Nationwide v Franklins

IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION BARRETT J

5733/01 - NATIONWIDE PRODUCE HOLDINGS PTY LTD (IN LIQUIDATION) v FRANKLINS LIMITED

HIS HONOUR: 1 The plaintiff Nationwide Produce Holdings Pty Ltd (In Liquidation) claims to be a creditor or contingent or prospective creditor of the defendant on two bases. In that capacity, it seeks certain relief the nature of which I shall come to in due course. 2 The basis on which the plaintiff claims to be an actual creditor arises from an order for costs made by the court on 5 November 2001. The order was an order for costs as agreed or assessed and, when the plaintiff initiated its present application, there had been neither agreement nor assessment. After the matter came before the court yesterday afternoon, however, there was agreement that the amount of the costs was $14,190. Thereafter I was treated to the spectacle of tender of the defendant's cheque for that amount by counsel for the defendant to counsel for the plaintiff and rejection of the tender. Counsel for the defendant then tendered a cheque for $14,190 drawn by its solicitors on their office account and that too was rejected. Next, I made, on the application of the defendant, an order for the payment of $14,190 into court by way of unconditional tender of the amount agreed as being payable pursuant to the order for costs. The defendant's solicitors' cheque, drawn on their office account, was then paid into court and the court's receipt was tendered as an exhibit in the proceedings. 3 The plaintiff's claim to be a contingent or prospective creditor arises from proceedings commenced against the defendant in the Federal Court. The proceedings are for unliquidated damages for alleged breach of contract and conduct contrary to s.52 of the Trade Practices Act in connection with the supply of goods by the plaintiff to the defendant. The proceedings were commenced on 23 May 2001. Under a pre-trial timetable set by Whitlam J, the defence is not due to be filed until a date in February 2002. No defence has been filed nor is there any reason at this point why it should have been. There is no material before this court which enables it to come to any view at all about the viability or merits of the Federal Court proceedings. 4 In the course of the hearing yesterday afternoon, the plaintiff called on a notice to produce. The defendant submitted that the case is one in which the court should "otherwise order", pursuant to Pt 36 r16(1) of the Supreme Court Rules, so as to remove the requirement for production of the documents sought. The applicable considerations are those relevant in cases where it is sought to set aside a subpoena. In seeking relief from the requirement to answer the notice to produce, the defendant relies upon two general heads which I might describe loosely as abuse of process and fishing expedition, with emphasis, I think, on the latter. 5 I need now to refer to the substantive relief the plaintiff seeks. Having pursued the Federal Court proceedings in the way I have described and having also had resort to the powers of examination the Corporations Act puts at the disposal of liquidators to enable them to perform their functions (proceedings in that arena having been the source of the costs order to which I have already referred), the plaintiff has initiated and prosecuted an application for an order that the defendant be placed in provisional liquidation on grounds best described as financial jeopardy in the nature of threatened or impending insolvency. In the alternative, it has sought orders of a Mareva kind in relation to the defendant's assets. 6 I must say at once that I consider the application for Mareva relief to be misconceived. The Mareva jurisdiction is one which a court possesses to protect its own proceedings from being frustrated by moves to spirit away or make unavailable assets which would otherwise be available to meet any judgment of that court. The Federal Court has been held by the High Court to have jurisdiction of this kind, and if there is to be any application for Mareva relief in support of the Federal Court proceedings which the plaintiff has initiated against the defendant, it should be an application to the Federal Court. It is really for that court to decide what is and is not needed to guard against the possibility of frustration of its processes. 7 Turning to the principal relief sought by the plaintiff, namely, the appointment of a provisional liquidator, I note that there is a threshold question about the plaintiff's standing. The only possible basis on which the plaintiff could maintain a claim for the order it seeks in that respect is that of a creditor. The defendant says that the plaintiff is not its creditor because the only possible debt is that arising from the cost order and that has now been satisfied. The untried claim for unliquidated damages in the Federal Court cannot be regarded as constituting the plaintiff a creditor of the defendant, even prospectively or contingently. So much is made clear by the decision of Santow J in Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311. 8 As to the costs order, the plaintiff says that the events which were played out yesterday with the cheques did not amount to payment and it therefore retains its creditor status. On this, I have been taken to the decision of the Court of Appeal in Australian Mid Eastern Club v Yassim (1989) 1 ACSR 399 and the decision of Santow J in Alcatel Australia Limited v PRB Holdings Pty Ltd (1998) 27 ACSR 708. Principles concerning tender and payment are discussed there and I regard the matter as relatively clear. The defendant tendered the sum of $14,190 to the plaintiff but the plaintiff refused the tender. That refusal, Meagher JA tells us in the Australian Mid Eastern Club case, means that the debt was not eliminated, a conclusion which is not surprising. But as Meagher JA later observed, tender is an answer to a debt claimed if there is a continued readiness to pay, coupled with an actual payment into court. As I read what his Honour said, the actions the defendant took and the other events which happened yesterday afternoon amount to what his Honour called an answer to a claim for the debt. On that basis the plaintiff's creditor status should probably be regarded as gone. 9 The plaintiff says that it was proper for it to decline to accept payment because of a fear that it would be receiving what turns out to be a preference. That is for the plaintiff to decide. It would be in no worse position if it accepted and was later forced to disgorge. There is nothing compelling a creditor somehow to remain pure by shunning a payment in respect of which there exists some theoretical future possibility of its proving to be preferential. A normally motivated creditor would be inclined to accept such a payment conscious of any risk of disgorgement, and with fingers crossed to the extent indicated by the circumstances. 10 The plaintiff has made valiant attempts to maintain its status as a creditor in respect of the costs order, but this has been solely for the purpose of pressing its application for the appointment of a provisional liquidator and that in turn, it seems to me, has been very substantially driven by the desire to apply pressure in relation to the proceedings in the Federal Court. 11 The plaintiff has tendered three items of evidence questioning the solvency of the defendant. First, there are the financial statements for the year ended 31 December 2000 which show substantial losses but also contain an unequivocal statement by the directors of the defendant, made in February 2001, that the defendant was able to pay its debts as and when they fell due. Second, there is an announcement in April 2001 of a withdrawal of the defendant group from the market by way of a structured sale of assets which, it seems, has been progressed in an orderly fashion. Third, there is a statement of a senior executive of the defendant that if any retail outlets remain unsold at the conclusion of the structured sale process, they will be closed so that the process can be brought to an end. All of this, I emphasise, appears in the context of clear assurances of financial support by the defendant's overseas parent company - assurances, moreover, which were underwritten by a large equity injection in December 2000 which is reflected in the financial statements to which I have referred . 12 In these circumstances, the plaintiff seeks, by means of a notice to produce, an array of materials from which one imagines it hopes to piece together some kind of plausible case of threatened insolvency. The documents sought are very extensively described. The plaintiff is effectively asking for full and free access to virtually the whole of the defendant's internal accounting records. This, to my mind, is not a legitimate use of the power to require documents in the present context where the plaintiff has sought to cling to creditor status so as to bring pressure to bear with a view to enhancing its prospects of achieving some advantage in relation to the Federal Court proceedings. The plaintiff, as I see matters, is not seeking evidence to support an indication of insolvency already independently shown, but rather is seeking to try to discover whether any case of insolvency can be constructed at all as a means of furthering its attempts to exert the pressure to which I have referred.

13 Pursuant to Pt36 r16(1), I order that the defendant is not required to produce documents to the plaintiff in response to the notice to produce, which is exhibit C.

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