Oriti, A.L. v Melcross Clothing P/L

ANTHONY LEO ORITI AND MELCROSS PTY LTD v. MELCROSS CLOTHING PTY LTD, DOV
PANETH, RON PANETH, DAVID ROBERT PANTHER, CLOUD NINE PROPERTIES PTY LTD,
SANDOR PANETH AND ERNO PANETH
No. VG221 of 1994
FED No. 555/94
Number of pages - 9
Interlocutory Injunction

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
BRANSON J

CATCHWORDS

Interlocutory Injunction - preservation of property (stock-in-trade) - whether to prevent a respondent from disposing of assets - validity/propriety of sale of business - validity of removal of director.

Federal Court Rules O25 rr2 and 3

Nippon Yusen Kaisha v. Karageorgis (1975) 3 All ER 282
Jackson v. Sterling Industries Ltd (1987) 162 CLR 612
Hortico (Australia) Pty Ltd v. Energy Equipment Co Pty Ltd(1985) 1 NSWLR 545
Devlin v. Collins (1984) 37 SASR 98
J D Barry Pty Ltd v. M and E Constructions Pty Ltd (1978) VR 185

HEARING

MELBOURNE, 4 August 1994
#DATE 10:8:1994

Counsel for the Applicants: Mr I Jones

Solicitors for the Applicants: Pryles and Defteros

Counsel for the Respondents: Mr A Swanwick

Solicitors for the Respondents: McMahon Fearnley

ORDER

THE COURT ORDERS THAT:

1. The first respondent provide to the second applicant during normal business hours and upon reasonable notice at any time until the hearing and determination of this proceeding or further order the right to inspect and (upon payment of $0.30 per page) to photocopy:

(i) all books of account and records of the Melcross Unit Trust, and

(ii) all books of account and records of the first respondent insofar as they relate to the performance of purported performance by the first respondent of its role as Trustee of the Melcross Unit Trust - including but not limited to the following documents:

(a) bank statements, cheque butts and pay-in-books;

(b) receipts and payments journals;

(c) bank reconciliations;

(d) shipping and title documents including bills of lading;

(e) financing documents including those relating to letters of credit;

(f) documents evidencing the importation warehousing and sale of goods by the first respondent and/or the Melcross Unit Trust from China to Melbourne in the period from 1 November 1993 to the present ("the said goods") including receipts, invoices, and dockets.

2. The respondents be restrained until further order of this Court from giving up custody or power of any document of or relating to any business of the first respondent or of the business the subject of the Deed made 1 July 1994 between the first respondent and the fifth respondent ("the said Deed").

3. The first and fifth respondents each cause to be kept and maintained at all times until the hearing and determination of this proceeding full and proper records and accounts disclosing the detail of all dealings by it or them with any or all of the assets the subject of the said Deed or referred to in the Schedule annexed to the said Deed (including but not limited to the stock-in-trade referred to in the said Deed, and including details of any other assets acquired by it or them wholly or partly from the proceeds of sale or disposition of the assets referred to in the said Deed) such records to cover the period from 1 July 1994 until the hearing and determination of this proceeding or further order of this Court.

4. The orders contained in paragraphs 5 and 6 of the order of The Honourble Mr Justice Jenkinson made on 28 July 1994 be discharged.

5. The costs of the argument in respect of interlocutory orders be reserved to the trial judge.

JUDGE1

BRANSON J The applicants seek interlocutory relief in this matter. First they seek inspection of the books of account and other records of the first respondent Melcross Clothing Pty Ltd. The respondents have no objection to the applicants having reasonable rights of inspection of such records and have agreed to provide copies as requested upon payment of the photocopying costs.

In addition the applicants seek the following orders:-

"2. That each of the Respondents be restrained until further order from whether by themselves or through their servants or agents or any of them, or otherwise howsoever, removing from the jurisdiction of this Court or otherwise transferring, dealing with, or disposing of any part of the consideration received by any of them from a sale of any of the stock in trade sold to the Respondent Cloud Nine Properties Pty Ltd under the Deed made 1 July 1994 which is exhibit No. 2 in the claim for interlocutory relief.

3. That each of the Respondents be restrained until further order from whether by themselves or through their servants or agents or any of them, or otherwise howsoever, transferring, dealing with, or disposing of any of the stock in trade sold to the Respondent Cloud Nine Properties Pty Ltd under the Deed made 1 July 1994 which is exhibit No. 2 in the claim for interlocutory relief."

Counsel helpfully provided to me at the commencement of the argument concerning this claim for interlocutory relief a document in the following terms:-

"BACKGROUND and SUMMARY

of proceeding to date

A business was established to manufacture clothing in China and import it into Australia for sale. The corporate vehicle was a Unit Trust of which the First Respondent was Trustee. The unit holders were the Second Applicant and the Second Third and Fourth Respondents, and the directors of the trustee were the First Applicant and the Second Third and Fourth Respondents. There was a falling-out between the four directors and the Second Third and Fourth Defendants caused the First Applicant to be removed as a director. There is a substantial dispute as to whether he was properly removed.

The remaining directors arranged for the importation of the first lot of clothing into Australia. Most of that clothing remains unsold. The trustee had borrowed heavily for the purposes of the business. In late June 1994 the directors defaulted on repayment to their bank. They say that they were unwilling to continue trading while insolvent and so resolved to sell the business to another company. That motive is disputed by the Applicants who allege that the sale of the business was part of a strategy to defraud him and deny him his entitlements to the fruits of the business. Be that as it may the business was sold the Fifth Respondent (the Sixth and Seventh Respondents being the directors of the Fifth Respondent, and also being the father and uncle respectively of the Second and Third Respondents). The sale was for a consideration being the taking over by the purchase of effectively all the liabilities of the business, and the purchase at cost price of the clothing being the stock in trade. Goodwill was to be purchased at a price to be determined by an independent valuation. That valuation has been completed and values the goodwill at Nil value. The Applicants maintain that they have been deliberately and wrongfully excluded from the business, and that the sale of the business is fraudulent and a sham and is designed to transfer the benefits of the business to persons associated with the Second the Third Respondents. The remaining Respondents are alleged to have acted in concert in this fraudulent endeavour. Any suggestion of improper motive or behaviour is strenuously denied by all of the Respondents. The stock-in-trade remains substantially unsold. The Applicants seek either to prevent its sale or to freeze the proceeds of sale pending determination of this proceeding. They seek principal relief in a range of measures in effect asserting that they are entitled to share in the proceeds of sale of the stock-in-trade and seeking damages for wrongful exclusion from the business.

All parties are agreed that the stock will diminish in value quite swiftly unless it is sold. The Applicant maintains that it's true value is substantially higher than cost price, and that the sale of it to the Fifth respondent at cost price was fraudulent. The Respondents maintain that the sale at cost price was necessary in order to avoid the business further defaulting to its bankers and creditors and exposing its directors to the penalties for trading while insolvent."

The only aspect of the content of the above document said to be in dispute between the parties was the sentence: "All parties are agreed that the stock will diminish in value quite swiftly unless it is sold." The applicants contend that the stock is partly winter stock and partly summer stock and "would be sold over one year to maximise its value." I conclude from this that at least some of the stock may need to be sold promptly to maximise its value. I note further that the first applicant in his affidavit sworn on 27 July 1994 deposed to the fact that "(u)nless the goods are sold soon, the stock, due to changes in taste and fashion, will quickly become worthless."
The first respondent is trustee of a unit trust of which the second applicant, along with the second, third and fourth respondents, is a unit holder. Pursuant to the Deed creating the unit trust each unit holder holds a beneficial interest in an undivided part of the trust fund. It is not contested that the clothing imported into Australia from China initially fell within the definition of the "Trust Fund" in the Deed.
The Deed gives to the trustee wide powers, including wide powers to carry on "any business which the Trustee may determine is desirable to be commenced acquired or carried on in the interests of the Trust Fund or the Unit Holders." The trustee is further empowered "to sell alienate or otherwise dispose of any property at any time forming part of the Trust Fund in such manner by public or private treaty and for such price in money or other consideration and in such conditions as the Trustee may in its discretion determine."
I can find nothing in the Deed to support the submission made on behalf of the applicants that the trustee was required to consult with unit holders before disposing of the business which is the subject of the Deed made on 1 July 1994 whereby the fifth respondent purchased the menswear clothing business of the first respondent.
The applicants, however, challenge the propriety of the sale on other grounds. They point out that the directors of the fifth respondent, the purchaser under the Deed, are the father and uncle respectively of the second and third respondents. The applicants contend that the sale was not negotiated at arms length and that the price negotiated and paid did not reflect the true value of the business sold. The applicants further contend that the trust property has been dealt with in circumstances amounting to a fraud on the applicants, or one of them, and that the second, third and fourth respondents thereby acted in breach of their duties as directors of the first respondent under section 232 of the Corporations Law.
Against this background the applicants put their claim for interlocutory relief on three bases. First they invoke Order 25 rule 2 of the Federal Court Rules which gives the Court a discretionary power to make orders for the detention, custody, preservation or inspection of property. Secondly they seek to invoke the principles which lie behind "Mareva" injunctions (see Nippon Yusen Kaisha v. Karageorgis (1975) 3 All ER 282); Jackson v. Sterling Industries Ltd. (1987) 162 CLR 612.) That is, they assert that there is a serious risk that the respondents, or some of them, may dissipate the proceeds of the sale of the stock in trade purportedly sold to the fifth respondent by the Deed of 1 July 1994 and that as a consequence the applicants may be unable to satisfy any judgment that they might obtain against the respondents. Thirdly the applicants invoke the ordinary principles governing the grant of injunctive relief.
I do not consider this to be an appropriate case for the making of an order under Order 25 rule 2 of the Federal Court Rules. The stock-in-trade purportedly sold to the fifth respondent by the first respondent is mens clothing which the first respondent caused to be manufactured in China for the purpose of sale in Australia at a profit. It is not suggested to be in any way unique, nor do the applicants have any peculiar interest in the stock-in-trade not shared by other parties. The second applicant claims a proprietary interest in the stock-in-trade as part of the Trust Fund of the Melcross Unit Trust. However, even assuming that the stock-in-trade remains part of the Trust Fund, it represents an investment intended to be realised for profit. I accept that significant delay in its sale may adversely affect its value. In the circumstances I consider that it is more appropriate for the stock-in-trade to be sold than to be preserved.
The applicants submitted that if the Court were of the view that it was appropriate for the stock-in-trade to be sold, it would be appropriate for the Court to make an order pursuant to Order 25 rule 3 of the Federal Court Rules for its sale. However nothing was put before the Court as to the appropriate manner of any such sale or as to appropriate terms for any such sale. The affidavit of the first applicant sworn on 27 July 1994 indicates that relevant skill, expertise, experience and industry contacts would be needed to sell the stock-in-trade in a way which would realise its asserted value. In the circumstances I conclude that it would be inappropriate to order a Court controlled sale.
The applicants further seek an order restraining the respondents or any of them from removing from the jurisdiction of the Court or otherwise transferring, dealing with or disposing of any part of the consideration received by any of them from a sale of any of the stock-in-trade sold to the fifth respondent under the Deed of 1 July 1994. I accept that this Court has a general interlocutory power to make orders preventing a respondent from disposing of assets so as to defeat any judgment obtained in an action: such power is part of the armory of the Court to prevent the abuse or frustration of its process (see Jackson v. Sterling (1987) 162 CLR 612 esp. per Deane J at p 464).
However such orders are an exceptional remedy and should not be lightly granted (Hortico (Australia) Pty Ltd v. Energy Equipment Co Pty Ltd (1985) 1 NSWLR 545). It must be shown that there is a real risk that the respondents might dispose of assets other than in the ordinary course of business, or take them out of the reach of execution before the applicants can obtain a judgment and execute it (Devlin v. Collins (1984) 37 SASR 98; Jackson v. Sterling Industries (1987) 162 CLR 612; J D Barry Pty Ltd v. M and E Constructions Pty Ltd (1978) VR 185).
The applicants, as I understand the submissions put to me, invite the Court to conclude that the conduct of the respondents to date is such that the risk may reasonably be assumed to exist.
The applicants point first to the removal, as they assert improperly, of the first applicant as a director of the first respondent, and the subsequent sale by the first respondent of the Melcross Clothing business to the fifth respondent - a company controlled by relatives of the second and third respondent.
The respondents assert in answer to the picture drawn by the first respondents that notice of the meeting called to remove the first applicant as a director of the first respondent was posted to him. This issue will have to be resolved at trial. The counter assertions are not of themselves sufficient to support a finding that there is a real risk that the respondents might dispose of assets in circumstances that would amount to an abuse or frustration of the Court's process.
The respondents assert further that the first respondent was experiencing difficulties in making payments to its trade creditors and by June 1994 it became evident that it would not be able to meet its obligations to its banker to make payment of $25,000 by 30 June 1994 and $45,000 by 31 July 1994. They say that they concluded that the company could not be allowed to continue to trade whilst insolvent. The respondents further depose to significant efforts made between April and June 1994 to sell the stock-in-trade which efforts proved unsuccessful.
The obligations of the first respondent to its banker was secured by a registered mortgage debenture over the whole of the assets of the first respondent, and also by guarantees and indemnities given by, amongst others, the second, third, fourth, and seventh respondents supported by registered mortgages over the homes of such respondents.
The fourth respondent resigned as a director of the first respondent on 29 June 1994. On 30 June 1994 the first respondent defaulted on the payment of $25,000 to its banker.
The affidavits filed on behalf of the respondents depose to the first respondent approaching the fifth respondent on or about 30 June 1994 seeking funding. Such funding was refused but out of such discussions it is said emerged the proposal for the fifth respondent to purchase the business of the first respondent. This proposal was put into effect by execution of the Deed of 1 July 1994. By such Deed the fifth respondent acquired both the assets and the liabilities of the first respondent. Such liabilities are shown by the Deed to comprise:-

. trade creditors totalling $51,304;

. loan of US $120,963.20 owing to the National Australia Bank; . unsecured loans from Dov Paneth to the maximum of $370,000.

The consideration under the Deed is expressed as follows:-

"THE consideration for the aforesaid is the greater of

(a) TWO THOUSAND DOLLARS ($2,000-00) or

(b) The Valuation of the business

referred to in Clause 2."

Clause 2 of the Deed provides for a valuation of the business as at the close of Trade on 30 June 1994 to be prepared by Crests Pty Ltd., Certified Practising Accountants.
The valuation undertaken by Crests Pty Ltd is in evidence. It ascribes a nil value to the goodwill of the business. In the circumstances it is not surprising that this valuation has not been seriously challenged. What is challenged by the applicants is the use of the book or cost value of the stock-in-trade to calculate the net asset (excluding goodwill) position of the business as at 30 June 1994. Such book value is accepted to have been $578,075.49. In addition it is accepted that a further $143,309.96 would be required to clear the stock-in-trade from customers.
I do not consider that it would be appropriate at this stage of the proceedings for me to evaluate the competing evidence placed before the Court as to the correct value of the stock-in-trade under various circumstances.
However, having considered such evidence, I am not satisfied that the terms of the sale of the business of the first respondent to the fifth respondent are such as necessarily to support a conclusion that the stock-in-trade was sold at a clear undervalue having regard to all of the circumstances. I am therefore unable to conclude that there is any evidence of a real risk that the respondents might dispose of assets other than in the ordinary course of business and take such assets out of the reach of execution before the applicants can obtain a judgment and execute it. I am of this view whether the terms of the sale are viewed alone or together with the allegations made by the applicants with respect to the removal of the first applicant as a director of the first respondent.

I point out that the applicants also sought to challenge the alleged unsecured loan from Dov Paneth. The respondents' case is that the actual unsecured loan was an amount in excess of $370,000. The applicants have not pointed to other resources of the first respondent which might have been utilised in the running of the business. On the evidence before me I am unable to conclude that there is a serious issue as to whether this aspect of the sale of the business was a fraud on the applicants.
Finally the applicants seek an injunction restraining the respondents from disposing of any of the stock-in-trade sold under the Deed of 1 July 1994.
I accept that there are serious questions to be tried between the parties as to the validity of the removal of the first applicant as a director of the first respondent, and as to the validity and/or propriety of the sale of the business of the first respondent pursuant to the Deed of 1 July 1994.
It may be, although the point was not argued before me, that the applicants need not demonstrate that they will suffer irreparable injury for which they could not be compensated in damages if an injunction is not granted (see Meagher Gummow Lehane 7th Ed para 2168). I do not consider it necessary to deal with this question as in my view the balance of convenience does not support the grant of the injunction sought.
In considering the balance of convenience I have taken into account the fact that damages will be an adequate remedy for significant aspects of the applicants' claim.
Evidence has not been placed before the Court as to the likely impact on the respondents, or any of them, of an injunction in the terms sought. However the evidence does show that the fifth respondent in acquiring the business of the first respondent took over its liabilities including liabilities to trade creditors and to the National Australia Bank. To restrain the fifth respondent from disposing of any of the stock-in-trade whilst leaving it responsible for such liabilities would seem harsh. Moreover I take into account the fact that the interest of the applicants in the stock-in-trade arises through the second respondents's holding of 25% of the units in the Melcross Unit Trust. The remaining 75% interest is held by the second, third and fourth respondents. I have also taken into account the fact that material placed before the Court by the affidavit of Dean Andrew Beveridge sworn on 4 August 1994 raises serious questions as to the ability of either of the applicants to give any meaningful undertaking as to damages.
In the circumstances I propose to:-

(a) order the first respondent to provide to the second applicant reasonable rights of inspection of the books of account and other records of the first respondent, including the books of account and other records of the Melcross Unit Trust;

(b) order the fifth respondent to maintain a full account of all dealings by it between 1 July 1994 and the hearing and determination of this matter with the stock-in-trade and other assets acquired by it pursuant to the Deed of 1 July 1994.

(c) continue until the hearing and determination of this matter the order contained in paragraph 5 of the order of Jenkinson J made on 28 July 1994.

I do not propose to make orders in terms of paragraphs 2 and 3 of the Minutes of Order handed to me on 4 August 1994.
The costs of this application will be reserved to the trial judge.

[1994] FCA 555

10 AUGUST 1994