Sherman v Oaklands

[2006] NSWSC 1327

CITATION:	Sherman v Oaklands [2006] NSWSC 1327 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	31/10/06
JURISDICTION:	Equity
JUDGMENT OF:	Brereton J
EX TEMPORE JUDGMENT DATE:	10/31/2006
DECISION:	Asset preservation order made
CATCHWORDS:	INJUNCTIONS - Asset preservation orders - against third parties - whether respondent may be liable to contribute to assets of defendant to satisfy judgment if obtained by plaintiff - risk of dissipation - relevant parties - whether payment by respondent to liquidator of defendant should be exempted
LEGISLATION CITED:	Uniform Civil Procedure Rules 2005 (NSW), r 25.14
CASES CITED:	Cardile v LED Builders Pty Limited (1999) 198 CLR 380; 162 ALR 294
PARTIES:	Steven John Sherman and Brian Raymond Silvia in their Capacity as Joint Liquidators of Wedmora Church St, Parramatta Pty Ltd (in Liquidation) ACN 002 497 716 (P1) Wedmora Church St, Parramatta Pty Ltd (in Liquidation) ACN 002 497 716 (P2) Bruce Stewart Oaklands (D1) Geoffrey David McDonald in his Capacity as Liquidator of Wed Property Services Pty Ltd (in Liquidation) ACN 110 357 072 (D2)
FILE NUMBER(S):	SC 4882/06
COUNSEL:	Mr S A Kerr (P) Mr J C Giles (D1)
SOLICITORS:	Clayton Utz (P)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
DUTY LIST

BRERETON J

Tuesday 31 October 2006

4882/06 Stephen John Sherman & Ors v Bruce Oaklands & Ors

JUDGMENT (Ex tempore)

1 HIS HONOUR: The first plaintiffs Stephen John Sherman and Brian Raymond Silva are the liquidators of the second plaintiff Wedmora Church Street Pty Ltd, which was known as Wedmora Pty Limited until 7 November 2005, when it changed its name to Citylink Construction Group Australia Pty Ltd, and then to its present name on 7 June 2006. The first defendant Bruce Stuart Oaklands is the sole director of Wedmora, Daniel Touma having resigned as a director on 19 January 2005 and Julie Touma having resigned on 9 December 2004. The sole shareholder in Wedmora is Citylink Developments Pty Ltd. The liquidators were oringally appointed as voluntary administrators of Wedmora at a creditors meeting on 27 July 2006 in place of Geoffrey David McDonald, who had been appointed voluntary administrator on 20 July 2006.

2 On 3 September 2004, Estate Holdings Pty Ltd, which is the registered proprietor of certain land in Church Street, Parramatta, contracted with Wedmora for the provision of project management and construction services in respect of the design and construction of a building on that land, for a contract price of just under $26 million. Under the contract, progress claims were made by Wedmora, certified by a firm of quantity surveyors Davis Langdon, and paid by Estate Holdings to Wedmora.

3 On 11 April 2006, Estate Holdings paid Wedmora a progress payment of $3,395,000. The cheque was deposited into an account in the name of Citylink Construction Group Australia Pty Ltd, the previous name of Wedmora, at the St George Bank's Five Dock branch, on 13 April 2006. On 19 April 2006, Wedmora drew a cheque on that account for $3,330,000 which, on the present state of the evidence, was probably paid to Citylink Group Pty Ltd, now known as Wed Property Services Pty Ltd, of which the second defendant Geoffrey David McDonald is now the liquidator, and Mr Oaklands was and is the sole director and shareholder.

4 On 12 May 2006, Estate Holdings made a further progress payment to Wedmora of $458,066, which was deposited on 15 May 2006 into the same account of Wedmora at the St George Bank's Five Dock branch. On 15 May 2006, Wedmora drew a cheque on that account for $450,000 which, again on the presently available evidence, was probably paid to Wed Property Services.

5 It appears that, of the $3,800,000 comprised in those two progress payments, only about $500,000 has found its way to sub-contractors in respect of the periods March and April 2006. The liquidators formed the view that the payments made by Wedmora to Wed Property Services may be recoverable, and applied for orders, for the examination of Mr Oaklands, his wife Joslyn Oaklands (also known as Joslyn Khalil), the former directors Mr and Mrs Touma, and also for orders for production addressed to Mr Oaklands, Mr McDonald the liquidator of Wed Property Services and former administrator of Wedmora, and Wedmora's accountants. In addition, the liquidators sought freezing orders, originally against Mr Oaklands and Mr McDonald.

6 On 19 September 2006, I made ex parte freezing orders against Mr Oaklands. I also made the orders for examination and the orders for production which the liquidator sought. I declined to make a freezing order against Mr McDonald. On 21 September, the freezing order against Mr Oaklands was continued by consent until 29 September, and it has since been continued up to and including today, though that is not the matter which presently concerns me.

7 It now appears that the practice of transferring the proceeds of progress payments received by Wedmora from Estate Holdings to Wed Property Services was not of recent origin, at least in March of 2006, but had occurred at least since November 2005. During the period from 7 November 2005 to 10 May 2006, a total $13,223,220 was remitted in this way by Wedmora to Wed Property Services from the proceeds of progress payments made by Estate Holdings to Wedmora.

8 Between 30 November 2005 and 15 May 2006, JBO Holdings Pty Ltd received cheque payments from Wed Property Services totalling $481,506.80. JBO was incorporated on 18 August 2005. Its sole director and shareholder is Mrs Oaklands, and she is also a director of Redline Racing Pty Ltd. Mrs Oaklands was examined before a Registrar on 24 October. In the course of that examination she gave evidence that she had given personal guarantees, to companies which supplied material and labour to Wed Property Services, and that she gave those guarantees at the beginning of January 2005, when work on the Church Street Parramatta job was commencing. She said that JBO was formed on the advice of her accountants for the purpose of receiving a fee for the provision by her of those personal guarantees, and that she negotiated with Mr Oaklands (on behalf of Wed Property Services) a fee of $20,000 per month for provision of the personal guarantees, but that that agreement was never recorded in writing. She said the fee was not paid from January 2005 until August 2005, because Estate Holdings was retaining funds against progress payments during that period, and that thereafter it was paid not on invoice or in any regular manner, but as and when Mr Oaklands found it convenient according to cash flow needs. She said that she had produced tax invoices "three weeks ago" - which must have meant in early October 2006 - on the advice of her accountant, in sums which corresponded with the payments which had been made in the past, and were backdated to correspond with the dates on which those payments had been made. As well as payments made directly to JBO, such invoices were created for payments made by Wed Property Services to third parties, which were used to acquire assets for JBO.

9 Despite requests by the liquidators, no evidence of the personal guarantees to which Mrs Oaklands has referred has been produced. If those guarantees were given in January 2005, it is curious that it was not until August 2005 that JBO was incorporated for the purpose of receiving the fees, and so far as the evidence goes, it seems that the advice to JBO to charge a fee for the personal guarantees, and JBO's decision to do so, was made in or about August 2005. If so, it is seriously arguable that, the personal guarantees having already been given in January 2005 according to Mrs Oaklands' evidence in the examination, there was no consideration for any agreement to pay her a fee for those guarantees when that agreement was apparently made eight months later. Moreover, the retrospective construction of invoices in early October was calculated to give the appearance of regularity to the payments, at a time after these proceedings had been instituted, and savour of an attempt to create a trail of documentary evidence and an appearance of arm's length dealing where one did not exist.

10 The liquidators now apply for freezing orders against Mrs Oaklands and JBO. Although the application was initially made ex parte late last week, it proceeded as a contested interim hearing. An applicant for such an order has to establish, first, a prima facie cause of action against the respondent – or, in the terms of Uniform Civil Procedure Rules 2005 (NSW), r 25.14, a good arguable case on an accrued prospective cause of action justiciable in the Court - and secondly, a danger that, by reason of the respondent absconding or removing itself out of the jurisdiction or disposing of within the jurisdiction or otherwise dealing with its assets, the applicant if ultimately successful will not be able to have a judgment in its favour satisfied – or, in terms of r 25.14, that having regard to the circumstances there is a danger that the prospective judgment will be wholly or partly unsatisfied.

11 In Cardile v LED Builders Pty Limited (1999) 198 CLR 380; 162 ALR 294, the High Court discussed the circumstances in which an asset preservation order may properly be made against a third party, as distinct from the defendant or proposed defendant in proceedings, and identified two such circumstances. The first is where the third party held, or had a power of disposition over, assets of the potential judgment debtor. The second was where there was some process ultimately enforceable by the potential judgment creditor, as a consequence of obtaining a judgment, by which the third party might be compelled to contribute to the judgment debtor to help satisfy the judgment.

12 The basis upon which the original freezing order was granted against Mr Oaklands was that while he was the sole director of Wedmora, payments were made by Wedmora to Wed Property Services of which he was also the sole director and shareholder, when there was no apparent obligation to make such payments, and when creditors of Wedmora were left unpaid, which gave rise to a seriously arguable case that he had committed a breach of his director's duties, so that damages or compensation for breach of fiduciary duty might be recoverable against Mr Oaklands.

13 In addition, if the payments were received by Wed Property Services with notice of such a breach - and given that Mr Oaklands was sole director and shareholder of Wed Property Services, it was seriously arguable that Wed Property Services would have notice of any breach by Mr Oaklands - those payments might well be recoverable by Wedmora from Wed Property Services. The basis on which the proceeds of the progress payments were remitted to Wed Property Services remains unclear. Mr McDonald, the liquidator of the Wed Property Services, has suggested that its affairs are somewhat independent of the affairs of Wedmora - a proposition which, at first sight, suffers from the difficulty that the sole director of Wedmora is also the sole director and shareholder of Wed Property Services. But Mr McDonald goes on to suggest that the history of the Church Street building project is that originally Mr Touma had negotiated to carry out the work; that when the contract appeared to have been won, Mr Oaklands took over Wedmora and he formed the building contract, but discovered that Mr Touma had left behind a number of unpaid accounts, which meant Wedmora could not get credit to carry out the project; as a result of which, so it is said, Mr Oaklands used Citylink Group, now Wed Property Services, and Citylink Developments, to obtain credit and carry out the project "as a principal sub-contractor to Wedmora Church Street". Other than Mr McDonald's assertion to this effect in email correspondence, there is no evidence to lend any weight to it before the Court, although Mr McDonald asserts that it is a plausible explanation for the way in which the group was set up.

14 To my mind it remains the case that Wedmora has, for present purposes, a good arguable case that it is entitled to recover, as payments made in breach of its sole director's duty and received with notice of the breach by Wed Property Services, the progress payment preceeds remitted to Wed Property Services. Alternative bases on which those payments might be recovered by Wedmora include that they were, or were pursuant to, a related company transaction or an uncommercial transaction.

15 Even if Mr McDonald's suggestion be correct, it does not follow that Wed Property Services was a sub-contractor of Wedmora, as distinct from an agent for the purpose of retaining and paying sub-contractors. While a relationship of the type suggested by Mr McDonald might strengthen Wed Property Services' position in respect of payments received by it which it paid on to sub-contractors, the present state of the evidence is that JBO was not a sub-contractor, and payments were made to it as a matter of convenience when funds were available, rather than pursuant to any obligation to make periodical payments. Payments made to Wed Property Services, to the extent they exceeded what was required to pay the sub-contractors, would still be vulnerable to recovery by Wedmora; at least, that is seriously arguably so.

16 So far as the payments made by Wed Property Services to JBO are concerned, I have already adverted to what appears to be a seriously arguable case that there was no true consideration for those payments. As Wed Property Services is itself now in liquidation, there is also a seriously arguable case that payments made in those circumstances to JBO are liable to be recovered by Wed Property Services as a related company transaction or as an uncommercial transaction. On that basis JBO may be obliged to contribute to the property of Wed Property Services, by refunding the payments it has recovered, so as to help Wed Property Services satisfy any judgment which may be obtained against it by Wedmora. It is, at this stage, at least arguable that the payments to JBO are liable to be declared void against the liquidator of Wed Property Services as uncommercial.

17 There are other bases on which a claim might be sustained by Wedmora directly against JBO, in particular as the voluntary, if not knowing, recipient of funds paid in breach of fiduciary duty - voluntary because, as I have said, there is a seriously arguable case that there was no consideration moving from Mrs Oaklands or JBO.

18 It follows that, in my opinion, Wedmora (or its liquidators) have a good arguable case against Wed Property Services to recover payments made to Wed Property Services, at least to the extent of the on-payments to JBO, and that JBO may be obliged to contribute to the assets of Wed Property Services to help satisfy a potential judgment in favour of Wedmora against Wed Property Services.

19 I turn then to the question of the risk of dissipation. Generally, this requires an applicant to show a more than usual risk of dissipation, and to be able to point to evidence rather than mere supposition to do so [Frigo v Culhaci]. That the assessment of the risk of dissipation involves the Court in making what is, in substance, a commercial judgment of the degree of risk, based on all the available information.

20 The following factors are material in the present case. First, the opportunistic nature of the payments made to JBO. This is so in at least two respects: if Mrs Oaklands' version, that the payments were consideration for her provision of personal guarantees, be correct, it is curious that those payments were made not to her but to a corporate structure; and, more significantly, their opportunistic nature is characterised by the circumstance that they were made as and when Mr Oaklands found it convenient from a cash flow perspective, rather than as and when any such obligation fell due.

21 Secondly, the absence of evidence of the personal guarantees, despite requests that they be provided. Thirdly, the retrospective creation of a documentary trail to give verisimilitude to the regularity of the payments. Fourthly, that what is claimed in this case is the preservation of an asset, formerly of Wedmora and now transmitted through Wed Property Services to JBO, in the hands of JBO, rather than a freezing of all of the assets of a respondent pending resolution of a disputed claim for unliquidated damages.

22 Fifthly, the coincidence of the establishment of JBO with the initial signs of the onset of insolvency. Mr Giles has pointed to the circumstance that since April 2006 only limited - and in the scheme of things, insignificant payments - were made to JBO. This is correct: by far the largest sums - the overwhelming proportion - of what was paid to JBO was paid earlier, in or about January 2006. But in this respect, it is particularly significant that the establishment of JBO for the purposes of receiving these funds and the payments to JBO coincide with the first signs of insolvency. Of the presently known creditors of Wedmora, which have submitted claims totalling some $2.848 million, the longest outstanding dates from 30 September 2005, and while that is only a relatively small debt of just under $20,000, another debt of more than $200,000 dates from 16 December 2005, those being the due dates for payment of those debts. In those circumstances, I am unable to see that any particular significance attends the fact that only limited payments were made in the last couple of months before appointment of a voluntary administrator.

23 Taken together, those matters satisfy me that in this case there is a more than usual risk of dissipation, sufficient to warrant the grant of Mareva relief.

24 As to the terms of the proposed freezing orders, Mr Giles submitted that proposed provision of $15,000 for legal fees was insufficient. At this stage, as I understand it, what is proposed is a freezing order until 10 November or thereabouts, when the matter will be revisited, this being only an interim application. It seems to me that $15,000 is sufficient for that period. In any event, the order reserves leave to the respondent to apply to vary, and if there were evidence of a requirement for provision for legal fees in excess of that sum, the Court would, in accordance with its usual practice, be very much inclined to accede to such an application.

25 Mr Giles has also referred to the potential impact of the freezing order on the position of Mr McDonald as liquidator of Wed Property Services. Mr McDonald has indicated that, having commenced investigations into the disbursement of funds by Wed Property Services, he has commenced the process for issuing demands on creditors for the repayment of void transactions, and that one of the creditors that will be receiving such a demand is JBO, for a net amount of $397,100. This, no doubt, substantially overlaps with the $482,000, the subject of Wedmora's claim. In my view, the order should expressly exempt from its reach, so as to permit, payments to be made to Mr McDonald in his capacity as liquidator of Wed Property Services pursuant to any demands made by him.

26 Other observations which Mr Giles made as to the proposed form of order have largely been accommodated. It is agreed that the order should be limited to $500,000, and that the orders for disclosure of information against persons in respect of whom there are to be examinations are not required.

27 I am not persuaded, and I did not understand Mr Kerr to firmly press, that there are grounds for a freezing order against Mrs Oaklands as distinct from against JBO. It is tolerably clear that the proceeds of the potentially disputed transactions are in the hands of JBO, not Mrs Oaklands.

28 Upon the plaintiffs by their counsel giving to the Court the usual undertaking as to damages, I make a freezing order against JBO Holdings Pty Limited ACN 115837502 until 5pm on 13 November 2006, in the terms of the draft freezing order attached to the interlocutory process filed on 27 October 2006 and marked Annexure A, subject to the following amendments:

(1) The insertion in the blanks in the preamble of "31 October 2007", and my name;

(2) The insertion in order 2 of the matter "13 November 2006" and "10am".

(3) The substitution in order 6(a) and 12(a)(i) of the matter "$500,000" for the matter "$5,500,000".

(4) The deletion of paragraphs 8, 9.1 and 9.2;

(5) The insertion in paragraph 10 of an additional sub-paragraph: "(e) paying to Geoffrey David McDonald, in his capacity as liquidator of Wed Property Services Pty Ltd (in liquidation), any sum up to the amount of any claim made by him in that capacity against you”.

29 I order that costs of the application be the plaintiff's costs in the proceedings.

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05/12/2006 - Insert "Brereton J" into field: Judgement of. - Paragraph(s) Initial field