FEDERAL COURT OF AUSTRALIA Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483 CORPORATIONS LAW – appointment of provisional liquidator – breach of Court Orders – balance of convenience favours not appointing provisional liquidator. Corporations Act 2001 (Cth) s 472(2) Trade Practices Act 1974 (Cth) Allstate Explorations NL v Batepro Australia Pty Limited [2004] NSWSC 261 Australian Securities Commission v Solomon (1996) 19 ACSR 73 Re McLennan Holdings Pty Limited (1983) 1 ACLC 786 Re South Downs Packers Pty Ltd (1984) 2 ACLC 541 Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 Tickle v Crest Insurance Co. of Australia Limited (1984) 2 ACLC 493 Gronow M, McPherson's Law of Company Liquidation (5th ed., Law Book Co. Service, 2006) EMMACOURT PTY LIMITED (ACN 002 819 034) v JEWELS OF AUSTRALIA PTY LIMITED (ACN 006 877 407), PNF SYSTEMS PTY LIMITED (ACN 105 219 341), PNF MANAGEMENT PTY LIMITED (ACN 105 219 378) AND ENTCORP PTY LIMITED (ACN 055 547 334) NSD 882 OF 2007 TAMBERLIN J 21 SEPTEMBER 2007 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 882 OF 2007 BETWEEN: EMMACOURT PTY LIMITED (ACN 002 819 034) Applicant AND: JEWELS OF AUSTRALIA PTY LIMITED (ACN 006 877 407) First Respondent PNF SYSTEMS PTY LIMITED (ACN 105 219 341) Second Respondent PNF MANAGEMENT PTY LIMITED (ACN 105 219 378) Third Respondent ENTCORP PTY LIMITED (ACN 055 547 334) Fourth Respondent JUDGE: TAMBERLIN J DATE OF ORDER: 21 SEPTEMBER 2007 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The respondents pay the costs of the applicant on a solicitor-client basis and the applicant has leave to tax those costs and seek recovery thereof forthwith. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 882 OF 2007 BETWEEN: EMMACOURT PTY LIMITED (ACN 002 819 034) Applicant AND: JEWELS OF AUSTRALIA PTY LIMITED (ACN 006 877 407) First Respondent PNF SYSTEMS PTY LIMITED (ACN 105 219 341) Second Respondent PNF MANAGEMENT PTY LIMITED (ACN 105 219 378) Third Respondent ENTCORP PTY LIMITED (ACN 055 547 334) Fourth Respondent JUDGE: TAMBERLIN J DATE: 21 SEPTEMBER 2007 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This application arises in the context of a principal application for winding up and for other orders, including a restraining order that the second and third respondents be prevented from acting pursuant to directors' resolutions passed by the board of the second respondent on 27 April 2007. There are also related claims under the Trade Practices Act 1974 (Cth). The principal application is due to be heard next month. 2 The factual background in brief is that Mr Talbot, who is the sole director and shareholder of Emmacourt Pty Limited ("Emmacourt"), claims that the affairs of the second respondent, PNF Systems Pty Limited ("PNF Systems"), in which Emmacourt has a twenty-five per cent interest and of which he is one of the directors, have been conducted in such a way by the other directors and shareholders as to justify the relief sought in the principal application. 3 The first respondent, Jewels of Australia Pty Limited ("Jewels"), has three directors, Messrs Bojczuk, Wilson and Agganis. Mr Wilson was also a director of PNF Systems, together with Messrs Bojczuk and Agganis, until 30 March 2007 when he resigned. Emmacourt is a twenty-five per cent shareholder of PNF Systems, with Jewels a seventy-five per cent shareholder. The third respondent, PNF Management Pty Limited ("PNF Management"), has the same directors as PNF Systems, Mr Wilson having resigned on 30 March 2007. The fourth respondent, Entcorp Pty Limited ("Entcorp") has the same board as Jewels. The business conducted by PNF Systems is a franchise business, comprising retail food outlets which sell healthy take away food and juices. 4 On 11 September 2007, Emmacourt filed a notice of motion seeking interlocutory relief in the form of an asset preservation order against Entcorp, the appointment of a provisional liquidator to PNF Systems and PNF Management, and other relief. As a consequence of this application, Entcorp has now given undertakings to the Court, taken action to repay certain moneys overpaid and otherwise removed the necessity for the asset preservation order. 5 The remaining question is whether a provisional liquidator should be appointed to PNF Systems and PNF Management under s 472(2) of the Corporations Act 2001 (Cth) ("the Act"). 6 The respondents submit that, in view of undertakings it has given and its repayment of moneys overpaid, there is no longer any basis to appoint a provisional liquidator because this would have an excessive, unnecessary and damaging impact on the trading, goodwill and commercial viability of PNF Systems and PNF Management. 7 It is a requirement of s 472(2) of the Act that an application for winding up of the corporation has been made before the appointment of the provisional liquidator. In the case of PNF Systems there is an application to wind up, but in the case of PNF Management there is not. This application in relation to PNF Management must therefore be dismissed. Accordingly, the reasons below should be taken to apply to PNF Systems. PRINCIPLES 8 Section 472(2) of the Act gives the Court power to appoint a provisional liquidator at any time after the filing of a winding up application and before the making of a winding up order. 9 The authorities indicate that the Court will generally not appoint a provisional liquidator unless there is a reasonable prospect that a winding up order will be made on the application: see Tickle v Crest Insurance Co. of Australia Limited (1984) 2 ACLC 493 at 494. An applicant must show some good reason for intervention prior to the final hearing on the winding up application to demonstrate that the appointment is needed in the public interest or to preserve the status quo or to protect the company's assets and affairs: see Allstate Explorations NL v Batepro Australia Pty Limited [2004] NSWSC 261 at [30]. 10 In order to warrant the appointment of a provisional liquidator, the Court must take into account the degree of urgency established by the applicant and whether the respondent's assets need to be protected from dissipation or seizure. In some other circumstances, such as where a company may be paralysed by a dispute between shareholders and directors or by an interim court order, there may also be grounds to appoint a provisional liquidator. 11 In this case, the application is primarily brought on the basis that there are suspicious circumstances or that it is reasonably open to conclude that there is danger to assets. There is no evidence which would warrant a conclusion that there is insolvency in this case. Nor is it suggested that there is a paralysis of the company. The issue whether assets are in jeopardy is a relevant and important consideration but not always an essential one: see Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80. In some cases there may be suspicious circumstances disclosed by the evidence warranting appointment and, where this is the case, there is authority that a provisional liquidator can be appointed: see Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 at 866. 12 In making its determination, the Court will take into account whether the assets may be dissipated in the interim period between the filing of the application to wind up and any winding up order being made. If the Court has no confidence that the affairs of the company are being carried out properly and for the benefit of shareholders it may appoint a provisional liquidator: see Gronow M, McPherson's Law of Company Liquidation (5th ed., Law Book Co. Service, 2006) at [6.300]. 13 The courts have recognised that the appointment of a provisional liquidator can severely damage a company's business, and for this reason such orders are not made as a matter of course or without substantial grounds. The Court recognises that an appointment could impede the company in the normal conduct of its affairs. This is an important factor to take into account: see Re South Downs Packers Pty Ltd (1984) 2 ACLC 541 at 549 (per McPherson J); Re McLennan Holdings Pty Limited (1983) 1 ACLC 786 at 788. REASONING 14 The case for Emmacourt in substance is that it has recently discovered that PNF Management has made payments to Entcorp, a corporation controlled by Messrs Bojczuk, Wilson and Agganis, contrary to interlocutory orders made in relation to both PNF Systems and PNF Management by Emmett J on 24 May 2007 which were designed to preserve the status quo. The payments made to Entcorp were paid over a sixteen week period in the amount of $11,846.15 per week, which is said to be approximately $2,000 per week in excess of the amount permitted to be paid pursuant to Order 2 made by Emmett J. Emmacourt says that this breach was carried out knowingly and in circumstances where the making of such excess payments shows or at least leads to an inference that the assets of PNF Systems and PNF Management are at risk of dissipation or loss, thereby warranting the appointment of a provisional liquidator. 15 Mr Talbot, the director and sole shareholder of Emmacourt, has sworn an affidavit setting out the circumstances in which the overpayment was discovered. For the reasons set out in the affidavit, Mr Talbot says that, due to the respondents' failure to comply with the Orders of the Court, he has a real fear that the assets of the second and third respondents will be in jeopardy unless a provisional liquidator is appointed. 16 As noted above, the business of PNF Systems comprises the franchising of retail food outlets which sell healthy take away food and juices. Mr Wilson, a director of Jewels and, until 30 March 2007, PNF Systems, has sworn an affidavit stating that PNF Systems' present annual cash flow is in the order of $1.7 million, spread across fifty stores throughout Australia. He also asserts that the cash flow is well managed by experienced chartered accountants. He says that because PNF Systems operates a franchise business it is dependent on acquiring new franchisees and maintaining existing ones. Its operations are regulated by a National Franchise Code which requires disclosure of any external administration appointment or any act of insolvency in a statement for the information of prospective franchisees for a period of ten years. Having regard to his experience in the franchising industry over fifteen years, Mr Wilson asserts that PNF Systems would not be able to secure any new franchisees after such a disclosure and the business would become unviable. Its goodwill and reputation would be seriously damaged and, as a consequence, the value of the retail outlets reduced. 17 The respondents submit that if a provisional liquidator is appointed the consequence will be that the proceedings will, in effect, be prematurely determined without an opportunity on the part of those companies to ventilate their position in relation to the principal application. 18 Mr Wilson was cross-examined on his affidavit. He purported to give an explanation as to the circumstances in which the excess payments were made and expressed regret at any breach of the Court's Orders. In essence, his explanation was that he did not seek legal advice about the meaning or effect of the Orders and that he adopted his own personal interpretation of them. This interpretation, particularly in relation to Order 2, is in my view clearly wrong. Mr Wilson said he considered that Order 2 left it open to PNF Systems and PNF Management to pay an amount in excess of $180,000 per annum plus GST on the basis that the excess payments were made "in the ordinary course of business". He says that he acted on his interpretation and that he considered the Court's Order authorised the making of such additional payments notwithstanding the absence of any duly passed resolution or authorisation from the companies to do so. 19 Mr Wilson's evidence under cross-examination is unsatisfactory. I do not accept his suggested interpretation of the Order as a reasonable basis for adopting the position that it has not been breached. The evidence is also unsatisfactory because of Mr Wilson's ambiguity in relation to his legal qualifications and because his answers dealing with this question were not open and frank. Generally, Mr Wilson did not respond directly to questions. More importantly, in relation to his interpretation of the terms of Order 2 and having regard to his legal qualifications and lengthy business experience, I am not persuaded that his explanation was reasonably open. I also found his assertion that Order 2 in itself provided a necessary authorisation to make the payments to be tenuous in the extreme. 20 A further unsatisfactory aspect of Mr Wilson's evidence relates to the assertion that any breach of the Court's Orders had been inadvertent. It appeared from the evidence of Mr Wilson that considerable attention was given to the appropriate interpretation of Order 2. The consequence of this interpretation was of course that the $180,000 limit fixed by Emmett J could be exceeded, contrary to both the language and intent of the Order. 21 Nevertheless, despite the unsatisfactory nature of the evidence given by Mr Wilson, I do not consider that there is a sufficient basis for the appointment of a provisional liquidator, having regard to the fact that the overpayments have now been repaid and undertakings as to future conduct have been given to the Court. I am satisfied that, as a consequence of this application and the undertakings given, Mr Wilson and the other directors of PNF Systems and PNF Management are unlikely to take steps which would jeopardise the assets of the companies, especially since the main proceedings have been set down for hearing in the near future. In addition, the amount of the overpayment was relatively small and not likely to put the assets in jeopardy, apart from giving Emmacourt cause for concern. 22 I note that some evidence was produced by Emmacourt from Mr Young, who has considerable experience in the franchise industry, to the effect that in his view the extent of any injury to the reputation or day-to-day management of PNF Systems and PNF Management would not be such as to warrant a refusal of the application to appoint a provisional liquidator. I have taken this evidence into account but I am not persuaded that there would be no serious and irreparable harm to the business of the two companies if a provisional liquidator were appointed. The balance of convenience in this case falls in favour of the respondents. 23 For these reasons, my conclusion is that the application to appoint a provisional liquidator should be dismissed. However, having regard to the breach of Order 2 and the evidence before me, and the fact that the application has resulted in the respondents giving undertakings and making repayments, I consider that the respondents should pay the costs of the applicant on a solicitor-client basis with leave granted to the applicant to recover those costs forthwith after taxation or agreement. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin J. Associate: Dated: 21 September 2007 Counsel for the Applicant: Mr A Street SC Solicitor for the Applicant: Garland Hawthorn Brahe Counsel for the Respondent: Mr M Cashion SC and Mr D Priestley Solicitor for the Respondent: Browne & Co. Date of Hearing: 12 and 14 September 2007 Date of Judgment: 21 September 2007