Plaintiff v Defendants

Plaintiff v Defendants - [2008] VSC 566 - VSC 2008 case summary — Zoe

[5]

1 The plaintiff ("Newtronics") sues its parent company, the first defendant ("Atco") on what it maintains is Atco's contractual obligation to provide financial support and not to call upon secured debts to the detriment of unsecured creditors. Newtronics also sues the second defendants (as well as Atco) in conversion. Atco is the parent company of Newtronics and had a mortgage debenture in its favour ("the mortgage debenture") as security for loans it made to Newtronics. On 21 December 2001 O'Loughlin J gave reasons for judgment in Federal Court proceedings against Newtronics commenced on 12 February 1998 by Seeley International Pty Ltd ("Seeley"). On 21 December 2001 Atco demanded the immediate repayment by Newtronics of all money owing to Atco ("the demand") secured by the mortgage debenture. On 8 January 2002 Atco appointed the second defendants as joint and several receivers and managers ("the receivers") over all of the undertaking and assets of Newtronics secured by the mortgage debenture. Newtronics contends in these proceedings that the appointment of receivers was void and of no effect. On 26 April 2002 the receivers sold the business and assets of Newtronics to Atco Electronic Controls Pty Ltd for a sum of $13,075,000 subject to adjustments realising $13,161,064. The purchase price was satisfied, in effect, by reduction of the debt due from Newtronics to Atco and was reflected in book entries. One consequence of Atco's enforcement of its security was that the amounts owing to Seeley on the judgments entered in the Federal Court proceedings could not be paid by Newtronics. On 21 December 2001 O'Loughlin J had found that Seeley was entitled to judgment for $8,901,708.02. On 18 January 2002 Seeley entered interim judgment against Newtronics for $8,901,726.02. On 31 January 2002 his Honour awarded Seeley interest on the judgment in the amount of $5 million and ordered Newtronics to pay Seeley's taxed costs. On 26 February 2002 James Henry Stewart was appointed liquidator ("the liquidator") of Newtronics.

[31]

The letter on its face purports to confirm something existing apart from the letter. The current period in which the confirmation is given is that from 1 May 2001 to 30 April 2002. The support confirmed was (a) that the debt to Atco would not be called upon within the current period and (b) that Newtronics would be put in a position to meet its then current trading obligations which, as at 20 July 2001, had either already been "incurred' or would be incurred. The promises Atco made, its conduct in supporting Newtronics, and its conduct in relation to the business activities of Newtronics, did not expressly limit the scope of the support other than to the financial period in which the letters were written and in which the support was given. There is nothing which otherwise indicated an intention by Atco to exclude claims of the kind made by Seeley. The letters of support were not expressed to operate narrowly for the purpose of enabling the directors only to finalise the accounts or to enable the auditors to report without qualification. Letters of support may be inherently problematic in steering a narrow path between promise and representation but these letters, in the context in which these were given, went beyond representation and in my view were on their face intended to do so. These letters on their face confirmed an agreement between parent and subsidiary which was well known to both and intended to be relied upon: the letters were not mere representations for limited purposes with a clear intention to that effect. It is no doubt possible, and at times commercially desirable, for letters of support, or letters of comfort, not to have promissory effect, as the cases make clear. Letters of support which do not have promissory effect can be useful in business for a variety of reasons even though they may have no legal effect.[15] These letters, however, did more than merely provide non binding comfort to Newtronics' auditors or, even, to Newtronics' directors: they contained the essential terms of an agreement between Atco and Newtronics which was known to both, which was intended to be relied upon and which was relied upon.

[33]

14 The relevant terms of the contract are to be found in the letters of support given by Atco to Newtronics' auditors which I find to have informed the directors of Atco when preparing the latter's accounts and which permitted Newtronics to continue trading without being insolvent. Each of the letters of support, in terms, subordinated Atco's debt to the rights of unsecured creditors within the current period referred to in the letters and undertook, if necessary, to provide funds to Newtronics to enable it to meet its current trading obligations that had or would have been incurred. Letters of support were not written in all of the accounting periods between 1994 and 2000 but those which were written were in materially the same terms. There is indirect evidence that a letter of support was provided in late 1994 to facilitate the preparation of accounts for the financial period which had then passed. There is a minute of a meeting of directors of Atco held on 8 November 1994 recording a resolution that Mr Gjergja be approved to sign a letter of support from Atco to Newtronics whereby the amount owing by Newtronics would "not be called upon within the [then] current period to the detriment of all other unsecured creditors" and that "if necessary, funds or additional bank security [would] be provided to Newtronics or its debt financier to ensure that it [could] meet its current trading obligations that [had or would] be incurred". I accept that a letter of support to that effect was signed in December 1994 by Mr Gjergja (who at the time was also a director of Newtronics). It was common ground that "the current period" described in the resolutions and letters of support referred to the financial period in which the letter was written and not to the preceding financial period in respect of which the accounts were prepared. It thus operated as a then current statement about what Atco had agreed to do in the current period about the debt owing to it and its agreement about the provision of further funds to meet current trading obligations which had or would be incurred. Letters to like effect were written by Mr Gjergja to Newtronics' auditors on 31 October 1997, 4 June 1999 and 30 May 2000. A similar letter was written by Mr Kenery to Newtronics' auditors on 20 July 2001.

[49]

28 I am not persuaded that the expert evidence of Mr Mentha against the receivers assists my consideration. His evidence was that the receivers should have discovered the notes to the recent accounts and the letters of support, and that if these had come to his attention he would have sought legal advice about the enforceability of the mortgage debenture. So much may be accepted, but the test in s 419(3) is not whether the receivers could or should have done something else but, rather, whether their belief (on the assumption that it was erroneous) was held on reasonable grounds. It will often (if not always) be possible to show that an erroneous belief would not have been held if something had been done other than what in fact occurred. However, care must be taken when evaluating the reasonableness of past conduct with the "benefit" of hindsight lest the certainty of error clouds an objective evaluation of the reasonableness of what actually occurred.[29] Mr Mentha's evidence may be helpful in determining how a wrongful belief might have been corrected, but does not assist much in determining whether a belief, albeit wrongful, was nonetheless reasonably held. For his evidence to be of assistance in that regard it must tend to establish that the belief actually held could not reasonably have been held. In other words, that the receivers could not reasonably have not looked at the accounts in question for the purpose of determining the validity of their appointment. In this case there was no reason for the receivers to turn to the accounts to consider the validity of their appointment as receivers under the mortgage debenture. Their task was to be satisfied about their appointment and they did so by looking at the matters which gave the mortgagee an entitlement to appoint receivers and which was the basis of their appointment. Even accepting that the then most recent accounts might have put the receivers on a train of enquiry about Atco's ability to invoke the terms of the mortgage, there was nothing about the appointment of the receivers that would have caused them to look at the accounts for the purpose of satisfying themselves about the validity of their appointment. More importantly, and in any event, the belief they had was one upon grounds which were reasonable.

[51]

30 Between the date of the liquidator's appointment and the receivers' sale of the Newtronics' business, the liquidator, Mr Stewart, had a duty to investigate the historical records and affairs of Newtronics although it seems that there was some delay to the commencement of those investigations pending the execution of his indemnity with Seeley. Seeley's solicitors had been Thomson Playford and at some point acted also for the liquidator. The receivers enquired of Thomson Playford about whether there was any information known to them affecting the validity or enforceability of the mortgage debenture and consequently of the receivers' appointment. Thomson Playford responded on 6 March 2002 that it would be inappropriate to respond to the enquiry in the circumstances in which the liquidator was currently attempting to obtain all books and records of Newtronics and was undertaking investigations into the circumstances of the creation, registration, existence and amount of the charge held by Atco over the assets of Newtronics. Mr Stewart gave evidence in his witness statement, and orally, that he had instructed Thomson Playford to act for him by 6 March 2002 but subsequently said, through counsel, that he made a mistake in giving that evidence. However, his other evidence was that he did see this correspondence between the receivers and Thomson Playford, and the incontrovertible fact is that he took no steps to challenge the appointment of the receivers until well after their sale of the Newtronics business. That is not to say that he or Newtronics is estopped from contending that the appointment was invalid but, rather, that his conduct provides additional objective evidence (if it be necessary) of the reasonableness of the belief held by the receivers concerning their appointment. From the receivers point of view, by March 2002, they had been acting as receivers to the knowledge of the liquidator whose legal duty included that of investigating the historical records and affairs of the very company whose business was about to be sold. Indeed, the sale of the business was both active and imminent. In that context it was reasonable for them to take some measure of comfort from the absence, when asked, of any foundation for the liquidator to doubt the validity of their appointment. To that may be added that Mr Stewart and his staff had had largely full, free and unsupervised access to the Newtronics records held by the receivers and were allowed to take folders for copying and were otherwise provided with substantial documentation. Mr Stewart had been kept informed about the sale process for the Newtronics' business and was provided with the sale documents before execution. From about 4 or 5 April 2002, he had in his possession at least the 2000 Newtronics' financial statements as well as the 1999 statements and the draft 2001 statements. The folder in which the 2000 statements were contained (marked "Pitcher Partners") had been specifically obtained from the receivers for copying by the liquidator's staff. The liquidator, who had a duty to investigate the historical affairs of the company, appears also to have held the belief that the receivers were validly appointed: he may not be estopped from contending that they were not, but they, in turn, may look to his conduct and belief to support the reasonableness of their own belief at the time.

At a glance

Court

Decision date

Before

Source

Judgment (80 paragraphs)

Parties

Cases Cited (9)