Earth Loop Pty Ltd v AIAN Investments Pty Ltd

DECISION : Application for appointment of provisional liquidator dismissed with costs.

CATCHWORDS : CORPORATIONS - winding up - application for appointment of provisional liquidator - whether "urgency" - whether "suspicious circumstances" - whether intrusive appointment warranted

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 9, 232, 233, 286(1), 286(2) Crimes Act 1900, ss 78BB(1), 300(1)

CASES CITED : Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 Roumanus v Orchard Holdings Pty Ltd [2007] NSWSC 1480

Earthloop Pty Limited as Trustee for The Goodsir Discretionary Trust - First Plaintiff Albert Frisoli - Second Plaintiff Yatooma Pty Ltd - Third Plaintiff PARTIES : Ros Civil Pty Ltd - Fourth Plaintiff AIAN Investments Pty Ltd - First Defendant Giuseppe Di Cianni - Second Defendant Di Cianni Pty Ltd - Third Defendant

COUNSEL : Mr C D Jackson - Plaintiffs Mr D A Allen - Defendants

SOLICITORS : Hughes & Taylor - Plaintiffs PA Legal - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3754/06 EARTH LOOP PTY LIMITED AS TRUSTEE FOR THE GOODSIR DISCRETIONARY TRUST AND ORS v AIAN INVESTMENTS PTY LIMITED AND ORS

1 These proceedings were commenced more than two years ago. There are fpir plaintiffs and three defendants. The natural person plaintiff is Mr Frisoli. The natural person defendant is Mr Di Cianni. The corporate parties are companies that are or have been involved in business ventures of the individuals. 2 The disputes arise from what can be described in broad terms as a falling out between partners or co-ventures in certain building and property development activities. 3 The relief sought by the plaintiffs in their further amended statement of claim filed on 20 May 2008 includes an order for the winding up of one of the corporate defendants. 4 By a cross-claim filed on 20 December 2007, the natural person defendant, Mr Di Cianni, seeks, among other relief, orders that the third plaintiff Yatooma Pty Limited and the fourth plaintiff Ros Civil Pty Limited be wound up. The winding up applications on both sides are advanced on the grounds of oppression and like conduct within ss 232 and 233 of the Corporations Act 2001 (Cth). The overall claims on both sides are substantially wider than merely claims for the winding up of certain companies. 5 I have today heard an interlocutory application by Mr Di Cianni - the natural person defendant and the cross-claimant - for an order appointing a provisional liquidator of the two companies he seeks to have wound up on the oppression ground, that is Yatooma and Ros Civil. That application is advanced by an interlocutory process (styled notice of motion) filed on 8 August 2008. 6 I should outline the several matters on which Mr Di Cianni relies. The first concerns a purported transfer of his shareholding in Yatooma to Mr Frisoli by an instrument of transfer dated 23 November 2004. Mr Di Cianni says that he did not sign this document and that his signature was forged. 7 Mr Frisoli has been charged with offences under ss 178BB(1) and 300(1) of the Crimes Act 1900 in connection with this instrument, being one charge of make false instrument with intent, and two charges of obtain money/valuable security/financial advantage by false/misleading statement. 8 Expert evidence of a handwriting examiner tends to suggest that the signature of the transferor on the document is not that of Mr Di Cianni. That expert evidence will in due course need to be fully evaluated. There is also however evidence of Ms Kourea, an employee, that Mr Frisoli instructed her to prepare the share transfer document and that Mr Di Cianni signed it in her presence on 23 November 2004, whereupon she signed as witness to his signature. 9 Mr Di Cianni says that he only found out about the share transfer document in April 2006. The question whether it is a false instrument is central to claims in the principal proceedings. 10 The second matter or series of matters to which Mr Di Cianni points in relation to Yatooma concerns movement and application of funds. There is a complaint that $160,000 out of the total of $350,000 raised on mortgage from Westpac in 2002 is unaccounted for. There is a similar concern about the application of the deposit from the sale of a property by Yatooma to one Simpson in September 2002. Various bank statements and other documents are in evidence with respect to movements of Yatooma's funds. These show very largely movements between accounts of Yatooma itself. Mr Frisoli has given evidence that some monies of Yatooma were expended in payments direct to subcontractors. He refers in that connection to a deed, but it is clear that the deed has nothing to do with payments to subcontractors. That, says Mr Di Cianni, is a source of justifiable suspicion. Mr Di Cianni has known about these matters for a considerable time. They too form part of the basis for the claims for final relief. 11 The third matter in relation to Yatooma is an allegation that from 1998 funds of the company were used to pay for Mr Frisoli's personal affairs, including life insurance, rent and home building costs. Mr Frisoli denies this on oath, except to the extent that company funds were on one occasion used to pay his daughter's school fees. 12 The complaints or concerns to which I have referred to this point relate to Yatooma only. In the case of Ros Civil - a company owned one third by Mr Di Cianni and two thirds by Mr Frisoli - there are complaints by Mr Di Cianni that $60,000 of the company's funds, obtained from a Westpac overdraft guaranteed by Mr Di Cianni, was used for purposes foreign to the interests of Ros Civil. He says the money was applied towards litigation in which an unrelated company, State Concrete (NSW) Pty Limited was involved. These alleged events happened in late 2005 and early 2006. Mr Di Cianni became aware of the matters in February 2006. 13 The next matter on which Mr Di Cianni relies in pursuing the interlocutory application concerns both the companies. It has to do with events that occurred well after the filing of the application for the appointment of a provisional liquidator. Those events followed on from an undertaking given to the court on 5 September 2008, that is less than one month ago. The notation on the court file is in these terms: "I note the undertaking that the books and records of the said two companies, Yatooma Pty Limited and Ros Civil Pty Limited, will be made available by those companies to the second defendant, Mr Di Cianni, and his legal advisors by no later than 10 September 2008."

14 Documents were delivered, as envisaged by the undertaking, within the time stated in the undertaking. 15 Mr Di Cianni, the applicant, has sworn an affidavit of 19 September referring to his inspection of the documents delivered. He refers to bank statements, cheque butts, letters and other correspondence and files relating to a building project at Camperdown. He says that there are gaps, particularly in the bank statements and cheque butts, which gaps consist of missing items for particular periods. He refers to absence of bank statements and cheque butts in relation to certain nominated bank accounts. Also he says there were no cash books, general ledgers, company records, company registers, annual tax returns, balance sheets or profit and loss accounts. The deficiencies or alleged deficiencies relate to both Yatooma and Ros Civil. 16 Mr Frisoli says in an affidavit of 29 September that all relevant documents in existence have been collected and produced. Dealing specifically with tax returns, balance sheets and profit and loss accounts of Yatooma, Mr Frisoli says expressly that these were among the documents delivered. 17 Mr Taylor, the solicitor for the respondents' on the motion, gave evidence that he received documents from Mr Frisoli and passed them on to the applicant's solicitor in accordance with the undertaking, together with a covering letter. The documents were in two boxes. Mr Taylor says that he saw within the boxes tax returns and financial statements, including profit and loss accounts. However, he was not specific about the years or the companies or company to which these related. 18 It is in light of all this evidence that I must approach Mr Di Cianni's application for an order for the appointment of a provisional liquidator of each of Yatooma and Ros Civil. In doing so I gratefully adopt the observations of Austin J in Roumanus v Orchard Holdings Pty Ltd [2007] NSWSC 1480 as to the general approaches to be adopted: "[8] As a general proposition, the plaintiff must establish an urgent need for intervention, or some other good reason to take control away from the directors ( Re JWD Pty Ltd (1990) 5 WAR 31; Re Capital Services Ltd (1983) 1 ACLC 1270; Re Gasbourne Pty Ltd (1984) 2 ACLC 103). However, the "good reason" must be established having regard to the urgent circumstances of the application. The urgency of the application almost inevitably means that the court will have before it substantially less evidence than will be adduced at the final hearing of the winding up application ( Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625, 635). Frequently, as in the present case, the hearing of the application takes place without oral evidence, and therefore without the court having any opportunity to assess the credibility of witnesses. In those circumstances the court deals with questions of fact only to the interlocutory standard, determining whether the plaintiff has established a serious question to be tried as to the grounds for winding up ( Boral Resources (WA) Ltd v Innovative Precast Systems Pty Ltd , Supreme Court of Western Australia (Sanderson M), 24 August 1998, BC 9804409 at 15). As in the case of an application for any other interlocutory order, much attention must be given to the question of balance of convenience, including the need for urgent intervention.

[9] Generally, the purpose for which a provisional liquidator is appointed is to preserve the assets of the company and the status quo in relation to its affairs ( Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 55 SASR 103; 3 ACSR 518 per King CJ). However, an order for the appointment of a provisional liquidator is different from some other kinds of interlocutory orders in that the order unavoidably disturbs the status quo to a degree, if at the time the application the company is carrying on business in a commercial environment. The very appointment of a provisional liquidator can have a drastic effect on the company's business, perhaps even leading to its commercial death (see the discussion by Kirby P in the Constantinidis case, at 635ff, and also Commonwealth v Hendon Industrial Park Pty Ltd (1995) 17 ACSR 358). This leads to the observation that "the appointment of a provisional liquidator pending adjudication upon the petition for winding up, is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo" ( Zempilas per King CJ, approved by Kirby P in Constantinidis at 635)." 19 Mr Allen of counsel for the applicant pointed out that to this should be added an observation of Young J in Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865. His Honour said: "As I understand the practice of this court over many years, if there is an application made in the presence of the company and suspicious circumstances are disclosed, which may not amount to putting the assets in jeopardy, and the plaintiff seeks a provisional liquidator and presumably is willing to fund the provisional liquidator to make investigation then ordinarily the court will appoint a provisional liquidator to make that investigation, though on an ex parte matter it may not have been so bold." 20 It is accepted by the respondents that there is a serious question to be tried on the principal claim for a winding up order in respect of each of Yatooma and Ros Civil. The inquiry must therefore be as to the balance of convenience and the question whether anything need be done to secure or stabilise the position pending trial of that principal claim. 21 It is relevant to note that Yatooma at least has some ongoing operations. It holds a builder's licence and, while the evidence leaves some doubt as to whether it exercises the licence for its own benefit or to enable Mr Frisoli to carry on a building business of his own, the fact remains that the licence is in existence and apparently in use. Ros Civil is said to have carried on a concreting business. It is not clear whether it continues to do so. The current litigation seems to play a large part in the activities of both companies as they now stand. They and their associates mount substantial claims against the defendants. 22 The course urged upon the court is one of intervention - intervention in a way which is often and justly described as "drastic". The form of intervention sought is one that is appropriate in cases of urgency. There is no urgency in this case, at least in relation to the allegedly forged share transfer of 2004, the deployment of Yatooma's funds in 2002 and the deployment of Ros Civil's funds in 2005 and 2006. The same is true of any application of company funds for Mr Frisoli's personal benefit. 23 Those wrongs, if indeed wrongs were committed, do not call for urgent intervention. Also, the applicant has been aware of them for years and is pursuing them in the ordinary way in proceedings which have been on foot for a long time. 24 The only thing which might conceivably be thought to call for urgent intervention is that which emerges from the evidence about the steps taken to comply with the undertaking given to the court on 5 September 2008. There are two issues there: first, whether the items delivered comprised everything required by the undertaking; and, second, whether the items delivered indicate some kind of suspicion, to use the term favoured by Young J, relevant to the discretion to appoint a provisional liquidator. 25 The first matter is, in my view, not one of direct relevance to the present inquiry. Failure to honour and carry out the undertaking to the court, if established, produces consequences of its own. 26 Of direct relevance here is the possibility that the well-being of the two companies is in jeopardy because of failure to keep proper books and records. Mr Allen referred to the statutory requirements in that respect. Section 286(1) of the Corporations Act requires a company to keep "written financial records that (a) correctly record and explain its transactions and financial position and performance, and (b) would enable true and fair financial statements to be prepared and audited". Section 286(2) says that these records must be kept for a period of seven years. There are, of course, separate requirement concerning the preparation of financial statements. Mr Allen pointed to the definition of "financial records" in s 9: "'financial records' includes: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements." 27 It is clear from this definition that just what is required by way of "financial records" will vary from case to case and that for a company with an uncomplicated and straightforward set of activities the requirements may be quite modest. 28 The evidence from which inferences might possibly be drawn as to the adequacy of financial records is that concerning the steps taken to comply with the undertaking. It may be inferred that there are some gaps. There is a possibility (remote, perhaps, in the light of Mr Taylor's evidence) that some required tax returns or financial statements were not brought into being. This, it is said, warrants a finding of what Young J calls "suspicious circumstances". I cannot really come to any firm conclusion on this. Absence of some documents may be less serious than absence of others. But even if there are "suspicious circumstances" it does not follow that a provisional liquidator will or should be appointed. It is a question of what a provisional liquidator could or would usefully do to address matters in the particular circumstances. 29 I am not satisfied that an appointment would, on balance, serve a beneficial purpose. I am entitled to infer that an appointment would be prejudicial, particularly in the case of Yatooma, which holds a builder's licence. I do not see how an appointment would rectify an apparent gap in the records from the past. I am not persuaded that there is relevant jeopardy for the future that needs to be checked or addressed. 30 The concerns that lie behind the present application are those that lie at the centre of the substantive proceedings. At an interlocutory level there is no safeguarding, remedial or stabilising purpose that needs to be served by the appointment of a provisional liquidator. 31 Both parties say that they want an early final hearing. That is another reason why I am inclined to let matters remain as they are. I point out that under practice note SC Eq 4 a hearing of five days, as this would apparently be, cannot be accommodated in the ordinary way in the Corporations List. It may be that the parties will see fit to make an application to the Expedition Judge. That is a matter for them. 32 For the moment, all I need do is to order that prayer 1 in Mr Di Cianni's notice of motion filed on 8 August 2008 be dismissed and that Mr Di Cianni as applicant pay the respondents' costs of the hearing in relation to that application. I so order. 33 The balance of the notice of motion of 8 August 2008 is stood over to the registrar's list on 7 October 2008. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.