6.5 Newton & Co
6.6 HP Holdings
76 The plaintiff is an A class shareholder in Newton & Co, and she is an A and B class shareholder in HP Holdings. She seeks leave to claim relief in favour of Newton & Co against the persons acting as its directors, in respect of what she refers to in her submissions as "the missing $1.5 million", and against the recipient of $1 million out of that amount, namely DF Holdings.
77 In respect of HP Holdings, she wishes that company to claim relief against the persons acting as directors in respect of:
(a) $1,051,234 purportedly lent to Sydney Frish;
(b) $151,234 purportedly lent to the estate of Otto Ekstein; and
(c) $52,000 purportedly paid as management fees in 2005.
78 As to Newton & Co, the plaintiff says that its financial statements show that its real estate was, during the years 2001 to 2004, progressively sold and converted into cash. At 30 June 2004 there was a term deposit of $1,489,364 as well as other current assets (see Ex RJBA 2, page 733). It had no non-current assets and its liabilities were insignificant. According to the financial statements for the year ended 30 June 2005, by that date the term deposit had gone and there were additional current assets, namely a loan to DF Holdings of $1 million and they loan to the estate of Otto Ekstein of $500,000 (Ex RJBA 2, page 753).
79 I shall deal first with the $1 million loan to DF Holdings. There are extensive pleadings as to the $1 million loan in the amended statement of claim and in the Defence. Additionally the evidence concerning the loan is extensively reviewed in the plaintiff's written submissions.
80 The plaintiff's claim is that the loan was not within the permitted objects of the company, was not authorised, was not paid for any proper purpose, caused detriment to the company, was a fraud on the company by Mr Ekstein and Mr Frish acting as directors, and was caused by them to be paid in breach of their fiduciary obligation and statutory duties as directors. The plaintiff contends, amongst other things, that these were acts that were an intentionally dishonest or reckless misuse of position causing detriment to the company. A resulting trust is asserted against DF Holdings. There are alternative claims for money had and received and money lent.
81 The Defence confesses that the payment was made, and asserts that it was a loan duly authorised by the directors of Newton & Co on 21 June 2004 for the benefit and proper purposes of the company, on commercial terms and at interest, which has been paid in accordance with those terms. Minutes of the meeting of 21 June 2004 is in evidence. The minutes says that Boucher & Muir had for many years relied upon a trade finance facility, the collateral for which had been provided by way of properties from its associated companies and entities, but as a result of disposal of the properties held by those entities, Boucher & Muir needed alternative collateral arrangements. The directors accordingly resolved to make a loan of $1 million to DF Holdings on certain specified terms, secured by way of mortgage, and they noted that on receipt of that loan, DF Holdings has agreed to provide a specified property as security for Boucher & Muir's trade finance facility. Other evidence indicates that second mortgage security was provided, along with a guarantee by David Frish, to secure a trade finance facility at $1.7 million.
82 The minutes on their face suggest a legitimate business purpose for the transaction, but the plaintiff raises various criticisms. She notes that there is no suggestion in the minute of disclosure of conflict or informed consent by shareholders. She might have referred specifically to s 191, although contravention of that provision does not invalidate the transaction. She is critical of the adequacy of the interest rate. She is critical of the security, which is by a second mortgage that is not to be registered unless the borrower commits an unremedied and irremediable default, although lodgement of a caveat is permissible. She also makes some criticisms of bills of exchange that we used in connection with the financing, but these may not have been anything other than reasonably routine aspects of the facility arrangements.
83 All in all, the plaintiff's case about the $1 million loan seems to be rather weak. But I have concluded that there is nevertheless a serious question to be tried. I agree with the plaintiff's submission that many of the matters raised on behalf of the respondents, especially in the defence, constitute a pleaded justification as to which they will bear the onus at the trial.
84 I turn to Newton & Co's "loan" of $500,000 to the estate of Otto Ekstein. According to the Defence (para 180):
(a) Newton & Co made a payment of $500,000 to Mr Ward-Harvey on behalf of the estate of Otto Ekstein in January 2005;
(b) the payment constituted a loan to HP Holdings, which enabled HP Holdings to discharge in part its liability to the partnership between the late Otto Ekstein and the late Sydney Frish;
(c) the payment was recorded in the financial statements of Newton & Co as a loan to the estate of Otto Ekstein, but more accurately it ought to have been recorded as a loan to HP Holdings.
85 However, according to the financial statements of HP Holdings for the year ended 30 June 2005 (Ex RJBA to page 612) the loan to the company from the Ekstein & Frish Partnership stood at $757,727, unreduced from the previous year (as to which, see page 590). Further, no liability to Newton & Co was introduced into the accounts during the 2005 year. Nor does any liability to Newton & Co appear in the financial statements to 30 June 2006.
86 It seems to me that the irregularities surrounding the payment of the $500,000 are sufficient to create a serious question to be tried as to whether there was a breach of statutory or fiduciary duties on the part of the persons claiming to be directors of Newton & Co who authorised the payment. There is still doubt about the destination of the $500,000, in the absence of any proper accounting.
87 The plaintiff's submissions allege that HP Holdings had more than sufficient funds of its own to discharge its liability to the Ekstein & Frish Partnership as at 30 June 2005. The argument seems to be that some bills receivable in the sum of $796,491 as at 30 June 2004 were received in the year to 30 June 2005, and a loan to Boucher & Muir of $728,226 was repaid during the year to 30 June 2005. The submission is that the company could have used those funds, plus some cash at bank, to repay the loan from the Ekstein & Frish Partnership of $757,727. But instead, according to the 30 June 2005 balance sheet, most of that money appears to have been used to make a loan of $1,051,234 to Sydney Frish and a loan to the estate of Otto Ekstein of $151,234. Although there has been correspondence between the solicitors on these matters, the commercial reasons for these transactions are not made clear.
88 It now appears to be agreed by the parties that there was no loan to the estate of Otto Ekstein of $151,234. The defendants now allege that the payment of that amount was made to the estate of Otto Ekstein in partial discharge of HP Holdings' liability to the Ekstein & Frish Partnership, and accordingly the 2005 financial statements of HP Holdings are wrong in this respect (in addition, one would add, to their failure to record the payment of $500,000 by Newton & Co, which they say was a loan to HP Holdings which then paid it to the Ekstein & Frish Partnership).
89 The 2006 financial statements of HP Holdings reduce the non-current asset item "Loan - Otto Ekstein Estate" from $151,234 in the previous year to zero at 30 June 2006, and they reduce the non-current liability item "Loan - Ekstein & Frish Partnership" by $151,234 from $757,727 at 30 June 2005 to $606,492 at 30 June 2006. As the sum of $151,234 had been treated incorrectly in the financial statements to 31 June 2005, one would have thought the correct course of action would be to correct the 2005 financial statements. The effect of the entries I have described in the 2006 financial statements is to create the misleading impression that some transactions occurred during the year to 30 June 2006 to give rise to that result. Be that as it may, at least the entries made in the 2006 financial statements produced an outcome as at 30 June 2006 that accords with the Defence.
90 As to the so-called "loan" of $1,051,234 to Sydney Frish, Mr Ekstein's solicitor, Mr Bilinsky, said he was informed that this amount was lent in anticipation "by the directors of the termination of the various business relationships between the Frish and Ekstein families" and that "the amount of the loan was less than the director had calculated to be the Frish family's interest in the Frish/Ekstein group of companies". In my opinion there is a serious question to be tried as to whether a loan made to a director in such circumstances is authorised and consistent with the fiduciary and statutory duties of the persons acting as directors.
91 The Defence alleges that the $1,051,234 was later transferred to Mount Idar Holdings Pty Ltd, a company associated with the Sydney Frish, at call and upon the security of his and his family's interests in the company, the partnership and associated companies. It was an interest-free loan for the purposes of a proposed winding up of the company, which did not occur because it was interrupted by the commencement of the present proceedings. I find it difficult to see how these matters provide an answer to the derivative claims that the plaintiff wishes to bring on behalf of Newton & Co and HP Holdings.
92 In written submissions on behalf of the plaintiff, counsel observes that if you double $1,051,234 you get approximately $2.1 million, which is close to the combined net assets of HP Holdings and Newton & Co as at 30 June 2005. He suggests there is a reasonable inference to be drawn that the Frishs and Mr Ekstein decided that they would take the cash that was sitting in HP Holdings and Newton & Co and divide it between them. On this analysis Sydney Frish received his distribution in the form of a loan recorded in the balance sheet of HP Holdings and the payment of $500,000 to the estate was in effect a distribution to Mr Ekstein. I think that submission is speculative but not entirely without foundation. I neither accept nor reject it. I have decided a serious question to be tried has been made out as to the $1,051,234, as well as the $500,000, by the other matters to which I have referred.
93 As to the $52,000 management fee, HP Holdings paid that amount in the year to 30 June 2005, according to its profit and loss statement of the year (Ex RJBA 2, page 613). No amount was paid to management fees in the previous year. It is not easy to see how a management fee of $52,000 would be justifiable in respect of the company is only assets were cash at bank, and some bills receivable and they loan to Boucher & Muir, which were collected and paid during the year to 30 June 2005. There is very little to "manage". According to Mr Berlin city's affidavit, the fee was paid to a company associated with David Frish. Those bare facts are sufficient to raise a serious question to be tried as to whether Mr Frish and others acting as directors may have improperly used their positions as directors to gain an advantage for themselves or someone else, contrary to s 182.