Australian Spirit Management Pty Ltd v Commissioner of Taxation [2011] NSWSC 1626 | Case summary

Judgment 1The Court is presently concerned with two interlocutory motions - the plaintiffs' motion for production of information and preservation of assets and the second, third and fourth defendants' motion for security for costs. The substantive proceedings relate to a very substantial quantity of whisky manufactured in Scotland and the proceeds of sale of another substantial number of litres of whisky which have been sold over the last few years. 2Australian Spirit Management Pty Ltd (" ASM "), Grant McKenzie Australia Pty Ltd ( "GMA" ) and Grant McKenzie Pty Ltd ( "GM ") are companies formed in 1999, 2000 and 2001 to act as managers ( "the Managers" ) under ventures in which " Participants " would invest significant sums of money to enable the Managers to have manufactured, in Scotland, whisky, with a view, it has been said, to subsequent sale at a profit. The Managers are companies controlled by Mr Ross Seller and Mr Patrick McCarthy, to whom I shall refer jointly as " the Promoters ". 3The Participants were not required to pay all of the amounts due as the cost of participation in the investment in cash. The cash component of investment was 25% of the total commitment with 75% to be borrowed from the second defendant, Chambers Finance Ltd, which was then and up until 2006, under the control of the Promoters. The third defendant, Grant McKenzie Hong Kong Ltd, was the party to whom the second defendant delivered the promissory notes in relation to the 2000 and 2001 ventures. The fourth defendant, Brackwell Trading Ltd, was apparently utilised as the corporate vehicle for the arrangement with the whisky manufacturers for the 2001 venture. Mr M J Leeming SC of counsel appears with Ms K Dawson of counsel for the second, third and fourth defendants and I shall refer to these three defendants collectively as " Chambers Finance ", although it appears that the second defendant is the principal corporate vehicle involved. From 2006, Chambers Finance has been under the control of Mr Robert Speirs. 4Mr P Bruckner of counsel appears for the Managers and for the other three plaintiffs whose roles I shall describe below. 5The Commissioner of Taxation ( "the Commissioner "), for whom Mr A J O'Brien of counsel appears, does not concede that he is properly joined as a party to the proceedings but he has no particular interest in the outcome of the two motions presently before the Court and leave was granted to Mr O'Brien to withdraw. The Commissioner has taken a position in relation to the three ventures which I shall describe below. 6The other defendants named in the commercial list statement are Participants in each of the three ventures. I shall refer to those involved in the 1999 venture as the "1999 Participants" , those involved in the 2000 venture as the "2000 Participants" and those involved in the 2001 venture as the "2001 Participants" . Not all of the original Participants have been joined because a number of them have become insolvent. Not all of those joined have been served. Not all of those served have appeared. Mr G Carolan of counsel appears for the seventh, twentieth, thirty-fourth, thirty-eighth, forty-first, forty-sixth, fiftieth, fifty-third, fifty-fourth, sixty-third, sixty-fourth, sixty-ninth, seventieth, seventy-second, seventy-ninth, eightieth and eighty-first defendants. Mr M Turnbull, solicitor, appears for the forty-third and forty-fourth defendants. Mr J Davis, solicitor, appears for the forty-seventh and forty-eighth defendants. Mr Carolan, Mr Turnbull and Mr Davis' clients support the plaintiffs' position on both motions. This does not mean that they support the plaintiffs' position in the litigation generally: see T129-T130. 7Under each of the Management Agreements entered into in 1999 between ASM and the 1999 Participants, ASM agreed that it would treat the 75% balance payable by Participants as paid on receipt by it of a non-negotiable promissory note issued by Chambers Finance. 8Under each of the Management Agreements entered into in 2000 between GMA and the 2000 Participants, GMA agreed that it would treat the 75% payable by the Participants as paid on receipt of a negotiable promissory note issued by Chambers Finance and each of the Management Agreements entered into in 2001 between GM and the 2001 Participants had a similar clause. 9By letters said to constitute or reflect " Secured Credit Facility Agreements " between Chambers Finance and the Participants (see for example pages 24-31 of Exhibit B1), Chambers Finance agreed with the Participants to issue promissory notes to the face value of the 75% balance and to deliver them to the relevant Manager: see for example clause 11 at page 27 of Exhibit B1. Those letters refer to English law as the governing law and contain an exclusive jurisdiction clause for the courts of England: see pages 29-30 of Exhibit B1. Mr Seller was appointed agent of Chambers Finance to execute documents. 10Clause 5.4 of the 1999 Management Agreements provides (see tab 6(b) of Exhibit A): "5.4 Application of Proceeds The Proceeds will be applied by the Manager in the following order of priority: (a) first, towards the Reimbursed Costs, to the extent that these costs are attributable to the manufacture of that portion of the Product sold; (b) second, the Borrowing Costs, to the extent that these costs are attributable to the manufacture of that portion of the Product sold; (c) third, the Marketing Fee, to the extent that these costs are attributable to the manufacture of that portion of the Product sold; and (d) fourth, the Proceeds remaining after application of the Proceeds referred to above, will be paid to the Participant, within a reasonable period after receipt of the Proceeds." A similar clause is found in each of the 2000 and 2001 Management Agreements. The plaintiffs refer to this clause as "the waterfall". 11Clause 1.1 of the 1999 Management Agreements defines "Reimbursed Costs" and "Taxes" as follows (see tab 6(b) of Exhibit A): " Reimbursed Costs means any costs and expenses reasonably incurred by the Manager including expenses arising as a result of: (a) the Manager creating from time to time provisions for future expenditure or liabilities with respect to the Project; and (b) any Taxes required to be paid in relation to the Project; ... " Taxes means present and future taxes, levies, imposts, deductions, charges, fees and withholdings (together with interest, penalties and expenses in connection with them) including GST" 12The Management Agreements acknowledged the Secured Credit Facility Agreements (see for example clauses 9.3 and 10.1 at pages 12-13 of Exhibit B1); and the arrangements between the Participants and Chambers Finance, which can be found for example at pages 24-39 of Exhibit B1, contemplate a right of sale by Chambers Finance: see clause 5(a) at page 25 and clauses 4 and 5 at pages 33-34 of Exhibit B1. 13The Management Agreements contain an acknowledgement by the Participants "that a loan has been obtained by the Participant from the Lender to assist in the payment of the Initial Cost": see clause 9.6(a) on page 12 of Exhibit B1. 14I set out below what appears to me to be the critical facts against the background I have just described that underpin the positions of the Managers and Chambers Finance both generally and in relation to the motions: (1) A total of $4.5 million cash was contributed by the 1999 Participants to the 1999 venture. The "lending" under the Secured Credit Facility Agreements was $12.95 million. (2) A total of $9.75 million cash was contributed by the 2000 Participants to the 2000 venture. The "lending" under the Secured Credit Facility Agreements was $12.95 million. (3) A total of $7,693,225 cash was contributed by the 2001 Participants to the 2001 venture. The "lending" under the Secured Credit Facility Agreements was $23,073,175. (4) The Managers entered into agreements with Scottish distilleries to manufacture whisky (specified in original litres of alcohol ( "OLA" )) using a portion of the cash referred to above. These agreements are not in evidence. There was a considerable shortfall between what was received by the Managers and what was paid to the distilleries. There is no evidence to suggest that any cash was laid out by the Managers beyond what was received in cash from Participants and indeed it has been alleged in the Position Paper of the Australian Taxation Office dated 4 February 2009 (Exhibit 1) that a considerable amount of money was diverted to the personal benefit of Mr Seller and Mr McCarthy through other companies controlled by them and, for example, used for the purchase of a boat for $225,000 (see pages 13-18 of Exhibit 1). (5) The Managers, by a funding agreement entered into in June 2009 ( "the 2009 Funding Agreement" ), appointed Chambers Finance to sell a quantity of whisky and Chambers Finance agreed to pay the net proceeds of sale to the Managers. (6) Pursuant to the 2009 Funding Agreement, Chambers Finance sold whisky and received a total of 3,483,948.35. In addition, another 200,000 is due by the end of the month. (7) Chambers Finance has also sold other hogsheads of whisky for which it has received a total of 3,672,677.64: see paragraph 17 of the second affidavit of Mr Christopher Allen Stevens of 1 December 2011. (8) Chambers Finance claims that it had incurred expenses of 1,467,570 which expenses related not simply to the whisky sold under the 2009 Funding Agreement but for all of the whisky ventures, namely 1999, 2000 and 2001. (9) The Managers revoked the authority of Chambers Finance to sell whisky pursuant to the 2009 Funding Agreement earlier this year and demanded payment of the proceeds of sale. (10) The Commissioner disallowed the claims for deduction of the Participants in the three ventures. The Commissioner also issued an assessment against each of Mr Seller and Mr McCarthy in relation to the ventures, each of those assessments being for an amount of approximately $6.7 million. Mr Seller has been served with a bankruptcy notice which he sought to set aside without success. He and Mr McCarthy are challenging the tax assessments in the Federal Court. Apparently, the basis for the assessments was that the Managers received funds as agents for the Promoters. The assessments include a penalty component, approximately $3 million in each case. (11) Mr Seller and Mr McCarthy have been indicted for offences of conspiring to defraud the Commonwealth by inducing officers of the Australian Taxation Office to act in contravention of their public duty and with the intention of dishonestly influencing the Commissioner of Taxation in the exercise of his duties as a public official: see page 92 behind tab 8 of Exhibit A. (12) There has, it appears, been a falling out between the Promoters on the one hand and Mr Speirs on the other. Even as late as 2009, Chambers Finance was willing to set about selling whisky (and transferring 800,000 to the Managers) to assist the Promoters in their court battles with the Commissioner. Now Chambers Finance is not prepared to countenance such assistance. (13) In June 2011, the Managers entered into a "Sales Agreement" with Whisky Sales Australia Pty Ltd ( "WSA ") for sale of all of the whisky manufactured under the three venture years (" the Sale Agreement" ). WSA on-sold the whisky to Whisky Distributors Pty Ltd ( "WD" ). (14) Another company, Whisky Security Pty Ltd ( "WSPL" ), is a party to the arrangements referred to in (13) above and has a pledge over "other whisky", ie whisky other than that sold by the Managers to WSA and on-sold to WD (see clause 10 behind tab 6(d) of Exhibit A). (15) Each of WSA, WD and WSPL are companies controlled and owned by the Promoters. I shall refer to these plaintiffs collectively as " the Purchasers" . (16) Mr Kelvin Solari, solicitor for the plaintiffs and for the Promoters has estimated costs of $1.4 million for these proceedings and Mr Seller and Mr McCarthy are described as clients who are, together with the plaintiffs, liable to pay Mr Solari's costs and disbursements of these proceedings. (17) Mr Seller and Mr McCarthy are actually parties to the proceedings because they are named as defendants, presumably because they are Participants. No appearance has been filed by them and Mr Bruckner said he does not act for them: see T31. (18) Chambers Finance had some difficulty with one of the distilleries (Speyside Distillers Company Ltd ( "Speyside" )) with whom it had in place a manufacturing agreement. Chambers Finance took action in Scotland (joining not only Speyside as a defendant but also Grant McKenzie Hong Kong Ltd) to establish its title to whisky held at that distillery and obtained a judgment in its favour: see pages 450-451 of Exhibit B2. (19) Chambers Finance has taken action in England against the 1999 Participants for unpaid amounts under the Secured Credit Facility Agreements and obtained default judgments against a number, but not all, of the 1999 Participants who remain solvent. (20) Chambers Finance has been selling whisky even after the Managers commenced these proceedings. (21) One or more of the plaintiffs has written to some distilleries in Scotland denying the right of Chambers Finance to access the whisky held and Chambers Finance has refused to provide details of the distilleries at which whisky is held in the absence of an undertaking by the plaintiffs not to write again to the distilleries about whom information is supplied. No undertaking of that kind has been offered by the plaintiffs. 15Chambers Finance has, a few days before this hearing, launched proceedings in Scotland against the Managers and the Purchasers to have determined its rights in relation to the whisky and it has joined to those proceedings the Scottish excise authorities. Apparently there are tight restrictions on who is permitted to sell Scottish whisky. Chambers Finance is of the view that Her Majesty's Customs & Excise may have its own objection to the sale of whisky to WSA or at least would require payment of impost should such sales be otherwise effective. 16I have referred to the plaintiffs' motion as being one for preservation of assets order coupled with a requirement for the production of information. Chambers Finance refers to it as a Mareva order with ancillary requirement of information. 17The second motion is Chambers Finance's motion for security for costs. Chambers Finance seeks the sum of $89,000 as a first tranche. The amount is based upon calculations of Ms Zoe Hillmann, a solicitor employed by Deutsch Miller, which is the firm of solicitors acting for Chambers Finance. 18The Managers (and Purchasers) put the following matters as relevant to both motions: (1) The Managers submit that Chambers Finance is not entitled to hold on to the balance of the proceeds obtained by Chambers Finance pursuant to the 2009 Funding Agreement at all or, alternatively, at least without payment of the Managers' legitimate "Reimbursed Costs". The Court was informed by Mr Leeming that Chambers Finance has approximately 2.4 million in its bank account with 200,000 due by the end of the month from sale of whisky that was manufactured pursuant to the ventures. The plaintiffs have sought copies of bank accounts of Chambers Finance but to date they have no t been produced. (2) The Managers assert that even if Chambers Finance is entitled to security over the whisky and a costs order is made against the Managers, those costs will have priority over Chamber Finance's interest over the whisky. (3) Chambers Finance has obtained other funds to which it is not entitled, it having sold whisky from the 1999 venture pursuant to a claimed security interest which the plaintiffs dispute. 19It is obvious that since Chambers Finance claims it is owed 75% of the participation amount and less than 25% of the Participation amount has been used to fund the manufacture of whisky, there is no realistic prospect that there would be any amount left for the Participants after the security of Chambers Finance, if valid, is realised. I think it is also clear that if the Promoters' claims are met by the proceeds of whisky sales there will be very little left for the Participants, particularly if the estimate of $14 million of excise payable on the whisky is correct: see T33.44. 20Mr Bruckner asserted that the shares in WSA and WD are held on trust for the Participants (see T19.18-28 and T94.31-T95.26). The ASIC searches contained in Exhibit A point to WD as holding shares on trust but no details have been provided of that trust (see pages 25-27 of Exhibit A). The search of WSA does not indicate that shares are held beneficially for anyone other than the shareholder named (see pages 22-24 of Exhibit A). 21Various explanations are given for the fact that not even all of the solvent Participants have been served, including the difficulties arising from the Managers holding out-of-date addresses for some of the Participants. None of the Participants who were represented before me indicated a willingness to expose themselves to risk either by supporting the plaintiffs in the undertaking or in providing security for costs. 22An important aspect of this case is that the Managers claim that "Reimbursed Costs" include (see T101-T102): (1) taxes payable by Mr Seller and Mr McCarthy; (2) the costs of the proceedings launched against or by Mr Seller and Mr McCarthy in relation to their taxation liabilities (which I should note are contested) - Exhibit 1 is an outline of the Commissioner's case against Mr Seller and Mr Carthy; (3) the costs involved in relation to taxation investigations, including resisting the production of documents; (4) the costs of Mr Seller and Mr McCarthy in the criminal proceedings (as described in ) above which have been launched and which, I was informed, involves a 42-volume brief of evidence with a further 92 volumes which have not been released yet and also a possible further 150 volumes of additional material (see T43); (5) the cost of these proceedings; and (6) the costs of handling requests by liquidators of insolvent Participants. 23Mr Bruckner drew attention to the fact that it was agreed by Participants under each of the three ventures that whisky could be pooled. He identified as an issue for determination how the insolvency of certain Participants is to be dealt with - whether the insolvent Participants' shares are to be held for the solvent Participants in the particular venture year or for all Participants or for the Manager. I accept that that issue is one on which there may be doubts as to how it should be treated. However, it will be of concern only at the end of a long process if there are any funds to be distributed. As I have indicated, if either Chambers Finance or the Managers make out their contentions, it is most unlikely that there will be any f unds for distribution. Chambers Finance has no interest in that issue. 24Chambers Finance claims that it has security over the whisky to repay $13 million lent for the 1999 venture. It has received 3,672,676.17 as proceeds of sale of whisky said to be on behalf of insolvent Participants (for all three ventures) and received 3,483,948.35 as proceeds of sale of whisky sold under the 2009 Funding Agreement, ie a total of 7,156,624.52. Chambers Finance claims to be a creditor of the Participants and asserts t hat it is entitled to security by reason of the lending and by reason of having incurred, inter alia, costs of storage and insurance. Chambers Finance says that on 30 June 2011, all of the 1999 Participants became liable to repay to Chambers the amount borrowed in 1999 under the Security Credit Facility Agreements. Chambers Finance accepts that until 30 June 2012 and 30 June 2013, the 2000 and 2001 Participants respectively are not yet required to repay money lent to them. 25The plaintiffs claim that Chambers Finance is not entitled to control of the whisky not yet sold and has not accounted for the proceeds of whisky sold in the past. 26The plaintiffs dispute that Chambers Finance has any entitlement in its role as lender because, they assert, it has not in fact lent any money to the Participants, the promissory notes being in fact not effective or valid promissory notes. The plaintiffs also assert that even if Chambers Finance has any right to repayment, that right does not permit Chambers Finance to reimburse itself from the funds obtained following sales under the 2009 Funding Agreement. 27Chambers Finance alleges that the purported sales by the Managers to the Purchasers cannot be effective because those sales do not meet the criteria set out in the Management Agreements: see clause 5.2 at page 9 of Exhibit B1. 28Chambers Finance has, through two open offers, offered to provide detailed information about its present holdings of whisky and as to the costs it has incurred to date in relation to storage, insurance and similar costs. Chambers Finance has offered, for the next seven months, not to sell or agree to sell any of the 2000 and 2001 whisky. The seven-month period is chosen because under its agreements with the Participants of the 2000 and 2001 ventures, the balance of money due from Participants is not due until June 2012 (for the 2000 venture) and June 2013 (for the 2001 venture). The offers are subject to exceptions and are conditional upon the plaintiffs giving the usual undertaking as to damages and providing details of the claimed "Reimbursed Costs". Those details were provided during the course of submissions: see [22] above. 29As matters presently stand there would appear to be four possible outcomes in the substantive proceedings: (1) The plaintiffs are successful in establishing that: (a) Chambers Finance has no legitimate security interest and that all sale proceeds of whisky which it has earnt should be paid to the Managers; and (b) reimbursement costs include the Promoters' costs. (2) The plaintiffs are unsuccessful in establishing that Chambers Finance has no valid security, but are successful in establishing that Chambers Finance's security stands behind the Managers' right to Reimbursed Costs which Reimbursed Costs includes the personal liabilities of Mr Seller and Mr McCarthy. (3) The plaintiffs fail both on the attack on Chambers Finance's security and on the contest of Reimbursed Costs. (4) The plaintiffs succeed in establishing that Chambers Finance has no valid security but fail in establishing any entitlement to Reimbursed Costs that include personal liabilities of the Promoters. 30In addition to the issue of Reimbursed Costs outlined above in [22], there are three components to the plaintiffs' case which undoubtedly loom large: (1) The plaintiffs seek to attack Chambers Finance's rights to retain any whisky pursuant to the Secured Credit Facility Agreements between the Participants and Chambers Finance on the one hand and under the Management Agreements between the Participants and the Managers on the other. (2) The plaintiffs seek to promote as valid and effective the Sales Agreement to the Purchasers entered into in June this year and to which I have referred. (3) The plaintiffs claim that even if, contrary to their principal case, the Chambers Finance security is valid and the sales to WSA etc are not valid or cannot proceed, Chambers Finance must stand behind the Managers under the waterfall. 31The ability of Chambers Finance to obtain security over the whisky on the basis of promissory notes (whether negotiable or not), where there is nothing to suggest that Chambers Finance would ever have been able to meet its obligations under the promissory notes and where the promissory notes did not support the expansion of the quantity of whisky to be produced beyond (at a maximum) the amounts provided in cash from the Participants, is intriguing. Mr Leeming submitted that in the light of Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [47]-[54], a beneficiary of an agreement does not need to provide any money to the other party to avoid the agreement being characterised as a scam. Mr Bruckner stated that his clients do not challenge Equuscorp and inferentially do not seek to characterise what occurred as a sham - rather the focus seems to be on whether the promissory notes were effective promissory notes, and whether there were any advances in fact made under the Secured Credit Facility Agreements. 32Mr Bruckner claimed that the Managers brought these proceedings for the benefit of the Participants. To the extent that a finding is made that Chambers Finance has in fact no security, it can readily be understood that that conclusion would benefit the Participants; but to the extent that the Managers' claim that Reimbursed Costs include the Promoters' expenses and liabilities as set out in [22] above, I cannot accept that such a claim could be in the interests of the Participants. There appears to me to a conflict of interest between the interests of the Managers and the interests of Mr Seller and Mr McCarthy since Mr Seller and Mr McCarthy want to have paid out of the whisky proceeds the amount for which they have been assessed by the Australian Taxation Office and all of the costs as set out in [22]. If the Managers owe duties of a fiduciary nature to the Participants as Mr Bruckner appears to contend, then there is an even starker conflict of interest between the Managers and the Participants in promoting the claims that the Managers bring in these proceedings. The sale of the whisky to the Purchasers which are companies associated with the Promoters without, again, anything more in cash than a few hundred dollars being received by the Managers appears to offer no real benefit to the Participants. How Mr Solari, who acts for the Managers, could also act for the Promoters, as his fee agreement says he does, if the Managers owe fiduciary duties to the Participants, is hard to fathom. I raised with Mr Bruckner this conflict issue (see T32-T33 and also T109-T110). I do not think his responses provided any satisfactory explanation. 33The claim that the proceedings are brought by the Managers for the benefit of Participants is connected to the fact that Mr Bruckner sought to present the proceedings as, principally, a claim for judicial advice under s 63 of the Trustee Act 1925 (NSW). There are a number of reasons why I cannot accept that categorisation: (1) As Mr Leeming points out, no attempt was made by the plaintiffs to seek judicial advice before the commencement of proceedings: see Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at [61]-[72] per Gummow ACJ, Kirby, Hayne and Heydon JJ. (2) The relief sought is clearly designed to promote the interests of the Promoters. This is confirmed by the involvement of the Promoters in the engagement of Mr Solari. (3) Following on from (2), there is a clear conflict between the interests of the Promoters and the Participants. The Managers, by advancing the claim that Reimbursed Costs include Promoters' liabilities, clearly favour the interests of the Promoters. (4) The Management Agreements do not expressly appoint the Managers as trustees and it is by no means clear that they are trustees: see, for example, the Background provisions and clauses 2, 3, 4, 12, 13 and 16.11 of the Management Agreements. I think Mr Bruckner's submissions recognised this problem because he sought to assert that there would be a constructive trust based on Residential Housing Corporation v Esber [2011] NSWCA 25 at [115]-[117] and Chan v Zacharia (1984) 154 CLR 178. There may be a constructive trust involved in respect of proceeds of sale obtained by the Managers, but as I have said, any amount held for the Participants or even the lender (if Chambers Finance makes out its case) is not at the forefront of the plaintiffs' case even on the issue of Reimbursed Costs. Sale of the whisky to the Purchasers, which the plaintiffs seek to validate, does not fall within this concept at all. (5) This does not appear to me to be the type of case which should or could be resolved by judicial advice: see Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 440ff per Sheller JA. 34There was no disagreement as to the general principles in regard to the availability of an order for security for costs where it has been established that a plaintiff or plaintiffs is or are impecunious: see Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [49]. 35There is no dispute by the plaintiffs with the method of calculation or general approach to security. 36I think it is clear that apart from access to the proceeds of sale of the whisky which is the subject of the current proceedings, the plaintiffs could not meet, either individually or collectively, an order for costs if one is imposed upon them. 37There are three reasons why the plaintiffs resist an order for security: (1) they assert that this is an application for judicial advice and security for costs is not ordered in such cases; (2) they assert that they do have access to the whisky proceeds because costs of these proceedings are part of the "Reimbursed Costs"; and (3) even if for some reason there is no access to the proceeds of sale or to a sufficient amount of it to permit payment of an order for costs, they can recover costs from the Participants. 38In my view, the first reason in has no validity for the reasons I have already given. 39So far as the second reason in is concerned, I think the claim that the costs of bringing proceedings to further the interests of the Promoters falls within the definition of "Reimbursed Costs" is highly contentious and it cannot be assumed that an order for costs against the Managers for a case designed to promote the interests of the Promoters will be recoverable from the whisky proceeds. 40So far as the third reason in is concerned, not only are there a number of Participants who are insolvent, but Chambers Finance has obtained default judgment in respect of all of the 1999 Participants (other than the insolvent ones). In any event, for similar reasons identified in dealing with the second point, I think that there must be a real doubt as to whether indemnification of the Managers, even if available in theory, would be available in circumstances such as this. 41In my view, an order for security for costs is appropriate. There is no dispute about the amount. 42I do not understand Chambers Finance to contend that there is not a seriously arguable case that the security interest it holds is defective, although Chambers Finance does point out that its security interest was created in or recognised in the documentation by which the ventures were established and that in a recital to the 2009 Funding Agreement the security interest was expressly recognised by the Managers: see page 115 of Exhibit B1. 43The plaintiffs' case that the tax liabilities of the Promoters and their costs in both criminal and civil proceedings are included in "Reimbursed Costs" appears, on what is before me at present, weak. Mr Bruckner relies on the definition of "Taxes" and clause 8.1(d) in the Management Agreements which authorises the Managers and their servants or agents on behalf of the Managers or on behalf of the Participants to commence any legal or arbitration proceedings of any kind in any court against any person including procuring compliance with the provisions of any agreement entered into by the Managers on behalf of the Participants and that the costs of such proceedings will be paid out of the "Project Assets" as defined - but that clause says nothing about Mr Seller or Mr McCarthy. 44The claim that Chambers Finance should pay to the Managers the net proceeds of sale under the 2009 Funding Agreement is not a weak claim and, apart from the underlying Reimbursed Costs issue, I think it is appropriate for Chambers Finance to be required to pay those funds into Court subject to three matters. 45The first matter is that the only undertaking offered is that of the plaintiffs. That undertaking has no value. An undertaking to pay any damages which would be suffered by Chambers Finance should it ultimately be held to be successful in these proceedings is a normal concomitant of obtaining injunctive relief from the Court: see Southern Tableland Insurance Brokers Pty Ltd (in liq) v Schomberg (1986) 11 ACLR 337 at 341, Varley v Varley [2006] NSWSC 1025, IceTV Pty Ltd v Ross [2007] NSWSC 1232 and Young, Croft & Smith, On Equity, (2009) at [16-420]. Where the undertaking is worthless or will be worthless if the plaintiff does not succeed, that is a compelling reason for injunctive relief not to be granted: see IceTV Pty Ltd v Ross (supra), and see Corporate Transport Services Pty Ltd v Toll [2005] NSWSC 166 at [44] per Campbell J (as his Honour then was) . 46The second matter is that it is quite unclear what damage would be suffered by Chambers Finance should it not be permitted to deal with the proceeds of sale of the whisky sold under the 2009 Funding Agreement. 47The third matter is that it seems clear that the purpose of the 2009 Funding Agreement was to enable the Promoters' costs and expenses to be met. Given the highly questionable nature of that purpose, I would not think it appropriate to require any payment by Chambers Finance to anyone but the Court. 48There is a further dimension to the problem, and that is that Chambers Finance has now commenced litigation in Scotland which litigation will, if heard, determine the rights of Chambers Finance, the Managers and the Purchasers, but not the Participants (see Exhibit G). It is at least likely that Chambers Finance will utilise, for the costs of those proceedings, funds it acquired from the sale of whisky either under the 2009 Funding Agreement or pursuant to Chambers Finance's claimed security rights against insolvent Participants or the 1999 Participants. There is no material before the Court which would suggest that Chambers Finance has any other source of funds. 49The complex background of the case and the competing contentions which I have endeavoured to expound must be brought into account in determining how best the situation can be preserved pending a hearing which, as Campbell J (as his Honour then was) observed in Corporate Transport Services Pty Ltd v Toll , involves the Court making a pragmatic judgment about the balance of convenience. 50One further matter which needs to be considered is that the arguments of Chambers Finance in relation to the preservation of assets appears to proceed on the basis that the plaintiffs are seeking a Mareva order. Mareva orders are directed to preventing a defendant from dissipating assets owned by the defendant where there is an established concern that the defendant might, by so doing, render any judgment obtained by the plaintiff nugatory: see Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321, P Biscoe, Freezing and Search Orders : Mareva and Anton Piller Orders, 2 nd ed (2008) at [2.70] and see Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 and Jackson v Sterling Industries Ltd (1987) 162 CLR 612. Because Mareva orders prevent a party from utilising his or her own assets prior to the determination of proceedings, the orders are regarded as highly intrusive and not to be granted lightly. It has been accepted that there is a difference between orders designed to protect the assets which are the subject of the proceedings (see Cardile (supra) at 389, Petar v Macedonian Orthodox Community Church St Petka Inc [2006] NSWCA 277 at [59]-[62] and Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433) and a freezing of specific assets of the defendant which are not themselves the subject of a claim. In this case, the funds to be preserved are the proceeds of sale from the whisky. Mr Leeming has informed the Court of the amount r eceived (and of the prospective receipt of a further 200,000) but the actual account details are not in evidence partly because Chambers Finance has resisted production of them. 51In the unusual circumstances here, I have some hesitation as to whether an y undertaking of value from the plaintiffs should be required, but I think that there is at least some scope for loss to Chambers should it be required to hand over the proceeds of sale of whisky (less storage and insurance costs to the extent that those have not been paid) and ultimately be successful in the proceedings. 52I think that the plaintiffs should be given an opportunity to obtain security not only for costs ($89,000) but also a further $50,000 to support the undertaking which they have given. I have selected the figure of $50,000 on a broad brush basis so that the undertaking has some substance and to give Chambers Finance a measure of protection should the plaintiffs fail in their case. If Chambers Finance contends that the amount is insufficient protection, application can be made to the Court for an increase in the amount, but only after compliance with the orders for disclosure referred to below. 53I propose to give the plaintiffs a period of six weeks in which to obtain the security either themselves or from Participants who support their claims against Chambers Finance (whether or not those Participants support the plaintiffs on the issue of Reimbursed Costs). 54Against the possibility that the plaintiffs do not provide security for $139,000 as referred to in [52] above by 4 February 2012, I propose to require Chambers Finance to transfer all of the proceeds of sale of the whisky from the three ventures to the Court only after receipt of notice of the security in an acceptable form. Until that time, it is appropriate that Chambers Finance be restrained, on the undertaking given by the plaintiffs, from disposing of or utilising any funds currently held by it that have been derived from sale of whisky the subject of the 1999, 2000 and 2001 ventures and to be received by it by the end of this month other than for storage costs or insurance costs or such other specifically identified purpose for the protection of the whisky. 55As offered by Chambers Finance, it should be restrained from dealing with the 2000 and 2001 whisky until 30 June 2012. That restraint should apply until 4 February 2012 and thereafter only if the $139,000 security referred to in [52] is provided by the plaintiffs. 56Chambers Finance must provide to the Court details of all whisky connected with the ventures held by it and copies of any bank statements held by it and details of all storage, insurance and other costs which have not yet been paid in accordance with paragraphs 1.1-1.4 and 2 of the plaintiffs' notice of motion filed on 15 September 2011. I will direct that the plaintiffs are not permitted to write to any of the distilleries whose identity is discerned from the documents produced without obtaining agreement of Chambers Finance or an order of the Court as to the form of notification. 57Short minutes of order reflecting these reasons are to be prepared by the parties as agreed, or in the event of contest, they are to bring competing short minutes. 58Provided security is provided by the plaintiffs by 4 February 2012, I think that the costs of the motions should be costs in the cause; but in the event that no security is provided by the plaintiffs by 4 February 2012 in an acceptable form, I will grant liberty to Chambers Finance to relist the matter to obtain an order that the plaintiffs pay Chambers Finance's costs of the motions.

Australian Spirit Management Pty Ltd v Commissioner of Taxation

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Judgment (3 paragraphs)

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Legislation Cited (1)

Cases Cited (14)

Cited By (4)