Excelsior Run Pty Ltd v Nelius Pty Ltd [2001] VSC 161

6. On 14 April 1999, the first plaintiff ("Excelsior Run"), was wound up by court order. The second plaintiff, John Menzies Spark, was appointed liquidator.

9. The second defendant, John Filippo ("Filippo") was a director of the first defendant Nelius Pty Ltd ("Nelius"). The third defendant, Joe Cascone ("Cascone") was appointed by the second defendant on 17 December 1998 as Receiver and Manager of the assets and undertaking of Excelsior Run. Filippo was also a director of the fourth defendant ("Millenium Journey") and the fifth defendant ("Mirater"). The sixth defendant, Camille Elizabeth Crosling, is the registered proprietor of land in Ivanhoe.

12. In May 1998, Excelsior Run executed a fixed and floating charge in favour of Filippo. The plaintiffs allege that in December 1998, Filippo, purportedly acting pursuant to the charge, invalidly appointed Cascone as Receiver and Manager of the assets and undertaking of Excelsior Run.

15. The assets of Excelsior Run included shares in Maple Oil N.L. that were subject to a lien in favour of the ANZ Bank. The plaintiffs allege that at the time of the execution of the charge, the first defendant, Nelius through its director Filippo, was aware of this lien. Purporting to act pursuant to the charge and in part settlement of an amount allegedly owed by Excelsior Run to Filippo for accounting services, Cascone transferred the Maple Oil shares to Nelius in August 1999. The plaintiffs allege that the shares were transferred at a value substantially less than market value and contrary to the Corporations Law.

18. The assets of Excelsior Run also included a property at Portsea that was sold to Millenium Journey in June 1998. Part of the purchase price was contributed by the sixth defendant from funds, it is alleged, that were misappropriated from Excelsior Run. The plaintiffs also allege that the sale of the Portsea property was an uncommercial and insolvent transaction pursuant to the Corporations Law. It is further alleged that the purchase price was substantially less than the market value of the property and was entered into so as to defeat, delay or interfere with the rights of the creditors of Excelsior Run.

21. Further, during the period November 1987 to October 1998 it is claimed that Excelsior Run made distributions, recorded as dividend payments to Mirater as its sole shareholder, at a time when Excelsior Run made a loss and was not permitted to declare any dividend. It is alleged that part of these distributions were used to provide funds for the sixth defendant to effect renovations and improvements to the Ivanhoe property and also to contribute towards the purchase of the Portsea property.

24. The above events largely came to light following a court ordered public examination of a former director of the company, Noel Crosling, a director, Mark Crosling, Filippo and Cascone pursuant to s.596A of the Corporations Law.

28. On 20 April 2001 I granted an interim injunction after a contested hearing against the then sole defendant Nelius. Orders were made on an interim basis restraining Nelius from transferring, dealing with, charging, mortgaging, assigning or disposing of certain assets consisting of shares held by Nelius in specified companies. Other orders were made including the adjournment of the plaintiffs' application until 4 May 2001. On the latter date the orders were extended over until the present time. The present matter for determination is whether or not the injunction ought be continued until trial or discharged. On each of the occasions to date that the orders have been made an undertaking as to damages was proffered by Mr Sparke as liquidator for Excelsior Run.

32. On 4 May 1998 Excelsior Run executed a charge in favour of Filippo. On 5 June 1998 a voluntary administrator and receiver and manager was appointed to Maple Oil. On 10 June 1998 the charge was registered. On 17 December 1998 Filippo purported to serve a written demand on Excelsior Run. The notice of demand was marked to have been served at 10.00 a.m. on 17 December 1998. The demand provided:

"In accordance with Clause 8.1d of the debenture charge the company is in default. Accordingly I hereby demand that all moneys due and payable to me be paid immediately."

36. Clause 19 of the charge required notice in writing to be given prior to the appointment of a receiver and manager. In the circumstances before me it was not entirely clear that proper demand had been effected by Filippo on Excelsior Run for the purposes of satisfying the notice requirement of the charge.

39. The demand was served by Filippo on Mark Crosling, a director of Excelsior Run. Mr Crosling is the husband of the sixth defendant. The notice of demand made no reference to the amounts that constituted "all moneys due and payable". Furthermore, the notice of demand did not make any reference to relevant invoices. However, attached to the notice of demand were two invoices. The first invoice ("the first invoice") was for the amount of $22,445 in relation to professional services rendered during the period from 1 November to 15 December 1998. The first invoice noted at its foot that terms required payment 30 days from the date of invoice. The second invoice was dated 17 December 1998 ("the second invoice") and was for the amount of $1,000 in relation to disbursements. Similarly, it contained a note at its foot that terms required payment 30 days from the date of invoice. The notice of demand and invoices were said on behalf of Nelius to have been served on Excelsior Run at 11.17 a.m. on 17 December 1998. Nevertheless it was not clear on the evidence before me as to whether both invoices had in fact been served on Excelsior Run. An examination of other invoices that appeared to be related to the same matters as those described in the first invoice indicated that there had been a part payment of the amount claimed. The first invoice did not appear to make allowance for this part payment if it related in fact to the same matter.

42. On the same day of service of the notice of demand at a time unknown to the court Filippo appointed Cascone as receiver and manager of Excelsior Run. It was the case of the plaintiffs that even if the notices of demand had been properly effected and served there was insufficient time allowed to Excelsior Run for the purposes of meeting the demand.

45. Subsequently, on 15 June 1999 a general meeting of shareholders of Maple Oil was held. A resolution was passed to issue shares to a creditor, Rothschild. In the explanatory memorandum given to shareholders some optimism was expressed with respect to the share price of Maple Oil. On the same day, 15 June 1999, Filippo sent a letter to Cascone, the then receiver and manager of Excelsior Run asserting that the fair value of the shares in Maple Oil was 1.5 cents per share and instructing Cascone to transfer 5,631,446 shares to Nelius. The plaintiffs asserted that from 15 June 1999 onwards significant activity occurred in facilitating the re-listing of Maple Oil. On 24 June 1999 an announcement of re-listing of Maple Oil was made to the Australian Stock Exchange. On 10 August 1999 Filippo sent a share transfer to Cascone in relation to the transfer of the Maple Oil shares to Nelius. Two days later, on 12 August 1999, the deed of company arrangement ended. On 9 November 1999 a further request was made to the Australian Stock Exchange for the re-listing of Maple Oil and on 30 November 1999 a memorandum was circulated to shareholders in Maple Oil. On 2 December 1999 Filippo requested a stock broker to sell the parcel of shares held by Nelius in Maple Oil at no less than 11.5 cents per share. On 3 December 1999 the shares in Maple Oil were re-listed on the Australian Stock Exchange at a price of 12.76 cents per share.

49. In accordance with the usual principles it is necessary for the plaintiffs to demonstrate that there is a serious question to be tried. The plaintiffs assert that there are three serious issues, first, that there was no proper demand effected to justify the appointment of the receiver; second, that the receiver breached the duty owed under s.420 of the Corporations Law and at common law to the company; third, that there was no consideration for the charge in any event.

53. The plaintiffs relied upon the principle stated by the High Court in Bunbury Foods Pty Ltd and Anor v National Bank of Australasia Limited and Anor [1984] HCA 10; (1983-84) 153 CLR 491. In that case Bunbury Foods granted a debenture to a bank to secure repayment of moneys. The bank demanded by notice payment of moneys owing but the notice did not specify the amount owing. The court stated the principle (at 502-504) that a debtor required to pay a debt payable on demand must be allowed a reasonable opportunity to meet the demand before the creditor can enforce his security. Of course, as to whether a reasonable opportunity has been allowed will depend upon the circumstances of each individual case. For present purposes on the evidence before me it is at least arguable that a reasonable opportunity was not provided to Excelsior Run to meet the demand. On the evidence filed by Nelius the demand and invoices in support were served at 11.17 a.m. on 17 December 1998. On the same day, but at a time at this stage unknown to the court, the receiver was appointed. It seems to me, therefore, that it is at least arguable that reasonable opportunity was not allowed to Excelsior Run in all the circumstances. As to whether the time allowed was in fact reasonable is a matter ultimately to be determined at trial. It follows, therefore, that I am satisfied that the first serious question to be tried has been made out.

56. After I reserved my judgment in this matter and on the eve of my handing down judgment the first, second, fourth and fifth defendants submitted further written submissions. It is an undesirable course to adopt. In summary, the submissions asserted that the claim with respect to alleged breach of duty by the receiver argued matters beyond the present pleading. I have considered the submissions carefully. It seems to me that all the plaintiffs need do for the purposes of the injunction application is demonstrate that there is a serious question to be tried with respect to the reasonableness of the time allowed to meet the demand. For the reasons already stated I am satisfied that the plaintiffs have made out an arguable case.

60. In so far as it might be necessary, I turn to consider the second serious issue to be tried. The plaintiff has put evidence before the court that as at 10 August 1999 when Filippo sent the share transfer to Cascone his state of knowledge was derived in part from his capacity as secretary and accountant of Maple Oil. So much was not rebutted or challenged by Nelius. In any event it appears arguable on the evidence before me that the knowledge of Mr Filippo as at 10 August 1999 included the fact that in May 1999 the estimated realisable value of Maple Oil shares was $1,012,000, that there was unreasonable likelihood he had knowledge that the deed of company arrangement would end on 12 August 1999, that there had been a successful meeting on 15 June 1999 whereby the claim of Rothschild had been resolved, that there had been an announcement to the Australian Stock Exchange, that there was a likelihood of re-listing, that there was activity with a view to re-listing Maple Oil from June 1999 onwards and, finally, that if the shares were re-listed their worth would be of some value over and above the price of 18 cents at the time trading in shares was suspended. Furthermore, it is at least arguable that Cascone accepted Filippo's direction and perfected the transfer of the shares without any reasonable and proper attempt to bring the sale of shares to the market. It is accepted by the authorities that there is an obligation in ordinary circumstances to take all reasonable steps to advertise or notify the availability of a property to potential buyers and, further, to ascertain the market value of property before selling: see Kyuss Express Pty Ltd v Sellers and Anor (2000) ACSR. In the present case the shares were sold only a few months after the transfer was effected for a substantial profit. It seems at least arguable, therefore, that the asset of the shares in Maple Oil were dealt with quickly, internally and at a time when prospects for the company were starting to improve.

63. Nelius relied upon an affidavit of a solicitor experienced in relation to corporations matters, one Graham Menzies. In effect the affidavit was submitted as expert evidence. It is not necessary for me to determine whether or not the affidavit was admissible or whether Mr Menzies was an expert. That is a matter to be determined at another time. Rather, it was apparent to me in the course of argument that there were aspects of the affidavit of Mr Menzies with which the plaintiff joined issue. I have formed the view that it is at least arguable that it should have been apparent to the receiver that the company would be re-listed and that the shares would become valuable as in fact occurred. It follows that the second serious issue to be tried is made out.

66. In the late written submissions Nelius challenged the manner in which the breach of duty is alleged and asserted that the injunction application went beyond the pleadings. It may be that ultimately the plaintiffs will need to further amend their statement of claim. Be that as it may it is not necessary for me to finally determine whether a breach of duty occurred. On the affidavits of Mr Sparke and Mr Lindholm the breach is at least arguable.

70. It was argued on behalf of the plaintiffs that the charge was specifically executed in order to secure fees owing by Maple Oil to John Filippo but that no unpaid fees were in fact owing by Excelsior Run to Fillipo at the time. Hence it was argued that Excelsior Run effectively gave a guarantee for which there was no consideration. It was submitted by Mr P. Hayes QC who appeared with Mr A. Herskope for Nelius that the charge was in fact a deed and therefore consideration was irrelevant. It seems to me on balance that there is difficulty encountered by the plaintiffs in making out the third serious question to be tried. However, on the basis of the matters already indicated I am satisfied that the other serious questions are made out.

74. There was no issue between the parties that much of the proceeds, over $700,000 of the proceeds of sale of the Maple Oil shares, had been disbursed. It was argued by Mr Sifris who appeared for the plaintiffs that the prospect of recovering the funds already disposed of was questionable possibly doubtful. He submitted that the court could not be confident that the balance of funds would be available arising from the undue haste in the sale of the Maple Oil shares, the sale having been effected after public examination but before the injunction was granted and the general lack of candour in the disclosure by Mr Filippo of the application of the proceeds of the sale of the shares.

77. Mindful of the fact that Nelius criticised the liquidator for delaying in bringing the application, Mr Sifris pointed out that the circumstances relating to the disposition of the shares did not become apparent to the liquidator until documents were produced to the court in connection with a court ordered examination under s.596B of the Corporations Law. I am satisfied for the purposes of the present application for an injunction that there has not been any delay on behalf of the plaintiffs in bringing the present application.

80. Mr Hayes QC for Nelius volunteered the proffering of an undertaking on behalf of Nelius not to dispose of the remaining shares save for the giving of seven days' notice to the plaintiffs and subject to the condition that Nelius be allowed to have released to it immediately the sum of $50,000 to meet the costs of these proceedings. Mr Hayes submitted that upon the proffering of the undertaking there was no further need for the granting of any injunction. He further submitted that the stigma attached to the imposition of an injunction was undesirable and in all the circumstances this court should exercise the discretion to accept the undertaking proffered and not extend the injunction.

83. In my view it is undesirable that the court in these circumstances be placed in the position of electing between the proffering of an undertaking and an injunction. In any event, the plaintiffs persist with their application to extend the injunction and it is that matter which I must determine. In the exercise of the discretion I do not consider that the proffering of an undertaking would be sufficient. Furthermore, there was no evidence before me as to the asserted stigma that attaches to the imposition of an injunction compared with the proffering of an undertaking. In any event, I intend in any event to fix the matter for trial very shortly.

87. In the present matter the applications for security were brought pursuant to Order 62.02(1)(b) and (f) of the Rules and s.1335 of the Law. The first, second, fourth and fifth defendants sought security in the sum of $50,000 up to the first day of the trial of the proceeding. The sixth defendant made application on the same basis for security in the sum of $45,000.

90. In opposition to the applications for security for costs there is no dispute that the first plaintiff, Excelsior Run is impecunious. So far as the second plaintiff, the liquidator, is concerned the evidence is to the effect that he is not indemnified with respect to the costs of the proceeding. I observe that the lack of an indemnity did not inhibit the liquidator from proffering the usual undertaking as to damages with respect to the injunction application. Furthermore, there was no challenge by Nelius as to the propriety of the liquidator proffering that undertaking.

93. Notwithstanding the evidence with respect to the financial position of the liquidator the evidence before me discloses that the creditors of Excelsior Run include public listed companies. The evidence reveals that the unsecured creditors or Excelsior Run are the ANZ Bank for the sum of $1,500,000.00, a firm of solicitors, Galbally and O'Bryan for the sum of $3,000, a director Mr Mark Crosliing for the sum of $12,000, Linc Energy for the sum of $9,600 and Mirater Pty Ltd for the sum of $110,511.

96. Considering as I do, the usual principles in relation to ordering security for costs there is one aspect of the exercise of the discretion that I consider the plaintiffs do not overcome.

99. It was argued by Mr Sifris on behalf of the plaintiffs that if security for costs was ordered it would lead to stultification of the litigation. In Ariss and Anor v Express Interiors Pty Ltd (in liq) [1996] VicRp 81; (1996) 2 VR 496 the Court of Appeal considered whether there is an obligation on a plaintiff who resists security for costs on the ground of stultification to demonstrate, not just that it lacks the resources to meet the order itself, but also that those who stand behind it and who will benefit from the litigation lack those resources. In that case the applicant for security relied upon s.1335 of the Corporations Law.

102. In Ariss the Court of Appeal held that it was relevant when considering whether the action might be stultified by an order for security to look at the practical and commercial difficulties in providing any security ordered but that the task of demonstrating those difficulties rested on the company resisting the application. In an affidavit sworn by John Ross Lindholm on 21 May 2001 he deposed that he had the care and conduct of the liquidation of Excelsior Run with the liquidator, the second plaintiff. In his affidavit Mr Lindholm expressed the opinion that it is in the interests of all the creditors of the company that the claims expressed in the current proceedings be pursued and not stultified by a security for costs order against the plaintiffs. He deposed that the proceeding would, if successful, benefit all creditors of the company. Mr Lindholm deposed, further, that the liquidator does not have an indemnity from the primary unsecured creditor, the ANZ Bank or any of the other creditors of the company. There was no evidence as to the practical and commercial difficulties the liquidator and, in particular, the unsecured creditors would have in providing any security ordered. Whilst the matter goes to the overall exercise of the discretion, it is apparent that the company has not fulfilled the task of demonstrating those practical and commercial difficulties considered in Ariss. That need not necessarily be the end of the matter. There have been cases where the courts have been prepared in the interests of justice to nevertheless order security: See Noitaroproc Pty Ltd (in liq) v Hodgson, unreported judgment of Byrne J dated 10 December 1999.

105. On balance I cannot be satisfied in the present matter that it is impossible for the creditors of the company to indemnify the plaintiffs. A further factor to be taken into account in my view is that the liquidator, the second plaintiff, has given a personal undertaking as to damages with respect to the injunction. It seems to me on one view that these circumstances are inconsistent with the evidence that the liquidator is not indemnified. Nevertheless, putting that matter to one side I consider that as the creditors will necessarily benefit from a successful outcome of the proceeding it behoves them in accordance with the principles stated in Ariss to put evidence before the court as to why they are impecunious and unable to indemnify the liquidator. That has not occurred. Accordingly in my view the applications for security for costs must succeed.

108. There is the remaining matter of the amount of security sought. The amount sought by each of the applications was not challenged in any way by the plaintiffs. Indeed it does not appear to have been a matter that occupied the plaintiffs. In the absence of such challenge and bearing in mind my knowledge of the matter to date in light of the application the amounts sought appear reasonable. I will make orders accordingly.