Findings
18 The plaintiff was registered under the Associations Incorporation Act 2009 (NSW) on 14 March 2011 (Ex 5, p 35) pursuant to an application dated 10 March 2011 and lodged by a Mr David Jacobsen, the son of Mr Kevin Jacobsen, containing a declaration and privacy acknowledgment signed by Mr Braun, the brother of Ms Billie Jacobsen, the wife of Mr Kevin Jacobsen (Ex 4, p 4).
19 Mr Braun is shown on the plaintiff's certificate of registration (Ex 5, p 35) as the public officer of the plaintiff, and Ms Braun, the sister of Ms Billie Jacobsen, is the Secretary and a committee member of the plaintiff (Ex 1 (affidavit of Ms Linda Helen Braun sworn 22 March 2011) in the winding up application at [1] and [33]).
20 The application for registration disclosed that:
(1) The objects of the plaintiff were:
'To promote the interests of fledgling producers, promoters and members of the public seeking to advance Australian entertainment.'
(2) The total assets of the plaintiff were $1,000.
(3) The major sources of income were expected to be 'donations' and 'fundraising'.
21 Clearly the plaintiff, at the time of registration, was an 'entity of straw' and no evidence was adduced that, subsequent to registration, its financial position had improved.
22 By deed dated 20 March 2011, the plaintiff alleges it accepted an assignment of a debt said to be owing by the company to Encore in the sum of USD54,800 in payment of a consideration of AUD1.00 but the deed was not executed by the plaintiff and there is no other evidence that the plaintiff bound itself to the covenants, on the part of the plaintiff, contained in the deed: (Ex 1 in the winding up application, ex 'A'). Notice of the alleged assignment dated the same date signed on behalf of Encore (Ex 1 in the winding up application, ex 'B') takes the matter no further. Why, it may be asked, would a creditor assign a debt in excess of USD50,000 that was owing to the creditor by a solvent company, owning valuable rights, to an unrelated assignee for AUD1.00? The short answer is that it would not. Indeed, by itself, the assignment casts real doubt on the existence of the debt, and even if it exists, its amount.
23 On 10 November 2010 Emmett J dismissed the application (NSD1498/2010) by Mr Kevin and Ms Billie Jacobsen seeking orders for, inter alia, the winding up of the company under subs 461(1)(f), (g) and (k) of the Act. His Honour ordered them to pay the costs of the company. As at 31 March 2011 the company had not received any moneys in payment of these costs.
24 On 21 March 2011, Mr Kevin Jacobsen filed a notice of discontinuance of proceeding (NSD1736/2010) he commenced on 13 December 2010, against the company and others. In consequence, orders were made by Bennett J on the same date, that Mr Kevin Jacobsen pay the respondents' (including the company's) costs, with some costs to be assessed on an indemnity basis and others on a party/party basis. As at 31 March 2011 the company had not received any moneys in payment of its costs.
25 This proceeding was commenced two days later by the filing of the originating process on 23 March 2011.
26 On 28 March 2011, Ms Tyson wrote to Mr McCartney in the following terms (Ex 1, annexure 'A'):
'We refer to the proceedings brought by Offstage Support Association Inc (Offstage) against Time of My Life Pty Limited (TOML) in the Federal Court of Australia.
Offstage alleges it is a creditor of TOML (based on a debt allegedly assigned from Encore International Inc (Encore)) however the originating process seeks an order to wind up TOML under either section 461(1)(e) or section 461(1)(f) of the Corporations Act (the Act).
The application is fundamentally flawed and is bound to fail, for at least the following reasons:
(a) Firstly, TOML denies any debt to Encore. TOML had no notice of any debt to Encore prior to receiving this application. Further, even if Encore was a creditor of TOML (which is denied), TOML had not received any notice of assignment as at 23 March 2011, when the Application was filed. Offstage was therefore not a creditor with standing to make an application on that date;
(b) Even if Offstage was or is a creditor of TOML (which is denied), the grounds relied upon in section 461 apply to members, not creditors. Sections 461(e) and (f) apply when the affairs of the company have been conducted in a way, inter alia, oppressive or unfairly prejudicial to members. It is not appropriate for a creditor which claims its debt has been unpaid, to seek to wind up a company on the grounds relied upon in section 461(1)(e) and (f).
Other fundamental failings include that the Deed of Assignment relied upon is not executed, and that whilst Lynda [sic] Braun deposes to being the Secretary of the Plaintiff, a search conducted with the Office of Fair Trading records that Stephen Braun (her brother) is its public officer. TOML also denies the substance of the allegations made in Ms Braun's affidavit, or that those allegations (even if founded) would ground orders for winding up under section 461.
For the reasons above the claim is fundamentally flawed and should be withdrawn.
If Offstage claims it is owed a debt by TOML, it should bring proceedings against TOML to recover the debt. It should not instead seek to wind up TOML on grounds applicable to members.
The present application is similar in nature to the first application brought by Kevin and Billie Jacobsen against TOML in the Federal Court last year (1498 of 2010), in which the Jacobsens sought an order to wind up TOML under sections 461(1)(f), (g) and (k) of the Act, based on them being alleged creditors of TOML. That application was dismissed on the first return date, with costs ordered against Mr and Mrs Jacobsen. We have provided your firm with a copy of the transcript of those proceedings previously, which should make evident the similarity between the matters raised in those proceedings and the present.
Of further concern is that the present application was instigated shortly after Kevin Jacobsen discontinued his second application against TOML in proceedings 1736 of 2010 in the Federal Court last Monday, 21 March 2011. We are instructed that Linda Braun is Billie Jacobsen's sister. A Fair Trading search indicates that Offstage was incorporated on 14 March 2011.
It is evident Kevin Jacobsen has had some involvement in the present proceedings in that Offstage relies on an affidavit of John Lord sworn in the previous proceedings, and Mr Jacobsen has written to various persons overseas, both notifying them of the action, and providing a letter from you in relation to the action (see enclosed). These communications and the timing of the latest application raise serious concerns as to the intention and purpose of the proceedings, and Kevin Jacobsen's involvement.
In the event the proceedings are continued, TOML will make urgent application to have the claim summarily dismissed. TOML reserves its right to seek orders, including costs orders, against non-parties including Kevin and Billie Jacobsen and the practitioners of your firm, relying on principles in Consolidated Byrnes Holdings Ltd v. Hardel Investments Pty Ltd [2009] FCA 399. TOML also reserves its rights to make submissions on the purpose for which this application is brought, including that the winding up is sought for a collateral or ulterior purpose.
We request that your client agree to discontinue the proceedings immediately, with no order as to costs.
We request that you confirm your client's position by 5 pm tomorrow, and whether it agrees to discontinue with no order as to costs. Failing this TOML shall seek orders as foreshadowed above, without delay.'
27 On 4 April 2011, Mr Philip Stern of Addisons wrote to Mr McCartney in the following terms:
'We refer to the directions hearing this morning before his Honour Justice Emmett.
The form of relief sought by your client (placing the company into liquidation) is misconceived. Even if the alleged debt to your client were owing (which it is not) there is no basis established to wind up the company. No answer could be given to this proposition when the matter was raised with your counsel by Emmett J this morning.
Ultimately this dispute concerns whether or not your client's alleged debt is in fact owing. The appropriate action if your client believes that it is owing is to commence a proceeding to recover the debt. When asked by his Honour why that was not the proper course to take, your client's counsel understandably could give no answer.
A winding up of the company achieves no more than depriving the company of its primary asset, for the reasons articulated by his Honour this morning i.e. the triggering of the provision in the rights agreement which results in the loss of the rights.
In fact your client's seeking to wind up the company when the obvious and proper course available to it is to commence a proceeding to recover the debt speaks volumes as to your client's true purpose in commencing this proceeding, that being to trigger the loss of rights clause to apply pressure upon the company.
We invite your client to now withdraw its application.
Our client reserves all of its rights in relation to this action, including the basis for the making of costs orders and by whom such costs orders should be paid, including costs orders against Ms Braun and other officers of your client.'
28 Mr McCartney acted for the plaintiff on the hearing of its application on 12 April 2011 on instructions from Mr Braun and Ms Braun. Mr McCartney, in turn, instructed counsel.
29 By reason of the findings in [18] - [22], [24] and [25] above, namely, the date that the plaintiff was brought into existence, the proximity of that date to the commencement of the proceeding and the discontinuance of the earlier proceeding, the identity of the persons associated with the plaintiff as officers or committee members, the limited amount of its assets and the nominal consideration it paid for the assignment of an alleged debt of over US$50,000, I find that the plaintiff was brought into existence for the sole purpose of commencing the proceeding and being used as the vehicle for the litigation whilst at the same time shielding, not only those associated with it as officers or committee members, but others, such as Mr Kevin Jacobsen and Ms Billie Jacobsen, from adverse costs orders or further adverse costs orders.
30 By reason of the matters referred to in [4] above, the proceeding was an abuse of process. The persons responsible for the commencement and pursuit of the proceeding, apart from the plaintiff, include Mr Braun as its public officer and Ms Braun as committee member, Secretary and attorney. In addition, Ms Braun affirmed the only affidavit in support of the application.
31 I find that there is much to be said for the company's submission, particularly having regard to my assessment of Mr McCartney's evidence at [15] - [17] above, that the plaintiff's case was hopeless at the outset. But even if issuing subpoenas might have assisted, once it became clear at the directions hearing on 7 April 2011 that leave would not be granted to issue subpoenas, from that point on there was no way forward.
32 The last ditch attempt in the days before the hearing to seek to rely upon the ground of insolvency, was also hopeless. Seeking to rely on two balance sheets, four and five years old, respectively, was undoubtedly doomed to fail as outlined in the Reasons at [5] - [7].
33 By reason of the finding at [26] above, I find that Mr Braun, Ms Braun and Mr McCartney were put on notice, no later than 28 March 2011, that costs orders would be sought against them if the proceeding was not discontinued.
34 Finally, and, having regard to the relief sought in this application (see [6] above), perhaps most importantly, I find that the plaintiff's application for an order that the company be wound up was brought for a collateral purpose. The proceeding was not brought for the purpose of recovering a debt, if there was one, or failing that, the winding up of the company; it was brought for the purpose of applying commercial pressure by the triggering of the 30 day clause found in the rights agreement between the company and Magic Hour Productions Inc (annexed to Ex 5, pp 23, 24) with the dual objects of securing a monetary payment from the company, or other interests associated with Mr Colin Jacobsen, for Mr Kevin and Ms Billie Jacobsen and, at the same time, deterring any dealing with the rights. That this was the purpose of the plaintiff, and those who stood behind it, including Mr Braun and Ms Braun; and not only known to, but acquiesced in by, Mr McCartney, is apparent from the following:
(1) The fact that the case was hopeless speaks volumes as to the true purpose for which the proceeding was brought. To recover a US$50,000 debt by the taking of complex winding up proceedings rather than suing in a court, after having been warned that this is an abuse of process, speaks tellingly of a different purpose.
(2) Knowledge of the 30 day trigger clause. Mr McCartney was well aware of this through his involvement in the earlier proceedings: see, for example, Ex 1, p 174. It is open to me to infer, and I do, that Mr Braun or Ms Braun were also aware of the provision by reason of their being siblings of Ms Billie Jacobsen, wife of Mr Kevin Jacobsen. Mr Kevin Jacobsen and Ms Billie Jacobsen were parties to an earlier application to wind up the company (Ex 1, [10] - [13]). Those proceedings were discontinued by the Jacobsens at the first directions hearing, following argument before Emmett J, during which it was apparent that the Jacobsens were aware of the 30 day trigger clause (see [8(2)] above).
(3) There had been a consistent course of conduct engaged in by the Jacobsens with the assistance of Mr McCartney, in disseminating letters advising certain persons considered to be involved in a potential sale of the rights, advising such persons that litigation has been on foot and warning such persons that any purchase of assets from the company may be imperilled by reason of Federal Court proceedings that had been commenced against the company and others (being a second set of proceedings).
(4) Within two days of the commencement of this proceeding, Mr McCartney's firm wrote to Mr Kevin and Ms Billie Jacobsen, disingenuously 'confirming' to them that the plaintiff had filed a winding up application against the company, copy attached. The letter goes on to suggest that they advise any party known to them that in the event that they attempt to conclude any transaction with the company that that may be impeded by the winding up application: Ex 1, p 148, which was then apparently distributed to various persons by Mr Kevin Jacobsen (see pp 151 - 162). Further, it is clear from the letter sent on 15 December 2010 by Ms Tyson to Mr McCartney (Ex 1, pp 163 -164) that Mr McCartney was aware that the company was engaging in a sale of its assets, of which Mr Kevin Jacobsen was aware.
(5) Exhibit 6: letter from Mr McCartney's firm dated 19 April 2011, to Ms Tyson of Addisons. This letter was sent at the time that an appeal had been filed against my order dismissing the application. It states the view that the appeal continues to enliven the termination provisions of the Magic Hour agreement and that mutual destruction of all of the Jacobsen Family's interest appears assured unless a positive step is taken prior to Good Friday. It is then suggested that termination will only be averted if the appeal is withdrawn, and the company is urged to seek an immediate resolution. This is clear evidence that the purpose behind the bringing of the winding up application was not to recover a debt, or have the company wound up, so as to enable some orderly process of dealing with its assets/liabilities; rather, the application was brought with a view to enlivening the 30 day trigger provision and thus place persons for whom Mr McCartney acted in a more favourable negotiation position as well as deter any dealings with the rights. While that letter is described as being 'without prejudice', no such privilege applies because the document is relevant to determining liability for costs: s 131(2)(h) of the Evidence Act 1995 (Cth and NSW). In addition, the company relied on the exception to the exclusion in s 131(2)(k) - where one of the persons in the dispute, or an employee or agent of such a person, knew or ought reasonably to have known that the communication was made in furtherance of a deliberate abuse of power: see Van Der Lee v State of New South Wales [2002] NSWCA 286 where the NSW Court of Appeal held that a communication evidencing abuse of process will not be protected by 'without prejudice' privilege (at [62]).