Alati v Wei Sheung & Ors; Alati v Shang Corporation Pty Ltd

Supreme Court of NSW|2000-06-08|Before: Young J

CITATION : Alati v Wei Sheung & Ors; Alati v Shang Corporation Pty Ltd [2000] NSWSC 601 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 2474/2000; 2645/2000 HEARING DATE(S) : 07/06/2000 JUDGMENT DATE : 8 June 2000

Mark Joseph Alati (P) Wei Sheung (also known as Wai Sheung and David Wai Sheung)(D1) PARTIES : Shang Corporation Pty Limited (D2) S & S Grand Constructions Pty Limited (D3) Hit Neo-&-Hi-Tech Park Group Investments Pty Limited (D4) JUDGMENT OF : Young J

C R C Newlinds (P) COUNSEL : D J Hammerschlag and V F Kerr (D1 & 2) R Parsons (D3) T G R Parker (D4) Michell Sillar (P) SOLICITORS : Mok & Associates (D1 & 2) Peter Bouzanis & Associates (D3) Allen Allen & Hemsley (D4) CATCHWORDS : CORPORATIONS [202]- Winding up- Application by creditor- Contingent creditor- Includes a person who is owed some money even though quantum unliquidated - CORPORATI0NS [230]- Winding up application- Power of Court- Court may make Mareva type order. LEGISLATION CITED : Conveyancing Act 1919, s 37A Corporations Law ss 459P(2), 462(2), 465A, 465B, 467(1)(c), 513A, 565, 588FC, 1324 Abignano v Wenkart (1998) 9 BPR 16,765 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 Anderson v Newton [1934] 3 DLR 224 Cadorange Pty Ltd v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 Cardile v LED Builders Pty Ltd (1999) 162 ALR 294 Re Community Development Pty Ltd [1969] QR 1 Community Development Pty Ltd v Engwirda Construction Co (1966) 120 CLR 455 Darvall v North Sydney Brick & Tile Co Ltd (1989) 15 ACLR 230 CASES CITED : Emanuele v Australian Securities Commission (1997) 188 CLR 114 Re Federal Bank of Australia (Limited) (1893) 62 LJ Ch 561 Glegg v Bromley [1912] 3 KB 474 Honner v Ashton (1981) 1 BPR 9478 LED Builders Pty Ltd v Eagle Homes Pty Ltd (1997) 38 IPR 107 Mandarin International Developments Pty Ltd v Growth Corp (Aust) Pty Ltd (1998) 143 FLR 408 Ronnoc Finance v Spectrum Systems Pty Ltd (1997) 45 NSWLR 624 Shevill v Builders Licensing Board (1980) 2 BPR 9662 Re Wilson Market Research Pty Ltd (1996) 39 NSWLR 311 DECISION : Orders made

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG J THURSDAY 8 JUNE 2000

2474/2000 - MARK JOSEPH ALATI v WEI SHEUNG & ORS 2645/2000 - MARK JOSEPH ALATI v SHANG CORPORATION PTY LTD

1 HIS HONOUR: I am hearing together two sets of proceedings commenced by Mark Joseph Alati. The first is matter 2474 of 2000. I will refer to the parties by the position they have taken in those proceedings. Mr Alati is the plaintiff. Mr Wei Sheung is the first defendant. Shang Corporation Pty Limited is the second defendant. S & S Grand Constructions Pty Limited is the third defendant. Hit Neo-&-Hi-Tech Park Group Investments Pty Limited is the fourth defendant.

2 Proceedings 2474 of 2000 are essentially proceedings to set aside certain mortgages as being in fraud of creditors under s 37A of the Conveyancing Act, 1919. There is however in that suit an additional claim for damages for breach of contract.

3 The second suit, matter 2645 of 2000, which was commenced by an application filed on 2 June 2000, names all the previous parties other than Mr Sheung and seeks winding up of the second defendant on the ground that it is insolvent, or alternatively, that it is just and equitable that it be wound up.

4 Basically the facts which are demonstrated to my satisfaction as on a prima facie case are as follows: (A) The plaintiff has a claim against the first defendant for damages for breach of a contract for sale of a property at Warriewood. (B) The second defendant guaranteed the first defendant's obligations under that contract. C) The first defendant owns 999 shares of 1,000 shares in the second defendant. (D) At all material times the first defendant was one of two directors of the third defendant. (E) The second defendant owns land at Marsfield. (F) The third defendant agreed to build on the Marsfield land for the second defendant. (G) The third defendant improved the value of the Marsfield land. (H) In 1998 the fourth defendant agreed to provide and did subsequently provide finance for the second defendant to develop the land. (I) The Marsfield land is subject to a bona fide first mortgage to the Arab Bank which secures approximately $1,100,000. (J) In April 2000 the first defendant left Australia ostensibly on business and has remained in China ever since. (K) No one else in Australia seems to have any complete idea of the financial position of the second defendant. (L) The principal place of business for the second, third and fourth defendants between 29 October 1999 and 18 April 2000 was at 601/51 Rawson Street, Epping. (M) The second defendant has now closed that office. (N) The breach of contract in respect of the Warriewood property occurred on 1 May 2000 when the first defendant did not complete it. (O) The first defendant (and consequentially the second defendant) thereupon became liable to pay the plaintiff damages. (P) Such damages are not yet quantified: the plaintiff says they could be as much as $600,000. (Q) On 3 May 2000 the second defendant granted a mortgage and fixed a floating charge to secure the amount owing by it to the third defendant. (R) On 5 May 2000 the second defendant granted a third mortgage to the fourth defendant. (S) On 11 May 2000 the second defendant contracted to sell the Marsfield land to Aliglow Pty Limited for $2,380,000. (T) $2,380,000 is a fair price. (U) Completion of the sale is due today. (V) The Marsfield land is virtually the only asset of the second defendant. (W) It is questionable as to whether the second defendant kept proper books of account. (X) The possible liabilities of the second defendant total about $4,000,000 on the assumption that the plaintiff is owed $600,000. (Y) The third and fourth defendants are prepared to discharge their mortgage if they are paid the balance after the Arab Bank is paid. (Z) If the plaintiff's claim is justified at $600,000 and there was a pari passu distribution, creditors would receive about 45 cents in the dollar from the liquidation of the second defendant on the assumption that no creditor was secured. 5 On these facts the plaintiff seeks: (1) In matter 2474/2000, an injunction in the nature of a Mareva order to keep the status quo pending a final decision; and (2) In matter 2645/2000, an order for a provisional liquidator or for injunctions to keep the status quo pending the final hearing of the application to wind up the second defendant. Both these applications have been strongly resisted.

6 I have been assisted by the submissions made by Mr Newlinds of counsel on behalf of the plaintiff, Mr Hammerschlag and Mr Kerr on behalf of the first and second defendants, Mr Parsons on behalf of the third defendant, and Mr Parker for the fourth defendant. I am indebted to all of them for their assistance.

7 Dealing first with the plaintiff's claim in matter 2474/2000, as I have said the claim is based on s 37A of the Conveyancing Act. That section, so far as is relevant, provides:

"Every alienation of property...with intent to defraud creditors shall be voidable at the instance of any person thereby prejudiced." 8 Mr Hammerschlag and Mr Kerr say that it is not acting contrary to that section for a person to prefer to pay some creditors over others, or to cause some creditors to be made into secured creditors. The conduct struck down by the section is preferring oneself to the general body of creditors.

9 In general I consider that that submission is correct, and it is supported by authorities such as Glegg v Bromley [1912] 3 KB 474 and Abignano v Wenkart (1998) 9 BPR 16,765.

10 It may well be that there could be circumstances where a person so acted to prefer some creditors or give mortgages to some creditors that it should be held that the general conduct involved alienation with intent to defraud creditors generally. However, in the instant case, assuming that apart from minor creditors the persons before the Court are all the major creditors, it would seem to me, in view of the authorities I have cited, that there is not a sufficiently strong prima facie case to justify granting injunctions to preserve the status quo. I realise that it is wrong to compartmentalise matters and that in cases where the detriment that will be suffered by the plaintiff is considerable, the Court does not look for a strong prima facie case as it might otherwise seek to find, and I have taken that into account. However I do not consider that the case is sufficiently strong in all the circumstances, including the prejudice to the third defendant, to grant an injunction. 11 Accordingly I turn to matter 2645/2000.

12 The initial problem is whether the plaintiff has standing to make the application to wind up the second defendant.

13 The case was heard, at least up to a certain point, on the basis that it would be decided strictly according to principles and that no quarter would be given by any party. The way in which the question was formally posed for decision was whether material which had been admitted in matter 2474/2000 could also be admitted in matter 2645/2000. By consent I reserved that question until I had heard the case generally.

14 The prime thrust of the argument by Mr Hammerschlag and Mr Kerr was based on the decision of Santow J in Re Wilson Market Research Pty Limited (1996) 39 NSWLR 311, particularly at 320-322. That case was put forward as authority for the proposition that a person who has an unliquidated claim is not a contingent creditor until the claim has been properly quantified.

15 If the case said that, it would be contrary to what the High Court said in Community Development Pty Limited v Engwirda Construction Co (1966) 120 CLR 455. See also the same case in the Full Supreme Court of Queensland, which was affirmed by the High Court in Re Community Development Pty Limited [1969] QR 1, especially at p 6.

16 It is interesting that although Santow J mentions the third edition of McPherson on Company Liquidation Law in his judgment in the Wilson case, the fourth edition, which was issued in 1999 and which includes the Wilson case in the table of contents, does not even mention it on pp 50 to 51 when dealing with a prospective or contingent creditor.

17 I think the reason for that is that the real rationale of the Wilson case is explained by Santow J himself in Mandarin International Developments Pty Limited v Growth Corp (Australia) Pty Limited (1998) 143 FLR 408 at 422. That is, if a debt is genuinely disputed and the dispute is yet to be dealt with on its merits, one cannot say that the person with the disputed debt is a creditor, and ergo that person cannot be a contingent creditor. It seems to me the case goes no further than that.

18 In the instant case, at least to date there is no dispute as to the existence of the debt. The only dispute is as to its quantum. Accordingly, under the principles set out by the High Court in the Community Development case the plaintiff is a contingent creditor.

19 As I have indicated, the application seeks winding up of the second defendant on the ground of insolvency or alternatively on the just and equitable ground. So far as the just and equitable ground is concerned, under s 462(2) of the Corporations Law a contingent creditor has standing to apply for winding up. On the insolvency ground s 459P(2) provides that a contingent creditor can only apply for winding up with the leave of the Court. Sub-section (3) provides that the Court may give such leave if satisfied that there is a prima facie case that the company is insolvent but not otherwise.

20 On the facts as I have set them out there must be a prima facie case that the second defendant is insolvent. Even though the fourth defendant is prepared for the sale of the property to be settled by receiving less than its full secured entitlement, unless it forgives the remainder of the debt - and there is no suggestion it is going to do so - the company on the facts as we have them would not be able to pay its debt. The position gets even worse if the plaintiff succeeds in that part of matter 2474 of 2000 which seeks damages for breach of contract.

21 Accordingly, the pre-condition for giving leave under s 459P is made out. The plaintiff is the only creditor who would have sufficient motivation for setting the insolvency law in operation. The plaintiff is a person who appears to be owed money by the second defendant and is entitled to set the law in operation and I should give leave under s 459P(2) of the Corporations Law to sue in insolvency nunc pro tunc (see Emanuele v Australian Securities Commission (1997) 188 CLR 114).

22 Having dealt with that objection the evidence that was admitted in proceedings 2474/2000 is admitted in proceedings 2645/2000. I now have to consider what order I should make.

23 Before the enactment of s 465A of the Corporations Law the Court could, and in appropriate cases did, make an order for winding up straight away in a case where the company was fairly clearly insolvent. The only reason for not making an order forthwith appears to have been that more money would need to be spent on legal niceties, advertising etc, which ultimately would reduce the funds available to creditors. Further, the legislature seems to have taken the attitude in enacting s 467A that that is no longer to happen or, if it is to happen, only in extraordinary cases. Thus today I am not really considering whether to make the final order for winding up on the application that has been filed.

24 Mr Newlinds referred to s 467(1) of the Corporations Law and in particular para (c). That section provides that: "On hearing a winding up application the Court may ...

25 The first matter to decide is whether Mr Hammerschlag is correct in his submission that s 467(1) only applies at the final hearing of the winding up application, or where there is before the Court a real possibility that the company will be wound up that day.

26 I do not accept this submission. It seems to me that s 467(1)(b) shows that the Court's power is to be exercised when the case is in the List for consideration and not just at the time when the Court is considering whether or not to make the actual order.

28 Although a comparable section has been in the Companies or Corporations Acts from the middle of the nineteenth century, there has not been any Australian case considering the extent of the Court's power in those 150 years.

29 Indeed, the only cases where courts seem to have exercised power under an equivalent of para (c) are Re Federal Bank of Australia (Limited) (1893) 62 LJ Ch 561 and Anderson v Newton [1934] 3 DLR 224, a decision of the Manitoba Court of Appeal.

30 In the Federal Bank case the Court was considering the winding up in England of a company which was incorporated in Victoria. Voluntary liquidation was taking place in Victoria and it was put to the English Court that it should not make any order in England but make some administrative direction so the English assets would be provided for. Williams J and the Court of Appeal declined to do that but orders were made that there be a winding up, and that the English liquidator's authority would be limited to assisting the Victorian liquidator.

31 In Anderson v Newton an order was made appointing a receiver to undertake the affairs of the company pending the hearing of the petition to wind it up. At p 228 the Full Court thought that that order could not have been an order that was authorised under s 467(1)(c), although that was the only power that they thought the judge could have used to make such an order. However, the case may depend on the fact that the order was made in such an esoteric fashion that a receiver was not an officer of the Court but purported to be an officer of the corporation.

32 The learned editor of Henochsberg on the Companies Act 4th ed (Butterworths, Durban, South Africa, 1985), when dealing with the equivalent section in the South African Companies Act, indicates that it would be appropriate for the Court under that power to make an order for judicial management, or otherwise make provisions for the administration of the company. No authority is given for this view and it does seem to be contrary to the approach that was taken in Manitoba. However, it seems with respect that the South African view more neatly fits in with the general words of s 467(1)(c) and the sort of approach that was taken in the Federal Bank case.

33 It must always be remembered when construing a power under this Act that one must have regard to s 109H of the Corporations Law which makes one take into account the purpose or object underlying the Corporations Law, whether that is expressly stated or not: see eg Darvall v North Sydney Brick and Tile Co Limited (1989) 15 ACLR 230.

34 It seems to me that one of the underlying principles in the Corporations Law is that if a company is insolvent there should not be any preferential treatment of creditors and that the company's assets should be distributed pari passu with limited exceptions. I believe that I should take that underlying principle into account, together with the wide words of s 467(1)(c) in holding that it is appropriate in certain cases to make an order which will preserve the assets of a company pending the hearing of the application to wind it up.

35 It would also seem to me to be appropriate to look at other sections of the Corporations Law to see the type of order that the Court can make under paragraph (1)(c). One obvious order is an order under s 465B substituting an applicant. Another would seem to me to be an injunction under s 1324(1)(d) and s 1324(b) of the Corporations Law.

36 However, what would be the purpose of making such a preservation order?

37 If the mortgages are not set aside under s 37A of the Conveyancing Act then, if the second defendant goes into liquidation, the secured creditors over the Marsfield land will take the whole of the proceeds of sale of the Marsfield land.

38 Insofar as the third defendant holds a floating charge, s 566 of the Corporations Law will apply although the charge will be considered enforceable on that land to the extent that the mortgage was a fixed charge.

39 Section 513A(e) of the Corporations Law now provides that the winding up commences at the time when the Court's order is made, though there is relation back for preferences under s 565 to the "relation back day". This, under s 7 of the Corporations Law is the date of filing the application, in this case 2 June 2000. That may not be sufficient to enable the preference, if it be a preference, given by the granting of the mortgages in May to be attacked.

40 Thus, if the mortgages cannot be set aside there is little purpose in granting any application for an injunction because this will just injure the secured creditors without benefiting the plaintiff.

42 First of all, although I have stated "facts" (A) to (Z) they are not necessarily all the facts which are relevant. Suspicion is generated by the close relationship between the various defendants. If no order is made then the chances of the plaintiff being able to obtain anything out of the first or second defendant will be virtually nil.

43 So far as the third defendant is concerned, the third defendant makes it clear that it does need the proceeds of sale from the Marsfield land for the purpose of paying its own subcontractors, which subcontractors have been utilised to do work on the Marsfield property which has improved it so that a greater sale price can be obtained. That factor may mean that even if the mortgage is formally set aside under the restitution principle set out in Cadorange Pty Ltd v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26, that it should still prevail over the plaintiff.

44 Another line of thought is engendered by the cases decided under the Mareva principle. Mr Hammerschlag directed my attention to what Emmett J said in LED Builders Pty Limited v Eagle Homes Pty Limited (1997) 38 IPR 107, and what the High Court said in that matter on appeal in Cardile v LED Builders Pty Limited (1999) 162 ALR 294, especially at 311, paras 51 and 52.

45 When considering whether to grant a Mareva order - and in practice these are rarely granted in this jurisdiction - one must consider, inter alia, the fact that Mareva orders and the like are not meant to provide any security for a creditor, but are to hold the fort against the real prospect of assets being dissipated so that the plaintiff will be left without any comfort even though it has a good cause of action. Care must be taken to make sure that, even though an undertaking as to damages is given, it is a case where damages can be properly quantified under that undertaking, and one must also take care not to prejudice unduly innocent third parties.

47 There is another problem. The settlement of the Marsfield property is due at 12 noon today. That settlement can only take place because the third mortgagee, the fourth defendant, is prepared to give a discharge of mortgage even though it is not getting the full amount owing to it. It may not be willing to let the settlement go through unless, for instance, $600,000 were guaranteed from the settlement pending resolution of the current proceedings.

48 Some play was made between counsel as to whether this meant the plaintiff was trying to get the best of all worlds. It seems to me, however, these parties are well able to look after their own commercial interests and I should just let market forces take care of them.

49 The fourth defendant did apply to be dismissed from the suit because it was not a proper party. Ordinarily a creditor is not joined in these sorts of proceedings. Creditors may give notice that they wish to be heard and are heard. In the instant case the rights of the fourth defendant were being affected by what the plaintiff sought, at least on an interlocutory basis, and I consider in this case it was proper to add it as a defendant.

50 There is one further collateral matter I should mention before dealing with the result of the case. The plaintiff has alternate remedies under or by virtue of the contract for the sale of land which was breached by the purchaser:

(a) to sue for damages; or (b) to exercise his secondary contractual rights under the contract itself.

See Honner v Ashton (1981) 1 BPR 9478, 9491 and Shevill v Builders Licensing Board (1980) 2 BPR 9662, 9671. 51 Mr Hammerschlag said by issuing the statement of claim in matter 2474 of 2000 that election had been finally made as a claim for damages. Although that might be so, it would seem to me that the better authority supports the proposition that, unless there is judgment on that claim it is still open to the plaintiff to discontinue that claim and to elect to re-sell and claim as a liquidated sum the difference between the resale value and the former sale price with appropriate adjustment; see Spencer Bower and Turner on Estoppel, 3rd ed (Butterworths, London, 1977) p 333. I mention this matter because what happened in the second of the Wilson Market Research cases reported in (1996) 20 ACSR 170, shows that this may be significant.

52 Having spent perhaps too long going through the details, because I thought it important in view of the fact that it is likely in this sort of case where there are three relatively innocent persons, at least one of whom must suffer for the acts of another party, that there will be an appeal. However, essentially the matter is whether, bearing in mind all the prejudices and inconveniences that will be suffered particularly by the third and fourth defendants if some order is made in the plaintiff's favour, and bearing in mind the problems the plaintiff has in any event even if the company is wound up, an order should be made.

53 I bear in mind the common directorships of some of the defendants, and also Mr Newlinds' submission about the rather singular matter that the really vigorous defence of these proceedings or portion of them was by Mr Hammerschlag rather than by the other defendants. One would have thought if there was not something more in it, it would be odd for the first and second defendants to be defending the proceedings so vigorously rather than leave the third and fourth defendants to fight it out with the plaintiff.

54 All the factors I have in mind make me think it is preferable to make some order preserving the status quo pending the hearing of these proceedings so that if they are successful the liquidator has a good chance of working things out before moneys are irretrievably lost.

55 I note that the third defendant in particular needs money to pay subcontractors. Whilst it cannot be said it is dissipating these moneys in the sense of riotous spending, the consequences will be the money will disappear into the hands of the subcontractors.

56 If as a consequence of the order I make matters become urgent so the whole suit has to be heard in the next few days, if the parties are ready that can be accommodated.

57 I think the proper order is that the second defendant not authorise any dispersal of the proceeds of the sale of its land contained in folio identifiers 1/55196, 12/23963 and 16/260270 unless it pays into Court or invests in a way to which the plaintiff's solicitor consents in writing the sum of $600,000 pending further order. The costs of the present application should be costs in the cause.

58 I note that not only does the plaintiff give the usual undertaking as to damages, but it is a term of the injunction that no later than 4 pm tomorrow formal undertakings under seal be filed on behalf of Class Electrical Services Pty Limited, MJA Group Pty Limited and Bedding Pty Limited.

59 There are four further matters which I need to comment on:

(1) Mr Hammerschlag submitted that it may be that the market will fall or rise on the Warriewood land and, accordingly, the plaintiff's damages may be nil no matter what the value of the land is today. In answer to the submission that the damages must have been fixed as at the time of breach, Mr Hammerschlag referred me to Ronnoc Finance v Spectrum Systems Pty Limited (1997) 45 NSWLR 624. However, that case seems to me merely to say that at common law one might assess damages as at the date of breach or the date of acceptance of the breach. Assuming for the moment it is correctly decided, and Mr Newlinds submitted it was not, it still would not cover the present point. The only time Mr Hammerschlag could get any comfort from this point is if there had been an election to sue for the difference between the retail price and the sale price.

(2) Mr Newlinds has indicated that I have not taken into account s 588FC of the Corporations Law. This is certainly true. The reason is it was not argued. I merely note this. It may be that s 588FC and sections in that vicinity may provide reasons why the mortgages can be attacked by the liquidator. I express no view on this.

(3) Mr Parker has asked me to take from Mr Newlinds an enhanced undertaking as to damages. He said there was a problem, if the winding up order was eventually made, it may still be said that the interlocutory injunction had been properly granted. Thus, any losses that his client might suffer if the sale fell through and the Marsfield property was only able to be sold at a diminished value might be said not to flow from the undertaking as to damages.

I appreciate that problem. However, there is also the further problem that such a loss in any event may not flow from the grant of the injunction; see Air Express Limited v Ansett Transport Industries (Operations) Pty Limited (1981) 146 CLR 249. I do not consider that I should ask Mr Newlinds for a further undertaking as to damages. I recognise the problems that Mr Parker's client has but I think it must be left to make its own commercial decision.

(4) Mr Newlinds correctly says that I have given no reasons as to why I preferred to make the order I indicated earlier rather than having a provisional liquidator take charge of the second defendant. He put that in particular the effect of my order is to leave the second defendant in control of the first defendant who appears to be conducting an informal winding up. There is force in that submission. However, the reason I believe that the type of order I indicated previously is appropriate is because I wish to cause the minimal amount of prejudice to the third and fourth defendants in the light of the fact that the plaintiff's case is not watertight by any means. I realise there may be other creditors that we do not know about but the probabilities are there are not, and if this is the only real asset of the second defendant, the current order will cause less damage and will be less expensive for the second defendant than appointing a provisional liquidator at this stage.

60 The parties having considered the matter, I can now proceed to make orders in accordance with the short minutes. Thus, I make orders in both matters in accordance with the short minutes of order which I have initialled. Both matters will stand over to 11.45 am on 19 June 2000. ****************

Last Modified: 09/26/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

At a glance

Court

Decision date

Before

Source

Judgment (68 paragraphs)

Cases Cited (9)

Cited By (6)