Jeffcoat Carpets & Vinyls Pty Ltd v NSW Land & Housing Corporation

LEGAL REPRESENTATIVES: RESPONDENT Mr J R Young of counsel SOLICITOR Teakle Ormsby George, PARRAMATTA.

JUDGMENT:

• 8 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES

JEFFCOAT CARPETS & VINYLS PTY LIMITED v NEW SOUTH WALES LAND & HOUSING CORPORATION.

Application for relief under s275 of the Industrial Relations Act 1991.

1 These proceedings were commenced on 29 August 1996 and have experienced a number of delays for reasons which are not presently relevant but involve in part the effect of other proceedings. After 11 mentions or directions hearings before the Registrar and other members of the Commission the matter was allocated to Schmidt J on 17 May 1999. It was mentioned on 21 May 1999 and a date for conciliation was fixed being 19 July. That was subsequently deferred at the request of the parties to 23 August 1999. On that date conciliation concluded with the parties indicating that they would advise within six weeks whether the matter was settled or not or whether more time was needed. After a further three mentions in February and March 2000, on 19 April the parties indicated that, although conciliation was not at an end, a notice of motion had been filed on 18 April seeking to add additional applicants and to make what would otherwise appear to be minor amendments to the summons for relief. It was agreed that the matter should be returned to the President for reallocation to another member of the Commission to deal with the motion, in effect, so as to not allow the motion to interfere with the conciliation process. The matter was then allocated to me, mentioned on 28 April and a date fixed for hearing of the motion on 17 May 2000. 2 At the conclusion of the contested hearing of the motion, I indicated that I proposed to grant the amendments sought including the addition of three new applicants, that I would decline to require the first (corporate) applicant to give security for costs up to the present date and that I would reserve on the question of costs of the motion. This judgment provides the reasons and conclusions relevant to those issues.

The Relevant Facts 3 The three further applicants sought to be added by the motion are the directors of the corporate applicant. The evidence of Mr Mark Richmond Jeffcoat, both by affidavit and cross-examination thereon, indicates that at a meeting of the directors held on 23 June 1999 the following resolutions were passed: IT WAS RESOLVED by the directors that, in the light of the above, the company's trading should cease on the 30th of June 1999. IT WAS FURTHER RESOLVED by the company that in order to leave behind the speculation surrounding Jeffcoat Carpets and Vinyls Pty Limited and that the approval be given for the directors to pursue their intentions with respect to carpet retailing outside the company. Accordingly it was agreed that the following assets and liabilities be assumed by the directors (or their nominees) at 30th June 1999. Plant and Equipment Motor vehicles (and corresponding loans) Stock Deposits received from customers Assignment of right to action against the Department of Housing IT WAS FURTHER RESOLVED by the company that the directors meet in approximately two weeks to assign transfer details and market values to the assets and liabilities transferred.

At a further meeting of the directors held on 8 July 1999 the following resolution was passed: IT WAS RESOLVED by the company that as resolved at the directors meeting, 23rd June 1999, the assets and liabilities be transferred for the values as follows: To Mark Jeffcoat Lindsey Jeffcoat Fred Damoiseaux Right to action against Department of Housing for breach of contract, for the sum of $45000. Such amount to be debited to their loan accounts equally at the 30th June 1999.

4 No other relevant resolutions appear to have been passed. The timing of these resolutions is significant in that, as I have indicated above, the matter was the subject of conciliation proceedings on 23 August 1999 when these events, it appears, were unknown to the respondent. Indeed it was suggested in the course of these proceedings that the fact of the resolution to cease trading was most significant in the context of assessing an appropriate response to the application in conciliation proceedings.

5 In any event, the conciliation has not completed. 6 On 24 February 2000 a deed of assignment was executed between the corporate applicant as assignor and the three directors as assignees, the deed containing the following relevant recitals: E. The Assignor resolved on 23rd June, 1999 to wind up the Assignor and 8th July, 1999 to transfer the assets of the company to the director.

F. The Assignees were directors of the Assignor company.

G. The Assignor agreed with the Assignors to transfer to the Assignees all the Assignor's estate title right and interest in the action taken by Jeffcoat Carpets Pty Ltd against the Department of Housing in consideration of the moneys outstanding to the Assignees from the Assignor.

Clause 2, COVENANTS BY Assignees , provides as follows:

2.1. The Assignor hereby ASSIGNS as from and including 8th July, 1999 ("the Effective Date") to the Assignees all the Assignor's right title and interest in the litigation case by the Assignor against The Department of Housing in the Industrial Court No. IRC1264 of 1996 ("the Court Case").

7 The only other provision in the deed relevant for present purposes is clause 4.6, Invalidity in the following terms: All provisions herein contained shall be construed so as not to be invalid illegal or unenforceable in any respect but if any such provision on its true interpretation is illegal invalid or unenforceable that provision may at the option of the Lessor be read down to such extent as may be necessary to ensure that it is not illegal invalid or unenforceable and as may be reasonable in all the circumstances so as to give it a valid operation of a partial character. In the event that any such provision or part thereof cannot be so read down such provision shall be deemed to be void and severable and the remaining provisions hereof shall not in any way be affected or impaired thereby.

8 It can be seen that the recitals E. and G. arguably conflict with the resolutions of the directors passed in June and July 1999. The conflict raised by E. is between the suggestion that the company was to "cease trading" and that contained in the deed to the effect that it was to be "wound up". For what its worth, these terms were synonymous in the understanding in evidence of Mr M R Jeffcoat who at the time of the resolutions was a director and the chairman of the corporate applicant. Mr Jeffcoat also gave an explanation, which I accept, for the delay between resolution and deed, that he relied on his accountant to take any necessary steps to give effect to the resolution, Mr Jeffcoat actually thinking that the resolution fully achieved the assignment.

9 The conflict concerning recital G. is a little more subtle. The transfer of the right of action is there said to be "in consideration of the moneys outstanding to the Assignees from the Assignor" (my emphasis). The later resolution of the Board was that the right be transferred "for the sum of $45,000", which was less than the total amount of moneys actually outstanding to the three directors.

10 It was these inconsistencies which caused the respondent to contend that the deed was invalid and inoperative because it failed as it were at the first post. Mr J.R. Young of counsel for the respondent argued that whilst the absence of the inaccurate recitals would not permit the proposition to be advanced their presence was destructive, although he was not able to provide any authority in support of the proposition. On the other hand Mr C Ying of counsel for the applicants argued that the inaccuracies, if any, in the recitals was immaterial to the validity of the deed. He submitted that the deed operated as between the parties and that it was not open to a third party to contend that a deed having an effect intended and understood by the parties to it was invalid. 11 He submitted that the question of the validity of the deed was not a matter to be examined in an interlocutory proceeding but if the respondent wished to maintain the point it ought be heard in the substantive proceedings. He referred to authority, which I will detail later. 12 In the alternative Mr Young submitted that were the court inclined to add new applicants that it should impose a condition that the corporate respondent give security for costs in the sum of $20,000. Further he contended that the respondent should have the benefit of an order for costs, in the circumstances where attempts by those representing the respondent to ascertain the background to the delayed execution of the deed purporting to reflect the July events were greeted with a denial that they were entitled to it. It left them in a position where, he contended, the respondents had little option but to oppose the amendments because the deed was, on the information provided, inconsistent with the events which grounded it and it was only until the evidence of Mr Jeffcoat in cross-examination that any reason for the delay was advanced. On the issue of security for costs Mr Young argued that it was not until February 2000 that they became aware that the corporate applicant was impecunious. Until that time there had been an understanding that it was continuing to trade and in the circumstances of its impecuniosity an order for security for costs would be justified. Conclusions

13 The question whether security for costs should be granted is a matter to be determined in the circumstances of a particular case. Impecuniosity of a corporate litigant is but one factor which may be taken into account. For a discussion of the principles see the judgment, which I would with respect adopt, of Marks J in Hallford Pty Ltd v Caltex Petroleum Pty Ltd (Unreported, IRC311 of 1997 - 22 May 2000) 14 I am unable to accept that adding as applicants the three assignees of the right of action against the respondent, should cause a condition to be imposed on the first applicant. The respondent's position vis a vis costs seems to me to improve considerably with the addition of the new applicants. It would seem that the new applicants have, in terms of the understanding at least of Mr Jeffcoat, been the "real" parties since the date of the resolution of the Board referring to the assignment of the right of action. Although the position in law may be different, the adoption by deed of an "effective date" of 8 July 1999, signals an effort by the parties thereto to put the new applicants in the driving seat on and from 8 July, 1999. That would seem to be a matter of significance on the ultimate costs question should the respondent be finally successful. 15 Further, the issue of security for costs as against that respondent seems to me to have been and to remain an issue which is open to be dealt with on its merits in the usual way. If the respondent wishes to pursue an order for security for costs against the corporate applicant, the appropriate course is to file a motion which would enable the matter to be dealt with on its merits and would give the applicant a proper opportunity to respond to that motion. I do not consider that the addition of applicants necessarily causes a response in favour of security for costs in the manner suggested. Indeed such authority has been referred to me suggests the contrary (see the following reference to the Eurocross case). 16 I reject the submission for the respondent that the inaccurate recital in the deed impairs its operation in some way. While the usual position is that the recitals may describe the factual circumstances in which the operative part/s of the deed are intended to have effect, and those recitals, if unambiguous, may, in an appropriate case, determine the effect of an ambiguous operative provision, where the operative provision is unambiguous, as here, that provision is to be preferred over a recital (See generally, Halsbury's Laws of Australia, Deeds and Other Instruments, 140-615 et seq). In the present case the misstatement as to winding up seems to me quite immaterial. Further, "inconsistency" between "the outstanding moneys" and some lesser amount ($45,000) seems not to be germane to the deed at all, assuming there is an inconsistency. 17 There is no other reason advanced or obvious to me as to why the deed should be impugned. Mr Ying referred me to two authorities in both of which the validity of deeds was challenged on the grounds that the assignment was said to be a sham designed to circumvent the prohibition against granting legal aid to companies and also, in one case, to avoid security for costs. 18 In Eurocross Sales Ltd and anor v Cornhill Insurance PLC [1995] 4 All England Law Reports 950 the facts were as follows. On 31 March 1992 Eurocross Ltd sold its business to Eurocross Sales Ltd for the nominal consideration of 1 pound. The business sold included "Potential claim against Cornhill Insurance for damage to plums imported in October 1991, a claim denied by the insurers, but which may have to go court for redress". Mr Sood and his wife were the shareholders and directors of both companies. Mr Sood executed the sale agreement on behalf of both companies. Later in 1992 Eurocross Ltd was wound up on a creditor's petition. On 14 April 1992 Eurocross Sales Ltd issued proceedings against Cornhill. In 1993, Eurocross Sales Ltd sold its business to Mr Sood; Cornhill applied for orders that the particulars of claim be struck out as disclosing no cause of action and that the action be dismissed; Cornhill also applied for an order that Eurocross Sales give security for its costs of proceedings; and Mr Sood applied to be substituted as plaintiff in the action. The precise sequence of those events was in dispute in the proceedings. 19 It is clear from the judgment of the Court of Appeal that the issue of the validity of the sale agreement remained open; it appears, inferentially, that the question of validity was treated in the proceedings as an issue for trial rather than for interlocutory determination although the basis for that approach is not discussed. In the course of judgment the court (Sir Thomas Bingham MR, Auld and Ward LJJ) said: Miss Lee for Cornhill does not suggest that the sale agreement was champertous, and she does not challenge the sale as any breach of the company's or the directors' obligations. She did at first submit that the sale agreement was a sham, but we cannot for our part see that it involved any element of pretence, of saying one thing and doing another, of disguising the true nature of the transaction. The sale may or may not turn out to be valid, but there is no indication that the company was to retain any interest in any recovery made by Mr Sood against Cornhill. There is inevitably some factual artificiality in the distinction between Mr Sood and his company, but the sale agreement appears to represent the deal which was, for whatever reason, done. It was not in our view a sham.

20 The relevant conclusions to which the court came are as follows: We would grant Mr Sood leave to appeal and Cornhill leave to cross-appeal. We would allow Mr Sood's appeal to the extent of setting aside the condition that he pay 5,000 pounds into court. Otherwise we would affirm the judge's order. We would dismiss Cornhill's cross-appeal.

We do not reach this decision without some unease. One need not be clairvoyant to foresee the possibility of abuse if the practice were to become prevalent of impecunious companies, unable to meet anticipated orders for security, assigning claims to penniless directors who would then litigate the claims without giving security, perhaps with the benefit of legal aid, and taking advantage of the rights accorded even in the higher courts to unrepresented personal litigants. These are not fanciful risks. But we think that the safeguard must be found (a) in the fiduciary duty owed by directors to their companies, which must ordinarily prohibit transfer of a company asset to a director at an undervalue; (b) in the right of the Legal Aid Board to refuse the grant of legal aid where it would be unreasonable to grant it; and (c) if need be, in amendment of the rules of court. On the facts and argument in this case, we do not think that the apprehension of future abuse would justify the court in making any order other than that which we propose. As Samuel Johnson observed, 'Sir, you must not neglect doing a thing immediately good from fear of remote evil'.

21 In Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd and Others; Circuit Systems Ltd (in liquidation) and another v Zuken-Redac (UK) Ltd ([1998] 1 All ER 218) the plaintiff, Norglen Ltd had gone into liquidation after commencing proceedings against the defendant seeking rescission of a contract for the sale of land. After a meeting of creditors, Norglen, acting by its liquidator, assigned to Mr Rogers (who was a 50 per cent shareholder in Norglen, his wife having the other 50 per cent interest) the legal and beneficial interests in the company's cause of action against the defendants. The consideration was an undertaking to apply the proceeds of the action to paying the company's creditors and the costs of the liquidation and then accounting the company for half the balance. Mr Rogers sought and was granted legal aid to apply to be substituted as a plaintiff instead of Norglen. The application was dismissed by the trial judge on the basis that the assignment of the cause of action should not be recognised or given effect because it was a "sham", on the ground that the sole or main purpose of the assignment was to enable the action to be carried on for the benefit of the company with legal aid available to Mr and Mrs Rogers as individuals. 22 Lord Hoffmann, with whom Lord Browne-Wilkinson, Lord Lloyd of Berwick, Lord Nolan and Lord Clyde agreed, upheld the appeal by Mr and Mrs Rogers. Two arguments in particular were advanced, namely: (a) that the introduction of legal aid for individuals in 1949 had the effect of restricting the power of liquidators and trustees to assign causes of action. They could no longer assign them to individuals on terms that the company or bankrupt's estate would receive part of the proceeds if it was intended that the action should be pursued with the benefit of legal aid. The policy expressed in the Legal Aid and Advice Act 1949 had created a head of public policy which required such assignments to be treated as invalid; (b) the Legal Aid Act 1988 prohibited the grant of legal aid to a corporation and it followed, upon the true construction of that Act, that a grant of legal aid to an assignee for the benefit of the company, as in a case like this, would also be unlawful. The assignment had therefore been executed for an unlawful purpose and was unenforceable under the principle that the courts would not lend their assistance to the achievement of an unlawful purpose.

23 In relation to those arguments Lord Hoffmann said: My Lords, these two very different arguments advanced in support of the decision of the Court of Appeal in the Advanced Technology Structures case illustrate the difficulties in analysing its reasoning. If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance -schemes are perhaps the best example. They either work (IRC v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259) or they do not ( Furniss (Inspector of Taxes) v Dawson [1984] 1 All ER 430, [1984] AC 474). If they do not work, the reason, as my noble and learned friend Lord Steyn pointed out in IRC v McGuckian [1997] 3 All ER 817 at 825, [1997] 1 WLR 991 at 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. There is no need for such spooky jurisprudence.

24 And later (at p.228): "the legality of the Legal Aid Board's exercise of its powers and discretions was not an issue in either of these appeals. It is concerned solely with the validity, as a matter of private law, of the assignments . . . . the Legal Aid Scheme can look after itself and does not require the courts to strike down private transactions which would otherwise be valid."

25 Although, having regard to my views regarding the effect of the deed, that matter is resolved, and although the facts are obviously distinguishable, these judgments seem to me to lend support to the propositions advanced by Mr Ying for the applicant on the motion, particularly with respect to security for costs.

26 I turn to the question of costs of the motion. Mr Ying argued that if the motion was granted over the objection of the respondents that the costs involved in the proceedings ought go against the respondent. Alternatively, the court might be disposed to make them costs in the cause (R.211).

27 There is no doubt that the requirement that the motion be heard and determined occurred as a result of the respondent's opposition to it and that in the usual course costs follow the event. However, the facts in this case demonstrate that through the failings of the applicants the motion became necessary in circumstances which were reasonably open to give rise to suspicion, involved inaccuracies of detail and provoked questions to which no full and adequate response was given such as to properly inform the respondent.

28 In these circumstances, I consider that neither are the applicants entitled to an order in their favour nor should the respondent be put to the obligation of meeting the applicant's costs on the motion. The costs are in the discretion of the Commission and in the exercise of that discretion it seems to me that neither party can be seen as entitled to a victory on the costs issue as against the other. The applicant's conduct gave rise to the motion, which nevertheless I have found unmeritorious. The appropriate order would be that each party pay its own costs of the motion. I so order.

29 The orders are: 1. That there be added as applicants to the proceedings, Mark Richmond Jeffcoat, Lindsey Catherine Jeffcoat, Freddy Hubert Damoiseaux.

3. That leave be given to amend the application in terms of the amended application filed in court 17 May 2000 and initialled by Peterson J.

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