CAC v Lombard Nash International Pty Limited [1998] FCA 1432 | Case summary

Federal Court of Australia|1998-09-04|Before: Beaumont J

BEAUMONT J. I have already given a judgment in this matter on a preliminary point as to standing and in that judgment I mentioned some of the background to the litigation. The parameters of the dispute between the parties are fairly indicated by their points of claim and points of defence respectively and they may be summarised as follows: By its points of claim the Commission seeks to make the following case as against the first respondent: 1. The first respondent was a director of Empire Systems Pty Limited ("Empire Systems") and of the third respondent. It may be noted here, although not pleaded, that Empire Systems is now in the course of liquidation. 2. On 30 June 1997 a cheque in the sum of $594,423 was drawn by Empire Systems from its bank account payable to cash. 3. The cheque stub to this cheque contained the handwritten word "Digitnet". 4. Digitnet Pty Limited ("Digitnet") was a major supplier of computer components to Empire Systems. 5. On 30 June 1997 another cheque in the sum of $396,500 was drawn by Empire Systems from its bank account payable to cash. 6. The cheque stub to this cheque contained the handwritten word "Beyond". 7. Beyond Peripherals Pty Limited ("Beyond Peripherals") was a major supplier of computer components to Empire Systems. 8. On 30 June 1997 each of the above cheques was deposited into Empire Systems' bank account. 9. On 30 June 1997 the sum of $990,923 was credited to the first respondent's loan account with Empire Systems. As against the third respondent the Commission seeks to make the following case: 1. Between 4 July 1997 and 18 March 1998, sixty three cheques were drawn by Empire Systems from its bank accounts for the benefit of the third respondent. 2. These cheques totalled the sum of $520,756.81. 3. On various dates between 4 July 1997 and 19 March 1998 the third respondent deposited into its bank account cheques drawn on Empire Systems' bank accounts in the total sum of $520,756.81.

The foregoing payments were not supported by consideration from the third respondent. As against both the first and third respondents the Commission seeks to make the following case:
1. Between 18 July 1997 and 7 January 1998, twenty one cheques were drawn by the third respondent from its bank account for the benefit of the first respondent.
2. These cheques totalled the sum of $110,000.
3. On various days between 8 July 1997 and 7 January 1998 the first respondent deposited into her bank accounts cheques drawn on the third respondent's bank account in the total sum of $100,000.
4. The above payments by the third respondent to the first respondent were not supported by consideration from the first respondent.
5. The first and third respondents are thus liable or may become liable to pay money to Empire Systems in respect of money owed.
6. By reason of the matters previously alleged, the interests of Empire Systems require protection by the appointment of a receiver of the property of the first respondent.
7. By reason of the foregoing it is also just and equitable that the third respondent be wound up. By their points of defence, the first and third respondents (the second respondent being a submitting respondent for present purposes) either admit or do not formally admit the primary facts alleged in the Commission's points of claim with one important exception. In respect of the crediting of the sum of $990,923 to the first respondent's loan account with Empire Systems on 30 June 1997, the first and third respondents allege that this transaction was a part of an arrangement entered into by her, or on her behalf, with Digitnet as to $594,423 and with Beyond Peripherals in respect of $396,500, in respect of which she became personally liable to the payment of those debts to the creditor concerned in substitution for Empire Systems. By their points of defence, the first and third respondents also dispute the Commission's standing to bring these proceedings, a matter which I have already dealt with in earlier reasons. They further dispute that the Commission has any entitlement either to restrain their activities pursuant to s 1323 of the Corporations Law ("the Law"), either by way of injunction or by appointment of receiver. Moreover, in its points of defence, the third respondent disputes that it is just and equitable that it be wound up. I will deal first with the Commission's claim that either a mareva style injunction or the appointment of a receiver should be ordered in respect of the assets of the first respondent. It has been noted that this claim is made pursuant to the provisions of s 1323 of the Law. It is accepted, on behalf of the Commission, that any such relief would be interlocutory in the sense that any order could only be made until further order. In other words, it is accepted on behalf of the Commission that the purpose of seeking this relief is in aid of the ultimate winding up of the affairs of the first respondent, together with the third respondent and Empire Systems, both of which were formally controlled by her, or her family interests. I accept of course, that it would not be appropriate nor would it be necessary, assuming some entitlement to relief were established, to grant any permanent relief under s 1323. Clearly, the kind of relief envisaged by that provision is in the nature of a holding situation to preserve the status quo pending the determination of the final rights of all concerned, including, of course, unsecured creditors. There is already in place, on a temporary basis, a mareva type injunction. Although I am satisfied, for reasons which I will give shortly in dealing with the claim for winding up, that there is evidence of the mismanagement of the affairs of both the third respondent and Empire Systems which would justify the grant or continuation of the grant of a mareva injunction for a temporary period, I am not persuaded in the exercise of my discretion that the further step of the appointment of a receiver of the assets of the first respondent is either justified or necessary at this stage. As Mr Johnson, on behalf of the first and third respondents, has pointed out, if an appointment of a receiver were allowed to be made, a question would immediately arise as to the source of the funding of the remuneration of any such receiver. Ultimately, there can only be one of two sources of that funding, and that is the first respondent or her unsecured creditors. There is no unsecured creditor who has given any indication of any willingness to provide that funding. The application for the appointment is opposed by the first respondent vigorously in those circumstances. Given the public nature of the resources available to the Commission, the funding of any receivership could, in practical terms, only be achieved by resort to the income of any assets made the subject of the receivership. However, the appointment of any such receiver could not achieve any elevation of the status of unsecured creditors to the position of secured creditors. That being so, the receiver could do no more, as I see it, than hold income received from the assets pending the final determination of the respective rights of all those involved. This could take some time. In the meantime there would be need to fund the receivership and, as I have already said, this raises, I think, serious practical difficulties. On behalf of the Commission I would refer to the decision of Cohen J in CAC v Lombard Nash International Pty Limited (1987) 5 ACLC 1020 where the appointment of a receiver was ordered in circumstances where the acts of directors were under investigation for a possible breach of the Companies Code. In that case, Cohen J was influenced by the unexplained disappearance of funds overseas. It is true, as I will indicate when dealing with the application for the winding up of the third respondent, that there is cause for real concern of this kind in the present case. But as has been noted, Empire Systems is already in liquidation and I am about to order the winding up of Global Finance. In those circumstances, it will be open to the liquidators of both those companies to examine those concerned as to the examinable affairs of these companies. In the Lombard case, the position was different. One of the primary reasons for the appointment of the receiver was that there would be a better prospect of investigation (see p 1022). In the present case that is not a necessary aspect of the receivership given the existing statutory power of the liquidators to examine not only the past officers of the companies but others who could throw light on the affairs of the two companies. The other point of distinction with the Lombard case is the present existence of, and the proposal I have to continue, the mareva injunction in force. There was no such injunction operating in Lombard. It seems to me, therefore, that on the balance of convenience and in the exercise of my discretion, I should not, at least at this stage, appoint a receiver of the assets of the first respondent. However, for the reasons and virtue of the circumstances explained when dealing with the application for the winding up of the third respondent, it is appropriate, in my view, that the existing mareva injunction continue until further order. In my opinion, this will adequately protect the interests of unsecured creditors for the time being. I turn then to the application for the winding up of the third respondent. As has been said, the primary facts pleaded by the Commission in their points of claim are not substantially disputed. There is, however, the possible question of the novation to which references have already been made and to which I will return. Before going to the circumstances which constitute the factual context in which the present claim arises, it should be noted that I accept the submission made by Mr Johnson on behalf of the third respondent that the test in this area was, for present purposes, accurately stated by Powell J in Re Netsor Pty Limited (1981) 6 ACLR 114. Powell J there said (at 119): "I accept that the words 'just and equitable' where appearing in s 222(1)(h) of the Act are words of the widest import, as also do I accept that the words are not to be confined by the creation of categories within which a case must be brought in order that it be held to be 'just and equitable' that a company be wound up (Ebrahimi v Westbourne Galleries Ltd, supra); but, this notwithstanding, it seems to me that the facts or conduct which make it, in any case, 'just and equitable' that a company be wound up must be facts or conduct which have a direct and immediate relationship to, or bearing upon, the management or administration of the affairs of the subject company or the conduct of its business. If authority for this view be needed, it is to be found in the advice of the Judicial Committee - delivered by Lord Shaw of Dumferline - in Loch v John Blackwood Ltd [1924] AC 783, 788 where his Lordship says:-

'It is undoubtedly true that at the foundation of applications for winding-up on the 'just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on lack of probity in the conduct of the company's affairs, then the former is justified by the latter and it is under the statute just and equitable that the company be wound up.' (See also Scottish Co-operative Wholesale Society Ltd v Meyer, supra, at 342 per Viscount Simonds, 347 per Lord Morton of Henryton, 361-4 per Lord Keith of Avonholm, 366-8 per Lord Denning; in Re Straw Products Pty Ltd [1942] VLR 222, 223, and in Re Wondoflex Textiles Pty Ltd, supra, at 467, each of which was cited, with approval by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd, supra, at 378; Re William Brooks & Co Ltd [1961] 79 WN 354.)." In essence, the Commission must show that there is, as Lord Shaw put it, "a justifiable lack of confidence in the conduct and management of the company's affairs". The question then is whether, on the primary facts as alleged, such a lack of confidence has been demonstrated. I should say at once that if the third respondent had been able to demonstrate that the circumstances in which the deposit of $990,923 on 30 June 1997 occurred, and if it had been demonstrated that the circumstances in which the claimant of the sum of $520,756.81 between 4 July 1997 and March 1998, were no more than a reflection of bona fide and genuine commercial dealings with arms' length parties, I would not be justified in concluding that there was the requisite lack of confidence. The third respondent did seek to make such a case by reference to three considerations. First, I was invited to infer that there had been a novation by reason of the circumstance that Digitnet had not proved in the winding up of Empire Systems. But, in my view, this circumstance is not probative of any novation of the kind suggested. There may be any number of reasons why Digitnet did not prove in winding up of Empire Systems. The reality is that this matter was very much a circumstance within the peculiar knowledge of the first respondent who chose not to give evidence. In those circumstances I should infer and do infer that if she were called her evidence would not assist her case or the case of the third respondent. It is next said on behalf of the third respondent that so far as concerns Beyond Peripheral there were real estate transactions which should be taken into account in the present context. It is true that there emerged in the cross-examination of Mr Jackson, the Commission's investigator, a reference to these transactions. It appears from his evidence that they occurred in February 1998 and that the subject of the dealing between the first respondent and Beyond Peripheral was the property at 190 Parramatta Road, Auburn. No further details emerged in the course of cross-examination. Again, this was a matter within the exclusive knowledge of the first respondent, yet she chose not to give evidence. Nor was any documentation of any real estate transaction sought to be tendered. I therefore put that matter aside for present purposes. The third consideration urged on behalf of the first and third respondents was that I should look at all of these transactions as innocent inter-company dealings, including regular transactions in the loan accounts of the directors of the respective company. It is true that moneys advanced by one company to another or to a director within a corporate group may be the subject of an implied promise to repay money on demand (see Walker v Wimborne (1976) 137 CLR 1 per Mason J at 5). But, as Mason J went on to point out, where no security and no promise to pay interest is made, the company making the payment receives no real benefit or advantage from doing so. It was in this context that the High Court held in Walker v Wimborne that, whilst for commercial purposes it may be realistic to look at a corporate group as a single unit, the position may be quite different when questions arise as to the solvency of the individual members of the group, where, in the absence of any claim by way of indemnity or guarantee, the rights of creditors, particularly unsecured creditors, are legally confined to the entity with which those creditors have dealt (see per Mason J at 7). Having regard to the evidence, which is essentially documentary as a whole, I am satisfied that neither Digitnet nor Beyond Peripherals received the sums of $396,500 and $594,423 respectively. Indeed, as the banking records clearly show it is really beyond dispute that those creditors did receive any part of those moneys. It is equally clear from the banking records, and indeed not disputed as a matter of primary fact, that between July 1997 and early 1998 Empire Systems paid over the sum of $520,756 to the third respondent. Again, the banking records show that between July 1997 and January 1998 the third respondent made available to the first respondent the sum of $110,000. The third respondent is not, it appears, trading. It has no staff and it appears to have no assets (or at least no current assets, except rights of recovery against the first respondent and perhaps other members of the group). In my view, the inference should be drawn that the payments made by Empire Systems and the payments made by the third respondent to the first respondent were made without any real consideration. They were, in the eyes of the law, voluntary consideration and in commercial terms they were not made in the ordinary course of business or for any genuine commercial purpose. In short, they were made without consideration, as alleged by the Commission. In those circumstances, it seems to me that Lord Shaw's test has been satisfied and I propose to order the winding up of the third respondent.

ORDERS I order the winding up of the third respondent.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont

Solicitor for the First Respondent: Nash O'Neill Tomko

Solicitor for the Third Respondent: Nash O'Neill Tomko

Date of Judgment: 4 September 1998

CAC v Lombard Nash International Pty Limited

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