10 Mr Russo does not, however, put a firm estimate on the realisable value of those contingent assets and, on the material put forward, it is not possible to put a realistic estimate on the amount which is likely to be recovered.
11 Mr Russo says that Equus does not have any trade creditors other than what he terms its "day to day creditors", with which he says it is completely up to date. He does not disclose, however, whether Equus has any current creditors other than trade creditors.
12 Mr Russo also says that Equus does not have any non-current creditors, other than associated companies. He does not state, however, the value or terms of those obligations.
13 Mr Russo says that Katesara has a number of charges over Equus securing debts of approximately $20,000,000, on which interest at the rate of 10% is payable on demand. He asserts that it is unlikely that Katesara would call in the debt and exercise its security even if WF&W were successful in the appeal. But evidently Katesara is not prepared to agree to limit itself in that way and I note in passing that in an email from Mr Russo to his accountants on 1 March 2006 he instructed them that he wanted Equus to pay back $2 million of the moneys owed by Equus to Katesara. For all that can be told, that has now been done, perhaps out of the $4.4 million which stood as cash at bank as at 1 April 2006; although senior counsel for Equus did say from the Bar table that his instructions were otherwise.
14 Mr Russo does not produce any accounts for Equus. He asserts instead that Equus is a private company and therefore not required to produce accounts. He also says that Equus does not have complete income tax returns. The last tax return lodged was for the year of income ended 30 June 2002, which disclosed a loss for that year of income of $2,072,425 and accumulated tax losses of $4,548,496, and the company's accountants are even now still working on the year end journal entries for completion of the 2003 tax return, at least according to the emails which were exhibited to Mr Russo's affidavit.
15 Counsel for WF&W submitted that it emerges from the affidavit material that the valuation of the assets is variable and in some cases manifestly exaggerated and that, when one discounts the stated value of the assets to allow for exaggeration, it is plain that the value of assets is substantially eclipsed by the value of liabilities; that the utility of contingent assets is at best problematic; and that the absence of proper financial statements is alarming.
16 Counsel for Equus responds that there are plainly assets of very significant value, and a number of contingent assets which are likely to be realised in the near future in terms of successful litigation and real property development; that there is not the slightest hint of Equus having defaulted in the performance of any obligation within the last ten years; and that there is in reality every reason to suppose that Equus will remain astute to meet its obligations as and when they fall due so as to ensure its continuing operation.
17 As in most things, there is something to be said for each point of view. Not all of Equus' assets are apparently overvalued, and it does not necessarily follow from the fact that an asset is contingent that it is not of any real worth. Moreover, the fact that a company has long term liabilities which exceed current assets, or even sometimes total assets, does not necessarily mean that it is doomed to financial disaster. As leading counsel for Equus submitted with some force, if it were otherwise, many of the largest companies would be unable to continue to trade.
18 But be that as it may, it is necessary to make an assessment of the matter on the basis of the material which is before us and on the basis of that material it appears to me that the most that can be said with any confidence about the financial position of Equus is that it appears to be a company that has possibly $4.4 million but maybe only $2.4 million cash at bank; it has a range of assets, some of which appear to be of significant value and others of which are of uncertain value; and it has a clutch of contingent assets which may be of very significant value but as to the true worth of which there are no necessarily reliable estimates. It has no financial statements or tax returns for the last four years of income; it has a trading loss incurred in the company's most recently reported year of operation of $2.4 million; it has generated possible net profits since then of approximately $1.6 million; it has accumulated tax losses of $4.6 million; it has current creditors of unknown amount and standing; it has secured fixed creditors of in the order of $20 million or possibly $22 million, which may or may not be accumulating interest at the rate of 10% per annum; it has further fixed creditors of unknown amount which are said to be associated companies; and it has a dependency for its solvency on the continuing discretionary co-operation of its creditors which, in the event of default, I assume, would be likely to act in their own interests.
19 Of course, I do not express a concluded view on the matter. This is an interlocutory application and we have not had the benefit of cross-examination. It may be that with further exposition what appear now to me to be possible problems would be revealed not to be so in fact. At the same time, however, the absence of proper accounts and financial records is a cause for serious concern. To say the least, it is unsatisfactory that none has been produced and it does not alleviate that concern that Equus may be a private company. Granted that small proprietary companies[2] are no longer required to prepare annual profit and loss accounts or balance sheets or to have those accounts or balance sheets audited,[3] they are still required to keep accounting records in accordance with s.286 of the Corporations Act; and to provide copies of financial statements and reports to members in accordance with s.315; to lodge accounts with ASIC if required to do so, in accordance with s.294; and to permit inspection of records by an auditor or legal practitioner on behalf of a member, in accordance with ss.247A, 247B, 247C.[4] They are moreover required to lodge tax returns with the Commissioner of Taxation, which is hardly possible, I should have thought, without first coming to a true and fair view about their financial position.
Security in respect of the fund
20 The nature of WF&W's rights in respect of the fund are debatable. On one view of the matter, that firm has or had no more than a contractual right under the agreement of June 2003 to keep the fund separate and apart to abide the hearing and determination of the proceeding. On that view of the matter, the fund and the firm's rights in respect of the fund gave the firm no more by way of security than its rights under the Deed of Costs to payment at an increased or higher rate in respect of the Beagle litigation.
21 Another view, however, which I am inclined to prefer, is that the fund once constituted was "trust moneys" in the broad sense that neither Equus nor the firm was beneficially entitled to them.[5] They were held in the Macquarie account subject to the rights of each of Equus and the firm to insist that the fund be kept separate and apart and applied in accordance with the agreement of 30 June 2003. Such if any interest in the fund as that may have conferred on the firm was at best contingent, in the sense that until and unless it was determined that the firm had a right to be paid at the higher rate under the Deed of Costs, it had no right to be paid out of the fund. Nevertheless, once the fund was constituted, it became a security in the broad sense that it was intended to and did improve the position of the firm in its action to recover what it contended was a debt.
22 A relatively long line of authority establishes that a payment into court under the rules of court must be treated as moneys paid into court to abide the event of the action and is security for the sum which the plaintiff may obtain at trial. Consequently, if a defendant becomes bankrupt or goes into liquidation before trial, the money must remain in court until the plaintiff's claim is decided by the court or there is an adjudication upon proof in bankruptcy or in the winding up.[6] As Lush, J. put it in Commercial Banking Co of Sydney Ltd v Colonial Financiers of Australia Pty Ltd[7] a payment in involves an appropriation by the defendant of part of its property and the setting aside of that part specifically to answer the plaintiff's claim if that claim is made good. Such an arrangement has been described as the giving of a charge on property in favour of the plaintiff.
23 It has also been held that similar principles apply to a disputed sum deposited with solicitors as stake holders to abide the determination of the dispute by arbitration. In Shirlaw v Malouf[8], Cohen, J. reasoned that, because the money was to be dealt with in exactly the same way as would an amount paid into court under an order, which is to say that it could not be withdrawn or repaid to a party unless there were a finding in favour of that party, the payment was a conditional security which the stakeholders were bound to hold and pay in accordance with the award. The parties had by their agreement fashioned their own rules to achieve the same effect as a payment in.
24 So too here it seems to me that Equus and the firm did by the agreement of 30 June 2003 fashion their own rules to achieve the same effect as a payment into court. They agreed that the fund would be kept separate and apart to abide the proceeding and paid out in accordance with the judgement of the court. In my view it makes no difference that the fund may have been under the control of the firm rather than independent stakeholders, for the firm was just as much bound as any stakeholder to deal with the fund in accordance with the agreement and the determination of the court as would be any third party stakeholder. Had it not done so, injunction would surely have gone to restrain disobedience and to compel compliance.
25 So to say is not necessarily to conclude that the agreement of 30 June 2003 amounted to an hypothecation of the fund. It is enough to confer security in the broad relevant sense that the agreement was one to set aside a fund to satisfy an identified, albeit unquantified, obligation. In point of principle, there is no reason why equity may not be invoked in the auxiliary jurisdiction in aid of the legal rights to which such an arrangement gives rise.
26 It was submitted on behalf of Equus that the agreement of 30 June 2003 was in terms no more than an agreement to keep the fund intact until the hearing and determination at first instance, and that the absence of any express reference to the possibility of appeal should be taken as implying that the parties did not intend the fund to be maintained until the hearing and determination of any appeal. There is, I think, some force in that submission. The drafting of the agreement is certainly open to that interpretation. On the other hand, there is force in the submission made on behalf of the firm that the contrary construction is plainly arguable, and that, subject to the balance of convenience, that is enough for the purposes of the sort of interlocutory relief which is sought.
The basis for injunction
27 As matters stand, therefore, which is to say that so long as the fund is kept intact, the firm arguably has the benefit of a security in the sense to which I have referred and to which it can resort if successful in its cross-appeal. If, however, the fund is paid out to Equus, the firm will be left unsecured and, as the evidence before us appears at the moment, perhaps unable to enforce execution in the event of success in the cross-appeal. Strictly speaking, of course, that is not the same thing as saying that the payment out of the fund would necessarily render nugatory the cross-appeal. If the firm were successful in the cross-appeal, it would, as senior counsel for Equus submitted, still have rights to claim, and ultimately to prove, as an unsecured creditor. But, as I say, on the probabilities as they appear from the evidence before us at the moment, there is no certainty or on the material necessarily even any significant probability that those rights would prove to be of value. In the particular circumstances of this case, I am persuaded that that is a legitimate basis on which to grant the injunction that is sought.
28 In effect, as it seems to me, the firm's position is analogous to that of a secured lender which has advanced funds on the security of a mortgage but failed at first instance in proceedings to enforce the mortgage. In such a case it cannot always be said that a discharge of the mortgage pending appeal will render the appeal nugatory, since the mortgagee retains the benefit of the covenant to pay in the event that it is successful in the appeal. But, in the scheme of things, the covenant to pay may prove worthless, and so, therefore, a stay or discharge pending appeal will ordinarily be granted. In effect, it is recognised that deprivation of security is so fundamental as of itself to be sufficient to warrant the grant of stay. So, too, as I see it in this case, the fundamental difference between the position of the firm with the benefit of the security of the fund and its position without the security of the fund is, in effect, a sufficient basis to warrant the grant of injunction.
29 Finally, it is to be noted that it is not suggested that the retention of the fund pending the hearing and determination of the cross-appeal would result in significant hardship for Equus. Indeed to the contrary, the submissions made on
behalf of Equus are to the effect that it has adequate capital and cash available to carry on with confidence.
Conclusion
30 Subject therefore to the firm by its counsel giving the usual undertaking as to damages, I would be prepared to make orders enjoining the parties until the hearing and determination of the appeal or further order from charging, disposing or otherwise dealing with the moneys standing in the joint names in the Macquarie account.