Ngati Tama Custodian Trustee Limited v My Virtual Home International Limited (in rec) HC Auckland CIV 2009-404-7584
[2009] NZHC 2597
•17 December 2009
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2009-404-7584
BETWEEN NGATI TAMA CUSTODIAN TRUSTEE LIMITED
Plaintiff
ANDMY VIRTUAL HOME INTERNATIONAL LIMITED (IN RECEIVERSHIP)
Defendant
CIV 2009-443-548
AND BETWEEN MY VIRTUAL HOME INTERNATIONAL LIMITED (IN RECEIVERSHIP)
Plaintiff
ANDNGATI TAMA CUSTODIAN TRUSTEE LIMITED
Defendant
Hearing: 7 December 2009
Appearances: S R G Judd for My Virtual Home
D M Hughes and T J Cooley for Ngati Tama Custodian Trustee
Judgment: 17 December 2009
JUDGMENT OF ALLAN J
In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 3 pm on Thursday 17 December 2009
Solicitors:
Kensington Swan, Auckland [email protected]
NGATI TAMA CUSTODIAN TRUSTEE LIMITED V MY VIRTUAL HOME INTERNATIONAL LIMITED (IN RECEIVERSHIP) HC AK CIV 2009-404-7584 17 December 2009
[1] My Virtual Home International Limited (in receivership) seeks an interim injunction to restrain Ngati Tama Custodian Trustee Limited from taking any steps to dispose of the assets of Creative Designer & Software Pty Ltd (CDS), pending further order of the Court. The application is aimed at preventing Ngati Tama from taking steps to sell, mortgage or otherwise dissipate such assets to external entities.
[2] The dispute is principally concerned with the relative priority of the charges held by Virtual Home and Ngati Tama respectively over the undertaking of CDS. The latter company is registered in Australia. Its assets are situated there.
[3] In a separate proceeding Ngati Tama seeks to place Virtual Home in liquidation. Throughout this judgment I propose to refer to Virtual Home as the plaintiff, and Ngati Tama as the defendant.
[4] On 19 November 2009, Heath J made an order restraining the defendant, any receiver appointed by the defendant over the undertaking of CDS, and any other agent of the defendant, from taking any further steps to market, sell, mortgage or otherwise dispose of the assets of CDS to external parties. That order was expressed to inure pending further order of the Court. His Honour adjourned the proceeding until 7 December when I heard argument from counsel over a full day, upon the question of whether the interim injunction ought to be further extended.
[5] There is a protest to jurisdiction by the defendants. They say that the
Australian Courts are forum conveniens. In reliance on Dale v Jeffrey HC AK CIV
2007-404-2015 24 April 2007, Heath J ruled that the defence of the application for an interim injunction did not amount to a submission to the jurisdiction of the Court. Accordingly, the defendant retains the right to argue forum questions at a later point, despite its defence of the injunction application.
[6] Heath J also made an order on 19 November 2009 restraining the defendant from advertising the liquidation proceeding pending further order of the Court. In this present judgment the Court is also required to consider whether the stay of advertising in the liquidation proceedings should be extended.
Factual background
[7] The plaintiff is a New Zealand company that owns 100% of the shares in CDS, which is incorporated in Queensland. CDS has developed software known as “my virtual home” which enables a user who wishes to build or renovate a home to create and vary on the computer screen a three dimensional image of the proposed design. There is also provision for information to be obtained about product services and prices relevant to a design project.
[8] The software is marketable not only to those wishing to build and renovate homes, but also to those who sell and service products relevant to such activities. Suppliers of goods and services will pay a fee (or possibly a royalty) for the right to have their offerings included in the links provided by the software. Marketing and distribution of the software, and development of the CDS business, is undertaken primarily by the plaintiff. CDS has granted an exclusive licence to the plaintiff in respect of the marketing and distribution of the software for all countries except Russia and Australia. The licence for Australia is held by a related Australian company, My Virtual Home Australia Pty Ltd. For Russia, the licence has been granted to a New Zealand company, Open Group Ltd (Open Group).
[9] Open Group is the major shareholder in the plaintiff. It holds just over 20% of the shares. It is also the holder of a General Security Agreement (GSA) over the plaintiff. Open Group has appointed a receiver, Mr Stewart, who is currently in control of the plaintiff pursuant to the GSA.
[10] The defendant is also a shareholder of the plaintiff. It owns about 10% of the shares. It is a New Zealand company that is a custodian trustee for the Ngati Tama Iwi in Taranaki. Ngati Tama also owns about 9% of the shares in Open Group, the sole director of which is Mr David Phillips.
[11] On 31 May 2007 Mr Rodney Martin was appointed to be the sole director of CDS, and on 4 June 2008 he was also appointed to be a director of the plaintiff. At that time, the continuing directors of the plaintiff were Mr Greg Lane and Ms Hermione Olsen. Mr Lane resigned as a director of the plaintiff on 18 June
2008, and Ms Olsen on 12 August 2008. On 7 February 2009 Mr Paul Condon and Ms Olsen were co-opted as directors by Mr Martin. Importantly for the purposes of this proceeding, Mr Martin was the sole director of the plaintiff and of CDS between August 2008 and 9 February 2009 when he was dismissed at a meeting of shareholders.
[12] Since 2005 the plaintiff has advanced a little over $10 million to CDS in order to fund the development of the software, that sum secured by the charge held by the plaintiff over the assets of CDS. There is a dispute between the parties as to the amount secured by the plaintiff’s charge over CDS. The initial advance was
$200,000. But the plaintiff says that on the true construction of the documents creating the charge, it secured all moneys then advanced or to be advanced in the future.
[13] In the plaintiff’s annual report of 2008 (no doubt distributed to all relevant parties including the defendant as shareholder), the sum then owing by CDS to the plaintiff in respect of term loans was about $7.9 million, said to be “ … secured … by way of a floating registered debenture”.
[14] It is now argued on behalf of the defendant, however, that the plaintiff’s security over CDS is limited to the amount of the initial advance of $200,000. It is unnecessary to resolve that aspect of the dispute at present. The plaintiff’s claim to an injunction does not turn on the precise sum secured by its charge over the assets of CDS. But as a matter of record, the plaintiff’s combined debt and equity investment in CDS as at 30 June 2008 was of the order of $15.6 million.
[15] By October 2007, the defendant had also made a heavy investment. It had paid AU$3.5 million for its shares in the plaintiff. In that month it took an equity investment in Open Group as well, on the footing that the capital contributed by the defendant would be advanced by Open Group to the plaintiff, and that Open Group would obtain security for that advance. The defendant acquired 900,000 shares in Open Group in October 2007 for AU$1 million. That sum (or at least some of it), was then advanced by Open Group to the plaintiff, which gave a security interest
over all its present and after acquired property to Open Group. By June 2009 the plaintiff owed approximately $1.6 million to Open Group.
[16] In mid 2008 there were further discussions between Open Group and the defendant about the additional funding requirements of the plaintiff and CDS. In July 2008 a document was prepared for the purpose of recording an arrangement to be entered into between the defendant and Open Group, whereby the defendant was to advance a further sum of AU$1 million to Open Group, so that company could make an advance to the plaintiff. In turn, the plaintiff would apply the funds for the benefit of CDS, which was its only significant asset.
[17] The document, dated 7 July 2008, records an agreement by the defendant to provide further funding to the plaintiff. Mr Judd points out that there is no suggestion in the document of direct funding by the defendant to CDS. There is also a reference in the agreement to the need for CDS funding from the plaintiff’s shareholders to be substantially reduced. Open Group, and Mr Phillips in particular, believed that the CDS software was in a state in which it could be marketed internationally, and that further development costs could and should be sharply reduced.
[18] At that time, there was a proposal that Open Group would provide security to the defendant in the form of mortgages over properties owned by Open Group in St Petersburg, Russia.
[19] Although the 7 July 2008 document was executed, the defendant says it was simply a draft document and never intended to be carried into effect. The case for the defendant is that the proposed funding arrangement was never finalised, as the parties were unable to agree on the exact amount to be advanced by the defendant, to whom the funds would be advanced, or the form of security to be provided by the plaintiff, Open Group and Mr Phillips.
[20] However, during 2008 the defendant provided additional working capital to enable both the plaintiff and CDS to meet their on-going operational requirements.
Between May and September 2008, the defendant provided something in excess of
NZ$560,000 to the plaintiff.
[21] For the purposes of the present application, it is unnecessary for the Court to determine the precise legal status of the 7 July 2008 agreement. Those issues are principally for the defendant and Open Group (not a party to the present proceeding) to resolve.
[22] From August 2008, Mr Martin (by now the sole director of both the plaintiff and CDS) commenced a series of funding initiatives aimed at injecting yet further cash into the plaintiff and CDS. The plaintiff argues that in so doing, Mr Martin acted in breach of his fiduciary obligations as director, and that the defendant was a knowing participant in Mr Martin’s activities, which lie at the heart of this proceeding.
[23] In essence, the plaintiff’s complaint is that Mr Martin aligned himself with the defendant, which, having decided that CDS needed further funding injections if the plaintiff’s investment in it was to be realised, required appropriate security for its proposed future advances. The plaintiff says the defendant persuaded Mr Martin to cause the plaintiff to co-operate with the defendant to that end. Ultimately, the plaintiff claims, the defendant’s design was to exclude Open Group altogether as an effective participant in the conduct of the plaintiff’s affairs. In return, the plaintiff alleges, Mr Martin was to receive an allocation of shares in the plaintiff at the behest of the defendant, once the affairs of the plaintiff were re-organised.
[24] For that proposition the plaintiff relies principally upon the evidence of Mr Niall, who at one time was a flatmate of Mr Martin. Mr Niall says he was told by Mr Martin on one occasion that he was co-operating with the defendant in order to assist the defendant in assuming control of the plaintiff.
[25] The defendant and Mr Martin each deny that any such arrangement ever existed, and Mr Martin specifically denies the truth of Mr Niall’s allegation against him.
[26] The narrative of Mr Martin’s impugned activities commences in August
2008. It will be recalled that in the preceding month Open Group and the defendant had been negotiating over the provision of further funding by the defendant through Open Group to the plaintiff and CDS. But by late August 2008 the defendant’s approach appears to have changed.
[27] On 24 August 2008, Mr Martin, as the plaintiff’s sole director, passed a resolution of the plaintiff terminating the consulting arrangements which had existed for some time between the plaintiff on the one hand, and Open Group and Mr Phillips on the other.
[28] On the same date he passed a further resolution:
a) changing the plaintiff’s legal advisers;
b)transferring the registered office of the plaintiff to the office of the plaintiff’s new solicitors;
c) directing that all communications by Mr David Phillips or Open Group to personnel within the plaintiff or CDS be referred to Mr Martin;
d)forbidding Mr Phillips from communicating with the personnel of the plaintiff or CDS without Mr Martin’s approval and prohibiting him from entering the CDS office in Brisbane;
e) authorising the creation of a management team consisting of Mr Greg
Lane, Mr Paul Condon, Mr Robert Rogers and Mr Martin. [29] Mr Lane and Mr Condon were aligned with the defendant.
[30] On the following day, 25 August 2008, a further set of resolutions was passed by Mr Martin in his capacity as director of both the plaintiff and CDS. The resolutions, apparently prepared without legal advice, are somewhat difficult to comprehend. However, the intention is clear. In effect, the resolutions authorised:
a) The grant by CDS of a charge to the defendant over the assets of
CDS;
b)A guarantee by the plaintiff of CDS’s liability under the new security to the defendant;
c) The ceding of priority by the plaintiff to the defendant in respect of their respective securities over the assets of CDS.
[31] On 1 September 2008, Mr Martin passed a further resolution commissioning Mr Rogers of NZIF to undertake consulting projects for the plaintiff and CDS in respect of:
a) intellectual property, technology and products;
b)plans and strategies for the commercialisation of the intellectual property of the plaintiff and CDS;
c) plans for the resolution of shareholder disputes in situations which currently existed in respect of significant shareholders of the plaintiff and CDS;
d) other business situations and opportunities which may arise.
[32] On 27 September 2008, Mr Martin passed a further directors’ resolution appointing Mr Condon to be the chief executive officer of the plaintiff. On
24 December 2008 the plaintiff and CDS (acting in each case by Mr Martin) and the defendant, executed documents, the effect of which was (in accordance with the earlier resolutions passed by Mr Martin), that:
a) CDS gave a fixed and floating charge over its assets to the defendant;
b)the plaintiff guaranteed the obligations of CDS under the charge to the defendant;
c) the plaintiff acknowledged that the defendant’s charge had priority over the plaintiff’s charge.
[33] Mr Martin has filed an affidavit in which he confirms that he did not have the consent of Open Group or other shareholders aligned with Open Group before entering into these transactions with the defendant. (The evidence is that a little more than 50% of the shareholders support the stance of Open Group.) Indeed, Mr Martin acknowledges that Open Group took a different view of the funding requirements of CDS, and expressly refused to support the large scale injection of further funds by the defendant.
[34] Mr Martin explains that CDS was running out of money, and that the only source of further funds was the defendant, which required appropriate security before it would maintain its financial support of CDS.
[35] In the unimplemented agreement of July 2008, there seems to have been a degree of common ground between Open Group and the defendant in respect of further funding of CDS. In that agreement, there was a reference to the need to reduce funding to CDS if further external funding sources could not be identified.
[36] During 2009 the defendant has made very significant advances to CDS. Sums of the order of $180,000 per month have been injected into that company.
[37] Ultimately steps were taken to dismiss Mr Martin. A meeting of shareholders was called for 9 February 2009. On 7 February 2009 Mr Martin, pursuant to his powers as a director, appointed Mr Condon and Ms Olsen to the Board of the plaintiff. At the meeting on 9 February Mr Martin was dismissed by resolution of the shareholders, but Mr Condon and Ms Olsen continued in office.
[38] On 11 June 2009, Open Group appointed a receiver in respect of the plaintiff, pursuant to its general security agreement. On 25 June 2009 receivers were appointed in respect of CDS by the defendant, in reliance on its charge over CDS’s assets. The receivers say that, as at the end of October 2009, the amount secured by the CDS debenture in favour of the defendant was AU$1,740,000.
[39] The principles relating to the grant of an interlocutory injunction are well established. The normal approach is to consider whether there is a serious question to be tried, and if there is, then to determine where the balance of convenience lies, and finally to conclude by having regard to the overall justice of the case: Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129, 142 (CA). Certain allied considerations must be borne in mind. If damages would be an adequate remedy and the defendant can pay them, then ordinarily no interlocutory injunction should be granted: American Cyanamid Co v Ethicon Ltd [1975] AC 396,
408.
[40] But if damages would not be sufficient or appropriate compensation for a plaintiff, then the Court will consider the position of a defendant were it to succeed at trial. In that event, if damages pursuant to a plaintiff’s undertaking would be sufficient to compensate the defendant for loss suffered as the result of being under a restraint pending trial, then provided that the plaintiff is in a position to meet its undertaking, an injunction will often be thought appropriate.
[41] It has been said that the balance of convenience will sometimes turn on a consideration of whether the granting of an injunction or its refusal, is the course which, after the action itself has been tried and the issues between the parties determined, would best allow the adjustment of the rights of the parties in a way that accords with fairness and justice: Somers J in Congoleum Corporation v Poly-Flor Products (NZ) Ltd [1979] 2 NZLR 560, 571 (CA). Other considerations which will sometimes be relevant include the position of third parties, the desirability of preserving the status quo where other factors are evenly balanced, and the prior conduct of the parties.
Serious question
[42] The statement of claim is drafted in a somewhat discursive style, but in essence the plaintiff’s claim is that Mr Martin (curiously not named as a party), was
a) caused the plaintiff to enter into major transactions for the purposes of s 129 of the Companies Act 1993 without requisite shareholder approval;
b) failed generally to act in the best interests of the plaintiff;
c) maintained a relationship with the defendant for his personal benefit which placed him in conflict with his duties as a director of the plaintiff.
[43] The plaintiff pleads against the defendant that the defendant accepted the charge over CDS and the benefit of the deed of priority with knowledge of Mr Martin’s breaches of duty, and that it was therefore an accessory to those breaches.
[44] The defendant’s knowledge is alleged to arise principally from its awareness that:
a) Open Group held a general security agreement over the plaintiff and was owed substantial sums by the plaintiff;
b)Open Group owned over 20% of the shares in the plaintiff and had considerable support from other shareholders;
c) the plaintiff owned all the shares in CDS;
d)the plaintiff’s only significant assets were its shares in CDS (valued in total at a figure in excess of $15 million as at 30 June 2007) and its loans to CDS;
e) the plaintiff had an exclusive perpetual licence in respect of the CDS
software;
f) Mr Martin as sole director of the plaintiff and CDS had not obtained the consent of Open Group to the granting of the defendant’s charge over CDS, nor to the deed of priority (the effect of the plaintiff’s charge being to substantially diminish the value of Open Group’s security over the plaintiff);
g) Mr Martin had neither notified the shareholders of the plaintiff, nor obtained their consent to the giving of a charge by CDS to the defendant, and the execution of the deed of priority.
[45] Section 129 of the Companies Act 1993 relevantly provides:
129 Major transactions
(1) A company must not enter into a major transaction unless the transaction is—
(a) Approved by special resolution; or
(b) Contingent on approval by special resolution. (2) In this section,—
Assets includes property of any kind, whether tangible or intangible;
Major transaction, in relation to a company, means:
(a)The acquisition of, or an agreement to acquire, whether contingent or not, assets the value of which is more than half the value of the company's assets before the acquisition; or
(b)The disposition of, or an agreement to dispose of, whether contingent or not, assets of the company the value of which is more than half the value of the company's assets before the disposition; or
(c) A transaction that has or is likely to have the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company's assets before the transaction.
[46] I am by no means convinced that the challenged transactions, either singly or together, constitute a major transaction for the purposes of s 129. On the face of it, the deed of priority does not constitute an agreement for the disposition of assets of the company, and so would appear not to fall within s 129(2)(b). Moreover, s
129(2A) excludes from the definition of the term “major transaction” a transaction involving the:
… giving or entering into an agreement to give, a … charge secured over assets of the company the value of which is more than half the value of the company’s assets for the purpose of securing the repayment of money or the performance of an obligation.
[47] In Fighter Trainers v McCormick (1999) 8 NZCLC 261,998, the Court held that the definition of the term “major transaction” in s 129 was not intended to catch debentures. Salmon J considered it could not have been the intention of the legislature to require that all debentures secured over all the assets of a company had to be approved by special resolution.
[48] There appeared to be force in Mr Hughes’ submission that if it is possible for a company to grant a charge over the entirety of its assets without obtaining approval by special resolution, then the company must also be able to subordinate its position in respect of a charge granted to it by a third party, without obtaining approval by special resolution.
[49] Further, there must be considerable doubt as to whether the relevant transactions are sufficiently important, calculated in dollar terms, to fall within the expression “major transaction” in s 129. Although Mr Martin believes that both CDS and the plaintiff are effectively insolvent, Mr Stewart’s evidence is that the assets of the plaintiff are worth in excess of $19 million. There is a ceiling of
$3 million upon the secured liability of CDS and therefore the plaintiff (on its guarantee) to the defendant, in terms of the defendant’s charge. That figure is significantly less than one-half of the assets of the plaintiff as calculated by Mr Stewart, who is the plaintiff’s receiver and ought to be in a position to express a view with some confidence.
[50] More broadly, Mr Judd argues that Mr Martin must necessarily have been in breach of his fiduciary duty to the plaintiff in that he wilfully entered into a transaction (the giving of priority and a guarantee by the plaintiff to the defendant) without shareholder approval when he knew that the majority of the shareholders were opposed to further significant funding for CDS, and in circumstances where the
transactions were not in the plaintiff’s best interests. The nature and extent of the wider breaches of fiduciary duty alleged on the part of Mr Martin received only limited attention from counsel during the course of argument. Mr Judd’s principal point appeared to be that the plaintiff ought not, without shareholder approval, to have put itself in breach of a negative pledge clause in the security it gave to Open Group, by ceding to the defendant priority in respect of its charge over the assets of CDS, and perhaps also by guaranteeing the obligations of CDS to the defendant.
[51] It may well be a breach of fiduciary duty for a director to cause a company to breach an existing security in that way. For present purposes I assume that it was. The crucial question insofar as the defendant is concerned is, however, whether it had sufficient notice of Mr Martin’s alleged breaches to constitute it a knowing recipient or accessory.
[52] A defendant which has received benefits in breach of fiduciary duty, is of course required to disgorge those benefits, if it knew or reasonably could have known of the breach: Westpac Banking Corporation v Savin [1985] 2 NZLR 41. But where the allegation is that a defendant was simply an accessory to a breach of fiduciary duty, something akin to equitable dishonesty must be established: Royal Brunei Airlines Sdn v Tan [1995] 2 AC 378 (PC).
[53] Mr Judd argues that the Court need not presently be concerned with the subtleties of the different levels of knowledge and liability, because the defendant had actual knowledge that Mr Martin was acting without the consent of either Open Group or the plaintiff’s shareholders. Essentially, the plaintiff argues, the defendant had full knowledge of, and indeed, orchestrated the steps taken by Mr Martin in concealing what he did from Open Group and from the other shareholders of the plaintiff. Mr Judd contends that the plaintiff has strongly established a serious question to be tried.
[54] Mr Hughes argues that the plaintiff has produced no evidence to demonstrate the requisite degree of knowledge on its part. Section 18 of the Companies Act provides:
18 Dealings between company and other persons
(1) A company or a guarantor of an obligation of a company may not assert against a person dealing with the company or with a person who has acquired property, rights, or interests from the company that—
…
(e)A document issued on behalf of a company by a director, employee, or agent of the company with actual or usual authority to issue the document is not valid or not genuine—
unless the person has, or ought to have, by virtue of his or her position with or relationship to the company, knowledge of the matters referred to in any of paragraphs (a), (b), (c), (d), or (e), as the case may be, of this subsection.
[55] The proviso to s 18(1) will, in certain circumstances, have the effect of imputing knowledge to a defendant. In this case Mr Judd says that, by reason of its shareholding in the plaintiff, the defendant has a relationship with the plaintiff, by virtue of which it is fixed with knowledge of Mr Martin’s alleged lack of authority.
[56] Mr Hughes maintains that s 18 does not assist the plaintiff. The defendant accepts that Open Group did not consent. The defendant had earlier sought Open Group’s consent to the defendant taking a prior security over the assets of the plaintiff. That was refused. Instead the defendant took security over the assets of CDS. The defendant did not know of the negative pledge clause in Open Group’s security, and was not on constructive notice. Further, Mr Hughes argues, the plaintiff has adduced no evidence to show that the defendant had, or ought to have had, knowledge that Open Group did not consent to the execution of the deed of priority.
[57] In summary, the defendant’s position is that these were not major transactions, that it was unaware of the negative pledge provision in Open Group’s security (and in any event that is a matter between Open Group and the plaintiff), and that its status as a shareholder does not operate to fix it with imputed knowledge of any asserted breach of fiduciary duty on Mr Martin’s part.
[58] Because I have reached a clear view as to where the balance of convenience lies, I do not propose to further discuss the various elements of the plaintiff’s asserted claim. I consider there are obstacles in the way of the plaintiff’s claim insofar as it is based on s 129. There may well be substance in the plaintiff’s claim
that Mr Martin was in breach of his wider fiduciary duties to the plaintiff, and that the defendant was sufficiently on notice in respect of those breaches to render itself liable for relief, but the ultimate analysis would need to await the giving of evidence at trial. For present purposes it is sufficient to say that there is a serious question to be tried. But I do not regard the plaintiff’s case as especially strong.
Balance of convenience
[59] The plaintiff and CDS are each in receivership. By the time of the hearing of the interim injunction application, a measure of agreement had been reached, in that it is accepted on either side that the business of CDS ought to be sold for the best available price. But there is no agreement as to what that best available price is likely to be.
[60] In order to guard against the possibility of sale by the receiver of CDS at what the plaintiff would regard as an under-value, the plaintiff sought and obtained the injunction granted by Heath J on 19 November. That injunction restrains the defendant (and therefore the receiver appointed by the defendant), from taking any further step to dispose of the assets of CDS, pending further order of the Court.
[61] At the hearing Mr Judd indicated that the plaintiff would accept an amendment to that interim order which would restrain the defendant or the receiver of CDS from entering into any agreement to sell its assets, but leave the receiver free to enter into, and advance, negotiations with interested parties. But ultimate approval of any sale would continue to rest either with the plaintiff or with the Court.
[62] In my opinion it would be artificial and unduly restrictive to restrain the defendant and the receiver in that way. The evidence is that the receiver of CDS, Mr Morton, is a partner in the firm of PKF Chartered Accountants in Brisbane. He is a registered liquidator in accordance with s 1282 of the Corporations Act 2001, and an official liquidator for the purposes of s 1283 of that Act. It is not suggested that he is other than an experienced receiver who will undertake his duties diligently. Those duties include an obligation to obtain the best reasonably available price for the assets of CDS.
[63] On 28 October 2009, having failed to reach an agreement with the plaintiff as to the way forward, Mr Morton terminated the plaintiff’s licence agreement with CDS, pursuant to which the plaintiff had the right to undertake marketing activities on behalf of that company. Mr Morton has taken certain preparatory steps aimed at effecting the sale of the business of CDS. In the meantime, the defendant is continuing to fund the trading of the business.
[64] If an injunction in the presently existing form is maintained, I am advised (and accept) that the defendant will cease to fund the operating costs of CDS, which are of the order of AU$180,000 per month. That would have the likely effect of the business of CDS to a halt. Moreover, it would probably significantly depress the sale price of the CDS assets. There is evidence (disputed to some degree by the plaintiff) that the business is likely to fetch significantly more as a going concern than it would if trading ceased.
[65] The core issue in dispute between the parties centres upon the relative priorities of the plaintiff and the defendant in respect of their charges over CDS. That argument will no doubt be resolved by this Court in due course. In the meantime, I consider the interests of both parties will best be served by permitting the receiver of CDS to market that business, and achieve a sale at the best reasonably available price. There is no evidence that Mr Morton will not take all reasonably practical steps to achieve an advantageous sale.
[66] If the present injunction is maintained and the defendant’s funding ceases, then the likelihood is that CDS would be placed in liquidation. A sale of the company’s assets would follow that step as a matter of course. But, as Mr Hughes argues, the price likely to be achieved upon a sale by the liquidator would be considerably lower than that which the present receiver may be able to obtain.
[67] Mr Judd expresses concern as to the risk that the receiver might organise a sale to a party aligned with the defendant, and so effectively hand control of the plaintiff’s business to the defendant through the back door. Other than the plaintiff’s general concern that Mr Martin and the defendant have been engaged in a concerted
attempt to displace the plaintiff in the affairs of CDS, there is no evidence to suggest that the receiver would somehow breach the obligations that rest upon him.
[68] I note in passing that according to Mr White, an executive officer of the defendant, Mr Phillips indicated to him in about July 2008 that CDS was urgently in need of further funding, without which its business would simply have to close down, the software having no value at that time. Mr White’s evidence on that point appears not to have been challenged. If that was Mr Phillips’ view of the CDS position as at mid-2008, then it is difficult to attribute significant substance to the plaintiff’s present fears that the receiver of CDS may sell it at an undervalue.
[69] Moreover, if the plaintiff considers that any sale effected by the receiver falls short of the reasonable sale price range, the plaintiff would be entitled to take action against the receiver, who has the usual indemnity from the defendant.
[70] The available undertakings to the Court in the present case also tend to suggest that the balance of convenience lies in permitting the sale of CDS assets. The whole of the plaintiff’s business lies in its investment in CDS, so the plaintiff is unable to give a meaningful undertaking independently of that investment. No doubt in recognition of that, Open Group has also provided an undertaking, but its financial position is uncertain. Aside from its investment in the plaintiff, its principal assets appear to be land in Russia, but there is no evidence as to Open Group’s equity in those properties, and it is self-evident that the enforcement of an undertaking given on the strength of those assets would present rather more difficulty than would be the case if Open Group had liquid assets within this jurisdiction.
[71] On the other hand, the defendant has given evidence that it holds in excess of
$4 million on call deposits. The fact that it has been funding CDS for some time is of itself an indication of overall financial strength.
[72] In my opinion, the balance of convenience lies in permitting the receiver of CDS to sell the assets of that company for the best reasonably available price. He cannot do that while the present injunction remains in place. For that reason the injunction granted by Heath J on 19 November 2009 is discharged.
[73] There will however be an order directing the defendant (and through the defendant the receiver) to pay into Court the net proceeds of sale of the business and/or assets of CDS, to be held by the Registrar on interest bearing deposit, pending the resolution of this proceeding. In that way, the plaintiff can derive some comfort from knowing that its priority dispute with the defendant, if successful, will entitle it to proceeds of sale which are secure.
[74] I consider overall justice will be achieved by the course I have outlined.
Protest to jurisdiction
[75] The defendant argued the injunction under protest to jurisdiction. Its application to dismiss the proceeding on jurisdictional ground is adjourned. Arrangements to resolve the dispute as to jurisdiction can be made at the first case management conference. The file is to be placed in an Associate Judge’s stream for case management purposes.
The liquidation proceeding
[76] On 19 November 2009 Heath J made an order restraining advertising in the liquidation proceeding. That order was plainly intended as a temporary measure in order that the Court might consider the apparent rights and obligations of the parties in the context of their wider dispute.
[77] The defendant’s claim in the liquidation proceeding relates to a sum of approximately $560,000 advanced by it to the plaintiff prior to the taking of the debenture in December 2008, together with the balances said to be owing under the plaintiff’s guarantee of the obligations of CDS to the defendant. At the behest of Open Group, a receiver has been appointed in respect of the plaintiff. By virtue of s
287(c) of the Companies Act, the plaintiff is accordingly presumed to be unable to pay its debts.
[78] Mr Judd contends that advertising ought to be further restrained because ultimately the plaintiff may have a counterclaim, or at least the right to a set off against the defendant, arising from the defendant’s alleged complicity in Mr Martin’s breaches of duty. At present the plaintiff’s statement of claim seeks merely equitable compensation in lieu of other relief, or alternatively an inquiry as to damages, but I accept that the pleading is capable of amendment and that there is at least a theoretical possibility that the plaintiff might succeed in obtaining judgment for a sum which it may be able to set off against any liability to the defendant.
[79] However, the answer to Mr Judd’s concern lies in ensuring that the liquidation proceeding is dealt with as part and parcel of the wider dispute between the parties. Accordingly, I direct that the liquidation proceeding be placed in the same Associate Judge’s list as the proceeding commenced by the plaintiff. But there is no discernible reason why advertising of the liquidation proceeding cannot be effected in the usual way. The order restraining advertising made by Heath J on 19
November 2009 is therefore discharged.
Result
[80] For the foregoing reasons there will be orders:
a) discharging the injunction granted by Heath J at [14] of his judgment of 19 November 2009;
b)directing the defendant (and through the defendant the receiver of CDS) to pay into Court the net proceeds of sale of the business and/or assets of CDS, to be held by the Registrar on interest bearing deposit pending the resolution of this proceeding;
c) adjourning the defendant’s application to dismiss this proceeding on jurisdictional grounds;
d)directing that the file be placed in an Associate Judge’s stream for case management purposes;
e) discharging the order made by Heath J on 19 November 2009 restraining advertising of the liquidation proceeding, and directing that that proceeding be listed in the first instance before the same
Associate Judge to whom the file in CIV 2009-404-7584 is referred.
Costs
[81] Costs are reserved. Counsel may file memoranda if they are unable to agree.
C J Allan J
0
0
0