Supercar International Holdings Ltd v Timothy Sommers

[2009] NSWSC 1488

CITATION:	Supercar International Holdings Ltd v Timothy Sommers & anor [2009] NSWSC 1488
HEARING DATE(S):	9 November 2009
JURISDICTION:	Equity Division Expedition List
JUDGMENT OF:	Brereton J
EX TEMPORE JUDGMENT DATE:	9 November 2009
DECISION:	Statement of Claim struck out – freezing order dissolved – report into financial statues of company ordered.
CATCHWORDS:	PROCEDURE – application to strike out Statement of Claim –many defects in pleadings - Statement of Claim struck out with leave to replead. Where plaintiff seeks reconstitution of proceedings so that defendant becomes plaintiff – where not a proper basis to remove plaintiff - INJUNCTIONS - Application for dissolution of freezing order – where prima facie undertaking as to damages is inadequate – where no serious risk of dissipation of property – freezing order dissolved
LEGISLATION CITED:	(CTH) Corporations Act 2001, s 127, s 180, s 181, s 182, s 232 (CTH) Trade Practices Act 1974, s 51AC, s 82, s 87
CATEGORY:	Procedural and other rulings
CASES CITED:	Fexuto v Bosnjack [1998] NSWSC 413 Grace v Grace [2007] NSWSC 6
PARTIES:	Supercar International Holdings Ltd (plaintiff/fifth cross-defendant) Timothy Sommers (first defendant/cross-claimant) Sue Sommers (second defendant/cross-claimant) Nathan Leslie Tinkler (first cross-defendant) Tinkler Group Holdings (second cross-defendant) Peter Dempsey (third cross-defendant) Thomas Richard Todd (fourth cross-defendant) Supercar Club Pty Ltd (sixth cross-defendant)
FILE NUMBER(S):	SC 4304/09
COUNSEL:	D Allen (plaintiff/fifth cross-defendant) D Clarke (defendants/cross-claimants)
SOLICITORS:	Catalyst Legal (plaintiff/fifth cross-defendant) Clamenz Corporate Lawyers (defendants/cross-claimants)

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

BRERETON J

Monday, 9 November 2009

4304/09 Supercar International Holdings Ltd v Timothy Sommers & Anor

JUDGMENT (ex tempore)

1 HIS HONOUR: The plaintiffs, of which the first plaintiff Supercar International Holdings Ltd is the holding company, are a group of companies in which the first defendant Timothy Sommers and the second cross-defendant Tinkler Group Holdings Pty Ltd each control 49 percent of the shareholding. They, or their principal, have fallen out, and the affairs of the companies are thus in disarray. In these proceedings the plaintiffs, at the instigation of the Tinkler Group, sue the defendants, Mr and Mrs Sommers, to recover funds which are said to have been taken by Mr Sommers in breach of his corporate or fiduciary duties as a director and applied to the acquisition of assets in the form of motor vehicles or real property into which it is said that they can now be traced. By a cross-claim, Mr Sommers sues the Tinkler Group, its principal and three of the plaintiffs for moneys which he claims are due to him under a share sale agreement and service agreements entered into between him and the cross-defendants. He also alleges that the affairs of the plaintiffs, and in particular of the first plaintiff, are being conducted in a manner oppressive of or unfairly prejudicial to him, and seeks relief on that account under (CTH) Corporations Act 2001, s 232. By reason of the same essential facts, he complains that the directors of the plaintiffs are acting in contravention of their corporate duties and seeks leave pursuant to Corporations Act, s 237, to bring an action against them under Corporations Act s 180, s 181 and s 182, on behalf of the first plaintiff Supercar International Holdings.

2 Before me are a series of interlocutory applications.

3 I shall deal first with the defendant’s application to strike out the Statement of Claim in part or in whole. For present purposes, I shall treat as the relevant pleading the proposed Amended Statement of Claim which has been proffered to the Court in response to some of the complaints that have been made so far about the pleading.

4 Paragraph 2 of the proposed Amended Statement of Claim alleges that, on 30 December 2008, Supercar International Holdings raised capital in the sum of $1,462,952. It descends to no particularity as to how that capital was raised – whether by a share issue or loan capital or otherwise. This allegation seems to have no connection with any later part of the statement of claim. It does not appear to allege any material fact for the purpose of the causes of action sought to be raised in the proceedings.

5 Paragraph 4 asserts a number of alleged duties of Mr Sommers in his capacity as a director of each of the plaintiff companies. Paragraph 5 contends that those duties were imposed as a result of Mr Sommers being a fiduciary of the plaintiffs by reason of his being a director and officer, or by s 180, s 181 and s 182 of the Corporations Act, or by s 51AC of the (CTH) Trade Practices Act 1974. Section 51AC of the Trade Practices Act imposes no such duty as is alleged. The duty alleged in paragraph 4 (c) is not a duty of a director or officer of a company, but one of the company. The other duties alleged do not accurately state duties of a company director.

6 Paragraph 7 alleges that the plaintiffs have suffered loss and damage “including loss and damage within the meaning of s 82 and s 87 of the Trade Practices Act and s 1317H of the Corporations Act”. It is not apparent how s 82 and s 87 of the Trade Practices Act have any connection with any cause of action maintained in the pleading. Nor does paragraph 7 identify which plaintiff is said to have suffered loss and damage as a result of what failure or contravention or what breach of duty.

7 Paragraph 8 asserts that the moneys allegedly taken by Mr Sommers can be traced into real property owned by the defendants. It does not allege any material fact to support that bare conclusion.

8 Paragraph 9 alleges that the purported service contracts and share purchase contract are not contracts, as they were not executed in accordance with Corporations Act, or Art 15 of the Corporate Constitution.

9 Corporations Act, s 127, provides, by subsection (4), that the section does not limit the ways in which a company may execute a document, including a deed. It follows that the fact that these documents may not have been executed in accordance with Corporations Act, s 127, does not mean that there was no contract.

10 Paragraph 14 alleges a bare conclusion of conversion, without pleading the material facts that would found a cause of action in conversion.

11 Although it is asserted in paragraph 18 that the moneys taken by Mr Sommers can be traced into the real property owned by him and his wife, no other fact is necessary to establish an entitlement to a tracing remedy in respect of property in the hands of Mr and Mrs Sommers has been alleged.

12 In my view the statement of claim is sufficiently defective that the better course is to strike it out in its entirety, and permit the pleader another attempt.

13 The defendants next contend that the proceedings should be reconstituted so that, in effect, the second cross-defendant, the Tinkler Group, becomes the plaintiff, and the corporations become defendants. There is some initial attraction in that course, because there is much to be said for the view that these proceedings are in substance a dispute between the two shareholders. However, that prima facie attraction does not survive analysis. The causes of action sued on by the corporations are causes of action which belong to the corporations and which they (and not their shareholders) are entitled to prosecute. There is, at least at this stage, no challenge to the retainer of those acting for the plaintiff corporations. It may well be oppressive for the plaintiff corporations to fund the action against Mr Sommers; observations about that course have been made by Young CJ in Eq (as his Honour then was) in Fexuto v Bosnjack [1998] NSWSC 413; see also my comments in Grace v Grace [2007] NSWSC 6. Those considerations may ultimately justify some restraint on the incurring of such expenditure by the corporations; but as they are not defending an oppression suit, but pursuing a cause of action of their company, their position might be distinguishable. However, I am satisfied that there is not a proper basis to remove them as plaintiffs and reconstitute the proceedings, since if they have a cause of action, they are entitled to prosecute it.

14 So far as the cross-claim is concerned, although there are some defects in the pleading, there is not presently on foot an application to strike it out. Such an application, were it made, might well enjoy at least some degree of success, for example, without traversing the pleading in full, there are allegations which are plainly embarrassing, such as paragraph 18 which pleads:

It is not clear whether Nathan Tinkler and Thomas Todd have purported to terminate the service agreements ...

15 Paragraph 25 pleads a passive intention, without identifying whose alleged intention it was. I do not suggest that those are the only problems with the pleading, but they are some of them.

16 What is before the Court so far as that pleading is concerned is the cross-claimant’s application under Corporations Act, s 237, for leave to bring the cross-claim on behalf of the first plaintiff Supercar International Holdings. The relief claimed to which this potentially relates are claims 6 and 7, which are as follows:

6 Further, an order that the first and second cross-defendant specifically perform their obligations under the shareholders agreement by:


a paying to the fifth cross-defendant $500,000 forthwith being the sum required to be paid as of 1 July 2009 pursuant to the shareholders agreement; and

b voting for the removal of Peter Dempsey as a director of the fifth cross-defendant and the appointment of another nominee to represent the interests of the cross-claimant.

7 A declaration pursuant to s 1317E of the Corporations Act 2001 that the first, third and/or fourth cross-defendants have breached sections 180, 181 and/or 182 of the Corporations Act 2001.

17 So far as claim 6 is concerned, the cross-claimant is a party to the agreement specific performance of which is sought. Such relief can therefore be claimed by the cross-claimant, without the necessity to obtain leave to bring the proceedings in the name of the fifth cross-defendant/first plaintiff. So far as paragraph 7 is concerned, only ASIC has standing to claim a declaration pursuant to the Corporations Act s 1317E; see section 1317J(1).

18 It may be that some cause of action could be formulated for the benefit of the fifth cross-defendant in respect of which it would be appropriate to grant leave under s 237, but if there is, it is not sufficiently articulated in the present pleading. In particular, although it was suggested that such a claim was to be found in paragraphs 46 to 48 of the cross-claim, there does not appear to be any allegation there of damage to the corporation in respect of which it could be appropriate to make a compensation order in favour of the corporation under s 1315.

19 By their motion, the plaintiffs seek an order that Mr Sommers cause documents in possession of Moneypenny Accountants relating to the plaintiffs to be given to Ernst & Young who have been appointed as an independent experts pursuant to UCPR r 31.17 to prepare a report on the financial position of the plaintiffs, and who in a letter have indicated that documents relevant to their enquiries were prepared by Moneypenny Accountants and have requested that Mr Sommers cause Moneypenny Accountants to provide those documents to them.

20 Mr Sommers has sworn an affidavit on 8 November 2009 in which he deposes that he has not been a personal client of Moneypennys, that each corporate plaintiff company is a client of Moneypennys, and that he is willing to direct Moneypennys to comply with any request for information and that he has no objection to the plaintiffs or the experts obtaining information from Moneypennys or giving instructions to Moneypenny and that, if required, he will produce a written authority to Moneypennys authorising them to deal with the companies in his absence. It seems to me that such an authority will meet the needs of the case.

21 The plaintiffs also seek an order defining the work to be done by the independent expert, who has expressed some uncertainty as to what was meant by the order appointing an independent expert to give a report “as to the financial position of the plaintiffs for the financial years ending 30 June 2008 and 2009 and as at the date of the report”.

22 The plaintiffs propose that the independent accountant report on whether each of the plaintiff companies has been solvent from 1 January 2008, and as to what items or property and what moneys have been applied to or for the benefit of Mr Sommers or any associate of his, what moneys are owing to Mr Sommers if the employment contracts are binding, and the value of the shares in each plaintiff company and the business conducted by each of the plaintiff companies as at three potentially relevant dates. The defendants submit that the independent accountant should conduct a review in the nature of an audit of the books and records of the plaintiffs for the two years in question, in order to establish the voracity of the accounts and fix its financial position as at 30 June for each of those years.

23 At this stage, there is no question in the proceedings requiring valuation of the corporations or their shares, although in the nature of things it may well be that in due course such a question will arise. Nor is there any necessity to determine the value of the shares at any of the earlier dates because, as has been pointed out for the defendants, there was an arm’s length transaction which indicates a value at the time of the agreement in shares by the plaintiffs. Nor does any question of solvency as such arise as an issue at this stage. It may well be that when the pleadings are recast, the issues will be more refined, and it may then become possible to see that some of these issues do require further examination; but it is not presently apparent that they do.

24 However, it is clear enough that clarification of the financial position by a review of the records to obtain certainty would advance the matter on any basis. That does not exclude the prospect that it might be taken further, such as to a valuation, at a later stage. But at this stage I do not see any necessity to proceed to a valuation, or an opinion as to whether or not the companies are or were insolvent. If it becomes necessary to do so, it would be necessary in any event to conduct some review of the documentation at first to determine the accuracy of the accounts before proceeding with the valuation. So, on either approach, I think a review as a first step will not be wasted.

25 The defendants apply for the dissolution of a freezing order initially granted ex parte and then continued by consent in the proceedings. Significant issues so far as the freezing orders are concerned are, first, the adequacy of the plaintiff’s undertaking as to damages. On an examination of the financial position of each of the plaintiffs and the loan accounts between them, it is not apparent that the plaintiffs have the ability to meet an undertaking as to damages; indeed, it seems highly dubious that they would have the ability to do so.

26 Secondly, and to my mind significantly, the continuation of the ex parte injunction was consented to by Mr Sommers on the basis that the plaintiffs would pay him the service fee to which he was entitled under the service agreements. Slattery J in other interlocutory proceedings, has since held that the terms of that agreement were too vague to be enforced. Nonetheless, it is quite clear that the basis of the agreement was that Mr Sommers would be paid something on a periodical basis in respect of the service fees to which the service agreements apparently entitled him. The circumstance that he has not been paid anything in that behalf is a significant change in the circumstances contemplated at the time of his consent to the continuation of the freezing order.

27 Thirdly, the plaintiffs have not really pointed to a real or serious risk of dissipation of property. Their argument has essentially been that, given the limited equity that Mr Sommers has in his real property, it is unlikely that the injunction would cause him much hardship. That, of course, is not the appropriate test. An applicant for a freezing order must show a real risk of dissipation of assets. In circumstances where Mr Sommers has equity in his family home in excess of the amount limited by the injunction, and a modicum of monitoring by the plaintiffs should be able to detect any attempt to sell that property, it seems to me that no real risk of dissipation has been established. A more limited injunction to permit such monitoring will occasion no hardship to the defendants.

28 Accordingly, my orders are:

(1) Order that the statement of claim be struck out with leave to replead.

(2) Direct that the plaintiffs serve any draft amended statement of claim by 16 November 2009.

(3) Order that the defendants’ notice of motion of motion filed on 5 November 2009 be otherwise dismissed.

(4) Dissolve the freezing order contained in paragraph 1 of the orders made on 9 September 2009 with effect forthwith.

(5) Upon the plaintiffs, by their counsel, giving to the court the usual undertakings as to damages, order that until further order the defendants be restrained from alienating or further encumbering their real property situate at and known as XX Abernathy Street, Seaforth in the State of New South Wales, except upon having given 14 days written notice of their intention so to do to the plaintiff’s solicitors, any such notice to specify the nature of, quantum of and parties to the proposed dealing.

29 Upon the plaintiff’s notice of motion filed 6 November 2009 and for the purposes of clarifying order 5(i) of 9 September 2009:

(6) Direct that the report as to the financial position of the plaintiffs for the financial years ending 30 June 2008 and 2009 and as at the date of the report be a review of the balance sheet and profit and loss of each of the companies Supercar International Holdings Limited, the Supercar Club Pty Ltd and TSCCF Pty Ltd for those three periods, to be performed in accordance with the standards applying to review engagements as specified in the applicable Australian Audit and Assurance Standards, including the standards on review engagements; and in addition thereto, as to what items of property and what moneys of each of those companies have been applied to or for the benefit of Mr Sommers or any associate of his during those periods, what moneys are owing to Mr Sommers upon assumption that his service agreements with those companies are valid and binding, what movements have there been in Mr Sommers’ loan account, and what movements have there been of funds between those companies and the Tinkler Group Holdings Pty Ltd holding Pty Ltd.

(7) The plaintiffs’ notice of motion of 6 November 2009 be otherwise dismissed.

30 It seems to me that each party has had a measure of success and a measure of failure, and that each should bear its own costs of the motions of today. I vacate the hearing on 13 November. I will adjourn the proceedings to 10am on 20 November 2009 in the Expedition List before me.

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