Cope v Home

• 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4153/02 - NARELLE LOUISE COPE & ANOR v ANDREW STEWART HOME & 4 ORS

1 Two companies with some commonality of ownership, Surface to Air (Franchising) Pty Ltd (or "STAF") and Surface to Air (Central Coast) Pty Ltd (or "STACC"), conduct bus operations serving airports in Sydney and Newcastle. They do so under a common banner, being "Surface to Air", and with a common 1800 telephone number through which passenger bookings reach whichever of the two companies is the more appropriate geographically to service the needs of a particular passenger requiring transport to or from an airport. 2 STACC is in administration, Mr Home and Mr Stewart having been appointed administrators under Pt 5.3A of the Corporations Act 2001 (Cth) on 12 July 2002. 3 The administrators have formed an intention of selling the business of STACC to a purchaser introduced by or associated with Euro Equities Pty Ltd. This proposal has developed since the second meeting of creditors began on 8 August. That meeting was adjourned to 22 August to enable Mr Fullbrook, a substantial shareholder, to pursue the possibility of a deed of company arrangement and also with a view to exploring further potential for the sale of the business. Because of interlocutory orders made by Windeyer J ex parte in these proceedings on 21 August 2002, the adjourned meeting, which resumed on 22 August, was further adjourned. The interlocutory orders also restrained sale of the business of STACC by the administrators. Those orders were directed to the administrators, rather than STACC and, as extended by me on 23 August, are in force until 5 pm today. 4 The plaintiffs contend that sale of the business of STACC, to the extent that it includes certain items described generally as intellectual property and being, in essence, assets associated with the Surface to Air operating system, will entail an invasion of the plaintiffs' legal or equitable rights. 5 The status of the plaintiffs, Mrs Cope and Mrs Mount, is slightly uncertain since, although they claim to be shareholders of STAF, the particulars recorded at ASIC suggest that it is their husbands who are the shareholders rather than them. Mr Fullbrook apparently owns 50 per cent of the shares in STAF, while either Mr or Mrs Cope owns 25 per cent and either Mr or Mrs Mount owns 25 per cent. 6 The rights the plaintiffs assert are said to arise from an agreement dated 22 November 2001. The parties to the agreement are Mrs Cope, Mrs Mount, STACC and Mr Fullbrook. The recitals refer to a proposal under which STAF is to be formed by the parties - apparently all of them - as a franchisor pursuant to a scheme under which individual bus owners will, as franchisees, carry persons between individually serviced areas and airports, with STACC operating a call centre and playing a coordinating role. 7 Then follows recital E: "STACC is currently in the possession of know how and intellectual property which it will transfer to STAF in order to enable STAF to establish and conduct the said franchising business."

8 Clause 2 of the agreement provides for the parties (without distinction between them) to form a company to be known as "Surface to Air Franchising Pty Ltd" and sets out intended directorships and shareholdings. Clause 3 contains provisions of the kind generally found in shareholders agreements. Then comes cl 4 headed "Contributions of the Parties to STAF": "4.1 Within 14 days after the formation of STAF, Cope and Mount shall pay to STAF equally the sum of $75,000.00, by way of share capital, and the parties shall then arrange for the said sum to be paid by STAF to STACC, in consideration of the obligations of STACC under clause 4.4 of this agreement. 4.2 STACC is to be paid the first $50,000.00 of franchise payments received by STAF by way of a management fee. 4.3 Cope and Mount shall also transfer to STAF as soon as is reasonably possible after the formation thereof the whole of the Northern Beaches goodwill. If there is any goods and services tax payable on the said transfer of the Northern Beaches goodwill, then:- 4.3.1 STAF shall indemnify Cope and Mount in respect of all goods and services tax payable pursuant to this clause 4.3 (including this clause 4.3.1); and 4.3.2 Cope and Mount shall provide to STAF a tax invoice, to enable STAF to obtain an input tax credit in relation thereto. 4.4 STACC and Fullbrook shall each take all steps reasonably necessary on their respective parts to transfer and assign to STAF, within 30 days of the formation of STAF, all intellectual property, systems, procedures, policies, computer software, manuals, telephone numbers and material available to Fullbrook and/or STACC which may assist STAF in conducting its said business, including those listed in the schedule to this agreement."

9 Clause 4.1 thus contemplates payment of $75,000 by Mrs Cope and Mrs Mount in equal shares to STAF with the parties then arranging on-payment of the $75,000 by STAF to STACC. There is evidence to show that each of Mrs Cope and Mrs Mount paid $37,500 direct to STACC on or soon after the date of the agreement and it may be inferred that these payments were made by them by reference to cl 4.1 of the agreement, with the result perhaps that each thereby became entitled to the shareholding in STAF provided for earlier in the agreement and that STAF, which then existed, although it had not, as it were, been taken off the shelf for the project, was to be regarded as having made to STACC the payment contemplated by cl 4.1. 10 I do not make any hard and fast findings on these matters at this stage but I do say that there is cogent evidence to support what I have said. There is likewise cogent evidence that STAF was subsequently taken off the shelf and activated with the result that "formation" of STAF, an event referred to in cl 4.4, occurred soon after 22 November 2001. 11 The crucial provision for present purposes is cl 4.4. It begins with words of command addressed to two of the parties: "STACC and Fullbrook shall...". These words must, in my view, be regarded as imposing on STACC and Fullbrook a contractual obligation owed by them to Mrs Cope and Mrs Mount. Clause 4.4 must be seen as embodying a contractual promise by STACC and Fullbrook to take the steps referred to, that is, all steps reasonably necessary to transfer and assign to STAF all items within the particular description, which are, "available to Fullbrook and/or STACC". 12 It seems to me to follow that transfer by STACC to any person other than STAF of items of the relevant kind owned by STACC will entail a breach of the contractual promise given by STACC to Mrs Cope and Mrs Mount, being the promise in respect of which they outlaid funds pursuant to cl 4.1. If STACC transfers the relevant items to someone other than STAF, it will have put it out of its power to do what it has promised Mrs Cope and Mrs Mount that it will do. 13 The contract here is in some ways analogous with the kind of contract referred to in a passage in the judgment of Barwick CJ in Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR at 460 as follows: "I would myself, with great respect, agree with the conclusion that where A promises B for a consideration supplied by B to pay C then B may obtain specific performance of A's promise, at least where the nature of the consideration given would have allowed the debtor to have obtained specific performance. I can see no reason whatever why A in those circumstances should not be bound to perform his promise. That C provided no part of the consideration seems to me irrelevant."

14 I conclude that there is a serious question to be tried or a prima facie case as to whether sale by STACC, at the instigation of its administrators, of the whole of its assets and undertaking, including the items the subject of cl 4.4 of the agreement of 22 November 2001, will entail breach as against Mrs Cope and Mrs Mount of a contractual promise made to them by STACC. 15 It was suggested by counsel for the administrators that damages would be an adequate remedy. That, of course, must be judged from the perspective of Mrs Cope and Mrs Mount, not from the perspective of STAF as transferee of the items STACC and Mr Fullbrook promised Mrs Cope and Mrs Mount to transfer. The unique characteristics of the items concerned (particularly the 1800 telephone number which is in the market place known to people wanting airport transportation) tend to make it doubtful that damages would be an adequate remedy for Mrs Cope and Mrs Mount; but also to be emphasised in that connection is the point that, on the evidence before the court concerning STACC's financial position, it seems likely that STACC is insolvent so that the prospects of recovering damages, if they were awarded, are problematic. The point I have just mentioned is also relevant to the balance of convenience to which I now turn. 16 The factor to be mentioned immediately in relation to the balance of convenience is the submission on behalf of the administrators that the administration introduces a public interest dimension that deserves special weight. 17 Reference was made to s.435A which states the objective of Pt 5.3A and the system of administration it creates. There was also reference to s.437A which puts the administrator in charge of the company, its business, property and affairs. Section 437D makes void any transaction or dealing affecting the company's property entered into otherwise than by or on behalf of the administrator. It was pointed out that under s.440H, once administration has begun, an application for winding up is deemed to be pending, but only for the very limited purpose of principles about the effect of a lis pendens on purchasers and mortgagees. There was also reference in a wider way to Div 6 of Pt 5.3A headed "Protection of company's property during administration" which suspends rights of chargees, lessors, licensors and others who might otherwise move to assert certain rights in respect of property owned or used by the company, the intention being, clearly enough, to leave property in the hands of the company, unaffected by such claims, and thereby to maximise the possibility of some constructive resolution of its position for the benefit of creditors. 18 Nowhere in this statutory scheme is there anything which in express terms places a general moratorium on contractual obligations of the company in administration. But there is a moratorium on the initiation and prosecution of legal proceedings against the company and in respect of its property. That moratorium is imposed by s.440D which precludes commencement or continuation of proceedings without the consent of the administrator or the leave of the court. That, to my mind, amounts to very much the same thing as a general moratorium on the enforcement of contractual obligations of the company, including prosecution of claims to have contracts specifically performed. 19 The present interlocutory application entails orders against the administrators. Under the orders currently in place and which it is sought to continue, it is the administrators as individuals who are restrained from selling or taking any step in the purported sale on behalf of STACC of the items the subject of the agreement of 22 November 2001. Although constituted in that way, this application is clearly an application in respect of the property of the company. Given ss.437A to 437C about the supplanting of the functions of officers and installation of the administrators as the only persons who can operate as the company's agents in relation to its business, property and affairs, I think that a proceeding ostensibly against the administrators in the present form is in substance no more or less than a proceeding against the company. On both bases, therefore, it is a proceeding within s.440D. 20 I do not accept the submission on behalf of the plaintiff that s.440D is really about pursuing debts. I regard s.440D as part of a general statutory framework which is aimed at affording an administrator a free and untrammelled hand in realising assets for the benefit of the creditors, including any claimants in respect of unliquidated claims for damages which will be pursued against the company in the usual way if it is returned to normal life or proved in the winding up if that is where the company's future lies. 21 I find in Pt 5.3A a general message that, unless an administrator agrees, or the court grants leave, the administrators are to proceed without being distracted by legal proceedings interfering with whatever way forward they see as most conducive to the interests of creditors. It is that thinking that led Young J in Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203 to conclude that grants of leave under s.440D would be rare. As his Honour also pointed out, considerations relevant to a decision whether to grant leave under s.440D are not the same as those involved in the grant of leave to proceed against a company in liquidation. 22 The administrators have advanced an argument based on s.588FE concerning voidable transactions. It is said that the transaction evidenced by the agreement of 22 November 2001 is, from STACC's perspective, a voidable transaction with the result that if and when a liquidator is appointed, which on the evidence as it stands is a likely sequel to the administration, it will be open to that liquidator to take action to avoid the transaction. The most that can be said about this at this stage is that it is a possibility. On the present state of the evidence little weight can be attached to the possibility. 23 I consider the balance of convenience considerations here to be finely balanced. On the one hand if no injunction is granted Mrs Cope and Mrs Mount will be denied any right as against STACC to compel transfer of the intellectual property rights to STAF and be left with a claim in damages against the STACC which may well be insolvent. On the other hand, grant of an injunction will run counter to the statutory expectation that the administrator should proceed untrammelled by legal proceedings and other inroads by persons asserting proprietary rights inconsistent with the free hand the administrators are intended to have. 24 In the end, I think it comes down to the question whether the statutory moratorium, particularly the aspect of it in s.440D precluding resort to legal proceedings, is intended to relegate rights of a proprietary kind in such a way that an administrator may proceed without interference from persons assisting them. The answer, as I see it, is generally in the affirmative. By precluding proceedings against the company or in relation to its property, the legislation aims to ensure that the company is freed during administration from the effects of claims upon its property that can be asserted through legal action. 25 I do not say, of course, that the administrators can proceed with impunity. They are responsible for the conduct of the company's affairs in generally the same way as a board of directors, although the statutory scheme under which they operate causes different interests to be predominant. Administrators cannot lightly cause their company to act in breach of contract. They must be mindful of the consequences of so doing, from the perspective of the interests they are bound to serve. Administrators are obviously not free to commit a company to a course of action entailing harm to its interests unless some clearly countervailing benefit is seen to justify that course. 26 For the reasons I have stated, the balance of convenience in the end must, I think, be regarded as favouring the freedom of the administrators to deal with the company's property without interference by the present claim initiated in respect to the company's property without leave under s 440D. In saying this, I am not to be taken as suggesting that it would be a proper exercise of the administrators' powers to effect a sale by the company which frustrated such rights as the plaintiffs may have under the agreement of 22 November 2001. That is not an issue that arises upon this application. I merely say that, in light of the statutory scheme, it is not appropriate that the administrators be subjected to restraint by injunction. 27 Orders 1 and 2 made by Windeyer J on 21 August and continued by me on 23 August until 5pm today will not be further continued. **********

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