been brought in to being prior to the comparable plans of LED. Davies J was not satisfied that there was any objective evidence or any reliable oral evidence which established that fact.
Davies J considered that the evidence concerning the transfer to Ultra Modern of the business name was a matter which weighed against the credit of Mr Cardile and against the reliability of the case put forward for Eagle Homes. There was no evidence before Davies J as to why that was thought necessary. Davies J concluded that one possible explanation was that Eagle Homes considered itself to be at risk in the proceeding. In reaching a conclusion against the credibility of Mr Cardile’s evidence, Davies J also relied on the finding which he made that a date had been written on a plan in order to assist to provide a defence for Eagle Homes in the proceedings.
Those two matters led his Honour to conclude that, on the whole of the evidence, Mr Cardile had given instructions to draftsmen for change to plans of Eagle Homes which when implemented would bring the plans of Eagle Homes into line with LED’s plans. His Honour was satisfied, therefore, that there was deliberate copying by Eagle Homes of LED’s plans.
RELIEF AGAINST EAGLE HOMES
It was not suggested that there was any danger of assets of Eagle Homes being disposed of outside the jurisdiction. Nor was it suggested that there was any immediate threat of any specific conduct which would denude it of assets, other than the incurring of expenses in the defence of the proceedings and in prosecuting any appeal.
As I have indicated, the only issue in relation to the claim against Eagle Homes is whether there should be an exception permitting Eagle Homes to deal with its money for the purpose of enabling it to continue to pay its legal, accounting and other costs in defence of the proceedings and in the prosecution of any appeal. That is to say, the question is whether Eagle Homes can be deprived of the capacity to expend its own money in the defence of the issues raised on the taking of accounts in the prosecution of any appeal. LED contends that if such expenditure were prohibited, Eagle Homes would not be deprived of the capacity to defend the proceedings or to prosecute an appeal because it would be open to Mr and Mrs Cardile to pay the legal expenses of defending the proceedings and of prosecuting any appeal.
The precise basis upon which that might occur was not developed. There is no reason why Mr and Mrs Cardile should be compelled to make gifts to Eagle Homes. On the other hand, in so far as they pay legal expenses incurred by Eagle Homes by way of making loans to Eagle Homes, that would hardly assist LED. That is to say, Mr and Mrs Cardile would be entitled to prove in the winding up of Eagle Homes, to the detriment of LED, in respect of the liabilities incurred to them for the loans made. The result would be the same as if Eagle Homes applied its own assets directly in the payment of legal expenses incurred in the defence of the proceedings or prosecution of an appeal.
Reliance was placed by LED on two decisions involving the ship “Coral Rose”, namely, Atlas Maritime Co SA v Avalon Maritime Ltd (The Coral Rose) [1991] 1 Lloyds’ Law Reports 563 and Atlas Maritime Co SA v Avalon Maritime Ltd (No. 3) [1991] 1 WLR 917. In the second of those decisions, orders were made which had the effect of restraining the defendant from paying legal costs. However, the circumstances of those proceedings might be regarded as unique.
The proceedings concerned a claim against Avalon Maritime Ltd “(Avalon”) for damages for repudiation of an agreement to sell the Coral Rose. Avalon was a wholly owned subsidiary of the Marc Rich group and the extent to which property was acquired or liabilities were incurred by Avalon depended upon the making of book entries by employees of Marc Rich. It was held that the financial arrangements between Marc Rich and Avalon had always contemplated that any monies received by Avalon would at once be paid to the credit of Marc Rich’s “Avalon account” and that the legal costs would at a later stage have been paid out of that account.
The Court of Appeal considered that the financial relationship was unusual and possibly unique. Reference was made to Browne v Browne [1989] 1 FLR 291 where it was held that full account should be taken of the availability to a beneficiary of trust funds in circumstances where the trustees had always acted in accordance with the wishes of one of the beneficiary who had immediate access to funds whenever required. Thus, consideration should not be limited to funds to which the party concerned has a legal right if there are reasonable grounds for believing that it can obtain money elsewhere(see per Lord Donaldson MR at 926).
Certainly, Mr and Mrs Cardile are the only shareholders of Eagle Homes. In that sense, it appears to be their creature and they control it. Nevertheless, the evidence as to the manner in which the affairs of Eagle Homes have been conducted does not justify a conclusion that it has been treated by its shareholders in the way in which the Marc Rich group treated Avalon. Nor does the evidence before me indicate that the assets of Mr and Mrs Cardile are readily available to Eagle Homes whenever required by it. Indeed, the contrary inference would normally be drawn where individuals choose to operate through a company having limited liability.
It has not been suggested that there are not bona fide issues remaining in the proceedings. It would, therefore, be a very significant step for the Court to restrain Eagle Homes from spending its money in defending its position. Only in very exceptional circumstances would such an order be justified since it could result in the proceedings going by default. In Clark Equipment Credit of Australia Ltd v Como Factors Pty Ltd (1988) 14 NSWLR 552, Powell J was not prepared to deprive the defendant of access to funds to enable it to defend proceedings when that was the likely result (at 569E-F).
In the absence of any suggestion that Eagle Homes is not acting in good faith in defending the proceedings, I do not consider that the circumstances are such as to warrant an order depriving it of access to its own property to defend the claim which is being brought against it. While there may be grounds for concluding that Mr and Mrs Cardile would have some interest in ensuring that Eagle Homes defend the remaining issues in the proceedings, they should not, in effect, be compelled to do so by depriving Eagle Homes of the capacity to defend those issues from its own assets.
Nevertheless, this application is brought in circumstances where, so far as I am concerned, the liability of Eagle Homes is established. It is only the quantum which remains to be determined. Different considerations arise in relation to the costs of defending the assessment of the claim on the one hand and the costs of prosecuting an appeal on the other. Eagle Homes has had its day in court and been found to have infringed LED’s copyright. While it was made clear that an appeal will be pursued, it was not suggested that the grounds intended to be relied upon were such as to indicate obvious error on the part of Davies J. In the circumstances, therefore, I am prepared to restrain, until further order, the disposition of further assets of Eagle Homes in the prosecution of any appeal.
There has been no suggestion that normal accounting fees and other expenses in relation to the conduct of the business and affairs of Eagle Homes would involve any undue dissipation of assets. Accordingly, I do not consider there is any reason to depart from the normal practice of permitting a defendant to expend its money in the ordinary day to day conduct of its affairs.
RELIEF AGAINST THE PROSPECTIVE RESPONDENTS
The claim against Mr and Mrs Cardile and Ultra Modern is that they have benefited from the matters in question and that LED is entitled to preserve the status quo in relation to all of their assets because, once a judgment is obtained against Eagle Homes, an attack will be mounted on the dividends and on the apparent transfer to Ultra Modern of the business of Eagle Homes, in order to ensure that Eagle Homes will be in a position to satisfy such a judgment.
While LED seeks to join the Prospective Respondents as respondents in the proceedings, no pleading has been formulated indicating any cause of action available to LED against any of them. In the course of argument, it was indicated on behalf of LED that one possible proceeding which might be brought against the Prospective Respondents directly would be under section 37A of the Conveyancing Act 1919 (NSW). Section 37A provides as follows:
“Voluntary alienation to defraud creditors voidable
37A (1)Save as provided in this section, every alienation of property made ... with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
(2)This section does not affect the law of bankruptcy for the time being in force.
(3)This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.”
LED contends that if it obtains a substantial judgment and can persuade a court that the declaration and payment of the dividends or the assumption of business by Ultra Modern were undertaken with the intention to defraud creditors and that an alienation of property was involved, those transactions could be avoided.
It was said, in addition, that there were, prospectively, causes of action available to Eagle Homes under Division 2 of Part 5.7B of the Corporations Law 1989 (Cth) (“the Law”). Sections 588FB, 588FC, 588FE(3), (4), (5) and 588FF relevantly provide as follows:
“558FB(1)A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(a)the benefits (if any) to the company of entering into the transaction; and
(b)the detriment to the company of entering into the transaction; and
(c)the respective benefits to other parties to the transaction of entering into it; and
(d)any other relevant matter.
........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
588FCA transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a)any of the following happens at a time when the company is insolvent:
(i)the transaction is entered into;
(ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b)the company becomes insolvent because of, or because of matters including:
(i)entering into the transaction; or
(ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
588FE(3)The transaction is voidable if:
(a)it is an insolvent transaction, and also an uncommercial transaction, of the company; and
(b)it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.
588FE(4)The transaction is voidable if:
(a)it is an insolvent transaction of the company; and
(b)a related entity of the company is a party to it; and
(c)it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day.
588FE(5)The transaction is voidable if:
(a)it is an insolvent transaction of the company; and
(b)the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and
(c)the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.
........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
588FF(1)Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b)an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c)an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d)an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:
(i)money that the company has paid under the transaction;
(ii)proceeds of property that the company has transferred under the transaction;
........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ”
Clearly, any cause of action under Division 2 of Part 5.7B of the Law will depend upon some further step being taken, such as the making of an order for the winding up of Eagle Homes. There is presently no application before any court for the winding up of Eagle Homes and it has not been suggested that Eagle Homes is likely to be wound up, except pursuant to an application made by LED, assuming it becomes a judgment creditor.
Before that will happen, LED must obtain a judgment against Eagle Homes. If that is not satisfied in full, LED would then make an application for a liquidator to be appointed. The liquidator would then apply to have the transactions treated as void as against him. To the extent that there was a disposition or alienation of property by the payment of the dividends or the winding down of the business, a liquidator may well be entitled to recover that property or an amount equivalent to it from Mr and Mrs Cardile or from Ultra Modern.
Finally, it was suggested that the conduct of the directors of Eagle Homes, in permitting Ultra Modern to assume the conduct of the business of building project homes which had been carried on by Eagle Homes, was a breach by those directors of the fiduciary duties and other statutory duties owed by them to Eagle Homes. To the extent that Eagle Homes has suffered loss or damage as a consequence of such breaches of duty, those directors and any persons who have participated in the breach of duty, or have knowingly derived benefits from the breaches, would be liable to compensate Eagle Homes or to account to Eagle Homes for that benefit.
The possible cause of action available to Eagle Homes against its director or directors for breach of duty appears to be that the director or directors of Eagle Homes, by allowing the business of Eagle Homes to run down and by causing Ultra Modern to take up business opportunities in relation to new plans which ought to belong to Eagle Homes, have been in breach of the duty which they owe to Eagle Homes. Ultra Modern, being the beneficiary of that breach of duty, and having knowledge of the breach of duty, would be liable to account to Eagle Homes in respect of the benefit received (see, for example, Barnes v Addy (1874) 9 Ch App 244).
The causes of action, prospective or otherwise, which Eagle Homes has against the Prospective Respondents might be rendered futile or worthless if, when a judgment against them is obtained in favour of Eagle Homes or in favour of a liquidator of Eagle Homes, they had no assets to meet that judgment. However, there has been no evidence to suggest that Mr and Mrs Cardile or either of them might depart the jurisdiction or have made any attempt to dispose of assets out the jurisdiction. The evidence certainly does not suggest that they are sophisticated. By that comment I intend no disrespect. However, the background of Mr and Mrs Cardile, in so far as that it is to be gleaned from the material before me, indicates that they are of somewhat humble origin. While there may be some evidence that they have a cultural connection with Italy, there is no suggestion that they intend either to return to Italy or to expatriate property to Italy. Nor is there any evidence to suggest that Ultra Modern may cease to carry on business or is proposing to dispose of any assets.
The most that can be said by LED is that, since Mr and Mrs Cardile have been prepared in the past to engage in transactions of the nature described above, there is reason to think that they may do the same in relation to the assets of Ultra Modern or may dispose of their own assets. It is said that they might be disposed to take such steps in order to avoid the prospective claims that might be made against them by a liquidator of Eagle Homes if judgment is given in favour of LED or to avoid the consequences of an order under section 37A if proceedings were taken under that provision by LED.
If I were to conclude that those claims were in danger of being extinguished in some way or otherwise being jeopardised by non-action on the part of those in control of Eagle Homes, that might be a reason for granting additional relief against Eagle Homes. For example that could be a justification for the appointment of a liquidator provisionally to Eagle Homes with power to commence proceedings for orders in the nature of Mareva injunctions against Mr and Mrs Cardile and Ultra Modern. Alternatively, a receiver might be appointed to the cause of action, with power to apply for Mareva orders, to ensure that it is preserved (see, for example, Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91). However, I am not satisfied at present that the claims, if they exist, are in jeopardy. Indeed, the causes of action, for the most part, have not even yet arisen.
It is out of the ordinary for an application to be made for the joinder of respondents to proceedings in which the substantive legal and factual issues have already been resolved after a final hearing. That circumstance highlights what appears to me to be a difficulty for LED in seeking any relief against the Prospective Respondents in these proceedings. Any claim against them is derivative. In so far as it is based on Division 2 of Part 5.7B of the Law or a breach of duty by the director of Eagle Homes, LED must contend that there is a cause of action which can be brought by Eagle Homes or a liquidator of Eagle Homes, if one was appointed, against the Prospective Respondents. Such claims, of course, are assets of Eagle Homes and a mere creditor of Eagle Homes can have no standing to enforce such claims on behalf of Eagle Homes. There are exceptions to the rule in Foss v Harbottle (1873) LR 8 Ch App 1035, but no suggestion could be made that a claim by a prospective creditor constitutes one of the exceptions.
Where there is an issue between a defendant/debtor and a third party as to ownership of property which is intended to be the subject of a Mareva injunction, that issue would have to be examined in the hearing of the application for Mareva orders. Such an issue, however, could not be finally resolved, as between defendant and third party, in proceedings brought by the plaintiff against the defendant. That appears to me to constitute a fundamental difficulty for LED in seeking relief in the form sought against the Prospective Respondents.
If a defendant will not pursue such an issue as against a third party, such that the property is in danger, the appointment of a receiver, as suggested above may be an answer. It would then be a matter for the receiver, on behalf of the debtor/defendant, to commence proceedings against the third party to preserve the property in question by enforcement of the cause of action which will resolve the issue as to ownership of the property in question. The appointment of a receiver would be in the nature of a Mareva order in the sense that it is to preserve the assets of a prospective judgment debtor to meet a judgment.
I was referred by LED to authorities said to support the proposition that Mareva orders will lie directly against third parties. Close analysis of the authorities, however, suggests that they are instances where the claim against the third party was in respect of specific property in relation to which it was asserted that the defendant/debtor of the claimant had a proprietary interest. In Winter v Marac Australia Ltd (1986) 6 NSWLR 11 a Mareva injunction was sought against the assets not only of the defendant’s wife but also of his sister. The Court of Appeal held that where a Mareva injunction is sought against a third party:
“it must be shown that the person against whom judgment may be obtained has some right in respect of or control over or other access, direct or indirect, to the relevant assets so that they or the proceeds of their sale could be required to be applied in discharge of the judgment debt.”(at 12)
In Coxton Pty Ltd v Milne (New South Wales Court of Appeal, 20 December 1985, unreported), Hope JA (with whom Glass and Priestley JJA concurred) said (at page 13) that a Mareva injunction may lie where:
“the alleged debtor and the disposition of its assets are effectively controlled, de jure or de facto, by the third party, the debtor’s assets will be insufficient to meet the debt, the creditor, although having no vested or accrued cause of action against the third party, may become entitled to have recourse to the third party or his assets to meet his debt, and there is danger that the third party will party will send his assets abroad or otherwise dispose of them.”
The question is whether Eagle Homes has control over or access to the assets of Ultra Modern or Mr and Mrs Cardile such that the proceeds of the sale of those assets could be applied in discharge of any judgment against Eagle Homes. There must be evidence to support a conclusion that there is a danger that the assets of the Prospective Respondents, which might otherwise be available to satisfy a judgment in favour of LED against the Eagle Homes, will not be available.
The bases for suggesting that assets of the Prospective Respondents might be available to satisfy a judgment in favour of LED are those outlined above. There is no other basis for contending that Eagle Homes has any interest in the assets of the Prospective Respondents. As I have indicated, questions of whether their assets will be available to satisfy any judgment will depend upon the outcome of proceedings on causes of action as between Eagle Homes and the Prospective Respondents which, for the most part, have not yet arisen. It is inappropriate for those questions to be litigated in these proceedings, particularly at the stage which these proceedings have now reached.
LED tendered against the Prospective Respondents the reasons for judgment of Davies J (LED Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 35 IPR 215). Davies J was not satisfied that Mr Cardile’s evidence before him was truthful. LED relied on the findings made by Davies J concerning the dating of Eagle Homes plans as attracting principles said to be found in Patterson v BTR Engineering (Aust) Ltd. In that case the prima facie case against the defendant involved gross dishonesty and the plaintiff claimed that the defendant, by making use of a corporation controlled by him, fraudulently misappropriated a large sum of money which, if it were still under the control of that defendant, would be quite likely to constitute, directly or indirectly, the bulk of the assets of that defendant.
Counsel for the Prospective Respondents objected under section 136 of the Evidence Act 1995 (Cth) to reliance being placed on the findings of Davies J as to credit. It was said that such reliance could be unfairly prejudicial because credit was important in the determination of an application for a Mareva injunction.
While a finding of false dating of a plan is a serious matter, it does not follow that the circumstances of Mr and Mrs Cardile can be likened to those under consideration by the Court of Appeal in Patterson v BTR Engineering (Aust) Ltd. In any event, for the reasons indicated above, I consider that, even if the findings by Davies J were admitted as evidence in the application against the Prospective Respondents, there should be no orders against them. Accordingly, it is not necessary to rule on the objection. Nevertheless, Mr and Mrs Cardile were, in effect, in control of Eagle Homes at the trial and Mr Cardile had ample opportunity to persuade Davies J as to his credibility. Accordingly, I would not have rejected the material under section 136.
CONCLUSION
As I have indicated, I have concluded that an inference can be drawn that the declaration of the dividends and the run down of the business of Eagle Homes has been motivated by a desire to limit the funds available to meet a judgment in favour of LED. It may well be that, if an application such as that presently before me had been brought earlier, relief would have been granted which prevented the declaration of a dividend or the transfer of the business name. I propose to make orders as asked in the notice of motion subject to the inclusion of two further exceptions as follows:
“(a)to enable it to pay and to continue its reasonable costs of defending these proceedings;
(b)to meet its normal accountancy fees and other expenses incurred in relation to the day to day conduct of its business and management of its affairs.”
I propose to order Eagle Homes to pay the costs of the motion against it.
If there were any evidence that the prospective causes of action which have been foreshadowed as being available to Eagle Homes are being prejudiced in any way, it would be appropriate for further relief to be given, for example, the appointment of a receiver. That relief is not presently sought and, on the present evidence, I would not be disposed to make any further orders against Eagle Homes. However, I would be prepared to entertain, on short notice, any further application which LED wished to bring against Eagle Homes if there is evidence that any prospective cause of action is in jeopardy.
I do not consider that, on the material before me, LED has made out a case for Mareva orders against any of the Prospective Respondents. In those circumstances, it is pointless making orders, at this stage, that they be joined as parties to the proceedings. Accordingly, I propose to dismiss the notice of motion for joinder and for Mareva orders against them.
The Prospective Respondents have been successful and costs would normally follow the event. However, I am mindful of the fact that the motion against the Prospective Respondents has been prompted by the conduct of Mr and Mrs Cardile. Accordingly, my inclination would be to make no order as to the costs of that motion. However, I will hear the parties further before deciding the question of costs.
I certify that this and the preceding twenty-four pages
are a true copy of the Reasons for Judgment of
the Honourable Justice Emmett.
Associate:
Date: 25 June 1997
Appearances:
Counsel for the Applicant:
I. M. Jackman
A. Grant
Solicitor for the Applicant:
Speed and Stracey
Counsel for the Respondent:
D.M. Yates
Solicitor for the Respondent:
Castrission & Co
Counsel for the Prospective second third and fourth Respondents:
T. Jucovic QC
D. Hammerschlag
Solicitor for the Prospective second third and fourth Respondents:
Castrission & Co
Dates of Hearing:
11 and 12 June 1997
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