Inetstore Corporation v Southern Matrix International

Bullock v The Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464 Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 Mayo Group International Pty Ltd v Hudson Respiratory Care Inc [2005] NSWSC 445 O D Transport Pty Ltd v Western Australian Government Railways Commission (1987) ATPR 40-761; 13 FCR 500; 71 ALR 356 CASES CITED : Re French Caledonia Travel Services Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 Shercliff v Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729 South Sydney District Rugby League Football Club Ltd v News Limited (1999) 169 ALR 120; [1999] FCA 1710 Weston v Carling Constructions Pty Ltd (in provisional liquidation) (2000) 175 ALR 202

Inetstore Corporation Pty Ltd (in liq) - First Plaintiff PARTIES : Robert Boyce Moodie in his capacity as liquidator of Inetstore Corporation Pty Ltd (in liq) - Second Plaintiff Southern Matrix International Pty Limited - Defendant

M Henry - Plaintiffs/Respondent COUNSEL : J T Johnson - Defendant/Applicant

Gray & Perkins Lawyers - Plaintiffs/Respondent SOLICITORS : Thurai Rajah Lawyers - Defendant/Applicant

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

6171/04 INETSTORE CORPORATION PTY LIMITED (IN LIQUIDATION) & ANOR v SOUTHERN MATRIX INTERNATIONAL PTY LIMITED JUDGMENT 1 HIS HONOUR: This is an interlocutory dispute aimed at deciding whether it should be a secured creditor of a company, or the company liquidator, who has control of the sale of the company's assets. 2 Inetstore Corporation Pty Limited ("the Company") operated a business which involved selling software which enabled retailers to operate a website through which members of the public could purchase items. On 1 January 2000 it gave a fixed and floating charge to the defendant ("the secured creditor"). The internal records of the Company in mid-2004 showed that the amount secured by that charge was a little over $72,000. By mid-2004 there had been default under that charge. On 25 June 2004 the directors of the Company appointed the second plaintiff, Robert Moodie, as administrator. Three days later the secured creditor appointed Mr Sloss as its authorised agent, to take possession of, and ownership of, all the mortgaged property. 3 On 17 September 2004 the creditors of the Company appointed the administrator as a liquidator of the Company. 4 In the latter part of 2004 the secured creditor made demand, on several occasions, for the administrator/liquidator to deliver the Company's assets to it, and inform it of precisely what assets the administrator/liquidator held. Those requests did not produce any response. 5 The Company has continued to operate while it is in liquidation. At least until recently, its operations have been cashflow positive. 6 The liquidator and the secured creditor have each been making attempts to sell the assets of the Company. The secured creditor obtained some offers in 2004 for sale at a price which would have paid all the debts of the Company, as then disclosed in its books. The liquidator denies that he was aware that the secured creditor was making those attempts to sell. The liquidator also made attempts, in the latter part of 2004, to sell the business of the Company. He has received offers to purchase, but has not accepted any of them because the secured creditor does not approve of the purchaser. 7 The liquidator asserts that he is entitled to an equitable lien over the assets of the Company to secure his fees, incurred as both administrator and liquidator. His claim for those fees exceeds $120,000. Furthermore, he claims that his equitable lien has priority over the rights of the secured creditor. 8 The situation has now developed where both the liquidator, and the secured creditor, agree that it would be desirable to sell the assets of the Company. What they cannot agree on is who should be in control of that process. 9 These proceedings were begun on 17 November 2004 by the Company and its liquidator. They sought a determination that the liquidator had power to sell the assets of the Company, an order directing the secured creditor to do all things necessary to effect the sale, and a declaration that the liquidator was entitled to priority over the secured creditor for payment of his fees. The secured creditor has filed a cross-claim, alleging that the liquidator is in breach of his obligations in denying the secured creditor access to the Company's assets, and a declaration of its entitlement to "unencumbered possession and ownership" of the mortgaged assets. 10 The application before me is an interlocutory process, brought by the secured creditor, seeking an order that the Company and its liquidator forthwith deliver the charged assets to the secured creditor, so that it can effect a sale of them. The secured creditor offers, in broad terms, to place any proceeds into a controlled money account over which the liquidator would have the same right to a lien for his fees as he would have had over the Company's assets if they had not been transferred to the secured creditor. The secured creditor also offers to undertake to make itself liable to the liquidator to the same extent as would arise under section 420A Corporations Act 2001 (Cth), if the liquidator had an obligation under section 420A owed to him by the secured creditor. 11 That interlocutory process was taken out on 25 July 2005. The occasion for it was that there was a stalemate about who should effect the sale of the assets, and the internet service provider which made available to retailers the web hosting facility whereby those retailers could use the Company's software had had some bad publicity in May 2005 when it was offline for two days. As well, there was a concern that the nature of the assets was such that their value declined fairly rapidly with time, and the value of non-competition restraints, by which past employees were bound, was also declining with time. 12 After the application was made, it received added impetus when, on 25 August 2005, the liquidator threatened that he would cease operating the business on 5 October 2005. The occasion for the liquidator making that threat was that the internet service provider had indicated that it would cease supporting the Company's products, which would deleteriously affect the Company's cashflow. As a result of communication with the internet service provider on the day this case was argued, it now appears that the internet service provider is not proposing completely to cease supporting the Company's products, at least in the short term. The liquidator is in the process of reconsidering whether to close the business down on 5 October 2005, but had not, at the time of conclusion of argument, arrived at a conclusion. 13 The remedy which the secured creditor seeks is in substance a mandatory interlocutory injunction. Such injunctions are granted on the same principles as are prohibitory interlocutory injunctions, namely, that there is a serious question to be tried, and that the balance of convenience favours the granting of the injunction: Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153-4. However, in the application of those principles the fact that the injunction which is sought is mandatory can affect the outcome: Mayo Group International Pty Ltd v Hudson Respiratory Care Inc [2005] NSWSC 445 at [59]; Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499. Serious Question to be Tried 14 The liquidator accepts that the secured creditor has a prima facie case for the relief it seeks. He submits, however, that the defendant's case is not a strong one. The strength of the case shown on an application for an interlocutory injunction can be a relevant matter to take into account in assessing the balance of convenience: Bullock v The Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464, at 472; O D Transport Pty Ltd v Western Australian Government Railways Commission (1987) ATPR ¶40-761 at 48,239; 13 FCR 500; 71 ALR 346; Shercliff v Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729 at 736-7; South Sydney District Rugby League Football Club Ltd v News Limited (1999) 169 ALR 120; [1999] FCA 1710 at [36]; Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 155. 15 One basis on which the liquidator submits that the strength of his case arises is that he has an entitlement to a lien for his remuneration and expenses in respect of work undertaken in preserving and realising the assets of the Company, and that that lien is one which has priority to the claim of the defendant to the assets. I accept that a liquidator can have a lien for his remuneration and expenses in calling in and converting the assets which have produced a fund, and that in some circumstances such a lien can have priority to the claim of a secured creditor: In Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 at 175; Re French Caledonia Travel Services Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 at 422-3 [198]; (2003) 48 ACSR 97 at 153. However, the question of which of two claimants to a fund has the higher priority is not determinative of which of those two claimants has the power to realise assets for the purpose of creating the fund. I accept that section 471C Corporations Act 2001 (Cth) preserves a secured creditor's rights to realise and deal with property the subject of a security. I also accept that a liquidator of a company has power to sell all the assets which are vested in the company. Whether the liquidator, in exercising that power to sell, can actually give a good title might depend on whether the particular purchaser had notice of any equities (such as those arising under an equitable charge) that attached to the property being sold. Whether the liquidator has a superior right to sell to a secured creditor will depend, at least in part, upon the terms of the security. In the present case, the secured creditor's charge has not been tendered in evidence - rather, the matter has proceeded on the basis that it is not contested that the charge exists, and has crystallised. It will also depend on what dealings there have been between the liquidator and the secured creditor concerning sale of the assets. 16 The second basis upon which the liquidator contends that his case is strong is that his entitlement to the lien entitles him to make an application for the judicial sale of the assets of the company: Weston v Carling Constructions Pty Ltd (in provisional liquidation) (2000) 175 ALR 202 at 206, [17]. I accept that the equitable lien of a liquidator for fees can ordinarily be enforced by applying to the Court for judicial sale of the assets which are subject to the lien. However, whether the Court actually makes that order for sale will depend upon whether there are alternative means by which the lien is able to be given effect to. Like all equitable remedies, the equitable remedies by which an equitable lien is enforced are discretionary, and moulded to the circumstances of the individual case. One of the factors which may bear upon whether the Court would actually grant such an order in the present case may depend upon whether there is some other way in which the claim of the liquidator to be paid from the fund can be given effect to. 17 The third factor to which the liquidator points is that, even though the secured creditor had appointed an authorised agent to take possession of, and ownership of, all mortgaged property on 28 June 2004, the fact that there had been such an appointment was not, according to the liquidator, disclosed to him before the commencement of the present proceedings. This is a fact which, the liquidator submits, suggests that his equitable lien has priority to the right of the defendant. I accept that that is one factor which would be relevant to a determination of priority. However, other factors, not gone into on this interlocutory application, could also bear upon which equitable security has the higher priority. 18 For these reasons, I do not accede to the liquidator's submission that his case is a strong one. I also make it quite clear that, by expressing that view, I am not saying that my view at this stage is that the liquidator's case is a weak one. Rather, at this stage of the proceedings I express no view about the strength of either party's case. Balance of Convenience 19 An applicant for an interlocutory injunction bears the onus of persuading the Court that the balance of convenience favours the granting of the injunction. The secured creditor has not persuaded me of this. The secured creditor did not make specific submissions going to the balance of convenience, save that it submits that its case for ultimate success was very strong. For reasons already given, I do not accede to that submission. 20 There is no evidence that either the liquidator or the secured creditor now has any particular prospective purchaser, to whom a sale would be made if possible. However, when neither of them has been taking active steps to sell the assets, because of the uncertainty surrounding these proceedings, and (at least so far as the secured creditor was concerned) if I were to make the order the way would be cleared for it to effect a sale, I do not place great weight on that factor. 21 The liquidator also points to the fact that granting the order sought would, in effect, be granting part of the final relief, when there has not been a full examination of either the evidence or the law relating to it. I accept that that is so, and that whether the balance of convenience favours the granting of the order needs to be approached by comparing what the consequences would be if the order were not granted and it turned out at a final hearing that the secured creditor was entitled to effect a sale of the assets, and what the consequences would be if the order were granted and at a final hearing it turned out that it was the liquidator who was entitled to effect the sale of the assets. 22 The liquidator also submits that granting the relief sought would alter the status quo which has existed since the commencement of proceedings in November 2004. I accept that that is so. 23 The liquidator submits that there is no evidence that maintenance of the status quo acts to the detriment of the defendant. Even though there is a real prospect that the liquidator might shut the business down in October, there is no evidence that the value of the assets on a going-concern basis is greater than the value of the assets on a break-up basis. 24 As well, the liquidator points out that the sole purpose of the order is to enable the secured creditor to find a purchaser for the assets of the Company. The proposal which the secured creditor puts forward does not take into account what is to happen to the assets in the event that a sale cannot be effected of them. In particular, no undertakings are put forward by the secured creditor concerning the security or preservation of the assets in the event that there is no sale. 25 As well, there have been some problems, this month, arising from attempts by hackers to break into the web server. Those attempts have required expenditure of money by the liquidator for modification of the programme. The liquidator has no particular expertise in computer programming, but has been able to employ suitable experts to fix this sort of problem. There is no evidence which suggests that the secured creditor would be in any better position than the liquidator to take this sort of action to maintain the assets. 26 The liquidator points to significant delay by the secured creditor in bringing the present application. The proceedings have been on foot since November 2004. The principal affidavits read on the interlocutory application are ones which were filed in April and May 2005 (though there were also some updating affidavits). The arising of the liquidator's threat to shut the business down is a new element, which to some extent, but not entirely, reduces the significance which the delay in bringing the present application would otherwise have had. 27 Two factors should, in my view, be accorded great weight in assessing the balance of convenience. The first of them is that the secured creditor proffers no undertaking as to damages. The secured creditor is a company with a paid up capital of $2.00. While its offering of an undertaking to act as though it had a liability to the liquidator in similar terms to that imposed by section 420A Corporations Act 2001 (Cth) might lessen the significance of the liquidator suffering loss through a sale of the assets at an undervalue, it does not cover the whole scope of a conventional undertaking as to damages. Only in exceptional cases will the Court grant an interlocutory injunction without an undertaking as to damages. 28 Mr Johnson, counsel for the secured creditor, said that part of the reason why an undertaking as to damages was not being offered was that the liquidator had declined to make available to the secured creditor the various computer programmes, which are company assets and hence the secured creditor could not form a view about the extent of the risks it would be running if it tried to sell the programmes. An echo of that submission is contained in an affidavit from Mr Sloss, the agent appointed by the secured creditor, where he recounts a meeting on 28 July 2004 with representatives of the liquidator, in which he said: "for all we know it could have a timer in it by which the software will turn off or explode … potentially the purchaser could suffer millions of dollars of damages …"

I do not regard this is a reason for excusing the secured creditor from giving an undertaking as to damages as the price of obtaining an interlocutory injunction. Part of the point of requiring an undertaking as to damages is that, by that undertaking, the person who gives it agrees to underwrite risks, of an indeterminate kind, that the Court, in granting the interlocutory injunction, is taking a course of action which later proves to have been the wrong one. 29 The second factor which deserves particular weight is that, if it eventuates that the liquidator has wrongly withheld the assets from the secured creditor, and the secured creditor has thereby suffered loss, damages will be an adequate remedy. Indeed, Mr Johnson accepted that damages probably would be an adequate remedy. 30 The question of whether damages are an adequate remedy can be relevant in two different ways to a decision whether to grant an interlocutory injunction. The first is where the interlocutory injunction is in the same terms as a final injunction which is sought in the proceedings. If damages would be an adequate remedy for the wrong in relation to which the final injunction is sought, that can provide a reason why there is no serious question to be tried about whether such a final injunction should be granted. When the liquidator concedes there is a serious question to be tried, I do not need to consider this way in which the question of whether damages are an adequate remedy can arise.

31 The second way in which the question can arise concerns the balance of convenience. When the court is assessing the balance of convenience, it is engaged in an exercise of prediction, of how the future would unfold in two alternative scenarios - if it were to grant the interlocutory relief and as a result of the judgment following the final hearing it became clear that the interlocutory decision gave the applicant protection that it turned out not to be entitled to, and if it refused the interlocutory relief and the final hearing showed that the applicant had been refused protection that it had a legal right to. It is in relation to that period, from the time of the interlocutory determination to the time of the judgment on the final hearing, that the court is assessing the balance of convenience. Thus, the question of whether damages are an adequate remedy needs to be assessed in relation to the time period between when the Court decides whether or not to grant the interlocutory injunction, and the ultimate disposal of the litigation. If, in relation to any wrongful conduct which occurs during that period of time, damages are an adequate remedy, there is no occasion for the Court to intervene. 32 It is not clear, on the present evidence, when the secured creditor first demanded that it be given possession of the charged assets. However, it is clear that, by now, that possession has been demanded, and declined. If it turns out that the liquidator was not justified in refusing to hand over possession of the secured assets, I see no reason why damages should not be an adequate remedy. 33 Paragraph 3 of the Interlocutory Process filed 25 July 2005 is dismissed. The defendant is to pay the costs of the plaintiffs of this application. **********

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