D'Aloia v Jarvie [2000] VSC 16

The primary relief sought by the applicants is an order that the respondent deliver up to them all assets and books of Smart in his possession. The applicants say that they have been appointed as administrators of Smart pursuant to s.436C(1) of the Corporations Law ("the Law") which empowers a person who is entitled to enforce a charge on the whole, or substantially the whole, of a company's property, to appoint an administrator if the charge has become and still is enforceable.

Supreme Court of Victoria|2000-02-02|Before: Mandie J

CORPORATIONS - whether administrators duly appointed pursuant to "charge" - s.436C(1) Corporations Law

This is an application by notice of motion dated 31 January 2000 by the applicants who are described as the administrators of Smarter Way (Aust) Pty Ltd (in administration). The respondent is the managing and sole director and sole shareholder of that company (which I will refer to as "Smart").

The primary relief sought by the applicants is an order that the respondent deliver up to them all assets and books of Smart in his possession. The applicants say that they have been appointed as administrators of Smart pursuant to s.436C(1) of the Corporations Law ("the Law") which empowers a person who is entitled to enforce a charge on the whole, or substantially the whole, of a company's property, to appoint an administrator if the charge has become and still is enforceable.

It is not disputed that the applicants were purportedly appointed in writing as administrators by Waiviata International Limited ("Waiviata") on 28 January 2000. What is principally is dispute is whether the alleged charge said to be constituted by or contained in a written agreement between Waiviata of the one part and Smart and the respondent of the other part, made on or about 6 January 2000, is a charge within the meaning of s.436C(1) of the Law.

The said agreement recites that Smart operates a business of an internet service provider for approximately 4,000 clients and has assets which include contracts with clients, intellectual property rights to exclusively use the domain name "www.smart.net.au", trade debtors of about $105,000, cash on hand, computer hardware worth about $150,000, computer software and business goodwill.

The agreement further recites that Waiviata and Smart had begun discussions regarding the acquisition of the business and its assets by Waiviata, and that Smart and the respondent had requested a short-term loan facility from Waiviata on the terms and conditions of the agreement which Waiviata was prepared to provide.

Clauses 1 and 2 of the agreement are to the effect that after a lawyer for Smart and the respondent has certified that he or she has explained to them the operation and effect of the agreement, and that in his or her opinion they understand it, Waiviata will advance $132,525.70 to Smart. The evidence shows that such a certificate was given and the money was advanced.

Clause 3 of the agreement provides that unless Waiviata and Smart have entered into a binding agreement for the acquisition of the business by Waiviata, Smart must, by a specified date (which in the event was extended to 24 January 2000) repay the sum advanced, plus certain interest and costs. No such binding agreement was entered into and the money was not repaid.

Clause 4, which is the key relevant provision, provides that if Smart fails to comply with Clause 3 "Waiviata will immediately become the full and absolute beneficial owner of the business and the assets and, to the extent possible without further act or documentation, the legal owner of the business and the assets".

Clause 5 of the agreement is in aid of Clause 4 and obliges Smart and the respondent, in substance, to take all necessary steps to perfect Waiviata's title, both legal and beneficial, to the business and all of its assets. The words "full and absolute ownership" are used in Clause 5(e); see too Clause 6(c).

Clause 7 provides, in effect, that once full and absolute ownership and control of the business and assets has passed to Waiviata, Smart is discharged from any obligation to repay the debt under Clause 3.

Clause 9 of the agreement requires Smart and Jarvie, the respondent, pending repayment of the debt, to conduct the business in its ordinary course, preserve its goodwill and assets and not dispose of or encumber any assets or distribute any assets or income or profits of the business. Obligations such as these are commonly found in documents which create floating charges, but Clause 9, of itself, does not create a floating charge.

As I understand it, broadly speaking, a charge is a security interest. It is the granting of an interest of some kind in property entitling the chargee to have resort to that property for the purpose of obtaining repayment of a debt or satisfaction of some other obligation secured by the charge (note s.269 of the Law). See Young v. Matthew Hall Mechanical and Electrical Engineers Pty Ltd (1988) 13 A C.L.R., 399 at p.403. I would adopt what was said by Brinsden, J. at p.403:

"In considering not dissimilar legislation to s.200(1) of the Code, Turner, J. in Paintin and Nottingham Ltd v. Miller, Gale and Winter [1971] NZLR 164 at 197 said - 'I think that the word "charge" must signify the giving of a security by way of mortgage, lien or encumbrance or to the like effect over property the ownership of which is and remains in the grantor'. In a later case, Waitomo Mills (NZ) Ltd v. Nelsons (NZ) Ltd [1974] 1 NZLR, 484 at 490, Richmond, J. stated - 'As such, I think that in its ordinary and generally accepted meaning, the word "charge" is apt only to describe a situation in which some particular property, real or personal, is appropriated or set aside in favour of someone who is given, by law or by agreement, will or otherwise, the right to resort to the property to satisfy or discharge some obligation'."

For an example of the distinction between a charge as a security interest in property on the one hand, and a transfer of absolute ownership in property on the other hand, see Re Cosslet (Contractors) Ltd (1997) 4 AER 115, especially at pp.127-128.

Counsel for the applicants was unable to point to anything in s.9 of the Law or in Parts 2K.2 and 2K.3 of the Law, or to any authority, which would support an argument that an agreement, such as the present, that property be transferred absolutely and beneficially to a lender upon non-payment of a debt by a specified date, without any right in the nature of an equity of redemption constituted a charge within the meaning of the Corporations Law or the law generally. I do not think that it does.

Although he at times equivocated, counsel for the applicants substantially maintained that the agreement took effect according to its terms and that the chargee was absolutely entitled to the business and assets, however valuable; that the debt could no longer be repaid in the sense that repayment would neither extinguish the charge nor give rise to anything in the nature of a mortgagor's equity of redemption, and that the debt would be formally discharged under Clause 7, once Waiviata obtained full control of the business and assets. These features are not in my opinion those of a charge.

Senior counsel for the respondent, on the other hand, submitted not only that the agreement did not constitute or contain a charge, but that Clause 4 of the agreement imposed an unenforceable penalty for breach, having a value manifestly in excess of the likely loss constituted by the amount of the unpaid debt plus interest and costs, citing O'Dea v. Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983), 152 CLR 359. In that regard I note that there is uncontradicted evidence that Waiviata offered the sum of $2 million to purchase the business and assets of Smart, and also that, even based on the recitals to the agreement, it might be inferred that the value of the business and assets was well in excess of the debt owed to Waiviata. There is much strength in the respondent's submission.

However, I prefer to determine this application simply on the basis that, in my opinion, the applicants have failed to establish the existence of a charge within the meaning of the Law, as above defined. I conclude that, therefore, they have not demonstrated that they were validly appointed as administrators.

Although the applicants said that they were seeking interlocutory and not final relief, having regard to the short time limits involved under Part 5.3A of the Law and the nature of the order sought, the relief granted would, in substance, be likely to be final. The process under Part 5.3A would inevitably proceed, unless restrained under some further interlocutory application as was foreshadowed by the respondent. Accordingly, I think that the application by notice of motion should be dismissed with costs.

I would add that if this application should properly have been viewed as interlocutory only (and I note that no undertaking as to damages was offered, or mentioned in the draft order produced) it seems to me that there is not a serious question to be tried as to the existence of a charge and, even if I were wrong about that, I do not think that the balance of convenience lies in favour of the court assisting the applicants when very real and serious questions have been raised as to the source and validity of their appointment; cf Aloridge Pty Ltd v. Christianos [1994] FCA 972; (1994) 12 A.C.L.C. 237 at 238-239.

The order will be: notice of motion dismissed with costs.

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