Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers & Ors [2002] QSC 400

Judgment (81 paragraphs)

[1]

[1] On 8 November 2002 I made orders under Rule 260 of the Uniform Civil Procedure Rules restraining the first and second respondents to the application (as it then was framed), Mr Sheers and Ms Schweitzer, from dealing with their assets including a unit at 2 Admiralty Drive, Surfers Paradise and property in a warehouse at 11 Jaygee Court, Nerang. The third and fourth respondents, Austide Holdings Pty Ltd and GRH & M Pty Ltd, were also restrained from dealing with their assets. The third respondent was formerly, and the fourth respondent is currently, trustee of the Austide Family Trust, of which the first and second respondents are beneficiaries. Those companies have in turn held the Admiralty Drive unit as trustee. The orders were made on information provided from the bar table by counsel for the applicant, Gold Ribbon (Accountants) Pty Ltd (in liquidation) ("Gold Ribbon") with an undertaking to put it in affidavit form.

[2]

[2] On 22 November 2002 the matter was brought on again. There was some argument as to who was the appropriate applicant, but the fundamental question was whether the restraining orders should remain in place. Mr Morris QC, for Mr Sheers and Ms Schweitzer, submitted that the interim orders should be set aside because of material non-disclosure and inaccurate statements by counsel at the earlier hearing and failure to comply with undertakings. Mr Crowe SC for the applicant indicated that the suggestion of non-disclosure and inaccurate statements required response and the matter was accordingly adjourned to enable further material to be filed. The matter is now brought back on for determination of whether the orders should remain in place.

[3]

[3] Mr Sheers is a former director of Gold Ribbon. The company operated a lending operation with funds advanced, originally by the Colonial Bank and later by the Commonwealth Bank, by way of a bill facility with a limit of $25,000,000. Its lending was generally to accountants in small practices. According to the affidavit of Mr Grant Sparks, one of Gold Ribbon's liquidators, as at 26 June 2001, funds were drawn to the extent of $23,598,701. The outstanding balance as at 1 November 2002 was $15,082,618.05. Under an Administrative Agreement Gold Ribbon's lending portfolio was managed by Austide Holdings Pty Ltd, of which both Mr Sheers and Ms Schweitzer were directors. According to Mr Sparks, the Commonwealth Bank gave notice by letter dated 3 July 2001 to Gold Ribbon to repay the amount of the facility on or before 3 July 2001. Gold Ribbon defaulted. Mr Sparks says that the liquidators hold as cash in hand in the liquidation of Gold Ribbon almost $723,000. The receivables by way of outstanding loans which are considered collectable amount to some $7,600,000.

[4]

[4] The proceedings in which the Mareva injunctions were originally sought were brought by Gold Ribbon against Michael and Julian Norton-Smith as guarantors of a loan to Jumarsh Pty Ltd. In their defence the defendants had alleged that Mr Sheers had represented to them that Gold Ribbon would not seek to enforce any guarantee against them. By an amended statement of claim Gold Ribbon sought to join Mr Sheers as second defendant in the proceedings, pleading that if the representations were made as alleged, he was in breach of his duties as its director and had been negligent. Accordingly Gold Ribbon sought damages for negligence, or alternatively compensation under s 131(7)(H) of the Corporations Act 2001, in the amount of $910,464.72, the amount outstanding for principal and interest under the loan facility which the first defendants had guaranteed.

[5]

[5] A fresh claim and statement of claim, naming Mr Sheers and Mr Garry Howes and others as first defendants, Ms Schweitzer as third defendant, Austide Holdings Pty Ltd as fourth defendant and GRH & M Pty Ltd as fifth defendant, was filed on 27 November 2002. It alleges that Ms Schweitzer, although not appointed as a director, was a director of Gold Ribbon within the definition contained in s 9 of the Corporations Act. It is pleaded that she and Mr Sheers breached the duties of care owed by them to Gold Ribbon under s 180 of the Corporations Act and at common law by failing to appoint an appropriately qualified administrator to process loan applications, failing to ensure that proper procedures were adopted in relation to initial loan applications and subsequent applications for extension or roll-over, and in various other respects failing to oversee the management of loans properly, as well, more generally, as failing to exert proper control over Gold Ribbon's affairs. Those failures are said to have resulted in some $6,450,000 in advances which are now a loss to Gold Ribbon.

[6]

[6] In addition it is alleged that Mr Sheers witnessed a loan application by Jumarsh Pty Ltd, of which he was then a director, in circumstances in which he had proposed to Michael Norton-Smith that Jumarsh lend monies to him and to companies of which he was a director, and in which he had an interest. Subsequently various consultancy agreements were entered by Jumarsh with companies of which Mr Sheers was a director. In applying for an extension of the loan Jumarsh declared receivables which could not have been genuine, and that should have been known to Mr Sheers. His conduct is alleged to constitute breaches of his fiduciary obligations and of s 181 and s 182 of the Corporations Act which impose obligations of a similar kind on directors. It is said to have caused a loss to Gold Ribbon of $910,464.72.

[7]

[7] Further breaches by Mr Sheers of ss 181 and 182 and of his fiduciary obligations are said to have occurred in relation to a loan to a Mr Moss, in relation to which it is said that Mr Sheers knew or ought to have known that the receivables declared were false and in respect of which it is said to have been agreed that Mr Sheers would obtain through companies associated with him an interest in the companies to be the recipients of the loan funds; and in respect of a loan to Spiller Holdings Pty Ltd in respect of which it is alleged that Mr Sheers knew directly from the director of the applicant that the receivables declared were false and that the funds lent were invested in companies associated with Mr Sheers. The conduct of Spiller Holdings in seeking the funding is also said to constitute misleading and deceptive conduct contrary to s 52 of the Trade Practices Act, a contravention in which Mr Sheers is alleged to have been a party.

[8]

[8] Against Austide Holding it is said that it breached express and implied terms of the Administrative Agreement in failing to carry out proper checks and searches and permitting applicants for loans to declare amounts receivable which included work in progress, and in various other ways was negligent in the administration of the lending program. Against GRH & M Pty Ltd it is said that it purchased the unit at Admiralty Drive and serviced the loan with monies derived from breaches by Mr Sheers and Mr Howes of s 181 and s 182 of the Corporations Act and of their fiduciary obligations with knowledge that that was so, and thus that it holds the unit on a constructive trust for Gold Ribbon, and that Mr Sheers and Ms Schweitzer hold their shares in it on constructive trust for Gold Ribbon. Alternatively an order is sought under s 1323(1) of the Corporations Act, prohibiting GRH & M Pty Ltd from dealing with the property.

[9]

[9] Mr Sparks outlined in his affidavit the procedure adopted in relation to loan applications. An accounting practice seeking funding would provide a loan application to Austide. The amount which could be borrowed depended on the practices disclosed and certified receivables. Up to 80 per cent of the receivables calculated with a greater weighting for current receivables would be lent. Every ninety days the loans were reviewed, at which time a borrower wishing to extend had to provide an updated declaration as to receivables.

[10]

[10] It emerged from the public examination of Ms Schweitzer that when an accountant lodged an application for a loan, she would undertake a credit reference association check as well as an ASIC search to ensure in the case of corporate borrowers that the office holders had been named correctly. But the figures provided by the prospective borrower for receivables were never questioned. She merely proceeded to calculate what could be borrowed depending entirely on the receivables figure given, which could include work in progress. When applications for extensions or variations arrived, the figure provided for receivables was again accepted at face value, whether it was appeared consistent with the original figure supplied or not.

[11]

The respondents' argument for setting aside the orders

[12]

[11] Mr Morris QC for Mr Sheers and Mr Schweitzer accepted that there was a serious question to be tried, at least on negligence. He argued, however, that the Mareva orders had been obtained ex parte in circumstances where allegations made from the bar table had not been substantiated, and there had been material non-disclosure by the applicant. The court would, for that reason, exercise its discretion to set the orders aside. In any event, on the material as now filed, there was no basis for concluding that assets held by the respondents or the proceeds of sale of any such assets were at risk or that Mr Sheers was at all likely to leave the jurisdiction. And, in addition, there was no reason to suppose that insurance would not cover any damages for compensation payable by the respondents.

[13]

[12] In relation to the first of these points it is necessary to consider the submissions which were made from the bar table on 8 November, the material filed in order to support those submissions and the extent, if any, to which it failed to do so.

[14]

The assertion that Mr Sheers' companies received monies from Gold Ribbon

[15]

[13] At the hearing on 8 November, Ms Downes for the applicant said that it had emerged from public examinations that Mr Sheers and Mr Howes, another director of Gold Ribbon, had engaged in a practice of encouraging potential borrowers to provide false figures in loan applications to elicit larger loans. A Mr Moss, an accountant who had been approached by Mr Sheers, had given evidence of being told by him to falsify the figures provided by him in that way. Those practices were undisclosed to other directors of Gold Ribbon or the original lender, the Commonwealth Bank. Mr Sheers and Mr Howes benefited by taking a cut out of money lent and also by encouraging the investment or loan of the moneys borrowed into or to companies associated with them. Mr Sheers had, she said, an involvement with a matrix of companies all of which had money flowing through them which had originated from the Commonwealth Bank through Gold Ribbon.

[16]

[14] Mr Morris QC said that the assertion that the companies associated with Mr Sheers had money flowing through them or between them could not be good, let alone that it had originated from the Commonwealth Bank. It is therefore, necessary to review the evidence presented on behalf of the applicant.

[17]

[15] Ms Hagenson, a solicitor acting for the applicant, has sworn an affidavit annexing a defence of Mr Gary Moss to an action by Gold Ribbon together with two affidavits sworn by him. The thrust of what he says is that he had a prior association with Garry Howes, and both he and Mr Howes had had judgment against them in an amount of approximately $70,000 in respect of a company whose debts they had as directors guaranteed. He had also a social acquaintance with Mr Sheers. His loan from Gold Ribbon, he asserts, was a sham. Although in his defence to an action by Gold Ribbon Mr Moss pleads that "the directors of Gold Ribbon" approached him to take out the loan, in his affidavits and subsequently in a public examination, Mr Moss makes it clear that it was Mr Howes alone who approached him and who dealt with him in arranging the loan. It seems, although this was not the respondents' point, that the allegation that Mr Sheers told Mr Moss to falsify figures cannot be substantiated.

[18]

[16] A document entitled `Request for Funding' signed by both Mr Howes and Mr Sheers referred to Mr Moss' receivables as being $838,000 of which $650,000 was current. In fact, according to Mr Moss, he was a sole practising accountant working from home with an annual turnover of less than $40,000 gross and average receivables of less than $2,000. He was a discharged bankrupt with few assets, living in rented accommodation. Notwithstanding, Gold Ribbon advanced funding of $735,000. He further asserts that Mr Howes and Mr Sheers entered into a written agreement with him guaranteeing that they would repay the loan. A number of companies were set up, of which he and they were office holders and shareholders, into which the funds were paid.

[19]

[17] Mr Sparks has annexed to his affidavit an acknowledgement of debt apparently signed by Mr Sheers and Mr Howes. It is expressed as given in favour of Mr Moss and recites that he, Mr Howes and Mr Sheers who are referred to as "the debtors" have come to "arrangements in relation to investments in certain companies" and that the debtors have agreed to be personally responsible for a proportion of borrowings by Mr Moss to fund those investments. The substantive part of the document acknowledges that a sum of $300,000 has been invested in two companies entitling Mr Howes and Mr Sheers to two-thirds of the shares purchased. They agree by the document to be personally responsible to repay in each case

[20]

one-third of two-thirds of the amount of $300,000 invested.

[21]

[18] Those funds were said by Mr Moss in a public examination to have been invested in companies called Cable Drum and No Lift. In a letter to Ms Schweitzer Mr Moss asserted that the investment of the funds occurred at Mr Howes' behest. A search of Cable Drum Pty Ltd shows that the company was registered on 15 October 1999 with Mr Howes and Mr Sheers as its directors and among the shareholders a number of companies including Timber Tec Holdings Pty Ltd, of which Mr Sheers was at relevant times the sole director. No Lift Products (Aust) Pty Ltd was registered on 6 October 1999, again with Mr Sheers and Mr Howes as its directors and with the same group of companies, including Timber Tec, as its shareholders.

[22]

[19] Mr Sparks identifies three other lending transactions of particular interest. The first is the loan of $842,000 to Jumarsh Pty Ltd. Mr Sheers was a director of Jumarsh between February 1999 and November 1999. Its loan application was processed during that period. That company's declared receivables varied from $500,000 in July 1999 to $1,500,000 in January 2000 and in the following year fluctuated from that amount to $1,000,000 and back again to $1,500,000. The records of Jumarsh, now in liquidation, did not support those figures.

[23]

[20] Mr Ross Duus, liquidator of Jumarsh Pty Ltd, Timber Tec Holdings Pty Ltd and two other companies of which Mr Sheers has been a director, has given an affidavit. He had unsuccessfully sought, pursuant to his powers under s 475(2) of the Corporations Act, a report as to affairs from Mr Sheers. Mr Duus noted the application for extension and variation dated 20 December 2000 which certified Jumarsh's receivables at $1,500,000 and compared it with the Jumarsh balance sheet as 30 January 2001 disclosing debts totalling $793,407.04. The bank account of Jumarsh did not disclose receipts beyond $100,000 over that seven month period.

[24]

[21] Mr Duus identified an amount of $334,265.76 of the advance from Gold Ribbon which had not been banked to the account of Jumarsh Pty Ltd. In his report to creditors, he expressed the view that the main aim of Jumarsh Pty Ltd was to borrow funds from Gold Ribbon and to lend the funds to other entities, in most instances, he said, without security or interest charges or supporting documentation. There was no apparent capacity in Jumarsh to support its outgoings of interest. As at the date of appointment of the provisional liquidator in October 2001, some $475,126 was owed to Jumarsh by companies of which Mr Sheers was a director: Rural Plant Hire Pty Ltd (in liquidation); Gold Ribbon Corporate Services Pty Ltd; Markway Holdings Pty Ltd; Timber Tec Holdings Pty Ltd; and RPM Holdings Pty Ltd (in liquidation). Jumarsh had also invested in Plantation Management Corporation (in liquidation), of which Mr Sheers had been a director, and Gold Ribbon Corporate Services Pty Ltd.

[25]

[22] Another of the loans referred to in Mr Sparks' affidavit is a loan of $602,000 to Spiller Holdings Pty Ltd, the sole director of which was one David Ryland who was a discharged bankrupt. The application was processed in May 1999. A request for extension and variation of the loan agreement dated 14 December 2000 gave the receivables of the applicant, which employed Mr Ryland as the single accountant in its practice, as $1,022,242. A copy of the transcript of a public examination of Mr Ryland was produced; his evidence was, not that Mr Sheers had told him to falsify figures, but that he had discussed with him the fact that figures provided by the borrower for receivables were false, prior to the making of the application, and Mr Sheers had indicated that he and the other directors were aware of the situation and were "okay with it." Mr Ryland in a letter to solicitors apparently written in response to attempts by Gold Ribbon (in liquidation) to recover the loans, referred to "Mr Sheers' fraudulent activities in respect of these advances".

[26]

[23] What Mr Sparks' affidavits and the transcripts of public examinations of Mr Sheers and Mr Ryland seem to show is that these funds and others borrowed by Mr John McCouat (who obtained $800,000, claiming to have receivables of $1,700,000) were used in an attempt to develop land purchased in the Whitsundays as a resort. The corporate vehicle for the development was Capital Asset Holdings Ltd, of which Mr Ryland and Mr McCouat were directors, the latter replaced by Mr Sheers in July 2000. Mr Sheers was thus a director of the developer company at the time the loan to Spiller Holdings Pty Ltd, by which it had obtained part of its funds, was rolled over by Gold Ribbon.

[27]

[24] The development failed and the first mortgagee entered into possession of the property. It appears from Mr Ryland's evidence that it was hoped to remedy matters in the following way: a nominee of Timber Tec Industries Ltd (of which Mr Sheers was a director), or a subsidiary of it, entered a contract to buy the property from the first mortgagee in possession. Mr Sheers borrowed $50,000 from him to use as deposit. There was, Mr Ryland said, to be a round-robin of transactions, the net effect of which would be to discharge the Spiller Holdings Pty Ltd and McCouat obligations to Gold Ribbon and to discharge the mortgage on the property. The monies necessary to repay Gold Ribbon were to be paid under the guise of a consultancy fee in the amount of $2.2 million to a company called Exchange Traders International Pty Ltd controlled by Mr McCouat, from which funds were to be deducted in the amount necessary to repay the Gold Ribbon debt. The contract did not, however, complete, and no repayment of the loan occurred.

[28]

[25] In further support of the contention that Mr Sheers and companies associated with him had received the benefit of funds from Gold Ribbon, counsel for the applicant made this point: Mr Sheers was discharged from bankruptcy on entering into a composition with his creditors in May 1998. His own affidavits referred to his having provided funds for the purchase of properties at Mark Way Mudgeeraba in respective amounts of $288,000 and $140,000 in November 1999 and January 2000, and to his having provided funds of $275,000 towards the purchase of the Admiralty Drive unit in December 1999. He had deposed to receiving income of $19,000 per month by way of consultancy fees and having living expenses of $20,000 per month. The obvious conclusion, Mr Crowe submitted, was that some of the funds used in purchases had been sourced from Gold Ribbon.

[29]

The assertion as to funds from Gold Ribbon to Mr Sheers' companies is supported

[30]

[26] The material thus far outlined is sufficient to demonstrate that Mr Sheers has an involvement with a matrix of companies. It is an overstatement to say that all of them have money flowing through or between them originating from the Commonwealth Bank. However, there is a reasonable inference to be drawn to that effect in respect of some of the companies: those companies to which Jumarsh had lent or in which Jumarsh had invested; Capital Assets Holdings Limited; Cable Drum Pty Ltd and No Lift Products (Aust) Pty Ltd.

[31]

[27] It should be said that Mr Sheers denies having encouraged accountants to falsify figures on applications for loans, or that he received any part of the moneys lent, or encouraged investments into companies associated with himself or Mr Howes. In particular he says that Timber Tec Industries Limited, Timber Tec Holdings Pty Ltd and Plantation Management Corporation Pty Ltd did not borrow directly or indirectly from Gold Ribbon. On one occasion only, he says, an entity associated with him borrowed $50,000 from Mr Norton-Smith or Jumarsh.

[32]

[28] Jumarsh, he says, ran an accounting practice. Loans were obtained from it in accordance with guidelines established by the original lender, Colonial State Bank Ltd and its insurer, HIH Insurance. He makes no specific response to Mr Duus' listing of debts owed by companies of which he was a director. He says that although he is shown in ASIC records as a director from 16 February 1999 to 1 November 1999, he had in fact resigned as a director approximately three months after his appointment but Mr Norton-Smith failed to notify ASIC of his resignation.

[33]

[29] Mr Sheers says that at the time he became a director of Capital Assets Holdings Ltd Mr McCouat and Mr Rylands had already obtained loan funds from Gold Ribbon and he did not know to what use they had put them. He joined the company with a view to developing the Whitsundays' property with private funding. When it was unsuccessful, he sought but failed to purchase the property, largely he says because of difficulties arising out of the appointment of Mr Sparks as provisional liquidator of Gold Ribbon. (Mr Sheers exhibits here, as elsewhere, a disconcerting tendency to regard his own actions and company transactions as synonymous.)

[34]

[30] In relation to the lending to Mr Moss, Mr Sheers says that Mr Moss had an interest in Cable Drum and No Lift prior to his having met him. The original application for a loan did not refer to those ventures. He had accepted an offer by Mr Moss to become a director and minority shareholder of the two companies. A later loan application by Mr Moss was refused.

[35]

The instructions to sell the unit at a `fire sale'

[36]

[31] Ms Downes had, in seeking urgent relief, relied heavily on what was said to be the impending "fire sale" of the unit at Admiralty Drive and other assets. Mr Sheers was said to have taken steps to that end after receiving the amended statement of claim joining him in the Jumarsh litigation. It was known that it was to be auctioned on the day following the hearing. In that context Ms Downes asserted that Mr Sheers had instructed Ray White, Main Beach to sell the unit in the following terms: - "do anything you can to sell it, take a small deposit or a long settlement." Mr Morris QC said that the allegation was unsubstantiated.

[37]

[32] To support its concerns as to the sale of the unit, the applicant relied in the first instance on an affidavit by Ms Chapman, an investigator with the Australian Securities and Investments Commission. Ms Chapman said that she had had a conversation on 7 November 2002 with Mr Moss, who told her words to the effect that "Sheers has recently placed his penthouse unit on the market and that (sic) he is in the process of selling his boat and other assets. The unit is to be sold in seven days, it's a fire sale." Subsequently an affidavit of Mr Hooper, who is said to have been present for the same conversation, was filed. He gave as his recall Mr Moss saying words to the effect that "Sheers has recently placed his penthouse unit on the market and that (sic) it was to be sold in seven days". According to Mr Hooper, Mr Moss described the sale as a "fire sale", and said he believed that Mr Sheers was also selling his boat and other assets.

[38]

[33] A Ms Christel Strohschon, a secretary employed by the applicant's solicitor, deposes to having telephoned Ray White Main Beach and spoken to a Mr Harman, a real estate agent there. He said words to the effect that "the vendor was anxious and very keen to sell the unit and just wanted it sold. The vendor would consider any offers as no reserve price has been set, including short contracts and small deposits."

[39]

[34] The respondents have put an affidavit of Mr Harman into evidence. He says that he was appointed to sell the unit on or about 20 March 2002. He was instructed to find the highest offer and to sell at the best price possible within a reasonable period of time. Neither Mr Sheers nor Ms Schweitzer said words to the effect "do anything you can to sell it. Take a small deposit or a long settlement". If a prospective buyer made inquiries about price, it was his practice to indicate that the vendor was determined to sell, had instructed him to submit every offer and was prepared to look at the best offer on the day of the auction. If there was a query as to whether terms of settlement or deposit could be varied, his standard response was that he had instructions to sell and to submit every offer, and that if the questioner were interested in a long settlement or a small deposit they should let him know.

[40]

[35] Mr Sheers similarly denies giving any instructions to the effect of being prepared to accept short contracts and small deposits and says that he has not spoken to Mr Moss or said anything to him about a fire sale of his assets.

[41]

[36] I accept that Mr Moss, for whatever reason, communicated to the ASIC investigators that Mr Sheers was to have a fire sale of his assets. His statement no doubt gained some force with the discovery that the unit was indeed for auction. The evidence of Mr Harman however, makes it clear that there was no element of urgency in the proposed sale of the unit. The assertion that the real estate agent had been instructed to do anything to sell it, taking a small deposit or a long settlement, was apparently an unwarranted inference from the agent's response to Ms Strohschon's questions. It was not properly put before the court. The appropriate conclusion, I consider, is one of carelessness in communicating the information, although at what point along the chain between Ms Strohschon, instructing solicitor and counsel that occurred is impossible to say.

[42]

Dealings with the respondents' interest in the unit

[43]

[37] It is appropriate, however, to examine further the respondents' interest in the Admiralty Drive unit. Austide Holdings Pty Ltd purchased the unit on 17 December 1999 for $800,000. Mr Sheers says that the purchase was funded by a loan from R & R Mortgages Pty Ltd in the amount of $570,000. He paid the balance of the purchase price, and the expenses associated with the purchase, withdrawing the funds from his Westpac Cash Management Account.

[44]

[38] Austide Holdings Pty Ltd held the property as trustee of the Austide Holdings Trust. Both Mr Sheers and Ms Schweitzer were beneficiaries under the relevant trust deed. R & R Mortgages Pty Ltd took a mortgage over the unit and also held a charge over the assets of Austide Holdings. In December 2000 it was paid out, the National Australia Bank in its place providing a facility of $600,000 in favour of Austide Holdings Pty Ltd as trustee for the Austide Holdings Trust, secured by a debenture over the assets of Austide Holdings Pty Ltd. In March 2001 Austide Holdings was replaced as trustee by GRH & M Pty Ltd. The National Australia Bank facility was increased in April 2002 to $960,000.

[45]

[39] On 6 November 2002, $228,575.43, an amount which, as will be later explored, it is reasonable to suppose came from the sale of a property at Mark Way, Mudgeeraba, was deposited to the account. On 12 November 2002, after the restraining orders had been made a cheque in the amount of $112,500 was drawn on the account. Needless to say, the equity of GRH & M Pty Ltd in the unit was correspondingly reduced. No attempt has been made to explain whether the cheque was drawn before or after the making of the restraining orders, whether any attempt was made to stop it or what its purpose was. The account was as at 18 November in debit in an amount of $844,109.36.

[46]

[40] The auction to sell the unit proceeded on 9 November 2002. It was passed in at $1,500,000. There remain, Mr Harman says, interested purchasers.

[47]

[41] At the 8 November hearing, counsel for the applicant also informed the court that Mr Sheers was in the process of selling a yacht, in which the Norton-Smiths or alternatively their company, Faraday Nominees Pty Ltd, had an interest, and other assets, including a "rather expensive brand new car". Mr Morris said firstly, that there was no evidence that Mr Sheers owned a brand new car. Mr Sheers has sworn in his affidavit that he and his partner lease a three year old Lexus four wheel drive and have a four year old Holden Statesmen on hire purchase. They own a six year old Ford Fairmont. The material exhibited to Mr Sheers' affidavit includes a schedule of insurance for a 1996 Ford Fairmont which has a different registration from a Fairmont Ghia registered in Ms Schweitzer's name and is presumably a different vehicle. The insured is shown as RTS Consulting Pty Ltd. It appears to be the case, however, that although there are more vehicles than was known to the applicant, none can be described as brand new. The newest is the three year old Lexus four wheel drive. I do not, however, regard the applicant's inaccuracy in this regard as of any consequence.

[48]

[42] As to the yacht, Mr Morris said that the applicant had failed to reveal an important fact to the court: that the boat had been seized by Mr Duus and that there were proceedings on foot in relation to a dispute as to ownership.

[49]

[43] Although the reference to sale of the boat was at one level supported by the evidence of Ms Chapman and Mr Hooper as to the conversation with Mr Moss in which the latter said that Mr Sheers was in the process of selling his boat, the applicant was plainly in possession of more information. The boat in question was, there is no dispute, a vessel bearing the evocative name "Sneaky Bits". According to Mr Sheers and Ms Schweitzer it is a power boat. Ms Schweitzer said in a 2001 public examination that it was owned by Timber Tec Holdings Pty Ltd; Mr Sheers says in an affidavit that it is owned by the shareholders of Timber Tec Holdings Pty Ltd: Farraday Nominees Pty Limited and RTS Consulting Pty Ltd, according to an ASIC search. The same search shows a fixed charge over the company's assets being given to Capewall Pty Ltd on 8 August 2001, and a fixed and floating charge to GRH & M Pty Ltd on 7 September 2001.

[50]

[44] In her 2001 public examination Ms Schweitzer said that she and Mr Sheers had put some $68,000 towards the purchase of the boat, while other money for the purchase was lent to Timber Tec Holdings by Rural Plant Hire Pty Ltd. She did however, express some uncertainty as to that arrangement. However, it appears that there was further examination of Ms Schweitzer in October 2002 in the course of which she gave more evidence about the boat, to the effect that Timber Tec Holdings Pty Ltd had borrowed money from Capewall Pty Ltd to purchase it. According to Ms O'Rourke, a solicitor acting for the applicant, Ms Schweitzer then indicated there was no loan agreement evidencing the borrowings. The bill of sale held by Capewall was said to be for an amount of $70,000.

[51]

[45] According to Ms Schweitzer's affidavit, Mrs Diane Johnston, the director of Capewall Pty Ltd, made complaint to her in March 2002 of default in interest payments by Timber Tec Holdings Pty Ltd and its shareholders. She requested Ms Schweitzer to act as her agent as mortgagee in possession. Ms Schweitzer agreed, and proceeded to have the boat detailed and listed for sale. In August 2002, however, Mr Duus as liquidator for Timber Tec Holdings Pty Ltd had seized the boat. She took proceedings in this court seeking declarations as to the validity of Capewall's security and return of possession of the vessel. A consent order was made on 8 October 2002 pursuant to which possession of the vessel was given to Capewall Pty Ltd for sale, with the proceeds to be retained in the trust account of Capewall's solicitors until resolution of the parties' entitlement to them. Ms Schweitzer said that in her public examination on 16 October 2002 she had informed Ms Downes that the vessel was being sold by Capewall Pty Ltd as mortgagee in possession. Mr Sheers says in his affidavit that the vessel was arrested on 25 October 2002 on behalf of Andrew Watson, a former director of Rural Plant Hire Pty Ltd (in liquidation).

[52]

[46] Ms O'Rourke in her affidavit says that Mrs Johnston is Mr Sheers' sister. Although on or about 11 October 2002 she had informed Ms Downes of the seizure of the yacht by Mr Duus and attempts made to retrieve it, she had not reminded her of those facts prior to the 8th November hearing. Ms O'Rourke says she was not aware of any arrest of the vessel until 12 November 2002, when she was advised of the result of a hearing of an application by Mr Watson in the Federal Court on that date.

[53]

[47] It seems extraordinary that the boat was nominated, without further elaboration, as an asset of Mr Sheers at the 8th November hearing: "he is in the process of selling his boat". As a minimum one would expect the applicant to have disclosed that its owner, in name at least, was Timber Tec Holdings Pty Ltd; and the interest claimed by Capewall Pty Ltd was clearly relevant. This aspect of the applicant's presentation of its case for an injunction was entirely unsatisfactory, and did amount to an inexplicable non-disclosure of a material fact. But given Mr Sheers' control of Timber Tec prior to its liquidation, and the association between him and the security holder, the applicant could justifiably have raised a concern about the status and likely fate of the boat. I doubt therefore that its failure to put the situation accurately was the product of duplicity rather than unpardonable laxness.

[54]

[48] Finally in this regard, Mr Morris said there was a material non-disclosure by the applicant of the existence of insurance policies available to indemnify the respondents against the applicant's claims. Mr Londy, a solicitor, has obtained copy of documents relating to professional indemnity insurance held by Gold Ribbon with Booker International Pty Ltd. The policy contains an endorsement extending indemnity to loss to Gold Ribbon arising out of claims "brought about or contributed to by any dishonest, fraudulent or criminal or malicious act or omission of any employee", but excludes indemnity to any person permitting or condoning such conduct. There would thus be a question mark over the insurer's obligation to indemnify if loss were the product of dishonesty on the part of Mr Sheers; which, although not pleaded, could conceivably be argued by the insurer were allegations by the Norton-Smiths or Mr Ryland, for example, to prove well-founded. The cover is for $5,000,000. Unfortunately there is an additional endorsement in these terms: "Please note policy cover has been cancelled ab initio due to non-payment of premium". It is dated 18 June 2001. There is nothing to suggest that the policy was revived. Prospects of recovery under that policy do not look encouraging and it is unsurprising that the applicant, if indeed it was aware of that material, did not think it relevant to the application.

[55]

[49] There is a second policy of insurance in favour of Austide Holdings Pty Ltd, although "insured" is defined in that policy to mean:

[56]

"(i) the legal entity or entities specified in the schedule; and/or

[57]

(ii) past and or present employees of the legal entity or entities specified in the schedule; and or

[58]

(iii) the past and or present principal of the legal entity or entities specified in the schedule."

[59]

The definition is ambiguous as to whether, for the purposes of the second and third clause, it is the employees or principal who must be identified in the schedule or merely the entity in question; but for present purposes I assume that Austide Holdings Pty Ltd, its employees and its principals (directors), are covered by the policy.

[60]

[50] This policy provides indemnity in an aggregate amount of $4,000,000. It is expressed to cover claims resulting from dishonest, fraudulent, criminal or malicious act or omission by any insured in connection with the professional services rendered, although it does not extend to insured perpetrating or condoning such conduct. A similar question arises as to indemnity if some of the allegations as to Mr Sheers" conduct were made out. The period of cover shown by the material provided is from 3 December 2000 to 3 December 2001. The Jumarsh, Moss and Spiller Holdings loans were all made in 1999. There is nothing to indicate whether the insurance remains current. Again, this insurance seems to me of doubtful value and I would not be prepared to say that the absence of any mention of it by the applicant, assuming it to have been aware of it, constituted a material non-disclosure.

[61]

[51] Mr Crowe, for the applicant, relied on this passage from the decision of Munby J in W v H[1]:

[62]

"... those who seek relief ex parte are under a duty to make full and frank disclosure of all the material facts. Those who fail in that duty, and those who misrepresent matters to the court, expose themselves to the very real risk of being denied interlocutory relief whether or not they have a good arguable case or even, as Behbehani's case [1989] 2 All ER 143 at 146, [1989] 1 WLR 723 at 726, shows, a strong prima facie case. On the other hand, as Balcombe LJ pointed out in the Brink's-MAT Ltd case [1988] 2 All ER 188 at 194, [1988] 1 WLR 1350 at 1358, this rule must not be allowed itself to become an instrument of injustice nor, as Slade LJ ([1988] 3 All ER 188 at 194, [1988] 1 WLR 1350 at 1359) pointed out in the same case, must the application of the principle be carried to extreme lengths. In every case the court retains a discretion to continue or to grant interlocutory relief even if there has been a non-disclosure or worse. In deciding how that discretion should be exercised the court will have regard to all the circumstances of the case, including the degree and extent of the culpability with regard to the non-disclosure or misrepresentation".

[63]

[52] Carr J in J & J Bone Pty Ltd v Quick Sign Shops (Australia) Pty Ltd[2] took a similar approach, accepting that it was not automatic that a material non-disclosure resulted in discharge of an injunction but rather that it was a question of weighing up the extent to which the applicants had defaulted. Lindgren J, on the other hand, in Hayden v Teplitzky[3] suggested a more rigorous response:

[64]

"Prima facie, the parties should be restored to their pre-injunction positions pending the hearing and determination of any fresh application by the plaintiff, even though the defendant being now aware of the plaintiff's intention will have the opportunity of disposing of assets".

[65]

[53] Having found in that case that the applicants had failed to disclose a material fact known to them, Lindgren J discharged the injunction, but after considering the matter afresh, granted a further injunction. He did, however, refer to a "less severe approach" suggested in Fitzgerald v Williams[4]. In that case the English Court of Appeal held that notwithstanding non-disclosure the case as presented to the primary judge had been

[66]

"an archetypal case calling for injunctive relief and would have been so even if [the materials] had been disclosed to him and even if the other factual points argued on the application for discharge and before this court had been raised before him."

[67]

In those circumstances justice required preservation of the defendant's assets.

[68]

[54] In the present case I propose to take the approach of Munby J; that is to say, to exercise my discretion with regard to all the circumstances of the case including the importance of the mis-statements and non-disclosure I have identified, the applicant's culpability and the merits of its case otherwise. In regard to the last it is necessary to consider another aspect of the evidence.

[69]

Mr Sheers' differing versions of how the purchase of 2 Mark Way was funded

[70]

[55] A matter which I consider telling against the respondents in this case is the varying content of Mr Sheers' affidavits as to the ownership of property at 2 Mark Way, Mudgeeraba. In the first of those affidavits, sworn on 9 July 2002, in order to resist an application for summary judgment by the vendor of the property, seeking specific performance of an agreement to lease, Mr Sheers swore that Markway Holdings Pty Ltd was the registered proprietor of the property. That company had borrowed $270,000 from Parker Simmons Securities Limited to purchase the property, the loan being secured by way of first mortgage. Timber Tec Holdings Pty Ltd held a second mortgage over the property securing a loan of $177,047.51. Mr Sheers, in that affidavit, swore that Markway Holdings remained "indebted to the second mortgagee for a sum of $177,047.51".

[71]

[56] In an affidavit sworn a month later on behalf of Markway Holdings Pty Ltd, Mr Sheers was seeking to set aside a statutory demand made by the liquidator of Timber Tec Holdings Pty Ltd (in liquidation). In this affidavit he said, consistently with his earlier affidavit, that Markway Holdings at borrowed $270,000 from Parker Simmons Securities Limited to fund its purchase of the property. However, in this instance he said that he funded the balance of the purchase price payable by Markway Holdings. He had purchased, he said, the adjoining property at 4 Mark Way, Mudgeeraba which he had caused to be registered in the name of Timber Tec Holdings. In November 1999 he paid the purchase price of $288,000 from his personal Westpac account. He decided also to purchase the property at 2 Mark Way, and incorporated for that purpose Markway Holdings Pty Ltd, the shareholders of which were a company owned by the vendor, Australian Investment Corp (Holdings) Ltd, and Timber Tec Holdings as his nominee. He said, somewhat curiously, that in order to secure the equity in Markway Holdings in his favour, a mortgage debenture in favour of Timber Tec Holdings was given over the company's assets. As time went on he found that he did not have the resources to continue making the first mortgage payments, and GRH & M Pty Ltd as trustee of the Austide Holdings Trust instead provided the funds. As security he agreed to transfer his "equity" in Markway Holdings to the Trust, and GRH & M Pty Ltd became the second mortgagee in place of Timber Tec Holdings. On this basis, he asserted, Markway Holdings owed no funds to Timber Tec Holdings; rather it was indebted to GRH & M Pty Ltd.

[72]

[57] Mr Sheers annexed to that affidavit three memoranda of resolutions dated April 2002: the first a resolution of the directors of GRH & M Pty Ltd (Ms Schweitzer and himself) resolving to purchase the mortgage debenture securing the amount of $177,047.51 from Timber Tec Holdings Pty Ltd; the second a resolution of himself as director of Timber Tec Holdings Pty Ltd resolving to sell the mortgage debenture to GRH & M Pty Ltd for $1; and the third a resolution of himself as director of Markway Holdings that the company's records now reflect the indebtedness to GRH & M Pty Ltd as the result of the sale.

[73]

[58] However, in his affidavit filed in these proceedings Mr Sheers gives a different version again of affairs, on this occasion swearing that he "as one of the directors of RTS Consulting Pty Ltd", a company which was one of the shareholders of Timber Tec Holdings Pty Ltd, lent moneys to Markway Holdings Pty Ltd.

[74]

[59] It is interesting to consider the effect of the different versions given by Mr Sheers. On the filing of the first affidavit in July 2002, he sought, presumably with success, to have Markway Holdings Pty Ltd be permitted to take possession of the property from the tenants "for the purposes of sale and the retirement of debt" including its debt to Timber Tec Holdings Pty Ltd. When his affidavit was filed in August 2002 he was no longer in control of Timber Tec Holdings Pty Ltd, which was now in liquidation, and wished to resist the statutory demand served by its liquidator on Markway Holdings. His affidavit resulted in a consent order setting aside of the statutory demand conditional on compliance with an order requiring Markway Holdings Pty Ltd to pay the proceeds of sale of the property at 2 Mark Way to the extent of $177,047.51 into court or to an agreed trust account. What actually happened was that the property was sold, the first mortgage paid out, and the balance of the proceeds paid to GRH & M Pty Ltd as second mortgagee.

[75]

[60] Those moneys are, it seems probable, the funds deposited to the National Australia Bank account on 6 November 2002. In effect, then, they returned to the benefit of Mr Sheers and Ms Schweitzer, rather than, as was no doubt anticipated by the respondent when the consent order was signed, to the hands of the liquidator of Timber Tec Holdings Pty Ltd. There is certainly a view available that the transfer of the mortgage to GRH & M Pty Ltd was a sham designed to put the proceeds of sale out of the liquidator's reach. At the best for Mr Sheers, it is apparent that he is prepared to offer the court the version of events which best serves his convenience; at worst, it is arguable that he shifts funds through his corporate vehicles in such a way as to keep them from the reach of creditors.

[76]

[61] There is a good arguable case against Ms Schweitzer, Mr Sheers and Austide Holdings Pty Ltd on the allegations of negligence and breach of duty in the statement of claim. There is a strong circumstantial case against Mr Sheers that his companies and ultimately he benefited from funds advanced by Gold Ribbon. An asset which the applicant would certainly look to if it were successful is the Admiralty Drive unit, which is on the market. One at least of the respondents has reduced the equity of GRH & M Pty Ltd in it with effect after the making of the restraining orders, in circumstances which are entirely unexplained. While no concluded view can be reached as to the manner in which the Mark Way property was dealt with, there is at least a real question as to whether the proceeds of its sale were artificially diverted from the company in liquidation to the hands of Mr Sheers; and that raises the concern of a similar outcome here.

[77]

[62] I am satisfied that there is a real risk of dissipation of assets by the respondents. Against that there is the question of whether the mis-statements, over-statements, and in one instance non-disclosure of a material fact I have identified should dictate an exercise of discretion against the applicant. Although reprehensible, I do not regard any of those matters as calculated; nor do I think that they affected the orders made on 8th November. It is, on balance, just and convenient that the respondents continue to be restrained from disposing of their assets. In all the circumstances, the orders will be extended pending trial or further order.

[78]

[1] [2001] All ER 300.

[79]

[2] Federal Court (WA) unreported WAG 77 and 102/95, 5 January 1996.

[80]

[3] (1997) 74 FCR 7

[81]

[4] [1996] QB 657.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (81 paragraphs)

Parties

Cases Cited (1)