Cardile v LED Builders Pty Ltd

Solicitors: Harris Freidman Lawyers (Plaintiff) Farrar Lawyers (Defendants) File Number(s): SC 2014/364395

EX TEMPORE Judgment (Revised) 1This is an application by the liquidator ("the Liquidator") of Limar International Pty Ltd ("Limar") to extend a freezing order made ex parte by Robb J on 11 December 2014. 2His Honour made the order against the first defendant, Mr Andrew Yiasemides, and the second defendant, Bon Fleur Pty Ltd, up to and including 17 December 2014. By consent and without admissions, those orders have been extended to today whilst the matter was readied for urgent hearing. 3I heard the matters as Duty Judge yesterday. I reserved until today, because of the busy nature of the list and also because of the complexity of the factual issues arising in the proceedings. 4I was greatly assisted by the comprehensive and careful submissions I received from Mr Lockhart SC, who appeared with Mr Hyde for the Liquidator, and from Mr Pritchard SC, who appeared with Mr Macauley, for Mr Yiasemides and Bon Fleur. 5The conclusion to which I have come is that I should not extend the freezing order. The result is that it will expire at 5.00pm today. 6There is no dispute between the parties as to the relevant principles. 7The Liquidator must show that he has a "good arguable case" against the defendants; that is, one that is "more than barely arguable", albeit not necessarily one having a better than 50 per cent chance of succeeding (see, for example, Errigal Ltd v Equatorial Mining Limited [2006] NSWSC 953 at [26]-[29] per White J). 8The Liquidator must show that there is a "danger" (that is a "real risk") that any judgment might be unsatisfied by reason of the defendants removing assets from the jurisdiction or disposing of their assets. 9A matter of discretion is involved. For that reason, a large range of other factors can be relevant. One factor that is relevant is whether the applicant has proceeded expeditiously, for example Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [53] per Gaudron, McHugh, Gummow and Callinan JJ. 10In my opinion, the Liquidator has not acted expeditiously and has not shown there is a real danger of dissipation by the defendants of assets. 11For those reasons I am not persuaded to continue the freezing order. 12The factual background is as follows. 13Between 2009 and October 2012 Limar manufactured nougat confectionary from a factory at West Gosford. 14Until 24 July 2012 Mr Yiasemides was a director of Limar. He resigned as director that day and his place was taken by his son, Mr Peter Yiasemides. The Liquidator alleges Mr Yiasemides continued to act as a shadow director. Mr Peter Yiasemides was, at all times, the sole shareholder in Limar. 15In October 2012 Limar ceased trading. 16Bon Fleur then commenced conducting what the Liquidator contends to be the same business from the same premises. Mr Yiasemides was, at all times, the sole shareholder in Bon Fleur. 17In these circumstances the Liquidator's case is that Mr Yiasemides is engaging in what the Liquidator calls a "phoenix activity". 18In a report prepared on 20 February 2014, to which I refer further below, the Liquidator said: "[Mr Yiasemides] in conjunction with his former wife developed a product known as Nougat Limar and in March 2003 commenced trading under the name Nougat Limar. Since that time, it is alleged [Mr Yiasemides] has, on four occasions, transferred the 'Nougat Limar business' ('the Business') from one corporate entity controlled by him to the next, each time placing the former company in external administration. In each case, the Business was transferred in circumstances where there were insufficient assets to meet the company's liability resulting in the relevant company's liabilities remaining unpaid. It is alleged Limar was the third 'reincarnation' of the Nougat Limar business, which has now been transferred to the related entity [Bon Fleur]". 19I set this out to reveal the ambitious nature of the claim made by the Liquidator. I do not mean to suggest that any such claim has been made out on the evidence before me. 20On 27 June 2012, that is, about a month before Mr Yiasemides' resignation as a director of Limar, a creditor of Limar, Global Foods Group Pty Ltd obtained a judgment against Limar in the Local Court for a net amount of $21,820.05. 21On 14 September 2012 Global served a statutory demand. 22On 9 October 2012 Limar applied to this Court to set aside that demand. 23At around this time, Limar ceased trading. 24On 5 November 2012 this Court ordered that the statutory demand be set aside on condition that Limar paid into Court the sum of $21,820. Limar did not do that. 25Subsequently, on 25 March 2013, Global served a further statutory demand for the same amount. I infer that demand was not paid, as on 7 April 2013 Global filed a winding up application. 26On 9 May 2013 voluntary administrators were appointed to Limar. 27On 12 June 2013 Limar was wound up and the Liquidator appointed. 28I mention these background facts to make clear that although the Liquidator's claim is that the defendants have engaged in what he describes as "phoenix activity", the amount of the judgment that caused the defendants to embark on that alleged course was modest indeed. 29Following the winding up in July 2013, Mr Yiasemides provided the Liquidator with relevant documents, including an RATA. 30On 20 February 2014 the Liquidator created a report to which I have referred. That report is called "Report to Solicitors". Despite that title, it was evidently circulated to non-related creditors (particularly Global). 31In its introduction, it stated: "This report has been prepared in relation to the proposed public examination of [Mr Yiasemides] and other relevant persons...to further investigate matters concerning the company's trading and operations prior to the winding up. Specifically, the matters of interest concern the transfer of [Limar's] assets and business to a related entity, and, therefore, beyond the immediate reach of [Limar's] creditors". 32On 5 December 2014 the Liquidator conducted a public examination of Mr Yiasemides and Mr Peter Yiasemides. 33Six days later, on 11 December 2014, the Liquidator applied for and obtained the ex parte freezing order from Robb J. 34The Liquidator claims Mr Yiasemides has breached his duties as a director (and shadow director) in a number of ways. 35First, the Liquidator points to payments made by Limar to Bon Fleur of $603,647.56 between 29 November 2012 and 30 April 2013. 36The Liquidator contends that these monies were owned by Limar and should not have been paid to Bon Fleur. Alternatively, the Liquidator claims that if the monies were paid to Bon Fleur as a creditor they constitute a preference. 37There is a significant factual contest about this claim. 38First, Mr Yiasemides contends that $361,150.44 of this sum constituted payments for nougat manufactured and supplied by Bon Fleur which was mistakenly paid by Bon Fleur's customers to Limar. Indeed, at the time of each of these transfers, Mr Yiasemides made narrations such as "transfer back paid to Limar in error" in his instructions to Bon Fleur's banker, Westpac Banking Corporation. That is, of course, not conclusive as to whether the payments were made mistakenly, but is a factor to be weighed in the balance at this stage. On the Liquidator's case, those narrations were knowingly false. That proposition was advanced in submissions (albeit in response to questions from me) but not put to Mr Yiasemides, who was not cross-examined at all. I do not come to any conclusion about that matter at this stage. 39Second, as Mr Pritchard SC pointed out, one these transfers (for $192,000, almost a third of the total amount) is a reversal, on 15 February 2013, of a payment made by Bon Fleur four days earlier, evidently an error. 40One of the Liquidator's contentions lying behind these claims is that Bon Fleur was, at the time of making these payments, making products using nougat for which Limar had paid for and which really belonged to Limar. 41Thus, Mr Lockhart said in his written submissions: "The Liquidator does not accept the $411,649 [sic] was [Bon Fleur's] money 'paid in error' by customers. Nougat continued to be manufactured by Limar prior to and up to the transfer of Limar in October 2012, and these payments, or a substantial portion of them, are likely to represent sales of Limar's nougat. Further, as at 30 June 2012, there was existing stock [of Limar] to the value of $952,994." (emphasis in original) 42The latter figure comes from an MYOB general ledger. 43However, the Liquidator in his report of 20 February 2014 placed the figure $69,850 on Limar stock as at 30 June 2012. 44If that is the correct figure, it points against the conclusion that Bon Fleur was selling nougat manufactured by Limar. 45Further, Mr Lockhart, with his customary candour, accepted that it may well be that towards the end of the period November 2012 to April 2013 Bon Fleur was selling its own stock. 46The second claim that the Liquidator makes is that Mr Yiasemides caused Limar to pay excessive amounts to related entities for rent, trademark licence fees, and plant and equipment. 47Mr Lockhart pointed to increases in the amounts paid by Limar for some of these services from 2010 to 2011 and to calculations and estimates performed by the Liquidator's staff suggesting the amounts paid were excessive. 48There is, however, no independent expert evidence to this effect. Further, as Mr Pritchard pointed out in his written submissions, those figures, along with wages, represent over 75 per cent of all the costs in a year in which sales of over $2.69 million were generated. Mr Pritchard submitted that these costs represented Limar's primary manufacturing costs and that there is no basis upon which it could be concluded that they were unreasonable. There is substance in that submission. 49Finally, the Liquidator alleges that, in breach of his duty, Mr Yiasemides caused Limar to repay a debt to a related company, Danhold Pty Ltd, the trustee of the Danhold Trust. 50In his written submissions, Mr Lockhart said: "The balance sheet for the Danhold Trust which shows a loan by Limar in 2010 of $699,000. This loan was reduced to $193,085 in 2011. Subsequently, it was substantially again reduced in 2012. This amounts to [a] breach of a director's duty by Andrew Yiasemides because at the time of repayment, the liquidity position of Limar was negatively impacted". 51In my opinion, the conclusion is not yet available that the diminution of Danhold's indebtedness from Limar bespeaks a breach of duty by Mr Yiasemides. 52My attention was not drawn to evidence dealing with the circumstances in which that indebtedness was created. 53Further, Mr Yiasemides gave evidence that the amount by which the debt was reduced by an actual payment was only $305,900; the balance was written off. 54Mr Yiasemides' evidence was that the loan from Danhold to Limar represented charges for the use by Limar of specialised manufacturing premises, equipment and trademark, required for Limar to undertake its operations, and that the loan represented invoices raised by Danhold at commercial rates. 55In all these circumstances, the most that can be said of the Liquidator's claim is that it may cross the modest threshold of showing a "good arguable case". It is probably fair to say that the case is "more than capable of serious argument". 56But the claims will raise significant factual issues and it appears quite likely that the case will be vigorously defended. 57More importantly, the Liquidator has been aware of these potential claims against the defendant since at least 20 February 2014 when he circulated his "Report to Solicitors". As I have said, that report was stated to be in relation to a proposed public examination of Messrs Yiasemides. 58In the report, the Liquidator outlines the claims that are now articulated by the Liquidator in support of the freezing order. 59For reasons which are not explained in the evidence, the examinations of Messrs Yiasemides did not take place until 5 December 2014. 60Subject to what I say below about Mr Yiasemides' property holdings, it is not suggested that Liquidator learned anything from the examination that he did not know already. 61What prompted the application for a freezing order (six days after the examination) was evidence given by Mr Yiasemides that he only owned one piece of real estate 62Hitherto, the Liquidator contends, he believed that Mr Yiasemides owned some eight properties. 63Mr Yiasemides, in his affidavit, gives evidence that he made the true position clear in a conversation with one of the Liquidator's former employees on 25 February 2014. There may be a dispute about this. 64The point is, however, that no new information emerged from the examination pointing to the likelihood of Mr Yiasemides dissipating his assets, such as to warrant an urgent ex parte application for a freezing order; except that Mr Yiasemides owns one, not eight, pieces of real estate. 65Mr Yiasemides' gave this evidence concerning the question of his property: "Despite [the Liquidator's] claim of dissipation of assets, I have taken no steps to sell and have no present intention to sell, the only real property I have registered in my name in Australia... I deny that I have attempted to dispose of assets other than in the ordinary course or with a view to defending creditors." 66That evidence was not challenged before me. 67During argument yesterday, I asked Mr Pritchard whether Mr Yiasemides was prepared to give an undertaking not to dispose of the one property he owns. I was informed that Mr Yiasemides was not prepared to give such an undertaking. 68In that regard, Mr Pritchard drew my attention to the observations of Campbell J in Tomasetti v Brailey [2012] NSWCA 6 at 18: "In some circumstances, as occurred in Commissioner of State Taxation (WA) v Mechold Pty Ltd (1995) 95 ATC 4053, a failure of a respondent to give an undertaking not to dispose of assets when requested to do so can be relevant material for the Court to take into account in deciding whether there is a sufficient risk of dissipation of assets. In that case, however, there was evidence other than a failure to give the undertaking when requested that went to the prospect that there might be a dissipation of assets. A litigant could not request an opposite party to give an undertaking not to dispose of assets, and then, when that request was not complied with, for that to be in itself a sufficient basis to warrant the Court in taking the significant and intrusive step of issuing a freezing order." 69Thus, the mere fact that Mr Yiasemides was not prepared to give the undertaking that I enquired of is not a matter which weighs significantly in the balance before me. 70In support of the proposition that there was a risk of dissipation, Mr Lockhart said this in his written submissions: "The risk of dissipation, leaving the liquidator high and dry, when it comes to enforcement of any judgment against Bon Fleur and Yiasemides is high in this instance. There is a very real risk that the defendants will seek to remove assets or diminish the value of assets in order to render them judgment proof. That is demonstrated by the phoenix activity that Andrew Yiasemides has engaged in, with the assistance of these various related entities over the past years. In addition, conduct of those businesses shows the disregard for the separate legal entities incurred, and this further demonstrates risk of dissipation. In addition the attempt to distance himself from Limar by engineering the appointment of his son as a director in July 2012, following the obtaining of judgment against Limar, further evidences of dissipation to avoid judgment." 71However, the Liquidator has known all these matters since at least February 2014. 72It seems to me that, in all these circumstances, the Liquidator has not established there is a real risk of Mr Yiasemides or Bon Fleur of dissipating their assets. 73There are a number of other factors relevant to the discretion to be exercised and which weigh against the exercising of the discretion to extend the freezing order. 74The first is that according to the Liquidator's 2014 report, the external creditors of Limar amount to only $59,190. The other creditors, whose claims amount to $359,910, are related in some way to Limar. Thus for the freezing order to be extended, it would be for the benefit of a relatively modest body of the external creditors. 75Further, the Liquidator has not yet articulated his claim by way of a pleading. 76Finally, the proceedings are likely to be lengthy and fiercely contested. Thus any freezing order would be for a lengthy duration. 77In all those circumstances, I am not persuaded that the freezing order should be extended. 78I dismiss the plaintiff's Interlocutory Process of 10 December 2014. 79I note that the defendants agree that such dismissal is without prejudice to the ability of the plaintiff, in due course, to file an Originating Process in such form as he may be advised. 80I direct the proceedings stand over before the Registrar on Thursday 5 February 2015 for directions. 81I order that the Liquidator pay Mr Yiasemides' and Bon Fleur's costs of the Interlocutory Process. Such costs are to include the appearances on 17 and 23 December 2014.