French v Chapple

1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J

4576/00 ANDREW FRENCH & ANOR V BRETT ANTHONY CHAPPLE & ORS

General Outline 1 These proceedings arise from a dispute between two directors, Messrs French and Chapple, of a company, Escalator Handrail Advertising International Pty Limited (EHAI), of which French and Chapple were the principal shareholders. EHAI was indebted to Chapple for moneys payable under a loan agreement secured by deed of charge over the property of the company. The moneys were payable upon demand. Chapple made demand for payment to be made within about four hours and immediately thereafter appointed a receiver pursuant to the charge. The receiver attempted but failed to sell the patents which were the main asset of EHAI. The receiver retired and Chapple purported to appoint the second defendant, Mr Poignand, as "controller". Poignand, purporting to act in accordance with powers under the deed of charge, then sold the patents to the third defendant, EHA Media Pty Limited, a company controlled by Chapple. That sale or purported sale was terminated, apparently as a result of the granting of an interlocutory injunction restraining the sale. 2 In these proceedings, by further amended statement of claim, French seeks declarations that the appointments of the receiver and controller were invalid; an order setting aside the agreement for sale of the patents which I have referred to; a declaration that Chapple was not entitled to enforce the charge; orders for accounts in respect of the loan; and an inquiry into damages sustained by EHAI as a result of alleged breaches of duty by Chapple as a director of that company. A cross claim by Chapple seeks contrary relief. Basic facts 3 French is an inventor. One of his inventions is a clear plastic handrail for escalators under which advertisements can be placed. He obtained patents for that invention in Australia and in nineteen countries overseas. He put considerable time and effort into developing the handrail between 1987 and 1996. He met Chapple in 1995 and discussed participating with him in the development of the invention. EHAI was formed for this purpose in 1996. Chapple brought this about as he was practising as an accountant at the time. He subsequently sold his accounting business to Mr Poignand. French had 65% of the shares in EHAI and Chapple 35%. 4 Money was required to bring the invention to what seems to have been described as the "roll out" stage. Chapple and a Mr Yuki Ishida agreed to lend $200,000 to EHAI for this purpose. This was documented under a loan agreement dated 20 June 1996, between Chapple and Ishida as lenders and EHAI as borrower. That document provided for funds up to $200,000 to be made available with interest payable quarterly on the amount drawn down, but on the basis that the lenders would advise the company seven days before each interest payment date of the amount payable and if they did not do so then the interest that would otherwise have been due was to be carried forward to the next interest payment date and then only if so notified. The deed provided that if interest was not paid within seven days of an interest payment date then the amount would be capitalised and added to the loan, but it is not clear that on the true construction of the document that provision would apply in the absence of the required notification. The deed did not provide for the repayment date at all, but it did contain the following term: 16. The borrower is to repay all amounts outstanding to the lenders before any capital or dividend distribution to any of its shareholders.

It provided that the rate of interest would be the variable home loan rate charged from time to time and published by the National Australia Bank. The deed provided that moneys due under it would be secured by deed of fixed and floating charge. 5 The deed of charge is also dated 20 June 1996. It was expressed to secure not only the moneys due under the agreement for loan, but also all other moneys owing by EHAI to Ishida or Chapple and all moneys paid or advanced by Ishida or Chapple for the accommodation or on account of EHAI. The mortgage contained a covenant by the mortgagor to pay the moneys secured "in such manner as the parties may have agreed or may agree in writing (but unless and until there is such agreement then on demand)". The deed provided for the usual powers of a mortgagee on default by the mortgagor. The deed contained additional provisions making the moneys secured repayable immediately without any demand or notice in certain circumstances, including the event of the mortgagor ceasing or threatening to cease to carry on the business of the company. It contained power to appoint a receiver of the mortgaged property acting as agent of EHAI with the usual powers of obtaining possession and sale of the mortgaged property and it gave power to the mortgagee in the event of default to exercise any power which was given to a receiver under the deed. 6 On 2 August 2000, Ishida assigned his rights under the deed of loan and the charge to Chapple. On 3 August 2000 at about 11.30 am Chapple served a demand on EHAI at its office at Crows Nest by facsimile demanding payment by 4.00 pm of the balance of the loan advances and interest; claimed at 30 July 2000 to be $572,215. The demand required payment at the offices of Chapple's solicitors, Messrs McGlynn and Partners and stated that in default a receiver would be appointed. Chapple was well aware that, at the time the demand was served, French was at Hawks Nest. He was also aware that on the day before the demand he had removed from a bank account in the name of the company at Raymond Terrace, upon which French was the sole signatory, the sum of $121,000 and placed it into an account beyond control of French. He had lied to French about this. 7 Shortly after 4.00 pm on 3 August, Chapple, by deed of that date, purported to appoint Mr Steve Nicols receiver and manager of the secured property. 8 Mr Nicols made some attempts to sell the company's property and particularly the patents without success. He retired as receiver, or was retired by Chapple, probably in early October 2000. 9 On 10 October 2000, Chapple purported to appoint Mr Poignand as "controller" of EHAI. 10 On 27 October 2000 Poignand, as controller of EHAI, entered into an agreement with EHA Media Pty Limited (EHA), the third defendant, to sell the patents of the invention to EHA for $200,000. EHA has an issued capital of only one share of $1.00 held by Evalina Pty Limited. Evalina is the trustee of the Chapple family trust. Poignand was a director of EHA, but resigned when appointed controller of EHAI. 11 On 10 November 2000 Austin J granted an interlocutory injunction restraining Poignand, EHA, EHAI (which was then a defendant) and another company from "assigning, licensing, charging, mortgaging or otherwise dealing with the patents". This prevented the sale referred to in the preceding paragraph being completed and according to Chapple for that reason the contract for sale was terminated. Poignand retired as controller on 23 February 2001 advising EHAI by letter of this and stating that Mr Chapple had entered into possession of the assets of the company as mortgagee in possession. 12 The deed of appointment of Mr Poignand as "controller" contained the following provisions: 1. Appointment. The chargee now appoints Roger James Poignand as controller of the charged property, such appointment to be effective on and from the date of this deed. 2. Controller's Powers The controller may exercise all powers over the charged property which are conferred by the charge or which may be conferred upon a controller by statute or otherwise. Additional facts 13 There were difficulties in providing moneys for the proper development of the invention and for prototypes to be constructed. Both French and Chapple made efforts to obtain new investors in EHAI and, it seems, to sell part of the their shareholding to those investors to obtain additional capital for the company. Quite how this was to be accounted for is not clear and it seems that the intended changes in shareholdings were never formally brought about. Nevertheless it is clear that new investors provided funds and that, so far as French was concerned, some of these funds were placed in the bank account to which I have referred at Raymond Terrace. He said that he did this because Chapple had used funds obtained from some of these investors for purposes other than the purposes of EHAI. Chapple says French used some of these funds for his own purposes. 14 In April 2000, French travelled to Switzerland to display the invention at the international exhibition of inventions in Geneva. The invention received a gold medal. While there French signed a heads of agreement document with Messrs. Wilson and Stegeman, who were interested in a licence to market the invention. He also had discussions with La Banca del Idee, an Italian foundation interested in investing funds in new inventions. Arrangements were made with a company Spiratex to produce some four hundred feet of the product which eventually came to Australia. After the success, if it could be called that, in Geneva, Chapple wrote various letters to people who had shown an interest, including Mr Migliora from La Banca and Messrs. Racey and Mills of the Spiratex company, containing enthusiastic comments about the prospects for commercialisation. At the hearing Mr Chapple agreed that as at 24 July 2000 the project was in the best shape to be brought to fruition that it had ever been. According to Chapple there had been a serious falling out between him and French in May 2000 when an acrimonious meeting took place with French threatening to walk away with the patents, although it ended peacefully. He said he was not confident the company had any future. There is no doubt that this was a serious disagreement after which French and Chapple did not speak to each other in the next months prior to 3 August, except in conversation about the prospective roll out, which was expected to take place on 31 July at Charlestown. I do not accept evidence of Chapple about his concerns, although they are put forward as a ground upon which the loan moneys became repayable without notice. That ground was not established. 15 So far as the roll out was concerned, on the morning in question Chapple told French that the roll out had been cancelled because some documentation required by the owner of the building where the roll out was to take place had not been finalised. In spite of this, Chapple subsequently arranged for some employees engaged in the building to allow the roll out to continue but he did not inform French of this. A few days before this happened he had discussed with Mr Nicol the question of a proposed appointment of Nicol as receiver. This does not reflect well on him. Counsel for French said it pointed to the conclusion that he was just awaiting an opportunity to take the invention to himself if he could. Whether that is or is not so, it is right to say that he was a most unimpressive witness and was, in my view, far more interested in his own advancement than the interests of the company of which he was a director. 16 After Nicol failed to obtain any interested purchaser for the invention and Mr Poignand took over, purportedly as controller. Poignand obtained a valuation dated 27 October 2000 of the patents from Bentleys MRI Consulting (NSW) Pty Limited of $75,000. The information which was given by Mr Poignand to the valuer was quite insufficient to enable the valuer to come to a proper valuation. On 27 October 2000, Chapple made an offer on behalf of EHA to buy the patents for $200,000 and that was accepted. EHA was closely related to Chapple as I have explained, and he did agree the purchase for $200,000 would not have required any money to be produced. The position was that the transaction had all the elements of a private foreclosure except that there was some slight difference between mortgagee and the purchaser. The chance of the transaction being held to be good as a purchase of anything other than title subject to the equity of redemption would, in my view, have been very slight. As it turns out that does not really matter because it is accepted that the transaction could not be completed and the contract has been terminated. Issues 17 The claim as originally pleaded put in issue the validity of the loan agreement and the deed of charge, but that claim has now been abandoned. The following matters, however, remain for determination: (1) whether the appointments of Mr Nicols and Mr Poignand were valid; (2) the question of whether or not Chapple is entitled to enforce the charge; and (3) questions relating to the accounts. 18 All sorts of orders are sought, but these are the claims made. It should be understood that it has now been accepted that the agreement for sale of the patent made between Poignand and EHA has been terminated, the appointments of Nicols and Poignand have come to an end. There is no basis put forward for the removal of Chapple as a director. There was previously a claim made that no demand for repayment could be made until a time when it was intended that dividend distributions would be made to the shareholders. Quite how capital distributions were to be made was not clear, although it was referred to as I have said in clause 16 of the loan agreement. This claim was not pursued with any enthusiasm at the hearing and quite clearly it could not have succeeded. The clause required repayment before dividend distribution, but it did not delay repayment until the company was in a position to pay dividends. Appointment of Receiver 19 The demand gave about four and a half hours for payment. The law in Australia is that, in contracts of loan repayable on demand, the demand must give time for the borrower to arrange for repayment by getting the money from a convenient place: Bunbury Foods Pty Ltd v National Bank of Australia Limited (1984) 153 CLR 491 at 503. That does not mean time to arrange re-finance or a new bank loan but time to advise a bank or financier of the need for funds to make a payment and transfer funds to make this possible. While I consider the time given very short, the fact is that there is no evidence that EHAI could have paid the demand at any time, for example even on seven days' notice. I think it is clear it could not. Even now there is no evidence of ability to pay. I conclude, not without a little hesitation, that the demand was good and the appointment was valid. Appointment of Controller 20 So far as the appointment of Mr Poignand as controller is concerned, the clear position is that there was no power under the charge to appoint somebody called a controller and the deed did not give any powers to a controller. The appointment was ineffective and invalid. Anything that Mr Poignand purported to do pursuant to his appointment would be invalid. That in itself would have been sufficient to set aside the purported sale to EHA in the unlikely event it was not set aside for other reasons. The fact that French wrote to Poignand saying he had no difficulties with the appointment cannot give rise to some form of estoppel or waiver of a right to object. All it meant was he had no problem with the person; it did not mean an acceptance of the validity of that appointment. 21 The fact this appointment was ineffective does not necessarily mean that Chapple was not entitled to enter into possession as mortgagee, thus becoming entitled to exercise whatever powers were given under the deed of charge to a receiver. Failure to repay as demanded brought about the right to enter into possession personally. He is, of course, at the present time restrained from taking any action to sell the assets the subject of the charge, but as I have held the appointment of receiver valid, it follows that Chapple can do what the receiver could do on default. Conflict of Interest 22 The question for decision here is whether not the fact that calling up the loan would be detrimental to EHAI and possibly cause it to fail would mean that Chapple was acting contrary to his duty as director of EHAI and so ought to be restrained from calling up the loan. Many directors lend money to companies they direct; accounts of companies, particularly small companies, have directors' loan accounts almost as a matter of course. There is no reason at law to prevent a lender from requiring repayment on the terms of a loan unless perhaps the calling up is for some collateral purpose rather than an genuine call for repayment. It is not suggested that Mr Nicol did not make a genuine attempt to sell the patents. Mr Poignand made a misguided attempt to do so. When the loan documents were executed the possibility of conflict was obvious. The only way to avoid it would have been to place some limitation on the right to demand repayment of the loan. In the absence of such a condition I conclude that there is no good ground to deny to Chapple his rights under the documents as chargee and lender. That, however, is subject to my decision on any question of a stay to give the borrower time to redeem on payment of the amounts due under the mortgage. Redemption and restraint on exercise of mortgagee powers 23 It is correct to say that there is no evidence whatsoever of the ability of EHAI to repay the loan whether it be any figure between $300,000 and $700,000. Mr Humphries of Messrs White Iliffe Forensic, stated that as at 30 April 2001, the amount due was $734,934.56. Mr Horder of Messrs Mackenzie Sutton Minett had numerous criticisms of calculations by Mr Horder. These were more relevant to proof by vouching than to the actual claim. While those matters might be relevant on the taking of accounts, they are, for the most part, not a matter for decision here. 24 On the pleadings as they stand the plaintiff seeks an account without offering to pay into court any sum. Assuming default with mortgagee in possession, any right to prevent enforcement by the mortgagee would require payment to the mortgagee, or perhaps into court, of the amount claimed; or, in special circumstances, some other amount ordered by the court: Inglis v Commonwealth Bank of Australia (1972) 126 CLR 161. The defence, in paragraph 17, sets these matters up. The claim for damages against Chapple for breach of duty as a director - which in any event was not made out - would not obviate the requirement for payment into court: See Inglis. 25 There are four categories of payment or claim liability in respect of which it could be said some plausible objection has been taken. These are: (1) interest charges; (2) payments by Evalina Pty Limited, said to be made on account of Chapple; (3) legal fees; and (4) payments to the receiver and controller. 26 As to interest, this has been calculated quarterly at seven percent and capitalised. The total interest figures amount to about $109,080 but this includes interest on interest. There is no evidence of the lender informing the borrower of the amount due for interest as required by Clause 13 of the loan agreement. Thus it may well be that claims for interest on interest fail, but I am not required to determine that. Neither am I required to determine the plaintiff's claim that there is no right to interest at all. It is only necessary to state that I would not restrain the exercise of the powers of the mortgagee unless interest were paid. Entitlement to interest was never challenged before the demand was made. 27 The Evalina advances, which represent the larger part of the payments to EHAI in contention, are a matter of some doubt. However, the evidence shows that Evalina treated the payments as reducing the debt of that company to Chapple and were paid by agreement on that basis. It is therefore at least likely that the payments were made on behalf of Chapple. What is not quite so clear is whether or not EHAI knew of this and showed payments in its accounts as such. On an application to restrain the mortgagee from exercising rights I consider that payment of these amounts would be required before any restraint order was made. 28 Fees paid to Mr Nicols for receivership fees amounted to $43,052 and to Mr Poignand $14,000 and possibly more. I would not require payment of the amount paid to Mr Poignand as the price for a stay. 29 There have been amounts included for legal costs which have not been rendered made up of three figures of $74,756, $58,831 and $8,000. These are said to represent the cost of these proceedings and amount in all to $141,587. Those figures could, of course, be somewhat reduced on assessment. Nevertheless, for the most part they are amounts which would be required to be repaid for release of the security together with the possible cost of taking accounts as to which cost there is no evidence: See Project Research Pty Limited v Permanent Trustee of Australia Limited [1995] BPR 11,225; Equus Financial Services Limited v RMBL Investments Pty Limited (Bryson J, unreported, 21 November 1996). 30 It follows from this that the only question is whether some stay should be imposed on the right of the mortgagee to exercise its powers under the deed of charge in the absence of any evidence of ability to pay or even offer to pay. As a strict matter of law there should be no stay. However, Chapple does have obligations to the company as well as rights in himself. These obligations can be enforced by an order restraining Chapple from exercising powers under the charge pending the taking of accounts between mortgagor and mortgagee on condition that EHAI pay into court a specific sum. The defendant has proposed the sum of $600,000 and, as I do not consider any basis exists for a lesser sum, I will make that order. The defendants also propose a time of forty five days for payment. I am prepared to accept that as reasonable. 31 Orders.

1. The parties should bring in short minutes to give effect to these reasons. They should provide for declarations that the appointment of Poignand was invalid and the sale by him of the patents was invalid. Chapple should be restrained from exercising powers as mortgagee in possession pending the taking of accounts, but on condition that EHAI paid to Chapple $600,000 within forty five days. If the plaintiff wishes it, there can be an order for accounts. It is unlikely that any orders are necessary on the cross-claim unless any of the patents are held in the name of French.

2. I will hear argument on costs when dealing with the orders.

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