MAS FOOD INDUSTRIES (AUSTRALIA) PTY LTD (IN LIQ) (ACN 079 606 545)

CHARLES PHILIPPE LOUIS NILANT as liquidator of MAS FOOD INDUSTRIES (AUSTRALIA) PTY LTD (IN LIQ)

Equity - Equitable liens - Vendor's lien - Contract for sale of business - Test for establishing vendor's lien - Requirement that contract be capable of specific enforcement - Goodwill - Availability of specific performance of contract for sale of goodwill

1 ANDERSON J: This is an application by the liquidator of MAS Food Industries (Australia) Pty Ltd ("MAS").

2 The application is brought pursuant to s 511 of the Corporations Law and is in the following terms:

" ... on the basis of the facts set out in the affidavit of the applicant filed herein [an order that] the court approves of the transaction represented by the agreement dated 14 February 2000 between MAS Food Industries (Australia) Pty Ltd (In Liq) ... and Pieman Australia Pty Ltd ... and, in particular, the payment to Pieman Australia Pty Ltd ... in satisfaction of its equitable lien and fixed charge as set out in clause 10 of the agreement dated 14 February 2000 between MAS Food Industries (Australia) Pty Ltd (In Liq) ... and Pieman Australia Pty Ltd ... "

3 The "affidavit of the applicant" is of 495 pages, including exhibits. So far as I gather from this affidavit, the relevant facts are as follows. MAS carried on a wholesale bakery business under various names and in early August 1999 entered into a heads of agreement with Pieman to purchase the Bovell's Bakery business and certain plant and equipment for the price of $750,000. A deposit of $75,000 was paid and pursuant to the heads of agreement, completion was to be 30 September 1999 on which date there would be payment of the balance of the purchase price and transfer of the business and assets to MAS. Although the heads of agreement did not make provision for formal documentation, the parties appear to have proceeded on the basis that the heads of agreement was a provisional agreement only and a formal contract would need to be prepared by solicitors. The task was undertaken by MAS's solicitors, Messrs Pullinger Stewart on instructions from the principal of MAS, a Mr Abdul Masagoes, who lived in Singapore. Pieman did not have solicitors. There were delays due, no doubt, to the need to come to terms on a range of detail and by 29 September 1999, the day before the agreed settlement date, the contract had not been executed. An engrossment of the final draft was executed on behalf of Pieman on 30 September, but it had still to be sent to Singapore to be executed by MAS. An informal arrangement was made between the parties that MAS would pay $300,000 of the balance of purchase price outstanding and would take over the business and would pay the remainder of the purchase price upon execution of the contract in Singapore by MAS. On this basis, MAS went into possession of the business and was allowed to and did all things necessary to commence the conduct of the business as proprietor as from 1 October 1999. The contract was finally executed by MAS in Singapore on 13 October 1999 and the balance of purchase price thereupon became payable. However, it was not paid. On 15 October 1999, Pieman caused a statutory demand for payment of the balance of purchase price to be served upon MAS and on 21 October 1999 made an application for the appointment of a provisional liquidator. The application was successful and this Court appointed Mr Louis Nilant provisional liquidator on 29 October 1999. On 5 November 1999, he was appointed administrator of the company pursuant to s 436B of the Corporations Law and he commenced to look for buyers for the company's assets, including the asset comprising the Bovell's Bakery business. On 28 February 2000, the company's creditors resolved pursuant to s 439 of the Corporations Law that the company be wound up and Mr Nilant was appointed liquidator. Whilst Mr Nilant was looking for buyers for the company's assets, Pieman took the position that completion of the contract between Pieman and MAS had not occurred and the business of Bovell's Bakery had not been transferred to MAS and contended that Pieman continued to be the owner of the business and was entitled to possession of it and to conduct it as its own business. These contentions appear to have caused Mr Nilant to deal separately with this particular asset.

4 As to whether the contract of sale of the Bovell's Bakery business to MAS was completed, "completion" is defined in the contract to mean "the completion of the sale and purchase of the Property in accordance with the terms of [the sale] agreement". The relevant provisions are largely contained in cl 5 and cl 12 and it would be a fair summary of these clauses that the sale was to take place on 30 September 1999 on which date there would be payment of the full purchase price and handing-over of the business. However, it is quite clear that, for its part, Pieman waived the requirement for full payment of the purchase price, but nevertheless did, in fact, hand over the business to MAS on the agreed date for completion. Accordingly, it was not open to Pieman to claim that it remained the proprietor of the Bovell's Bakery business. Pieman sold and delivered the business to MAS on 30 September 1999.

5 This appears to have been ultimately accepted by Pieman and there was a consensus between the parties to the effect that if Pieman completed the transfer of the business by formally transferring the business name "Bovell's Bakery" to MAS, the liquidator would admit that Pieman was the beneficiary of an equitable lien to secure the unpaid balance of the purchase price. That is how the dispute seems to have been resolved and Mr Nilant then commenced to deal with Pieman with a view to selling the business back to Pieman. It seems from the papers, although the details are not entirely clear, that by this time, Mr Nilant had made substantial progress in arranging the sale of all the other assets of MAS to another company. It seems also to be reasonably clear from the papers that no-one else was interested in purchasing the Bovell's Bakery business, except Pieman. On 14 February 2000, Mr Nilant entered into an agreement with Pieman and caused MAS to enter into an agreement with Pieman whereby MAS agreed to sell and Pieman agreed to buy the business and certain plant and equipment for the specified sum of $467,000, plus stock at valuation. There was an allocation of purchase price of $80,000 to the plant and equipment and $387,002 to the goodwill of the business, the sources of which were identified in the second schedule as being the business name "Bovell's Bakery" (to which $387,000 was apportioned) and miscellaneous items such as customer lists, to which $2 was apportioned. (I mention, only to show it has not gone unnoticed, that this adds up to $467,002, whereas the specified price is $467,000.) The agreement contains a cl 10 in the following terms:

"10.1 Immediately after completion [MAS] must pay the following amounts to Pieman:

$387,000 in full and final satisfaction of Pieman's alleged equitable lien over part of the assets; and

$80,000 in full and final satisfaction of Pieman's alleged fixed charge over part of the assets.

10.2 The payments to Pieman are to be paid by [MAS] to Pieman from the purchase price for the assets excluding that part of the purchase price representing the payment for the stock."

6 In other words, the whole of the purchase price payable by Pieman was to go back to Pieman to discharge the claimed equitable lien and the claimed fixed charge.

7 The reference to the fixed charge is a reference to a charge created by a so-called "second agreement" entered into between MAS and Pieman whereby MAS purchased certain plant and equipment of the business for a purchase price of $85,000. Under this second agreement, title to the plant and equipment passed immediately, but Pieman had the benefit of a fixed charge. That charge was not registered within time. However, this Court granted an extension of time for registration and there seems to be no doubt that Pieman presently has a valid, specific security in respect of the plant and equipment the subject of the second agreement to the extent of the unpaid portion of the purchase price.

8 The reference to the "alleged equitable lien" requires some explanation. The liquidator received advice to the effect that Pieman is entitled to assert an equitable lien over the subject-matter of the agreement for the sale of the business to secure the unpaid portion of purchase price. Pieman will take back the business and the plant and equipment, but will not part with any cash. It will, however, relinquish its equitable lien and its fixed charge. The result will be that MAS is relieved of those secured liabilities. They amount to $387,000 (being the unpaid portion of the purchase price of the business, ie, $375,000, plus interest of $12,000) and $80,000 being the unpaid portion of the purchase price of the plant and equipment. The liquidator is not able to enter into this agreement with respect to the sale of the business to Pieman unless Pieman does have the equitable lien which it claims. Unless Pieman does have the equitable lien, it is simply in the position of an unsecured creditor of MAS in respect to the balance of the purchase price of the business and the liquidator would have no authority to extend preference to Pieman by, in effect, paying out that indebtedness by transfer of the assets comprising the Bovell's Bakery business.

9 Hence the need for the present application. In effect, the court is being asked for a direction that an equitable lien exists. There are two secured creditors. Prior to the purchase of the Bovell's Bakery business by MAS, the latter had granted fixed and floating charges to the State Bank of New South Wales Ltd and National Australia Bank Ltd. The property the subject of the fixed and floating charges extended to all of the assets and undertaking of MAS, including future acquired property. Thus, the floating charge extended to such interest as MAS acquired in the Bovell's Bakery business and the plant and equipment. However, both these creditors have accepted that if Pieman is the beneficiary of an unpaid vendor's lien, their equitable security interests under their floating charges must yield to Pieman's lien. I should say that, in my opinion, that is an entirely appropriate concession for the banks to make. In point of principle, it seems to me unarguably correct that the holder of a fixed and floating charge over the assets of a company cannot obtain in equity any better interest in future acquired property than is obtained by the company in that property. Any security interest which the debenture holder obtains must be subject to the vendor's lien.

10 As to the fixed charge in favour of Pieman over the plant and equipment the subject of the second agreement, there is no suggestion that the banks have priority under their debentures and they do not claim priority. The rights of debenture holders under a floating charge yield to the claims of a specific chargee. Sykes & Walker, The Law of Securities, 5th ed 962 - 965. Pieman's fixed charge over the plant and equipment to secure payment of the balance of the purchase price of the plant and equipment ($80,000) has priority over all other known creditors.

11 The nature of equitable liens was authoritatively discussed by the High Court in Hewett v Court [1983] HCA 7; (1983) 149 CLR 639. In that case, Deane J at 663 described an equitable lien as "a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness". That is, equitable liens arise by implication of law; they cannot be created by agreement or by statute. As Deane J pointed out, they differ from common law liens in that they do not rely on possession. They are a pure hypothecation. Once found to exist, equitable liens are indistinguishable from equitable charges. As in the case of the equitable charge, the holder of an equitable lien has a proprietary interest in the property the subject of the lien and, by court order, access to the remedies of sale and the appointment of a receiver: see per Deane J (loc cit). They are also a secured creditor within bankruptcy and winding up proceedings: R&H Tresize v Bilato Nominees Pty Ltd [1986] NTSC 7; (1986) 83 FLR 44 at 46.

12 The situations in which an equitable lien will arise are not circumscribed, however, there are certain classes of equitable liens that are commonly acknowledged. These are summarised in Sykes & Walker, The Law of Securities, 5th ed at 199 - 206. There are those that arise purely due to the legal relationship between the parties. The solicitor's lien over his/her client's file until all fees are paid is an example. There are those that arise in a contractual context. That is, purchaser's and vendor's liens. Generally speaking, a purchaser has an equitable lien with respect to the deposit until the sale transaction is completed. Vendors also have a lien over property sold by them to the extent of any outstanding purchase money: see Hewett v Court (supra) for a discussion of both of these liens. In other situations equitable liens have been said to arise through estoppel (see Jackson v Crosby per Cox J (1979) 21 SASR 280 at 306-307) and subrogation (Hewett v Court per Gibbs CJ at 645-646). It seems that the only feature linking these types of equitable liens is that they can be said to be "a right which may be said to be invented for the purpose of doing justice": Whitebread & Co Ltd v Watt [1902] 1 Ch 835 at 838.

13 Where payment of the purchase price has not been completed, the vendor's lien arises as soon as the contract of sale has been entered into and subsists after completion has occurred and legal title to the property and possession has passed to the purchaser. The vendor's lien can attach to real property and personalty. The rationale for the vendor's lien is that: "a person, having got the estate of another, shall not, as between them, keep it, and not pay the consideration": Mackreth v Symmons [1808] EngR 393; (1808) 15 Ves 329 at 340. Further, "[t]he doctrine of 'vendor's lien' is one created by equity as part of a scheme of equitable adjustment of mutual rights and obligations applying, unless negatived, to every ordinary contract of sale of land": Davies v Littlejohn [1923] HCA 64; (1923) 34 CLR 174 at 185 per Isaacs J.

14 In Hewett v Court Deane J discussed criteria by which it could be determined whether an equitable lien of any type exists. He acknowledged that "it is difficult, if not impossible, to formulate any satisfactory statement of the necessary or sufficient circumstances for the implication of an equitable lien which is applicable to any relationship at all": 668. However, he suggested three matters which would be sufficient for the implication of an equitable lien (at 668 - 9):

"(i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it ... ;

(ii) that the property ... be specifically identified and appropriated to the performance of the contract ... ; and

(iii) that the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property ... to a stranger without the consent of the other party or without the actual or potential liability having been discharged."

15 In my opinion, each of these criteria is satisfied in this case. Subject to what must now be said about the question whether a vendor's lien is available only in respect of contracts which are capable of specific enforcement, I would hold that the property the subject of the contract of sale is held by MAS subject to an equitable lien in favour of Pieman.

16 Central to the decision of Hewett v Court was the question of whether a contract must be specifically enforceable before a purchaser's lien can arise. The question was also discussed in relation to vendor's liens. Gibbs CJ regarded it as "established that a vendor's lien will not arise unless the contract for sale is specifically enforceable" and he cited as authority the following cases: Capital Finance Co Ltd v Stokes [1969] 1 Ch 261 at 278; London and Cheshire Insurance Co Ltd v Laplagrene Property Co Ltd [1971] Ch 499 at 514; In re Bond Worth Ltd [1980] Ch 228 at 251": (149 CLR at 649). In their joint judgments, Wilson and Dawson JJ appear to accept the correctness of the proposition. Murphy J confined his judgment to equitable liens in favour of consumers, saying that such liens did not depend on the availability of specific performance. It is clear, however, that Murphy J regarded equitable liens in favour of consumers as a special category.

17 Only Deane J gave direct support for the general proposition that equitable liens arising out of contracts do not depend on the question whether the contract is specifically enforceable. At 664, 665 he said:

"The peculiar and sometimes discretionary grounds for resisting a decree of specific performance are simply not appropriate to be indiscriminately applied as criteria of exclusion of an equitable interest in the nature of a lien ...

The basis of specific performance lies in the equitable doctrine that personal obligations under a contract should be enforced where damages would be an inadequate remedy. The basis of equitable lien between parties to a contract lies in an equitable doctrine that the circumstances are such that the subject property is bound by the contract so that a sale may be ordered not in performance of the contract but to secure the payment or repayment of money."

18 Deane J concluded that there is "no proper basis for precluding the implication of an equitable lien by reason of the suggested unavailability of specific performance".

19 In Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473 at 493, Kearney J reviewed the judgments in Hewett v Court and concluded that "[a]lthough attracted to the analysis and conclusion of Deane J, I do not consider that as a judge of first instance I am at liberty on the present state of authority to hold that an equitable vendor's lien is available ... " to a party to a contract with respect to which specific performance will not be ordered.

20 I think that I too must hold myself bound, on the present state of authorities, to hold that specific enforceability of the sale contract is a prerequisite to any finding that an equitable lien exists in favour of the unpaid vendor.

Is the contract for the sale of Bovell's Bakery specifically enforceable?

21 Early authority was to the effect that equity would not specifically enforce a contract for the sale of goodwill, due to the nebulous nature of goodwill: Baxter v Conolly [1820] EngR 501; (1820) 1 J & W 576, 37 ER 487; Darbey v Whitaker [1857] EngR 762; (1857) 4 Drew 134, 139. In Kennedy v Vercoe [1960] HCA 64; (1960) 105 CLR 521 at 529, Dixon CJ, Kitto and Windeyer JJ noted that:

" ... the objection [to the making of an order of specific performance] is the uncertainty of the subject matter of the contract, the impossibility of supervision or the difficulty of specifying the acts to be done": p 529.

22 The contract in question is not a contract for the sale of goodwill alone. The property the subject of the sale is described in cl 2.2 of the contract as follows:

"2.2 The Property the subject of the sale mentioned in Clause 2.1 shall mean the whole or part of the following ('the Property') namely:

(b) the plant and equipment used by the Vendor in the Business being:

(c) all delivery crates used in the Business as at the date hereof branded as Bovell's Bakery;

(d) the full advantage of all Contracts and Arrangements relating to the supply, service, distribution, licence and sale entered into or held by the Vendor concerning the Business as at the Settlement Date with any party either in Australia or elsewhere, including but not limited to the contract to supply 'black and gold' products to the Foodland Group, save and except for debtors;

(e) all Intellectual Property in relation to the Business including but not limited to the right to use the name 'Bovell's Bakery' or copyrights, designs, patents, trade marks, business names and other rights associated with the Business either registered or unregistered;

(f) all raw materials, packaging material and finished goods held by the Vendor as at the Settlement Date."

23 Even if the major asset is regarded as the goodwill, it is clear that main source of the goodwill of this business is the right to use the business name "Bovell's Bakery" or "Bovell's". By cl 5.2, the contract provided for the transfer of the business name to MAS. There is no difficulty whatever in making a decree for the specific performance of the obligation to transfer that name. That being so, I hold that the contract was specifically enforceable.

24 For the above reasons, I would make an order approving the sale by the liquidator to Pieman Australia Pty Ltd in terms of the agreement dated 14 February 2000.