Tri Commercial Furniture Pty Ltd v Smith
[2000] NSWSC 1135
•24 November 2000
CITATION: Tri Commercial Furniture Pty Ltd v Smith [2000] NSWSC 1135 CURRENT JURISDICTION: Equity FILE NUMBER(S): SC 1394/98 HEARING DATE(S): 22 - 24 November 2000 JUDGMENT DATE: 24 November 2000 PARTIES :
Tri Commercial Furniture Pty Ltd (P1 & XD)
Lynntama Pty Limited (P2)
Sylvandale Pty Ltd (P3)
Gary Robert Bullivant (P4)
Roy Alexander Gavin (P5)
Peter Gregory Smith (D1)
Workstation Relocation Pty Limited (D2 & XC)
JUDGMENT OF: Hamilton J
COUNSEL : J E Thomson & J B Conomy (P1-5)
D E J Ryan SC & M Southwick (D1 & 2)SOLICITORS: Piggott Stinson Ratner Thom (P1-5)
Magney & Rhodes (D1 & 2)CATCHWORDS: EQUITY [34] - General principles - Fiduciary obligations - General principles - Joint venture agreement - Scope of agreement. LEGISLATION CITED: Supreme Court Rules 1970, Part 28 CASES CITED: Federal Commissioner of Taxation v Karageorge (1996) 34 ATR 196
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533
Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319
Re Minister for Immigration and Multicultural Affairs; Ex parte Fejzullahu (2000) 74 ALJR 830
Vyse v Foster (1872) LR 8 Ch App 309DECISION: Interlocutory injunction granted.
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISIONHAMILTON J
FRIDAY, 24 NOVEMBER 2000
1394/98 TRI COMMERCIAL FURNITURE PTY LIMITED & 4 ORS v PETER GREGORY SMITH & 1 ORS
JUDGMENT
HIS HONOUR:
1 These proceedings arise out of a failed joint venture which ran its course from about late 1996 to late 1997. There were three parties to the joint venture. Two of the joint venturers and persons associated with them are the plaintiffs. The third joint venturer and an associate of his are the defendants. The terms of the joint venture agreement are under dispute. It was largely an oral agreement come to in discussions at various times among the three principals, although its terms may be partly incorporated or referred to in minutes of meetings that occurred. The terms of the conversations are disputed, at least in part, and even minutes of the same meeting appear in differing versions. The joint venture seems to have been created to conduct a business of the sale of new office furniture. The joint venturer defendant already conducted a business of the relocation of computer workstations. The plaintiffs allege that, if not initially, at least during the course of the joint venture, it became part of the terms of the joint venture agreement that the defendant joint venturer would run down the portion of its business conducted in its own name and thereafter its principal, Mr Smith, would do the larger jobs theretofore done in that business in and devote 100 per cent, or the vast bulk, of his time to the joint venture business. Specifically, it is alleged that at some stage there was discussion and agreement to the effect that the defendant joint venturer would continue to do jobs under $5,000 in its own name but, in respect of jobs over $5,000, would bring them into the joint venture and would carry them out on its own account only if the joint venturers agreed that they should not be done within the joint venture. There is no dispute that disagreements arose and that the joint venture was brought to an end about the end of 1997. Thereafter the second defendant (“Workstation Relocation”) carried on the business it had been doing. The other joint venturers appear to have removed some of the assets from the joint venture company, which did not have any business other than the joint venture business, and also carried on their businesses independently.
2 In 1998 the plaintiff commenced proceedings which proceeded slowly. When early in 1999 the defendants talked about selling the Workstation Relocation business the plaintiff instituted by motion an application for Mareva orders. However, that application also proceeded slowly, essentially being stood over generally until recently. However, the plaintiffs have been galvanised into action by the fact that the defendants did indeed sell the business in October 2000 for $1.25 million. Of that purchase price some $930,000 reached the hands of the first defendant and his wife, who is not a party to these proceedings, and there it remains. Until the hearing before me, it was the subject of undertakings given to the Court by the first defendant and his wife that they would not dispose of those proceeds, but they have indicated that they are unwilling to continue those undertakings, and that has brought the matter to a head. The plaintiffs now apply for injunctive relief in relation to the whole of the sum of $930,000 odd. They seek that relief in three ways. At first they suggested that the appropriate relief was an order by way of preservation of subject matter under Part 28 of the Supreme Court Rules 1970 (“the SCR”). Secondly, they suggested that there should be an interlocutory injunction on ordinary principles to restrain the dispersal of funds which represented the fruits of a breach of fiduciary duty by the defendants. Thirdly, they sought relief upon Mareva principles.
3 The principles upon which interlocutory injunction applications are usually determined, I take to be as stated by Gleeson CJ in the High Court in Re Minister for Immigration and Multicultural Affairs; Ex parte Fejzullahu (2000) 74 ALJR 830 at [7]:
“The applicants must show that there is a serious question to be tried in the principal proceedings, and that the balance of convenience favours the granting of an injunction.”
And as stated by McLelland J in this Division in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 - 6:
“As I see it, the position is as follows. Where a plaintiff’s entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled: see, eg, Appleton Papers Inc v Tomasetti Paper Pty Ltd [1981] 3 NSWLR 208 at 216; A v Hayden (No 1) (1984) 59 ALJR 1 at 4-5; 56 ALR 73 at 79. Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the Court to decide that question on the interlocutory application. Where the uncertainty depends in whole or in part on a contested question of law, it may or may not be appropriate for the Court to decide that question on the interlocutory application, depending on circumstances, eg, A v Hayden (No 1) (at 4; 78); Cohen v Peko-Wallsend (1986) 61 ALJR 57 at 59; 68 ALR 394 at 397. If the Court does decide the question of law the uncertainty is to that extent removed.
Unless the plaintiff shows that there is at least a serious question to be tried which if resolved in its favour would entitle it to final relief, then the requirements of justice as between the parties will dictate that an interlocutory injunction should be refused: Australian Coarse Grain Pool Pty Ltd v Barley Marketing Board of Queensland (1982) 57 ALJR 425; 46 ALR 398; Tableland Peanuts Pty Ltd v Peanut Marketing Board (1984) 58 ALJR 283; 52 ALR 651; A v Hayden (No 1); Castlemaine-Tooheys Ltd v South Australia (1986) 60 ALJR 679; 67 ALR 533 and Cohen v Peko-Wallsend Ltd .”
The principles relating to the grant of Mareva relief were succinctly stated by Gleeson CJ, when Chief Justice of this Court, in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321 - 322 as follows:
“The remedy is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant’s absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.”
His Honour went on in his judgment to discuss the nature and the degree of the danger which must be shown to found Mareva relief. That will be of some materiality in this case as will appear below that. I am well aware of the need for the material presented to show upon analysis a reality in the threat of dispersal of assets: see my judgment in Federal Commissioner of Taxation v Karageorge (1996) 34 ATR 196.
4 The defendants contend that the plaintiff has no case for relief, or, if there be one, one so slight that it will not support an interlocutory injunction. Essentially the course of action that they followed during the joint venture period in carrying out for their own benefit contracts in excess of $5,000 is not denied, but they deny the establishment of a term of the agreement which would preclude them from so doing. They say, in essence, that there cannot be considered to be an appropriate correspondence between the breaches of fiduciary duty (if there were breaches) in carrying out contracts in this way and the subject matter now sought to be restrained, namely, the proceeds of sale of the business almost two years after the end of the operation of the joint venture. In addition, on that subject matter, they say there is no correspondence in amount between whatever profits the plaintiffs lost and the sum now representing the sale of the business. They say that, in the context of the balancing exercise prescribed in Kolback, they should not suffer the inconvenience of being deprived of the considerable asset represented by the fund of $930,000. Furthermore, since the evidence shows that the profit of the business when disposed of was running at something like $1 million per annum, they should be allowed to use those funds to or earn replacement income or make replacement investments for themselves. They say that there is no reason to apprehend dispersal of any funds on their part and that in any event, all of Workstation Relocation, the first defendant and his wife are people of very considerable substance, so that there is no reason to think that funds would not be available to meet any judgment or order in money terms in the proceedings. Furthermore, they point as a discretionary factor, which they say is strong in this case, that goes against the grant of any relief, to the plaintiffs' delays in seeking the relief. They point out in this regard that nothing was done to gain relief in respect of the business while it was in Workstation Relocation’s hands for nearly three years, that the application for Mareva relief was left to lie for nearly two years, and that the plaintiffs were aware from about February of this year that the defendants were seeking to sell the business and did not seek relief until after it was sold. They also claim that the removal of assets from the joint venture company by the plaintiffs after the cessation of the joint venture should be regarded as meaning that the plaintiffs are precluded from relief since they did not come to ask for it with clean hands.
5 In the end, the matter was not really argued before me upon a Part 28 basis, it was argued rather on the other two bases. So far as the question of the cause of action is concerned, which is material to the application for injunctive relief both on the ordinary and the Mareva basis, the defendants complain about the scattered and scrappy nature of the conversations themselves, as they are at this stage deposed to. They also point to what they say is the lack of consideration for any promise in relation to the contracts greater than $5,000 since, it does seem upon the material, that the agreement in relation to that was come to at a later time than the original agreement for the formation of a joint venture relating to the sale of new office furniture. There is some force in these submissions. However, in my view, the plaintiffs have an arguable case, if their witnesses be believed, of establishing that there was a joint venture agreement which included the claimed provision as to contracts greater than $5,000. Equally, I do not find inherently improbable, but regard as a possible version of what happened, an arrangement, perhaps in loose language among businessmen, but legally binding, whereby the defendants' existing business was to be brought into and operated through the joint venture arrangement. The evidence will, no doubt, be enlarged if the matter goes to trial. But even upon the present evidence, I do not regard such an arrangement as highly improbable in the way that was pressed upon me by Mr Ryan, of Senior Counsel for the defendants.
6 Mr Ryan also strongly urged on me that there was really no relevant subject matter to be restrained. If anything were taken in breach of fiduciary duty, it was contracts, and he says the relevant contracts are long since performed and gone. What there is now is the proceeds of a sale, the subject matter of which was essentially contracts now existing, and the goodwill of a business which, in reality, represented transactions more recent than the transactions the subject of these proceedings. However, it seems to me that the plaintiff has an arguable case whereby it may reach the present proceeds through principles discussed by Mason J (as his Honour then was) in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. Although His Honour was in the minority as a result of differing views of whether or not a fiduciary relationship arose in that case, in my view, and counsel for both sides agreed, his Honour's statement of the principles is not detracted from by the fact that he was a dissentient. His Honour said at 110:7 If the plaintiffs' version of the agreement be established, it will follow that the defendants took contracts which should have gone to the joint venture and in a real sense conducted a competing business with the business of the joint venture company. In those circumstances, it seems to me reasonably arguable that it must account to the plaintiffs for the profits and gains made from that competing business. Mr Ryan has also pointed to the lack of correspondence between what losses there were to the plaintiffs during the joint venture and the recent profits of the business and its value upon sale. This correspondence is a matter which, he suggested, must be established by the plaintiffs before properly limited relief, either ordinary or Mareva, could be granted. But those propositions must be viewed in the light of what was said in Hospital Products by Mason J at 109 - 110 as follows:
“I should mention that a particular problem has arisen with respect to the declaration of a constructive trust of a competing business established and carried on by a fiduciary in breach of his duty. One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty. Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made. In In re Jarvis (1958) 1 WLR 815, Upjohn J observed (at p820), correctly in my opinion, that it is not possible to say that one approach is universally to be preferred to the other, for each case depends on its own facts and the form of inquiry which ought to be directed must vary according to the circumstances. In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty.”
“However, there is authority for the proposition that equity does not assume jurisdiction to punish fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty.”
His Honour then cited from the judgment of James LJ in Vyse v Foster (1872) LR 8 Ch App 309 at 333. His Honour continued:
“The proposition which I have stated based on the observations of James LJ needs to be modified in order to take account of the situation where the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible. There ‘... the whole will be treated as trust property, except so far as he may be able to distinguish what is his own’: (Brady v Stapleton (1952) 88 CLR 322, at p 336, quoting Page Wood V-C in Frith v Cartland (1865) 2 H & M 417, at p 418 (71 ER 525, at p 526)). The proposition may also need to be modified to take account of a profit acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain.”
8 It seems to me in this case that, if the plaintiffs' cause of action be established, the defendant has made profits from relevant contracts, the amount of which the plaintiff simply does not know, although there is evidence that more than $2 million was received from one customer of the second defendant, namely St George, over a period. To quote that figure, of course, does not allow for the cost of earning it, nor does it allow for any proportion of that amount attributable to contracts to the benefit of which the second defendant was alone entitled, but it is the defendant who knows those amounts and not the plaintiffs, and until that be elucidated, it seems to me that the principle in the last cited passage from the judgment of Mason J should be taken to apply.
9 So far as the balance of convenience is concerned, the plaintiff will obviously be inconvenienced if the assets of the defendants are dispersed in such a way as would not permit a judgment or order for the payment of money in its favour to be met. On the other hand, there is force in Mr Ryan's submission about the defendants' right to use their capital to make investments and earn income. Perhaps the most significant feature in this balancing operation is whether there is a real apprehension of the dispersal of funds. This is clearly a vital factor in the application on Mareva principles, but, in the circumstances of this case, it seems to me relevant also to the balance of convenience in the application on ordinary principles.
10 The defendants undoubtedly have substantial assets. There are draft accounts of Workstation Relocations as at 30 June 2000 in evidence. It is not entirely clear what cash assets now remain with the company, although it is clear that the moneys in the business were not part of what was sold. However, undoubtedly, the company possesses three commercial or industrial properties in Queensland of very considerable value which are earning income and are stated to be unencumbered. Prior to October 2000, it may be that it could not be said that the plaintiffs had any reasonable fear of dispersal of assets, and it may be, though this is not specifically deposed to, that that was the reason why they did not press for interlocutory relief earlier. However, what occurred at the time of the sale of the business is in two regards, in my view, very significant on this aspect of the case.
11 On 3 November 2000 Magney & Rhodes, the plaintiffs' solicitors, wrote to Pigott Stinson Ratner Thom (“Piggott Stinson”), the defendants’ solicitors, as follows:12 Furthermore, as has already been noted, the proceeds reached the hands not of Workstation Relocation, to which they belonged, but the hands of Peter Smith (who is a party to these proceedings) and Mrs Smith (who is not). The only explanation given of this is in an affidavit of Peter Smith as follows:
“Since our telephone conversation this afternoon we have received instructions from our clients to advise you that ... Workstation Relocation Pty Limited ... has now sold the workstation relocation business. The name 'Workstation Relocation' was transferred to the purchaser. One of the terms of that sale was a restraint of trade, affecting both [Workstation Relocation] and Peter Smith. Accordingly, neither (Workstation Relocation), nor Peter Smith now competes with your clients ...”
Pigott Stinson on 6 November wrote back, inquiring when the sale of the business took place, what were the terms of the contract (including the sale price), and asking for detail of “the aspects of the business of Workstation Relocation Pty Limited sold to the purchaser if not all parts of the business were sold.” A reply was received, dated 8 November 2000, which contained the following:
"(a) Contracts were entered into on 16 October 2000, and settlement took place on 20 October 2000.
(b) The transaction was at arm's length, for value.
(c) As you were advised yesterday, Magney & Rhodes acted for the vendor.
(d) The transaction simply involved a transfer of the business name, ‘Workstation Relocation’, an agreement to change the name of Workstation Relocation Pty Limited and a restraint on each of Peter Smith and Workstation Relocation Pty Limited ... preventing them from carrying on a workstation relocation business in New South Wales for a period of fifteen (15) years.
(e) [Workstation Relocation] remains the owner of substantial assets, and remains solvent.
All that has taken place in this transaction is that our clients have ceased trading as Workstation Relocation, that name is now used by another person, and our clients have entered into a lengthy restraint of trade. Your clients have alleged no interest in the name 'Workstation Relocation', which is all that was transferred.”
Wherever the facts as so stated emanated from, these statements were, at very best, highly disingenuous and, at worst, downright dishonest and designed to deflect the plaintiffs from seeking relief against the proceeds of the contract. That is certainly a view which could be taken of those letters. No explanation of how these statements came to be made has been laid in evidence before the Court on this application.
"Prior to entering into the sale agreement, I received financial advice to the effect that it would be tax effective if the proceeds of the sale were put in the names of myself and my wife, rather than into [the company]. Accordingly, pursuant to the sale agreement, my wife and I received a total, after legal and agency costs, of $930,447.38 on settlement.”
There is no evidence as to the basis on which these moneys were simply taken by Mr and Mrs Smith because this was "tax effective". No evidence is given of a transaction with the company to show whether this was a withdrawal of capital in some form or whether the money was lent to them and is repayable to the company, nothing at all is said about it. Thus there is a record of recent times of undoubtedly inaccurate, and perhaps dishonest, statements apparently designed to mislead the plaintiffs as to the nature of the transaction carried out, and another transaction between one of the defendants and the other and his wife which, unexplained, shows a propensity simply to place moneys where these people divine it is to their financial advantage to put moneys at any particular time. In my view, on the basis of these matters, there are grounds for a reasonable apprehension of assets being moved or removed to avoid the incidence of a judgment.
13 I have already said there is force in the argument of Mr Ryan as to the inconvenience of the tying up of a large capital sum for an indefinite, although one hopes not too long, period against a claim of the plaintiffs, as yet undefined as to quantum. If I grant an injunction, however, an avenue will be provided for the amelioration of any inconvenience to the defendants, by my granting leave to them to move to vary the injunction from time to time so that, if they wish to make a particular use of the funds, the injunction can be reformulated so as to protect the plaintiffs' interests whilst not inconveniencing the defendants unduly. One matter, depending upon the real circumstances that exist, would be for there to be either restraint or security over property in Queensland if in truth it be unencumbered. This would protect the plaintiff, whilst not interfering with the defendants' receipt of income from the properties, which seem to be held at the moment as investments designed to earn ongoing income. There is no available evidence from which it could be inferred that any of the funds relevant to these proceedings have gone into the properties, so that they could not be the subject of the injunction if it be granted by reference to ordinary rather than Mareva considerations.
14 I have given careful consideration to all the evidence before me and to all the matters which I have set out above. The conclusion that I have come to is that the correct result of the balancing exercise or balancing exercises to be carried out is that I ought grant injunctive relief in relation to the fund at present held by the first defendant and Mrs Smith until further order, but granting the defendants leave to apply to vary the injunctions on two days’ notice. The injunction is granted both on ordinary grounds and on a Mareva basis. I should say that a conceivable ground for variation, in addition to those stated above, is that upon further definition of the plaintiffs' claim the amount of $930,000 may be too great an amount to be restrained. I shall direct that short minutes be brought in to give effect to these orders. If it is more convenient to do that on Monday rather than today, I hope that the parties will perhaps be able to continue the existing restraints until Monday. The plaintiffs will, of course, be required to give the usual undertaking as to damages.
…oOo…
0
10
1