Reported Decision : (2005) 23 ACLC 1270 New South Wales Supreme Court CITATION : Exception Holdings Pty Ltd (in liq) v Albarran & Ors [2005] NSWSC 677 HEARING DATE(S) : 30//06/05 JUDGMENT DATE : 30 June 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : Young CJ in Eq DECISION : Charge void under s 267 of Corporations Act. CATCHWORDS : CORPORATIONS [72]- Creation of charge- Charge created in favour of executors- Executors were also directors of chargor- Whether charge created "in favour of" ... "relevant persons"- Whether charge void. SUCCESSION [255][257]- Co-executors- Appointment of receiver to company by one co-executor- Acted without consent of the other- Whether one co-executor can bind all- Discussion of when executors become trustees. WORDS & PHRASES- "In favour of". Conveyancing Act 1919, ss 54A, 153(4) LEGISLATION CITED : Corporations Act 2001 (Cth), ss 267, 418A Wills Probate & Administration Act 1898, s 83 Burke v Dawes (1938) 59 CLR 1 Colyton Investments Pty Ltd v McSorley (1962) 107 CLR 177 Commercial Banking Company of Sydney Ltd v Colonial Financiers of Australia Pty Ltd ][1972] VR 702 Fletcher v Burns (NSWCA, 19.3.1997, unreported) In re Ingham [1893] 1 Ch 352 Lepard v Verno (1813) 2 V & B 51; 35 ER 237 Melsom v Vanpress Pty Ltd (1990) 3 ACSR 109 CASES CITED : Neill v Hewens (1952) 53 SR (NSW) 113 Re Mayo [1943] Ch 302 Re Morant [1924] 1 Ch 79 Re Timbatec Pty Ltd [1974] 1 NSWLR 613 Sky v Body (1970) 92 WN (NSW) 934 Sneesby v Thorne (1855) 7 De GM & G 399; 44 ER 156 Stokes v Churchill (1994) NSW ConvR 55-694 Union Bank of Australia v Harrison, Jones and Devlin Ltd (1910) 11 CLR 492 Exception Holdings Pty Limited (in liq) (P) Richard Albarran (D1) Philip Edward Pomfret (D2) PARTIES : Julio Cesar Labraga (D3) FILE NUMBER(S) : SC 3316/05 D Robertson (P) COUNSEL : M Aldridge SC and P Blackburn-Hart (D1) R Forster SC (D2) Henry Davis York (P) NOT Lawyers (D1) SOLICITORS : Dibbs Barker Gosling (D2) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST YOUNG CJ in EQ Thursday 30 June 2005 3316/05 – EXCEPTION HOLDINGS PTY LTD (IN LIQ) v ALBARRAN & ORS JUDGMENT 1 HIS HONOUR: By originating process filed on 3 June 2005 the plaintiff, Exception Holdings Pty Ltd in liquidation, on the authority of its liquidator, seeks an order under s 418A of the Corporations Act 2001 (Cth) that the purported appointment of the first defendant, Richard Albarran, as receiver and manager of the plaintiff is invalid, together with consequential orders. 2 The Court directed pleadings and in due course a statement of claim and defence were filed. Today there was an attempt by the second defendant to file a cross-claim. It seemed to me that this would merely hold up the litigation and that to refuse leave to file the cross-claim would merely mean that the cross-claim could be put forward by originating process in another suit, or perhaps further interlocutory process in this suit, so that to allow the matter, which appeared to me to have some degree of urgency, to proceed was preferable than to allow the cross-claim to be filed. It was, however, marked as MI02 and will be left with the papers. 3 The full facts in the background of this matter are, it would seem to me at this stage, complex and the summary I am about to give certainly does not pretend to be an exhaustive or one hundred percent accurate account of those facts. It should not be taken as setting out any issue estoppel but it is sufficient to enable me to decide the present case. 4 There are three persons who were associated together in business. They were Richard Lawrence Highland, Julio Cesar Labraga and Philip Edward Pomfret. 5 The corporate vehicle that was used for their enterprises was the present plaintiff, Exception Holdings Pty Ltd, of which it would appear each had a one-third interest prior to Mr Highland's death on 27 March 2003. 6 Mr Highland himself had his interests behind the shield of a discretionary trust, the trustee of which is Nowhere in Particular Pty Ltd. 7 By his will, Mr Highland left the substantial part of his estate to the trustee of his discretionary trust to be held on trust for the persons who are beneficiaries under that trust. Those beneficiaries included Mr Highland's widow, Penelope Highland and I believe some thirty or forty others as possible beneficiaries. Mr Highland's will appointed Mr Pomfret and Mr Labraga as his executives and they duly took out probate. Mr Pomfret and Mr Labraga are also the current directors of Nowhere in Particular Pty Ltd. 8 It would appear that in 2002 the Westpac Bank advanced money to the plaintiff company which was used for its business purposes. However, in 2004 the bank wished to have substantial repayments made to it and payments were made of approximately $1.3 million from the funds held by the estate of Mr Highland, apparently from the proceeds of insurance policies. It would also seem that Mr Labraga also paid substantial moneys on behalf of the company. 9 In about October 2004 when these moneys were paid over, and I use the word "these" loosely, it was apparently assumed by everyone connected with the plaintiff that some security would be given with respect to the payment made by the estate. It seems that Mr Labraga also says that some security was to be given in respect of the moneys he paid. 10 The parties do not seem to have directed their minds to the rights and obligations inter se but it would appear, without delving into the matter, that there would be rights of contribution so that the estate could claim one-third of what it paid on behalf of the company as against each of Mr Pomfret and Mr Labraga and perhaps Mr Labraga may have similar claims. However, from his evidence in the witness box, that awful fact did not seem to have, even today, dawned on Mr Pomfret. 11 On 27 January 2005 there were produced two documents, one called a loan agreement and the other a deed of fixed and floating charge. The parties to the latter were described at the commencement of the document as: "This deed of fixed and floating charge is made on 27 January 2005 between Julio Cesar Labraga and Philip Edward Pomfret as trustees for the estate of Richard Lawrence Highland...(the "chargee") and Exception Holdings Pty Ltd...(the "chargor")." 12 The document was executed in a very peculiar way. It was said to be executed as a deed in Sydney by Julio Labraga and Philip Pomfret as trustees for the estate of Richard Lawrence Highland, but Mr Labraga was said to sign by Mr Pomfret, his attorney. Mr Pomfret signed on his own behalf. The plaintiff company signed by Mr Pomfret, who signed as director/secretary and also signed for Julio Labraga acting as Mr Labraga's attorney under power. There is no doubt that Mr Labraga did give Mr Pomfret a general power of attorney of 28 June 2002, but that power of attorney did not confer any authority at all on Mr Pomfret to sign, either for Mr Labraga in his capacity as a trustee, or as Mr Labraga in his capacity as a director of Exception Holdings Pty Ltd. The effect of the bizarre execution is not however a matter that is before me for decision in the present proceedings. 13 Clause 18.1 of the deed of fixed and floating charge which appears under the heading "Appointment of Receiver" provides: "If an Event of Default occurs, the Chargee may, whether or not it has taken any other enforcement action, appoint one or more persons to be a receiver or receiver and manager...of any of the Chargor Property." 14 By an undated document, although it seems it is common ground that it should be dated 30 May 2005, Mr Albarran was appointed as receiver under the deed of charge, which was signed for and on behalf of the estate of the late Richard Highland by one of its executors, Philip Pomfret. 15 The present plaintiff was wound up by an order made by Nicholas J on 26 May 2005, an order which was altered under the slip rule by an order of Barrett J a few days later. Prior to that there had been an appointment of a provisional liquidator. I am told from the bar table that those appointments are subject to an appeal to the Court of Appeal which is listed for directions in August but apart from noting that fact it does not, it seems to me at the moment, have any forensic significance. 16 Section 418A of the Corporations Act provides that where there is doubt as to whether a receiver's appointment is valid the corporation or any of its creditors may apply for an order declaring that the purported appointment was valid, or as the case may be. 17 Today I was grateful for the assistance of Mr D Robertson for the liquidator, Mr M Aldridge SC and Mr P Blackburn-Hart for the receiver and Mr R Forster SC for Mr Pomfret. 18 The attack made by Mr Robertson on the appointment of the receiver fell under two heads: (a) the appointment was invalid under the general law; and (b) the effect of s 267 of the Corporations Act 2001, meant that it was invalid. 19 As to (a), Mr Robertson put that it was noteworthy that the document, namely the charge of 27 January 2005, was expressly made by Messrs Labraga and Pomfret as trustees for the estate. This amounted either to an estoppel by which they were prevented from alleging other than that they were trustees, or alternatively, a declaration that they were trustees and they should not be allowed to renounce that declaration. 20 Alternatively, he put that the estate of Mr Highland was fully administered so that in fact and in law, Messrs Labraga and Pomfret had become trustees rather than executors. The reason for that distinction is that generally speaking trustees must act unanimously; see eg Sky v Body (1970) 92 WN (NSW) 934 at 935. Whereas the position is not as clear with executors and it may be that one is sufficient to bind all. 21 The first matter to examine is whether one executor can by contract bind all, even assuming that the other executor does not assent to what the first one does. I was referred to the decision of the High Court of Australia in Union Bank of Australia v Harrison, Jones and Devlin Ltd (1910) 11 CLR 492. Of the four judges, the Chief Justice at page 507 indicated that he was not going to go into the question of the power of one of several executors to make a valid contract binding the property of the testator as distinct from a transfer of it but he considered that if that question ever had to be decided, careful notice should be made of the decision of Stirling J in In re Ingham [1893] 1 Ch 352. Barton J at 508 was more positive, that it had never been questioned that at law one executor binds all, and Isaacs and Higgins JJ took a similar view. 22 When one goes through the authorities that proposition at law remains unassailed. In equity there is some doubt but the doubt comes about because equity considers that sometimes it is unfair for an estate to lose its property because one executor has signed a contract with which the other does not agree but it does not declare the contract void, it merely refuses to give an equitable remedy and so leaves the parties to their remedies at law. 23 Nowadays the situation with respect to the sale or mortgage of real property is covered by s 153(4) of the Conveyancing Act 1919 and decisions like Colyton Investments Pty Ltd v McSorley (1962) 107 CLR 177, especially at 183, make it clear that by statute, unless there is an order of the Court, all the executors must join in. Where a provision such as section 54A of the Conveyancing Act require the persons to be charged to sign, again the Court considers that all the executors must sign the note or memorandum; see eg Fletcher v Burns (NSWCA, 19 March 1997, unreported). Again, in Stokes v Churchill (1994) NSW ConvR 55-694, Santow J refused to grant specific performance where only one executor had signed, as it would be unfair on the estate, but again it would seem the parties were left with their remedies at law. 24 Where there is no assignment at law and so a court of equity needs to give its assistance to complete a transaction, such as before s 12 of the Conveyancing Act was enacted or where there was an equitable assignment, again equity might decline to lend its support to the transaction: Lepard v Verno (1813) 2 V & B 51; 35 ER 237. See also Sneesby v Thorne (1855) 7 De GM & G 399; 44 ER 156 another specific performance case. 25 It is on the last two authorities referred to that Stirling J bases his words on page 360 of In re Ingham which caused Griffith CJ concern in the Union Bank case; see also Neill v Hewens (1952) 53 SR (NSW) 113. 26 When one reads all the cases one can see that at law the proposition still remains good that one executor binds the estate. The question I am dealing with here is the efficacy at law of the appointment of the receiver and the cases support the view that it was validly executed if the parties were executors rather than trustees. 27 The argument was made that if one executor can appoint a receiver, the other can revoke it. However, I am not at all sure that this is true. Many acts once done can not be revoked and in any event cases like Re Mayo [1943] Ch 302 would tell against the action by the second executor to revoke what the first executor had already done and had communicated and which act had taken effect. 28 I then turn to the question as to whether these people were executors. The evidence is that this estate has not been fully administered in the true sense at all. There are still debts outstanding. There is again a claim involving a tax debt, which may be litigated or contested, the assets have not been distributed and it is not a fully administered estate. However, Mr Robertson said that it is not necessary that the whole estate be administered before executors can become trustees as to some assets and he cites Burke v Dawes (1938) 59 CLR 1 at p 19. However, what Dixon J said there has, with respect, nothing to do with the instant case and merely affirms the proposition that where there is a distinct fund and the executors can see there are sufficient assets, they may set up a separate trust for that fund. That is far removed from the present case. 29 Then it is said that the executors can assent to the separation of certain matters out of the estate and they may assent in such a way so that they become trustees. But it is very difficult to see, in light of s 83 of the Wills, Probate and Administration Act, 1898 and the facts of the present case how that has occurred. 30 The next argument was that by saying that they were trustees in the deed of fixed and floating charge, they either declared themselves trustees or alternatively they are estopped from denying that they were trustees because there was some sort of conventional estoppel or an estoppel by deed. 31 With great respect, I cannot see how in the present case any of those propositions can be valid. How one can have a conventional estoppel when the same individual signed a document on behalf of every one is very hard to comprehend. There is no statement of existing fact in the document, there is no reliance by anyone on any statement of existing fact, there is no case that anyone has acted to their detriment, if that be relevant and a fair reading of the document is merely that it was put together without the care that one would expect such a document to be drafted, other than one prepared in the month of January, so that the word "trustee" should just be read as a misnomer. So when one looks at certain paragraphs, such as 34 of the document and the way it was executed, that view is reinforced. 32 Accordingly, in my view, the charge was given by the executors and the appointment could be made by one executor. 33 (b) I now turn to the argument under s 267 of the Corporations Act. 34 Omitting surplus verbiage, that section says that where a company creates a charge in favour of a "relevant person" and within six months after the creation of the charge the chargee purports to take a step of enforcement, then the charge and any powers purported to be conferred by it are taken always to have been void. 35 "Relevant person" is defined in s 267(7) as a person who is, at the time when the charge is created or at any time during the period of six months ending at that time, an officer of the company or a person associated with such a person. 36 It is to be noted that the section affects a charge on property of a company "in favour of" such a person. Mr Forster's main submission against s 267 applying was that the persons involved were merely trustees of the estate of Mr Highland and they were the directors of the plaintiff and it was put that it was a mere coincidence they also happened to be the persons who represented the estate of Mr Highland. I was encouraged to read the words "a company creates a charge in favour of a person" as if they were "the company creates a charge for the benefit of a person", so that where the relevant persons were trustees of an estate the section did not apply. 37 The words "in favour" have been discussed by the courts on many occasions and they are dealt with as well as anywhere else, if I might say so with respect, in a judgment of Malcolm CJ in Melsom v Vanpress Pty Ltd (1990) 3 ACSR 109 at 113. 38 As his Honour pointed out, the authorities which are there set out, such as Re Timbatec Pty Ltd [1974] 1 NSWLR 613 at 617; Commercial Banking Company of Sydney Ltd v Colonial Financiers of Australia Pty Ltd [1972] VR 702 at 703 and Re Morant [1924] 1 Ch 79, 86-87 show that the words "in favour of a creditor" or the like are very wide. They do not just mean to a creditor, they do not just mean for the benefit of a creditor, but they are involved in dispositions or something which is to the advantage of the person, whether he is a beneficiary, trustee or otherwise. 39 It may well be that if the executor was a trustee company or someone completely independent that the Court might come to the view on the facts that although that person was named as the chargee, as the estate had no other connection the charge was not in favour of a person who was an officer of the company. But that is not the present case. 40 In the present case Mr Pomfret and Mr Labraga are involved as insiders rather than outsiders, as indeed is Mr Highland and his estate and there are mutual obligations under the equitable doctrine of contribution which affect or advantage all of them. It also seems to me that when one sees that the company has created the charge, that the charge is in favour of Mr Labraga and Mr Pomfret, albeit as executors of Mr Highland's estate, that the company has created a charge on the property in favour of persons who were relevant persons either because Mr Labraga or Mr Pomfret are the named chargees or because they represent the estate of Mr Highland. 41 There is an escape in s 267(3) that if the chargee can satisfy the Court that immediately after the creation of the charge the company that created the charge was solvent and in all the circumstances of the case it is just and equitable for the Court to grant leave to enforce the charge, it may do so. It would seem that on the material before me it may be difficult for the company to satisfy the first limb of that section but I think it is probably right to allow a little time for it to work out whether there is some escape through that gateway. 42 I also need to consider the question of costs in a case where the plaintiff succeeded but only on half the case, though it was a case where it could only have succeeded on either (a) or (b) but not both. I have given these reasons ex tempore. It may be that counsel will want some time to consider them, so all I intend to do at the moment is stand the matter over for short minutes of order to be brought in, in two weeks' time. 43 I stand the matter over to 11 am on 15 July 2005 with liberty to apply. *************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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