Austress Freyssinet v Kowalski [2007] NSWSC 1105 | Case summary

3164/06 AUSTRESS FREYSSINET PTY LTD & 3 ORS V ANDREW ANTHONY KOWALSKI JUDGMENT 1 HIS HONOUR: By an amended notice of motion filed in court on 27 September 2007, the plaintiffs seek relief of the following kinds: (a) orders for the oral examination of the defendant under s 108 of the Civil Procedure Act 2005 (NSW), together with orders for the production of documents under that section (paras 3 and 4 of the amended notice of motion); (b) an order that costs previously ordered by the court in favour of the plaintiffs be assessed and made payable forthwith; (c) costs of the amended notice of motion (including costs in relation to some orders for discovery that have already been dealt with). Application for examination under s 108 2 The first plaintiff ("Austress") is a specialist construction contractor, with particular expertise in the pre-stressing and pre-tension of concrete, carrying on business in Australia and parts of Asia. It holds 100% of the voting shares in the second plaintiff, Austress-PSC Design. The third plaintiff ("Freyssinet"), a French corporation, holds 20%, and the fourth plaintiff ("Immer") holds 80%, of the voting shares in Austress. Freyssinet owns 75% of the voting shares and 68.75% of the ordinary shares in Immer, and the defendant owns the remaining 25% of the voting shares and 31.25% of the ordinary shares. On about 24 March 2005 Freyssinet and the defendant entered into a shareholders' agreement concerning their respective shareholdings in Immer and the governance of Immer and Austress. The defendant was also until 2 December 2005 a director of Austress and Austress-PSC Design and was employed as the managing director of Austress. I take the facts set out in this paragraph from the judgment of Windeyer J in Austress-Freyssinet Pty Ltd v Kowalski [2007] NSWSC 399. 3 By clause 16 of the shareholders' agreement, the defendant undertook to Freyssinet that during the term of the agreement and for a further stated period of time he would not be "Involved" in any capacity in any business or activity that was the same as or similar to the "Business" or any material part of it, or solicit anyone who was a customer of the Business, or entice away or endeavour to entice away from the Company or the Business any employee or anyone who was at any time a Director, agent, Representative, associate or adviser to the Business. The definition provisions in the agreement included the following: " Involved includes direct or indirect involvement as a principal, agent, partner, employee, shareholder, unitholder, director, trustee, beneficiary, manager, consultant, adviser or financier." 4 In their initial statement of claim, the first two plaintiffs alleged various breaches of fiduciary duties, contractual duties under the shareholders' agreement, and statutory duties under the Corporations Act, by the defendant and another company called Canada Bay Pty Ltd, particularly with respect to alleged unauthorised drawings of funds made during the course of the defendant's employment by Austress. The plaintiffs sought orders for compensation and accounting and the setting aside of certain bank guarantees. An amended statement of claim filed on 1 September 2006 altered the substance of the claims and increased very substantially the amount of compensation sought. But neither the initial nor the amended statement of claim made any complaint about contravention of clause 16, the restraint clause. 5 According to the findings of Windeyer J in the Austress-Freyssinet case to which I have referred, in March 2006 the defendant became a director of a company now known as NT Prestressing Pty Ltd, and in May 2006 he became shareholder in a company now known as Global Concrete Industries Pty Ltd, holding 10 of the 60 issued ordinary shares. Global Concrete Industries has, since 19 May 2006, held 100% of the voting shares in NT Prestressing. NT Prestressing is engaged in the same type of pre-stressing work as Austress. It has obtained several contracts for work where Austress was an unsuccessful tenderer. 6 These events led to further claims against the defendant in the proceedings. A further amended statement of claim filed on 23 October 2006 added Freyssinet and Immer as plaintiffs and introduced claims by them for injunctive and other relief for alleged contravention of the restraint clause, by virtue of the defendant's activities in connection with NT Prestressing and Global Concrete Industries. 7 It will be seen that the claim for relief for alleged breach of the restraint clause was rather different in character from the plaintiffs' other claims in the proceedings. That led Windeyer J to make orders, on 1 December 2006, for a separate hearing of the restraint claims by the third and fourth plaintiffs. A separate trial was duly held and his Honour published reasons for judgment on 27 April 2007 in the case to which I have referred, Austress-Freyssinet Pty Ltd v Kowalski [2007] NSWSC 399. 8 His Honour found (at [13]) that it was clear that the defendant's conduct was in breach of the restraint clause, although in expressing that finding he did not refer to the definition of "Involved" or the circumstance that the defendant was not a shareholder in the competing entity, NT Prestressing, but had only a minority shareholding in its holding company, Global Concrete Industries. Nevertheless, his Honour clearly proceeded on the basis that, by being a shareholder of the holding company of NT Prestressing and in the circumstances of the case, the defendant was "Involved" in NT Prestressing's competing business activity. 9 His Honour then considered whether the restraint, in its application to present and contemplated conduct in breach, was contrary to public policy. He concluded that the restraint clause was too wide in various respects, one of which was that the restraint upon being a shareholder in a competing company was too wide because it could prevent investment in a listed public company involved in the construction business (at [21]). 10 When the matter returned to Windeyer J for the making of orders on 3 May 2007, counsel for the defendants submitted that it was not clear from the judgment whether his Honour was intending to restrain the defendant from holding a minority shareholding in the holding company (Global Concrete Industries) of the company (NT Prestressing) that competed with Austress. Windeyer J replied that he had intended that his orders would cover that situation (Ex JSS1, Tab 4, p 2). 11 It seems to me that his Honour's finding at paras [13] and [21] of his judgment, reinforced by his clarifying statement of 3 May, implies the view that, under the definition of "Involved", a minority shareholder in a holding company of a wholly-owned subsidiary that conducts a competing business has an indirect involvement, as a shareholder of the holding company, in the subsidiary's business activities. I respectfully agree with this view. The holding of shares in the holding company gives a shareholder an economic interest in the businesses and profits of the corporate group and each subsidiary entity in the group, proportionate to the shareholding in the parent. The definition clause speaks of indirect involvement as a shareholder but it does not require that the shareholding be a direct shareholding in the competing entity itself. 12 The restraining order made by Windeyer J was as follows: "1. The Defendant be restrained from being Involved in any capacity in any business or activity in the Region which is the same as or similar to the Business or any material part of it, until the expiry of 3 years after the date on which the Defendant transfers to the Third Plaintiff all of his shares in the Fourth Plaintiff in accordance with the provisions of clause 3 of the Shareholders Agreement entered into in March 2005. "For the purposes of this order: (i) 'Involved' includes direct or indirect involvement as a principal, agent, partner, employee, shareholder, unitholder, director, trustee, beneficiary, manager, consultant, adviser or financier, but excludes involvement as a shareholder of a public company listed on the stock exchange of any country; and (ii) 'Region' means Australia, Indonesia, Hong Kong, Malaysia, New Zealand, Vietnam and the Philippines; and (iii) 'Business' means the design, construction, repair and monitoring of pre-stressed buildings and other structures. "For the avoidance of doubt, it will be a breach of this order for: (iv) the Defendant to hold office as a director of NT Prestressing Pty Ltd (ACN 117 791 661) for so long as the business of NT Prestressing Pty Ltd includes the design, construction, repair and monitoring of pre-stressed buildings and other structures or any business which is the same or similar to it; (v) the Defendant to hold shares in Global Concrete Industries Pty Ltd (ACN 118 596 642) for so long as Global Concrete Industries Pty Ltd remains a shareholder in NT Prestressing Pty Ltd and the business of NT Prestressing Pty Ltd includes the design, construction, repair and monitoring of pre-stressed buildings and other structures or any business which is the same or similar to it." 13 This order had the effect of requiring the defendant to resign as a director of NT Prestressing and to divest himself of his shares in Global Concrete Industries. After several demands by the plaintiffs' solicitors, the defendant's solicitors wrote on 13 July 2007 supplying a copy of the defendant's resignation as a director of NT Prestressing dated 10 May 2007 and a transfer of the shares in Global Concrete Industries bearing the same date. The defendant's resignation as a director has been recorded in the records of ASIC, although there was some considerable delay in this process. 14 The transfer of shares was expressed to be in consideration of the sum of $10 paid by Masterlink Business Services Pty Ltd as transferee. The transfer was signed by Vincent Joseph Taranto as sole director/secretary of Masterlink. The plaintiffs' solicitors wrote to the defendant's solicitors 1 August 2007 expressing concern about the sufficiency of this year transfer, pointing to the consideration which they described as "surprisingly low" given that NT Prestressing is wholly owned by Global concrete Industries, and noting that the purchaser of the shares, Masterlink is a company whose sole director and secretary is the defendant's accountant. 15 In response to demands by the plaintiffs' solicitors for further information, the defendant made two statutory declarations, dated respectively 15 August and 20 August 2007. In the first, he said he executed the form of transfer on 10 May 2007 and was not aware of anything more he could do to complete the transfer of shares in Global Concrete Industries. In the second declaration, he deposed to a conversation he had with Mr Taranto on or shortly before 10 May 2007, and said that there was no other communication, arrangement or understanding between Mr Taranto, Masterlink and him in relation to the transfer of the shares. The conversation was as follows: Defendant: "Vince, the court has ordered me to transfer my shares in Global. Will you take them?" Mr Taranto: "Yes. Transfer them to Masterlink." 16 In these circumstances the plaintiffs seek orders under s 108 of the Civil Procedure Act. Section 108 provides, relevantly, as follows: "108(1) The court may, subject to and in accordance with the uniform rules, make an order requiring a person bound by a judgment or order: (a) to attend the court to be orally examined as to any material question, or (b) to produce any document or thing that is in his or her possession and that relates to a material question. (2) [order with respect to a person that is a corporation] (3) [judgment creditor under a judgment debt] (4) [functions of a Local Court] (5) For the purposes of this section, the material questions in relation to a judgment or order are: (a) [where it requires the person bound by it to pay money]; (b) to the extent to which it does not require the person bound by it to pay money, such questions concerning or in aid of the enforcement or satisfaction of the judgment or order as may be specified in the order under this section." 17 Section 108 envisages the adoption of uniform rules to give effect to it. I raised with counsel for the plaintiffs the question whether any of Part 38 may be applicable in the circumstances of the present case, notwithstanding that Part 38 is headed "Examination of Judgment Debtor". Closer examination of Part 38 persuades me that none of its provisions has any bearing on the present application. Some of its provisions are inapplicable in a case of examination in the Supreme Court, and others do not apply to examination in aid of the enforcement of a non-monetary order. Compliance with rule 38.1, which makes provision for the person in whose favour the order has been made to give notice in writing identifying specific material questions and specified documents, allowing not less than 28 days for compliance, is not mandatory, by virtue of rule 38.2(2), in the case of a judgment or order of the Supreme Court. In my view there is no need to require the plaintiffs to serve a special "examination notice" on the defendant in the present case, given that the defendant has been brought to court to answer the amended notice of motion and has been represented by counsel. The amended notice of motion is sufficiently specific, in the circumstances, as to the scope of the questions to be asked and the identification of the documents to be produced. 18 The amended notice of motion seeks the following two orders: "3. The defendant attend before the Court for oral examination, pursuant to section 108 of the Civil Procedure Act 2005, for the purpose of being asked questions in relation to his compliance with order 1 of the orders made by the Court on 3 May 2007 ("the Order"), including: (a) questions concerning the steps the defendant has taken to comply with the Order; (b) questions concerning the steps taken by the defendant to effect the transfer of the shares in Global Concrete Industries Pty Ltd ("Global Concrete"); (c) questions concerning the steps taken by the defendant to resign as a director of NT Prestressing Pty Ltd ("NT Prestressing"); (d) questions concerning the existence of any communication, arrangement or understanding between the defendant and Mr Vincent Taranto and/or Masterlink Business Services Pty Ltd ("Masterlink") in relation to: (i) the transfer to Masterlink of the defendant's shares in Global Concrete ("the Shares") on or about 10 May 2007; (ii) the entitlement to dividends paid on the Shares; (iii) the enjoyment or exercise of any rights attaching to the Shares; and (iv) future dealings in relation to the Shares. "4. The defendant produce, pursuant to section 108 of the Civil Procedure Act 2005, any document in his possession: (a) evidencing any communication, arrangement or understanding of the kind described in order 1(d) above [semble, order 3(d)]; (b) evidencing that the defendant's resignation as a director of NT Prestressing has taken effect, including documents evidencing the acceptance by NT Prestressing of his resignation as director and NT Prestressing's notification to the Australian Securities and Investments Commission ("ASIC") of his resignation; (c) evidencing that the defendant's transfer of his shares in Global Concrete has taken effect, including evidence of approval of the transfer by the board of Global Concrete (if required) and the recording of the transfer in the Company Register of Global Concrete." 19 In my opinion, orders in terms of paras 3 and 4 would satisfy the requirement of s 108(5)(b) that the questions to be put in the examination be "specified" in the order. 20 Counsel for the defendants drew attention to an observation in Republic of Costa Rica v Strousberg (1880) 16 ChD 8, to the effect that an examination of a judgment debtor under rules of court permitting such a process is a cross-examination of the "severest kind". He referred to the observation of Gray J in Martinek v Evans (2004) 211 ALR 651, at [18], that "the procedure of examining a judgment debtor as to his or her means of paying the judgment debt should be used as a last resort, after other means of finding assets have been utilised". He submitted that examination of a person subject to an injunctive order should also be regarded as a matter of last resort, and that the defendants should not be subjected to cross-examination of the "strictest kind" in a case such as this. He contended that the plaintiffs' proper remedy, if they contend that the defendant has not complied with the court's orders, is to make an application for the defendant to be dealt with for contempt of the orders. 21 I do not find much assistance in the cases to which counsel has referred me. They are cases about the examination of a judgment debtor, a process which has as its purpose "to ascertain from what sources the debtor may satisfy the judgment debt": McCormack v National Australia Bank Ltd (1992) 35 FCR 303 at 306 (Davies, Neaves and Miles JJ). Questions outside the scope of that objective are impermissible, as was held in that case. But as far as I can see, the cases do not create any presumption against the use of the power to order an examination. In Mullins v Southern Goldfields Ltd (unreported, Full Court of the Supreme Court of Western Australia, Malcolm CJ, Wallace and Rowland JJ, 24 April 1990, BC 9001368) Malcolm CJ rejected a submission that there was an element of injustice involved in exposing a party to cross-examination of the "severest kind", saying that the same contention could be made with respect to any order for examination or any order refusing to set aside an order for examination (at 11). 22 Section 108 is wider than the rules of court that were considered in the cited cases, because it expressly extends to an examination of a person bound by a judgment or order that does not require payment of money. In such a case, it gives the court a discretion to allow any questions "concerning or in aid of enforcement or satisfaction of the judgment or order". In my view the language of the section is inherently available to be used in aid of enforcement of an injunctive order, in circumstances where the evidence, while not establishing failure to comply with the order, points to circumstances raising a question about compliance that reasonably warrants investigation. The question is whether the evidence in the present case meets that threshold. 23 The relevant evidence before me concerning the transfer of shares includes the following: · the consideration for the transfer was $10; · the transferee was a company the sole director and secretary of which is the defendant's accountant, Mr Taranto; · it appears that Mr Taranto has detailed knowledge of the defendant's financial affairs and acts in an advisory capacity for the defendant (see JSS1, tab 17); · the transfer was made to Masterlink pursuant to a request by the defendant and for the purpose of complying with the court's order to transfer the shares, according to the conversation described in the defendant's second statutory declaration; · that statutory declaration states that there is no other arrangement or understanding with respect to the transferred shares; · the plaintiffs' requests for further information about the transfer have been responded to only after substantial delays (JSS 1, tabs 7, 10-15), and ASIC was notified by the defendant of his resignation on 10 May 2007 from the board of NT Prestressing, only on about 21 September 2007. 24 Counsel for the plaintiffs submitted that these facts provide a foundation for further investigations as to whether Masterlink holds the transferred shares in trust for the defendant or there is some arrangement between the defendant and Mr Taranto notwithstanding the defendant's statutory declaration. Counsel for the defendant submitted that the facts provide no basis for any inference that a trust was created or any grounds for suspicion that the shares may now be held on trust; and that there is nothing in the evidence to suggest any arrangement as to the holding of the shares (indeed, the defendant's second statutory declaration is to the contrary); and consequently there is no basis for the making orders under s 108. 25 Plainly the fact that the shares were transferred by the defendant to his accountant for $10 is not of itself evidence of the creation of an express trust in favour of the defendant. Nor do the defendant's statutory declarations provide any evidence of the creation of an express trust. There is nothing in the evidence to justify the imposition of a constructive trust arising out of some form of unconscionable conduct or breach of equitable duty. 26 There is a question, however, as to whether the evidence before the court points to the existence of a resulting trust. The plaintiffs' solicitors alleged in their letter of 1 August 2007 that the consideration of $10 was surprisingly low given that the company, Global Concrete Industries, wholly owns NT Prestressing. There is some further evidence suggesting that NT Prestressing may have substantial value. In exhibit JSS1, at tabs 19 and 20, there are some newspaper reports about involvement of NT Prestressing in major construction activities, namely the building of the Burj Tower in Dubai (said to be the tallest tower building in the world) and the sale to Middle East countries of a type of concrete that can be laid quickly. As counsel for the defendant submitted, the fact of involvement in large building projects is not in itself any indication of profitability and therefore shareholding value. But it seems to me that the scale of the projects and activities of NT Prestressing, evidenced by the newspaper articles, provides a foundation for investigations as to its value and consequently the value of the shares in Global Concrete Industries. It is not necessary for the plaintiff to prove that the shares have a substantial value, but only to persuade the court that it is justifiable and appropriate to make the investigations that s 108 permits. 27 If the shares in Global Concrete Industries have substantial value, and have been transferred for nominal value, a presumption of a resulting trust has arisen. If the presumption is not rebutted, then the shares are held in trust for the transferor. That, it seems to me, is a matter worthy of investigation. 28 If it is established by investigation that Masterlink holds the transferred shares in trust for the defendant, then it seems to me that the defendant continues to be "Involved" in the NT Prestressing's business and activities which, according to the findings of Windeyer J, are activities in competition with the business of Austress. Windeyer J found, and I agree, that a minority shareholder in a holding company of the entity that carries on a competing business is, under the definition of "Involved", indirectly involved in that competitive business activity. In my view the same reasoning leads to the conclusion that the beneficial owner of a minority shareholding in the holding company is "Involved" in the competing business activity of the subsidiary. The definition of "Involved" refers to indirect involvement as a beneficiary as well as indirect involvement as a shareholder. The definition and the wording of clause 16 do not limit the scope of the restraint to cases where the beneficial interest is a direct beneficial interest in the business of the subsidiary, as opposed to a beneficial interest in shares of the holding company. 29 As to whether there are grounds for investigating whether, notwithstanding the defendant's second statutory declaration, there are arrangements between him and Mr Taranto with respect to Masterlink's holding of the shares, I agree with the submission made by counsel for the plaintiffs that the facts and circumstances justifying an investigation include (apart from the very fact that the shares were transferred for nominal consideration to the defendant's accountant) the relationship between the defendant and Mr Taranto, who appears from the evidence to be a financial adviser and not merely an accountant, and the defendant's substantial delays (suggesting reluctance) in responding to the plaintiffs' concerns about the transfer and their requests for further information. 30 If an arrangement with respect to Masterlink's holding of the shares exists between the defendant and Mr Taranto, either there is some form of trust and so an indirect involvement for the purposes of the restraint clause and the injunction, or else factual involvement in the business of NT Prestressing by virtue of the terms of the arrangement. In this regard, it should be noted that the definition of "Involved" is inclusive, and so conduct which constitutes "involvement" in the competing business according to the natural meeting of the word is covered by the restraint clause. 31 It seems to me that s 108 provides a useful function in circumstances such as the present. The very limited information available to the plaintiffs, summarised above, is arguably not sufficient for them to conclude that the defendant is in contempt of Windeyer J's orders. It would be an unsatisfactory situation if, in such a case, the person with the benefit of the orders had no other remedy than to commit to an immediate application for punishment for contempt. It is in my view reasonable for a party in the position of the plaintiffs to employ the examination and production procedure with a view to clarifying whether the transfer has led to a resulting trust or the presumption of resulting trust has been rebutted by further facts. Enforcement of costs order 32 On 3 May 2007 Windeyer J ordered the defendant to pay 80% of the third plaintiff's (Freyssinet's) costs in relation to the relief sought by the third and fourth plaintiffs concerning enforcement of the restraint clause. The plaintiffs' solicitors wrote to the defendant's solicitors on 18 July 2007 disclosing details of relevant costs and proposing an agreement as to the sum payable to discharge the costs order, but they received no reply. They wrote again on 12 September 2007 making a further proposal in respect of costs and enclosing a detailed and extensive bill of costs, apparently intended to be in a form suitable for assessment. No reply was received. 33 The plaintiffs now seek an order that the costs ordered by Windeyer J on 3 May 2007 be assessed and be payable forthwith. Counsel for the plaintiffs drew my attention to the judgment Barrett J in Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1, dealing with the circumstances in which the court may order that a costs order made before the conclusion of proceedings should be payable forthwith. One of the circumstances identified by his Honour (at [11]) is "where the application or aspect in respect of which the particular costs order is made before the conclusion of the proceedings represents the determination of a separately identifiable matter or may be viewed as the completion of a discrete aspect". That is the case here. Windeyer J held a separate trial for the determination of the allegations concerning the restraint clause, and what remains in the proceedings are allegations about breaches of contract and breaches of duty not related to the restraint issue. Another circumstance regarded as relevant in the cases is that costs may be ordered to be paid forthwith if there is much to come in the case, and a fairly long time before the proceedings are disposed of (at [13]). That consideration also applies here. Although it is not possible at this stage to make a reliable estimate of the length of the trial, counsel for both sides agreed that some considerable time would have to elapse before the rest of the case is ready for hearing. 34 Applying these criteria, I am satisfied that it is appropriate to order that the costs ordered to be paid by Windeyer J in his orders of 3 May 2007 be assessed and be payable forthwith. Costs of the application 35 The amended notice of motion was in three discrete parts. One part related to discovery. The parties resolved the discovery issues in a manner that constituted substantial success for the plaintiffs. The normal costs outcome where an interlocutory application is resolved in favour of one party is an order that the successful party's costs of the application be its costs in the proceedings. In my view that is the correct outcome in the present case, as far as the discovery issues are concerned. If it is necessary for the costs relating to the discovery issues to be assessed, the costs assessor will have to make some judgments as to the apportionment of costs between the discovery issues and other issues raised in the application, but that is not a good reason to make some other kind of order. 36 The plaintiffs have been successful with respect to the other two parts of the application, both of which relate to Windeyer J's separate determination of claims concerning the restraint clause. Costs should follow that event. Just as it is appropriate, for the reasons I have given, to order that the costs order made by Windeyer J should lead to assessment and payment forthwith, so also it is appropriate that the costs of the present application, so far as they relate to those questions for separate determination, be assessed and paid forthwith. Conclusions 37 I am satisfied that this is an appropriate case for the court to make orders under s 108, and that those orders should be substantially in terms of paras 3 and 4 of the amended notice of motion. However, those paragraphs will need to be supplemented so as to identify the time and place of the examination, the judicial officer before whom it will take place, the time for production of documents and the place at which production is to occur. I shall stand the proceedings over so as to permit draft orders to be prepared. 38 As to the costs order made by Windeyer J, I shall make an order in terms of para 8 of the amended notice of motion. As to the costs of the amended notice of motion, I shall order that the defendant pay the plaintiffs' costs of the amended notice of motion forthwith, as agreed or assessed, except for costs of the application for orders concerning discovery, as to which the plaintiffs' costs will be their costs in the proceedings. 39 Counsel foreshadowed that other orders will be sought for the further disposition of the case. **********

Austress Freyssinet v Kowalski

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Judgment (11 paragraphs)

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