Powell v Business Expansion Capital Pty Ltd
[2008] TASSC 26
•2 June 2008
[2008] TASSC 26
CITATION: Powell v Business Expansion Capital Pty Ltd [2008] TASSC 26
PARTIES: POWELL, Stephen
R R & S M POWELL HOLDINGS PTY LTD
R R & S M POWELL PTY LTD
DEVIL DRINKS PTY LTD
MOUNTAIN MAID PTY LTD
ORANGE INVESTMENTS PTY LTD
FOREST MARSH PTY LTDv
BUSINESS EXPANSION CAPITAL PTY LTD
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 315/2008
DELIVERED ON: 2 June 2008
DELIVERED AT: Hobart
HEARING DATE: 24, 29 April, 21, 22, 23, 29, 30 May 2008
JUDGMENT OF: Evans J
CATCHWORDS:
Equity – Equitable remedies – Injunctions – Interlocutory injunctions – Serious question to be tried – Probability of success – Nature of the rights asserted – Conduct of the parties.
Trade Practices Act 1974 (Cth), ss51A, 51AA, 51CA, 52.
Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 72 ALJR 873; A v Hayden (1984) 59 ALJR 1; Castlemaine Tooheys Ltd v South Australia (1986) 67 ALR 553; Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 16; Blundell v Associated Securities Ltd (1971) 19 FLR 17; Forsyth v Blundell (1973) 129 CLR 477; Mainbanner Pty Ltd & Ors v Dadincroft Pty Ltd & Ors (1988) 10 ATPR 40-896; Town and Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (1988) 20 FCR 540; Glandore Pty Ltd v Elders Finance and Investments Co (1984) 67 ALR 186; Harvey v McWaters (1948) 49 SR (NSW) 173; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83, referred to.
Aust Dig Equity [334]
REPRESENTATION:
Counsel:
Applicant: P W Tree SC, N R Readett, K P Bradshaw
Respondent: D J Gunson SC, T J Williams
Solicitors:
Applicant: Clerk Walker
Respondent: Ware & Partners
Judgment Number: [2008] TASSC 26
Number of paragraphs: 42
Serial No 26/2008
File No 315/2008
STEPHEN POWELL, R R & S M POWELL HOLDINGS PTY LTD,
R R & S M POWELL PTY LTD, DEVIL DRINKS PTY LTD,
MOUNTAIN MAID PTY LTD, ORANGE INVESTMENTS PTY LTD and
FOREST MARSH PTY LTD v BUSINESS EXPANSION CAPITAL PTY LTD
REASONS FOR JUDGMENT EVANS J
2 June 2008
The first named plaintiff, Stephen Powell, is the sole director and shareholder of each of the six plaintiff companies. The primary business of the first five companies is the manufacture and sale of fresh fruit juices and soft drink beverages. In these proceedings the companies have been referred to as the "Hartz Group". I will refer to them as Hartz.
On 11 September 2007, each of the plaintiffs accepted a letter of offer dated 10 September 2007 from Michael Gawler, a lawyer acting for and writing on behalf of Business Expansion Capital Pty Ltd ("BE) ("the agreement"). The express terms of the agreement, in brief summary, involve:
·BE paying Hartz $630,000 for stock with a wholesale value of $805,000 ("the BE stock") and Hartz quarantining but rolling over that stock.
·Hartz paying BE $30,000 for legal costs, supervision and an establishment fee, and $10,000 in respect of due diligence.
·Hartz agreeing to pay BE a risk fee of not less than $600,000, that fee becoming due at the latest on 1 September 2008.
·BE supervising Hartz.
·BE being entitled to require the payment of all moneys due to it, including the risk fee, together with all legal and associated collection and enforcement costs in the event of the breach of a term of the agreement.
·Hartz providing BE with security which included charges over the companies.
The last paragraph of the "letter of offer" is as follows:
"The agreement made by your acceptance of this letter of offer is viewed by my client as an interim measure. BE Capital hopes to reach agreement with you for it to take up equity in Hartz Group, if it can arrange a solution to your group's current financial difficulties. It hopes that future agreement can be reached in the near future. I am in discussions with alternative finance providers at present, and we are progressing this as quickly as possible."
After some resistance, consistent with the term in the agreement as to the provision of security, on or after 9 October 2007, two of the plaintiffs, R R & S M Powell Holdings Pty Ltd and R R & S M Powell Pty Ltd, each provided BE with a debenture charge securing its maximum prospective liability to BE ("the debentures") and Forest Marsh Pty Ltd provided BE with a mortgage to secure the payment of an amount of $630,000.
On 1 April 2008, BE appointed the sole director of BE, Rick Leighton and its lawyer Michael Gawler, as joint and several managing controllers of the two companies that had given a mortgage debenture ("the managed companies").
On 23 April 2008, the managing controllers issued a 19 page "Information Memorandum" inviting offers to purchase the assets and business operations of the managed companies. The memorandum specified that the closing date for offers was 9 May 2008; that a deposit of 10 per cent was payable on the execution of the contract; and that full payment of the balance purchase price was to be made by 31 May 2008.
On 23 April 2008, the plaintiffs issued a writ and statement of claim against BE in which they seek:
·rescission of the agreement, or alternatively an order that it be declared void and set aside ab initio;
·an order that the debentures be declared void and set aside ab inito;
·an injunction restraining the defendant from enforcing or in any respect whatsoever seeking to rely upon the agreement and the debentures; and
·damages.
When the plaintiffs issued their writ and statement of claim, they also filed an interlocutory application, seeking an injunction against BE. The terms of the injunction as now sought by the plaintiffs are that until further order BE whether by itself, agent, appointee or howsoever be restrained from selling or purporting to sell the business or any assets other than stock of any or all of the plaintiffs.
The plaintiffs contend that the last paragraph of the letter of offer set out in par3 of these reasons, coupled with other communications between those involved in the negotiations with BE, establish that it was a term of the agreement that BE would continue to negotiate in good faith towards an agreement whereby it would take up equity in Hartz. The plaintiffs assert that in breach of that term, BE refused and failed to negotiate, whether in good faith or at all, towards an agreement whereby it would take up equity. These allegations are denied by BE. This aspect of the plaintiffs' claim is a claim for damages alone. The paragraphs in the plaintiffs' statement of claim, which detail the claims which are the basis for their contention that they are entitled to have the agreement and the debentures rescinded or declared void and set aside ab initio, are as follows:
"6Further or alternatively, on or before 10 September 2007, the defendant by its servant, agent or director Rick Leighton ('Leighton') and its servant, agent, solicitor or attorney, Michael Gawler ('Gawler') represented to the plaintiffs that:-
(a) it was interested in taking up equity in the Hartz Group;
(b)the basis upon which it wished to negotiate towards taking up equity in the Hartz Group was:-
(i)that it would assist in taking the Hartz Group to an Initial Public Offering ('IPO') whereby it would be listed on the Australian Stock Exchange;
(ii)that it would be remunerated by receiving either 50% of the difference between the value of the business as at September 2007 and the value of the company as established at IPO, or $600,000.00, whichever was the greater;
(c)pending agreement as to the defendant taking equity in the Hartz Group, and to facilitate their need for short-term capital, the defendant would provide $600,000.00 for working capital;
(d)if and after the plaintiffs signed the 10 September letter, it would continue to negotiate towards taking up capital in the Hartz Group on the terms which it had intimated to the plaintiffs (as pleaded in para 6(b) hereof);
(collectively 'the representations')
7The representations:-
(a)were made by the defendant in trade and commerce;
(b)were made by the defendant with the intention of inducing the plaintiffs to sign the 10 September letter.
8In reliance upon the representations, the plaintiffs signed the 10 September letter.
9The representations pleaded in paras 6(a), (b) and (d) hereof were misleading and deceptive, or likely to mislead and deceive, in that:-
(a)the defendant was not interested in taking up equity in the Hartz Group in the way therein pleaded; and
(b)if and after the plaintiffs executed the 10 September letter, the defendant did not intend to continue to negotiate in good faith towards it taking up capital in the Hartz Group on the basis pleaded in para 6(b) hereof.
10Further or alternatively, the representations pleaded in paras 6(b) and (d) hereof, were in respect of future matters, and the plaintiffs rely upon s51A of the Trade Practices Act.
11Further or alternatively, at the time that the firstnamed plaintiff, and the Hartz Group by their servant or agent, the firstnamed plaintiff, entered into the agreement: -
(a)the plaintiffs were at a position of special disadvantage as against the defendant in that:-
(i)the firstnamed plaintiff was extremely distraught and emotionally unwell in consequence of the recent tragic death of his wife and eldest son, by virtue of which he had a substantially reduced capacity to properly manage the Hartz Group, whereas the defendant was soundly managed;
(ii)the Hartz Group was in need of an immediate advance of working capital in the sum of about $600,000.00 whereas the defendant was not;
(iii)the defendant was skilled in the advancement of capital for the purposes of business expansion, including the terms upon which such funds might be advanced, whereas the plaintiffs were not.
12The defendant has made unconscientious use of that advantage by:-
(a)proffering the 10 September letter for signing by the plaintiffs, without suggesting that independent legal advice should first be obtained;
(b)proffering the 10 September letter for signing by the plaintiffs without advising them that the agreement was to their substantial disadvantage, and on terms dramatically different to that which could be obtained from alternative credit providers;
(c)proffering the 10 September letter for signing by the plaintiffs without advising them to first obtain independent financial or accounting advice as to the commercial wisdom of doing so.
13In the premises, the agreement is unconscionable in equity, and in procuring the plaintiffs signing of the 10 September letter, and in seeking to rely upon it, the defendant has engaged and is engaging in conduct that is unconscionable, contrary to s51AA and/or s51AC of the Trade Practices Act."
Whilst BE admits some of the matters alleged in these paragraphs, the core matters upon which the plaintiffs rely in order to obtain the relief sought are in dispute.
The interlocutory application seeking an interlocutory injunction was listed for hearing on 24 April 2008. That hearing was adjourned to 29 April 2008 on BE's undertaking to continue to operate the company as a going concern. The hearing on 29 April 2008 did not progress to a conclusion, as on that day, with the co-operation of the parties, a timetable was fixed with a view to the principal action being heard and determined before the finalisation of steps being taken by the managing controllers to sell the business. Initially it was envisaged that the principal action would be ready for trial on 8 May 2008 and that its hearing time would be three days. The parties were not able to advance the hearing of the principal action as quickly as had been anticipated. On 6 May 2008, the hearing date was deferred until 19 May 2008 and the terms of BE's undertaking were changed to an undertaking that until 5pm on 19 May 2008 it will:
"(a)keep the business formerly operated by Powell Holdings Pty Ltd but now operated by the Managing Controllers appointed by BE operating as a going concern to the extent that and for so long as the cashflow generated by the business and funds to the credit of the business bank accounts will reasonably allow without trading while such cashflow and money is insufficient to pay the debts of the business as they fall due;
(b) not sell any assets of the business other than stock."
On 15 May 2008, the date for the commencement of the trial was again deferred, on this occasion until Wednesday 21 May 2008. BE's undertaking was extended until 5pm on Wednesday 21 May 2008. The trial commenced on 21 May 2008 and the undertaking was extended until Monday 26 May 2008 at 5pm. After the trial had progressed for two days, it was obvious that there was no prospect of it being concluded by 5pm on Monday 26 May 2008. As BE was not then prepared to extend its undertaking, the trial of the action was adjourned sine die, and on 23 May 2008, the plaintiffs renewed their application for an interlocutory injunction. At the end of that day BE extended its undertaking until 5pm on Monday 2 June in order that further time could be allocated to the hearing of the interlocutory application. That hearing concluded on 30 May 2008. It is not possible to predict with any certainty when sufficient time will be available to resume and conclude the hearing of the principal action.
In Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57, detailed attention was given to the approach to be taken by a court when considering an application for an interlocutory injunction. Gleeson CJ and Crennan J, at par14, said:
"… in all applications for an interlocutory injunction, a court will ask whether the plaintiff has shown that there is a serious question to be tried as to the plaintiff's entitlement to relief, has shown that the plaintiff is likely to suffer injury for which damages will not be an adequate remedy, and has shown that the balance of convenience favours the granting of an injunction. These are the organising principles, to be applied having regard to the nature and circumstances of the case, under which issues of justice and convenience are addressed. We agree with the explanation of these organising principles in the reasons of Gummow and Hayne JJ, and their reiteration that the doctrine of the Court established in [Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618] should be followed."
In Beecham, a unanimous decision of four members of the High Court, the phrase used to describe the requisite assessment of a plaintiff's claim was not "whether there is a serious question to be tried". In that case, at 622, the requisite enquiry was expressed as being an assessment of "whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is, there is a probability that at a trial of the action the plaintiff will be held entitled to relief".
In O'Neill, Gummow and Hayne JJ, at par65, said that in Beecham the phrase "prima facie case" was not used to mean that the plaintiff must show that it was more probable than not that at trial the plaintiff would succeed, and that it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending trial. At par70 they said there is no objection to the use of the phrase "serious question" if it is understood as conveying the notion that the seriousness of the question, like the strength of the probability referred to in Beecham, depends upon the considerations emphasised in Beecham. At par71, they criticised statements of Lord Diplock in American Cyanamid Co v Ethicon Ltd [1975] AC 396 to the effect that the court would be satisfied that there was a serious question to be tried if satisfied that the plaintiff's claim was not frivolous or vexatious, and they said of them at pars71 and 72 that:
"They obscure the governing consideration that the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.
The second of these matters, the reference to practical consequences, is illustrated by the particular considerations which arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application."
Regardless of whether the phrase used to describe the requisite assessment of the plaintiffs' claim is whether there is "a prima facie case" or whether there is "a serious question to be tried", the approach to be taken to this consideration is as spelt out in O'Neill.For my part, I use the phrase "a serious question to be tried", its use being consistent with the decisions of the High Court in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, pars16 – 17, 53, 64, 66 – 67 and 246, Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia(No 3) (1998) 72 ALJR 873, pars21 and 122, A v Hayden (1984) 59 ALJR 1 at 5, and Castlemaine Tooheys Ltd v South Australia (1986) 67 ALR 553.
Returning to the statement of Gummow and Hayne JJ in O'Neill to the effect that a determination of the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory orders sought, it can be seen from O'Neill that some causes of action, for different reasons, do not lend themselves readily to the grant of interlocutory injunctive relief. In O'Neill, the fact that the right asserted was one which would interfere with the public interest in free speech counted against the grant of relief, see Gleeson CJ and Crennan J at par19, and Gummow and Hayne JJ at pars73 and 85. Another illustration given in O'Neill of a cause of action that does not lend itself readily to the grant of interlocutory injunctive relief, is an application for an interlocutory injunction to restrain the enforcement of a law claimed to be ultra vires on constitutional grounds. In the absence of compelling grounds, it is the duty of the court to defer to the enactment until it is judged ultra vires. See par66. In this case I am conscious that the relief sought by the plaintiffs involves a challenge to the validity of the debentures provided by the companies to BE, and on this basis it is sought to restrain BE from exercising its rights under the debenture. Courts are ordinarily reluctant to restrain the exercise by a mortgagee of a power of sale unless the mortgagor has brought into court the amount due under the mortgage. See Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 164; Blundell v Associated Securities Ltd (1971) 19 FLR 17 at 45 – 46; Forsyth v Blundell (1973) 129 CLR 477 at 505; and Mainbanner Pty Ltd & Ors v Dadincroft Pty Ltd & Ors (1988) 10 ATPR 40-896 at 49663. In this case, whilst the plaintiffs have not brought the amount due under the debentures into court, the defendant presently has an unchallenged third mortgage from Forest Marsh Pty Ltd to secure the repayment of $630,000. I will return to this mortgage later. I am also mindful of authority that the requirement that a mortgagor must bring the amount due under the security into court may be relaxed when the principal proceedings involve an attack upon the enforceability of the security, see Town and Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (1988) 20 FCR 540 at 545; Glandore Pty Ltd v Elders Finance and Investments Co (1984) 67 ALR 186; and Harvey v McWaters (1948) 49 SR (NSW) 173.
Before further addressing the considerations that require my attention, I turn to the evidence. When referring to the evidence, it needs to be emphasised that I am in no position to express a final conclusion on any of the matters to which I refer, and I am not doing so.
In 2002, Hartz acquired Mountain Maid, a company that operated in Batlow, New South Wales, and produced apple juice. Mountain Maid was purchased for about $M1.1. At the time of its purchase, it was in receivership. As local fruit suppliers refused to supply Hartz with product, it was necessary to move the entire Mountain Maid plant from Batlow to Hobart earlier than had been anticipated. The time and costs involved in dismantling the plant, transporting it to Hobart and reinstalling it in Hobart were significantly greater than had been anticipated. The cost of the move is estimated by Mr Powell at $M3.3 to $M3.5. He also said that the need to move the plant prematurely resulted in Hartz foregoing revenue estimated at $M4.5.
Prior to the purchase of Mountain Maid, Hartz banked with the Commonwealth Bank, to whom it owed about $M2. In order to purchase Mountain Maid, Hartz changed its lending bank to Rabobank, from whom it ultimately borrowed between $M6 and $M7. Besides the initial borrowings from Rabobank, funds that went into the Mountain Maid purchase included the proceeds of sale of a warehouse that adjoined the Hartz factory at Prince of Wales Bay, an amount of about $M1.1.
The Mountain Maid purchase was not a financial success. It did not result in any substantial increase in Hartz revenue, but substantially increased its liabilities. Mr Powell says that the end result was that by July 2004, Hartz was sustaining substantial annual trading losses of around $750,000. He says that from time to time Hartz sold assets to repay loans and he realised personal assets worth about $800,000 in order to satisfy financiers and creditors. Capital injections or the like that I can identify include:
·$180,000 raised by financing Mr Powell's previously unencumbered boat through Bennetto & Co. These funds were used to pay the deposit on Mountain Maid.
·$50,000 derived from the sale of a Mercedes Benz owned by the group in May 2004.
·$50,000 raised in May 2007 by financing a previously unencumbered Bentley motor vehicle owned by Mr Powell through Westpac.
· Creely Bay is a property owned by Mr Powell and two others in the Central Highlands. In 2004, Hartz applied to its own use an amount of between $65,000 and $85,000 that was held for the owners of Creely Bay. Hartz was in charge of the bank account and needed the funds. Since that time, Hartz has almost cleared its liability to the Creely Bay owners by the payment of regular instalments.
Rabobank required that Hartz reduce its indebtedness by the payment of regular instalments of principal. Hartz was not able to do this because of its reduced cash flow. Rabobank told Hartz to find another financier and in conjunction with looking for another financier, Hartz sold its factory at Prince of Wales Bay and leased the factory back. Most of the proceeds were applied in reduction of the debt to Rabobank. A consultant accountant, Mr Allister Beaton, had arranged for Rabobank to take over Hartz' finances from the Commonwealth Bank. He and Mr Dennis Bignold, a consultant in financial affairs, assisted Hartz in obtaining finance from the National Australia Bank in October 2006. Mr Powell says that the Rabobank debt having been reduced by the proceeds of sale from the factory, the changeover to the National Australia Bank required a loan of about $M3. At about this time, in order to improve its cash flow, Hartz entered into an invoice factoring arrangement with the National Australia Bank. Pursuant to this arrangement, the National Australia Bank paid Hartz a percentage of the face value of its invoices. Mr Powell said that the amount was "maybe 80%". A difficulty with this arrangement was that although Hartz' customers were instructed to pay the amount due into a designated National Australia Bank account, some customers made payments into Hartz' long-standing Commonwealth Bank account. In June 2007, the National Australia Bank put Hartz under asset management. On 28 June 2007, the National Australia Bank instructed PPB, an accounting business, to conduct a high level investigation and review into the finances of Hartz. The report provided by PPB to the National Australia Bank on 1 August 2007 identified $200,000 that had been wrongly paid into Hartz' Commonwealth Bank account and which had not been forwarded to the National Australia Bank. After receiving the PPB report, the National Australia Bank gave Hartz notice that it required it to find an alternative financier by 1 November 2007.
When, in June 2007, it had become apparent that Hartz needed more funds, Mr Powell engaged Mr Craig Seymour of Focussed Strategy Pty Ltd to prepare an application to the National Australia Bank for further finance totalling about $M1. It was this application that prompted the National Australia Bank to engage PPB to conduct an audit on Hartz. In July 2007, Mr Seymour prepared a due diligence pack for Hartz, to be provided to potential buyers, investors or lenders. On 8 August 2007, R R & S M Powell Holdings Pty Ltd and Mountain Maid Pty Ltd signed an agreement to sell the Hartz business to E Learning Desktop Ventures Inc. On its face, had that agreement been completed, the purchaser would have taken over Hartz' National Australia Bank indebtedness, paid out a lease on a VW Tourag motor vehicle that Mr Powell had the use of, and paid an additional sum of $775,000. This would have left Hartz with a net benefit of about $375,000 after it had cleared liabilities on Mr Powell's boat, Bentley and a Mercedes Benz vehicle used by him. I should say that Mr Powell has a different understanding of the effect of this agreement than appears on its face. The purchaser did not pay the requisite deposit and the agreement was not pursued.
Through Mr Seymour, Mr Powell was introduced to BE. Mr Powell authorised Mr Seymour to negotiate with BE about finance. In an email dated 22 August 2007 from Mr Seymour to Mr Leighton, a proposal is canvassed pursuant to which BE would contribute $600,000, an amount said to be needed to cover Hartz' creditors and immediate needs. The proposal also involved the marketing of the business with the objective of selling it by March 2008. An element of the arrangement was that BE would receive a share of the profit derived from the sale, dependent upon the price. In the course of what then ensued, a letter of offer dated 29 August 2007 was sent by Michael Gawler on behalf of BE to Mr Powell. That offer introduced the proposition that Hartz would pay BE a risk fee of $750,000 if the business was not sold prior to 1 September 2008, and a risk fee of the greater of that amount, and a portion of the sale proceeds calculated in accordance with a formula there specified if the business was sold. By a revised letter of offer dated 1 September 2007, Mr Gawler wrote to Mr Powell. In that letter the amount of the loan was $630,000 and the base risk fee was reduced to $700,000. Before this letter of offer had been accepted, Mr Leighton and Mr Gawler attended on the National Australia Bank in Melbourne seeking an extension of the time within which the bank would allow Hartz to resolve its financial difficulties. The bank refused. Immediately following the meeting, Mr Leighton telephoned Mr Seymour and told him that the bank required full repayment of all the facilities extended to Hartz and Mr Powell by no later than 30 November 2007. (If correct, this was in fact a one month extension of time.) Mr Leighton said that in these circumstances BE could not proceed with any arrangement with Hartz as it was too risky. Mr Seymour told Mr Leighton that Mr Powell was in a state of nervous collapse at the prospect of his company failing and that Hartz required an immediate injection of capital to enable it to pay its outstanding creditors and obtain materials for the manufacture of finished product. Mr Leighton said that he would consider an alternative proposal. Following a conference call involving Mr Leighton, Mr Gawler, Mr Seymour and Mr Powell, it was agreed that Mr Gawler would forward a further letter of offer which incorporated an arrangement that in return for BE's payment of $600,000 it would receive stock. In the resultant letter of offer dated 10 September 2007 forwarded by Mr Gawler to Mr Powell, the base risk fee was specified to be $700,000. At the insistence of Mr Powell, that letter included the last paragraph set out in par3 of these reasons. Mr Powell also altered the base amount of the risk fee from $700,000 to $600,000, and initialled those alterations throughout the letter of offer. It was signed by the plaintiffs on 11 September 2007. On the offer's acceptance, BE provided Hartz with cheques totalling $600,000 made payable to creditors of Hartz that had been identified as requiring immediate payment.
During the period leading up to the signing of the letter of offer, Hartz' financial situation was parlous. Key suppliers, who had not been paid in accordance with their terms of trade, were refusing to supply material and items that were essential for Hartz to continue its operations. On 19 July 2007, Mr Powell advised the preparers of the PPB report of the following pressing trade creditors:
Plasdene Glass-Pak
$324,000
Caled Containers
40,000
Directus Australia
250,000
Tas Fruit Processing Co
34,000
Red labels
40,000
Foot & Playsted
58,000
Amcor Fibre Packaging
39,000
Powerco Tasmania
7,000
Red Eye International
58,000
Total
$850,000
Not all of the above liabilities were outside trading terms. Mr Powell said that at about this time, Hartz had other creditors totalling between $500,000 and $600,000 that were within trading terms. Another creditor that he referred to as pressing was Net Sea Freight, a transport provider that was owed about $25,000. To encourage creditors to continue to supply goods and services, Hartz had informed them that funding would be available by about 1 September 2007. When that funding failed to materialise, supplies stopped. The creditors who refused supply included Directus Australia, who supplied the concentrate used in the production of orange juice, which accounted for about 50 per cent of Hartz' revenue, and Caled Containers and Plasdene Glass-Pak, who provided the glass and plastic containers in which produce was marketed. Mr Powell said that in the absence of supplies, Hartz was in diabolical strife. It is against this background that the letter of offer was signed.
Within a short time of Hartz' execution of the letter of offer on 11 September 2007, relations between Hartz and BE began to sour. A number of the matters that Hartz was required to attend to, pursuant to the agreement, were not done, in part because of the inadequacy of Hartz' accounting system. Mr Leighton says he felt he could not trust Mr Powell and over the night of 2 October 2007, he decided that BE would not put any equity into Hartz, and steps should be taken to obtain the securities that Hartz had agreed to provide. On 4 October 2007, Mr Leighton and Mr Gawler visited Hartz. Mr Powell was told of BE's position and demands were made as to the provision of securities in accordance with the agreement. Hartz resisted providing the requested securities and only agreed to do so on 9 October 2007 when confronted with the reality that BE was taking proceedings against Hartz in the Federal Court.
Pursuant to its agreement with BE, Hartz entered into an arrangement by which its invoices were factored through Bibby Financial Services Australia Pty Ltd ("Bibby"). As with the previous factoring arrangement with the National Australia Bank, some creditors wrongly made payments in relation to accounts that had been factored by Bibby direct to Hartz. Mr Gary McCarthy, the commercial manager of Hartz, calculates this amount at $464,090.67. He says that as at 28 February 2008, the total amount owed to Bibby in respect of money that had been paid to Hartz, that had not been recovered from creditors by Bibby, was $1,387,768. On Bibby becoming aware of the funds that had been wrongly paid direct to Hartz, it ceased making payments to Hartz on 28 February 2008, save for the following amounts which were paid to cover wages:
17 March 2007 $50,000.00
25 March 2007 $31,417.08
31 March 2007 $25,000.00.
Mr McCarthy says that from 28 February 2008, the only source of Hartz' cash flow was from sales outside of the factoring arrangement and daily cash sales. Mr McCarthy says that prior to 28 February 2008, Bibby had not been paying invoices on receipt, but delayed payment until it was satisfied that the invoice had been rendered and the product delivered. As a result, Hartz was never in a position to pay outstanding accounts as they fell due. He would sit down with Mr Powell each Friday and obtain directions on the creditors who were to be paid and how much was to be paid. After 29 February 2008, when Mr Powell resigned as chief executive officer, this process continued with Craig Robinson, the new chief executive officer, directing Mr McCarthy as to the creditors to be paid and how much.
When Craig Robinson took over as chief executive officer of Hartz, he considered there was an urgent need to ascertain the true state of Hartz' finances, and he engaged a specialist financial consultant, Courtney Clowes, to review the financial position of the organisation and the viability and solvency of the group. The Clowes' report is included in a report prepared by Mr Robinson titled "Internal Interim Report on Company Performance and Status". This report was presented to Mr Powell on 17 March 2008. In that report, Mr Robinson records that it is his and Courtney Clowes' opinion that Hartz is, or will become, insolvent in its current form as it does not appear to have the ability of paying creditors as and when debts fall due. Other conclusions expressed in that consolidated report are that:
·Hartz has lost approximately $500,000 during the year to date and the loss is likely to be higher than this.
·Hartz has lost nearly $400,000 in 2004 and $750,000 in 2005.
·Sales were far too low to sustain the levels of overhead production capacity and employees of the business.
·The balance sheet was probably in a desperate situation. The only cash in the business should have been paid to Bibby. Debtors had not been managed carefully. The quality of the debtors' ledger had to be assessed. Bibby had complained that it was overstated and inaccurate, so it was likely that there were either bad debts or unapplied payments that would reduce the total balance.
·That creditors were significant and there was not enough cash to pay them immediately. As with the debtors' ledger, there were data quality issues that needed to be resolved.
On 17 March 2008, Mr Powell and Mr Robinson met with Damien Geason, Hartz' solicitor. Mr Geason says that a matter addressed at the meeting was whether Hartz was insolvent and he said that he had grave concerns that it was insolvent. He was told by Mr Powell that Mr Powell would speak to Mr Geoffrey Schwind of Direct Liquor, a Victorian company, about putting equity into Hartz. In his evidence, Mr Powell said he had been negotiating with Mr Schwind for about six months and that at this time he was in the final stages of negotiating an equity investment from him. He also said that he, Mr Powell, had signed heads of agreement with Direct Liquor. The next day Mr Powell and Mr Robinson had a face to face meeting with Mr Schwind. In an email dated 19 March 2008 in which Mr Robinson reports on the outcome of that meeting to Mr Geason, Mr Robinson says that Mr Schwind had expressed interest in taking an equity stake in Hartz, and that a balance sheet was to be prepared for Mr Schwind's consideration. Mr Robinson said that he told Mr Schwind that "this window of opportunity will only be open for about seven days". Mr Robinson concluded his email to Mr Geason with an enquiry as to where that left Hartz in terms of being able to continue to trade. Mr Geason advised Mr Robinson that trading for a further seven to ten days in order to allow Mr Schwind to decide whether he was going to invest did not cause any significant concerns. He added that after that period, it would be time to make a call on whether Hartz continued to trade. In evidence, he explained that in giving that advice he was influenced by two significant factors:
· one was that the Easter break fell within this period of seven to ten days; and
·the other was that he had been told the plant was effectively net operating, there was no actual production, so debts that could not be paid were not being incurred.
The heads of agreement to which Mr Powell referred were not signed by Direct Liquor. As drawn, they confirmed the intention of Direct Liquor to enter into discussions concerning the possibility of investing in Hartz and taking a controlling interest in Hartz. By them the parties would have agreed that information disclosed by either party was confidential. The heads of agreement seem to be the sort of agreement that the parties would enter into as a preliminary to pursuing serious negotiations. That they were not signed by Direct Liquor suggests that it was not interested in pursuing negotiations. No evidence to the contrary effect from Direct Liquor has been put before me.
As already mentioned, on 1 April 2008, BE appointed Rick Leighton and Michael Gawler as joint and several managing controllers of R R & S M Powell Holdings Pty Ltd and R R & S M Powell Pty Ltd. Mr Leighton said that in order to enable staff and rent to be paid, and essential ingredients to be purchased so as to allow production to recommence, BE advanced about $136,000 to the managing controllers. As to this sum he says in an affidavit sworn on 28 April 2008 that the following amounts have been paid:
"aOn 4 April 2008 the sum of $8,448.00 to Kerry Ingredients in Newtown to purchase materials essential to the manufacture of Hartz product
bOn 5 April 2008 the sum of $40,000 to the trust account of the then company solicitor Butler McIntyre Butler to meet part of the rent liability for the company premises at Prince of Wales Bay
cOn 7 April 2008 the sum of $2,446.09 to John Fairfax Publications in Sydney for the 'Expressions of Interest' advertisement in the Australian Financial Review
dOn 9 April 2008 the sum of $5,081.47 to Caled Containers Pty Ltd in Franklin to purchase material essential to the manufacture of Hartz product
eOn 9 April 2008 the sum of $10,000.00 paid into the Hartz trading account in order for staff wages to be paid for the previous week
fOn 10 April 2008 the sum of $3,223.00 paid to Southland Industries in Moonah to purchase materials essential to the Manufacture of Hartz product
gOn 11 April 2008 the sum of $593.39 paid to Brickwood Holdings Pty Ltd in Cheltenham to purchase materials essential to the manufacture of Hartz product
hOn 16 April 2008 the sum of $4,365.39 to Directus Australia in Sydney to purchase materials essential to the manufacture of Hartz product
iOn 16 April 2008 the sum of $61,990.80 to the trust account of ER Henry, Wherrett & Benjamin Solicitors for the landlord of the company's premises to meet the rental arrears and avoid the landlord taking possession of the premises".
Mr Leighton says that as at 1 April 2008 there was no production at all taking place at the Hartz factory and most of the production staff had been stood down or directed to take leave. In the affidavit referred to, he says that the situation of the business at the control date, 1 April 2008, was as follows:
"aHoldings had trade creditors of approximately $1,615,647 million and no means of paying them.
bAll of the major suppliers of ingredients to Holdings had stopped supplying to it or had placed it on cash on delivery arrangements.
cSome goods which had not been delivered were not delivered because freight had not been paid and carriers were refusing to deal with Holdings any further.
dAll production by Holdings had ceased the week before the control date. The factory was standing idle. Staff had been told to take leave.
eStaff had also been given notice that their employment was to become casual, and that all of them would lose their permanent positions. Several staff have been employed by Holdings for more than twenty years.
fFridge rental contracts for more than 300 fridges essential to the distribution network of Holdings were significantly in arrears and the owners of the fridges were threatening to remove the fridges or to assign their use to Juicy Isle, the direct competitor of Holdings.
gThe distributors responsible for the provision of the majority of the available cash to the company were unpaid, and unable to get stock their customers were demanding. I was informed by Geoff Jones, the principal distributor for the business that he would be unable to continue to be a distributor unless he was paid some of the approximately $40,000 due to him.
hThe principal supermarket customers of the business, being the principal customers of Holdings, were unable to get stock and threatening to discontinue provision of shelf space for it.
iAs at 1 April, when rent for April became due rental on the premises occupied by Holdings was more than $86,000 in arrears.
jManufacturing staff were being paid very low wages, in most cases of approximately $30,000 per year. At the control date, the most important staff member, the production manager, had already resigned and had agreed to take up a position with Juicy Isle. … On the control date the quality insurance officer indicated that he too was resigning and intended to take up a position with Juicy Isle. ... We offered him a higher salary but were unable to persuade him to stay. Some days later, the mixer responsible for making up the ingredients recipes for numerous different products, also indicated that he too was resigning and taking up a position at Juicy Isle at a significantly higher salary.
kPAYG and other taxes were significantly in arrears.
lThe last statutory accounts lodged were for the year ended June 2005."
Mr Leighton says that at the control date Hartz was clearly insolvent and had been trading insolvent for some months.
Besides the claims made by the plaintiffs that are set out in par8 of these reasons, in their statement of claim the plaintiffs initially made a claim that involved an allegation that BE had failed to exercise its powers under the debentures in good faith. That claim has been abandoned. In brief summary, the claims made by the plaintiffs that provide a basis for the relief sought, which in turn provides a basis for the interlocutory injunction sought, are founded on:
·A claim that BE by its representatives made representations that are false and misleading, were likely to be false and misleading, or were representations as to future matters as to which BE could not have reasonable grounds for the representations. Breaches of the Trade Practices Act 1975 (Cth), ss52 and 51A are alleged.
·A claim that when the plaintiffs, by the first plaintiff, signed the letter of offer, they were in a position of special disadvantage as against BE, and that BE conducted itself unconscionably by having the plaintiffs sign the agreement. It is alleged that the agreement is unconscionable in equity and is unconscionable in breach of the Trade Practices Act, ss51AA and 51AC.
Insofar as there is evidence before me which may substantiate a basis for these claims, the plaintiffs have demonstrated the likelihood of success with the claims. However I am dubious about whether the plaintiffs have demonstrated a likelihood that they will obtain the relief they seek, which would in turn warrant the grant of an interlocutory injunction. The only potentially adverse consequence to the plaintiffs from BE's advance of $600,000 pursuant to the agreement, is that the plaintiffs deferred looking elsewhere for an investor or a financier. The aspect of the agreement that is adverse to the plaintiffs is that which relates to BE's entitlement to the risk fee of not less than the $600,000, that is, a 100 per cent return on the advance that was made. It seems that the plaintiffs, by Mr Powell, were aware of the risk fee aspect of the agreement. Nevertheless they took BE's payment of the $600,000 pursuant to the agreement on 11 September 2007, and took no steps to challenge the agreement until 24 April 2008, by which time the managing controllers had been in place for twenty-four days and BE had contributed a further $136,000 in order to keep the business operating. In exercising its power under the Trade Practices Act, s87, to declare the whole or any part of an agreement void ab initio, the Court considers the conduct of the parties after they had knowledge of the fact that provides the basis for their claim for relief. In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 102 – 103, Lockhart J, agreed with by Burchett J said:
"In granting a remedy under s 87, the court is not restricted by the limitations under the general law of a party's right to rescind for breach of contract or misrepresentation. Nevertheless, in exercising its discretion under s 87, the court will consider the conduct of the parties after they had knowledge of the misleading quality of the conduct: Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd(1981) 36 ALR 23, per Northrop J at 60. Such an approach is consistent with that adopted by the Privy Council in Senanayake v Cheng [1966] AC 63 at 83, observing that at general law the questions for the court in determining whether to allow restitution are 'whether restitutio in integrum is substantially possible and whether rescission is timely and just and fair'. On this approach the court must consider all the circumstances before it in the exercise of its discretion.
Equity, of course, allows rescission without requiring that the status quo ante be exactly restored: Alati v Kruger (1955) 94 CLR 216, per Dixon CJ, Webb, Kitto and Taylor JJ at 223–4. The court will be more open to granting rescission at the suit of an innocent party where a contract has been induced by fraud, in order to deny the defendant the benefit of the fraud at the expense of the innocent party: Spence v Crawford [1939] 3 All ER 271 at 288–9, per Lord Wright. It remains that the longer the time elapsed since the agreement, and the more substantial any deterioration in the intervening period as a result of the purchaser's management of the business, the more difficult it will be to secure restitution in a manner which does 'practical justice' between the parties, in the phrase adopted by the majority in Alati v Kruger, supra.
Reliance was placed by counsel for Henjo upon Alati v Kruger (94 CLR 216) as authority supporting the making of the orders for restitution in this case. In that case the High Court affirmed orders of the trial judge allowing rescission although the respondent purchaser had closed down the business and left the leased premises after the hearing and before judgment. The court required compensation by the purchaser as to benefits derived during the period of occupation, including compensation for stock in trade received by the purchaser, and for the use of the premises and other property subject to the contract. Orders for restitution are, of course, discretionary and that decision of the High Court must be read in the light of its own facts, which are very different from the facts of the present case. One notable difference is that the element of delay in prosecution by the innocent party of its cause was not present in Alati v Kruger."
As presently informed, I am dubious about the plaintiffs' prospects of obtaining relief that includes a declaration that the whole of the agreement is void ab initio. I am similarly dubious about the plaintiffs obtaining similar consequential relief in relation to the mortgage debentures.
If the plaintiffs do not obtain the interlocutory injunction they seek, it seems inevitable that BE, by its managing controllers, will proceed to sell Hartz. On one view this would leave the plaintiffs in a position in which the relief they seek in the principal action would not provide them with an adequate remedy. That would be the case if the plaintiffs had the means to maintain and retain Hartz. The evidence suggests that they do not. The thrust of the evidence is that for some time the plaintiffs have recognised that the business had to be sold. Mr Leighton and Phillip Webb, a chartered accountant, estimate the cost of running the business at full capacity at in excess of $150,000 per week, which includes $38,000 per week for rental and wages. Unresolved statutory demands have been made against R R & S M Powell Holdings Pty Ltd, the most recent being one for $112,009.26 from the Deputy Commissioner of Taxation. Mr Webb assesses the total due to the Deputy Commissioner of Taxation at $268,419. Other creditors are pressing for payment. By a letter dated 16 May 2008, Red Eye International Pty Ltd advised that it was taking proceedings to recover $51,157.76. Mr Webb has estimated that the deficiency between the assets and liabilities of R R & S M Powell Holdings Pty Ltd as at 1 April 2008 was $1,118,363. If the plaintiffs do not have the means to maintain and retain Hartz, the difference in the potential outcomes should the interlocutory injunction be refused is not the difference between the plaintiffs keeping Hartz and Hartz being sold, but the difference between a sale of Hartz by the plaintiffs, or a sale at the hands of creditors other than BE, or by BE. As to this difference, if the plaintiffs succeed in their principal action, damages will be an adequate remedy, although it would be difficult to quantify them. As to this consideration, I recognise that the proper test is not whether damages would provide the plaintiffs with an adequate remedy, but rather whether it is just in all the circumstances that the plaintiffs should be confined to this remedy? See StateTtransport Authority v Apex Quarries Ltd [1988] VR 187 at 193. If the plaintiffs establish claims for damages against BE, Mr Leighton and Mr Gawler they should have the means to meet those claims. BE has a net worth of about $M1.3. Mr Gawler and Mr Leighton both gave evidence. The impression that I gained is that they are successful businessmen. They were not questioned about their means or lack of the same.
Mr Powell has given the Court the usual undertaking to pay BE any damages which BE may sustain by reason of the interlocutory injunction, if granted. BE contends that this undertaking is worthless. On behalf of the plaintiffs, it is not contended that Mr Powell has significant funds available to meet any claims that might be made again him. It is put, however, that BE has security from Forest Marsh Pty Ltd which is sufficient to meet any damages BE may suffer by reason of the injunction. Forest Marsh Pty Ltd owns 1,282 hectares of land on six separate titles in the Central Highlands. On 11 September 2007, this land was valued for the National Australia Bank by a certified practising valuer at $980,000. Mr Powell said that he expected to obtain subdivision approval in relation to this property by the end of last month and that this approval would greatly increase the value of the land. In this regard, Mr Powell is supported by the valuer. In his report, he says that potential exists for a significant increase in the property's value if subdivision approval is obtained. I have been told that the property is subject to a mortgage to the National Australia Bank, followed by a mortgage to Bibby, and finally a mortgage to BE to secure $630,000. I am also told that following the completion of the sale of Mr Powell's home on 30 June 2008, the amount payable to the National Australia Bank under its Forest Marsh mortgage will be reduced to $147,000. The evidence before me as to the amount due to Bibby under its security is most unsatisfactory. As I understand it, the difficulty in arriving at that amount arises from difficulties in establishing the amount that rightly or wrongly, as the case may be, has been paid by creditors on invoices to Bibby, Hartz and, to a lesser extent, the National Australia Bank and the managing controllers, and making appropriate adjustments. Linked to this is the difficulty of establishing what amounts Bibby has paid to Hartz in respect of what invoices and what amounts, if any, particular creditors have paid on particular invoices. A difficulty I face in assessing Bibby's claim for costs is that the factoring agreement between Bibby and Hartz was not put into evidence and Mr McCarthy, who gave evidence to the Court in relation to the difficulties of establishing Bibby's entitlement, has never seen that agreement.
On 4 April 2008, Bibby appointed Blair Pleash as receiver/manager of (inter alia) Forest Marsh Pty Ltd. On 9 April, Mr Pleash wrote to Mr Geason advising of his appointment. Mr Geason communicated with Mr Pleash, who told him that Bibby did not believe that the collection of book debts would satisfy Hartz' liability to it and was moving to sell Forest Marsh. He said that he was seeking marketing proposals from three real estate agents. Mr Geason sought details of the amount actually outstanding, and Mr Pleash said that he was unable to provide the details because of disputes in relation to various entitlements.
On 28 May 2008, Mr Leighton had a conversation with a Sonya Armstrong at Bibby in respect of the amount currently due. In summary, the information Mr Leighton was able to provide to the Court arising from that conversation was that Bibby asserts that its loss will be $480,000, plus costs, a total of $650,000. He also said that the managing controllers claimed $56,091 from Bibby for payments that had been wrongly made to Bibby by customers.
On the evidence before me I am most uncertain about the ultimate amount that will be recoverable by Bibby from Hartz. On the following calculation, $183,000 would become available to BE under its security over Forest Marsh:
Value
$980,000
Amount secured to National Australia Bank
$147,000
Amount due to Bibby
$480,000
Costs due to Bibby
$170,000
$797,000
$183,000
The best I can say is that on the information before me there is a reason to expect that to the order of $200,000 will be available to BE upon the sale of Forest Marsh. In addition, from Mr Leighton's conversation with Ms Armstrong, it seems that Bibby will pass back to the managing controllers the benefit of endeavouring to recover debts that have been outstanding for 90 days or more, totalling $313,000.
I refer to some of the other matters that bear on the balance of convenience. There is conflict between the plaintiffs and BE as to which entities own what assets of the business. Real as this conflict is, I give little weight to it from the point of view of deferring a sale by the controlling managers as they are only purporting to sell the assets of the managed companies, and any dispute as to the ownership of assets will not be resolved in the course of the principal proceedings. Insofar as the four trademarks utilised by Hartz are registered to Mountain Maid Pty Ltd and they, with the agreement of Bibby, which has appointed a receiver to Mountain Maid, are included in the sale, this would not be a detriment. Such amount as is attributed to the trademarks would reduce the amount of Bibby's claim and thereby directly or indirectly come back to benefit those entitled to it. Undoubtedly the fact that the parties are in litigation in relation to BE 's entitlement to sell, will, and has, put off potential buyers. However, I consider it significant that the injunction sought is in relation to the sale of a going concern as distinct from a fixed asset such as real estate. It seems to me that delaying a sale may diminish the value of the business, as ongoing uncertainty may cause staff to leave, and gives competitors of Hartz the opportunity to make inroads into its business. To my mind there is something of a contradiction in an order that restrains BE from selling the business but puts pressure on BE to continue its controllership of the business. Whilst I realise that BE could simply walk away from the controllership, I cannot see how this would be a benefit. On the evidence before me it seems that if BE walked away, another creditor would step in and force a sale of the business.
I am not persuaded that the interlocutory injunction should be granted. The interlocutory application is dismissed.
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