New South Wales Supreme Court CITATION : Australian Receivables Limited v Tekitu & Ors [2010] NSWSC 823 HEARING DATE(S) : 26 July 2010 JUDGMENT DATE : 28 July 2010 JUDGMENT OF : Ball J DECISION : The defendants' motion dated 7 July 2010 is dismissed with costs. CATCHWORDS : PRACTICE AND PROCEDURE - Application for variation of orders - whether there is a material change in circumstances or discovery of new material CATEGORY : Procedural and other rulings CASES CITED : Australian Receivables Limited v Tekitu Pty Limited & Ors [2008] NSWSC 433 Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44 Australian Receivables Limited (Plaintiff) PARTIES : Tekitu Pty Ltd (First Defendant) Ross Edward Smith (Second Defendant) Lynette Mary Smith (Third Defendant) FILE NUMBER(S) : SC 2007/257468 R Bender (Plaintiff) COUNSEL : N Cotman SC (Defendants) M Fisher (Defendants) SOLICITORS : Forbes Dowling Lawyers (Plaintiff) Malcolm Johns & Company (Defendants) - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY LIST BALL J 28 JULY 2010 2007/257468 AUSTRALIAN RECEIVABLES LIMITED v TEKITU PTY LIMITED & ORS JUDGMENT 1 This is an application for a variation of an order made by Brereton J on 4 April 2008 (see [2008] NSWSC 433). At that time his Honour made an order, among others, restraining the defendants from disbursing moneys held by their solicitor, Rodd Peters Solicitor, in a controlled moneys account. The total amount held in that account is $224,607.72. The defendants seek the release of $145,019.08 of that amount. 2 The substantive proceedings concern a contract dated 9 January 2007 by which the plaintiff purchased from the first defendant the assets of a mercantile collection business formerly carried on by the first defendant. The second and third defendants are directors and shareholders of the first defendant. 3 The purchase price under the contract essentially consisted of three amounts – an initial payment of $950,000 plus amounts described as the "First Earn-out" and the "Second Earn-out". The First Earn-out was calculated as fifty percent of the net revenues of the business between 1 July 2006 and 30 June 2007 in excess of $5.6 million. The Second Earn-out was calculated as fifty percent of the net revenues of the business for the period 1 July 2007 to 31 December 2007 in excess of $2.8 million. 4 Following completion, a number of clients of the business continued to pay the first defendant rather than the plaintiff. Clause 17.5 of the sale agreement provided that the first defendant would account to the plaintiff for those amounts "immediately" and "without deduction". In all, the plaintiff claims that the first defendant has failed to account to it for amounts totalling $552,235 under that clause. Of that amount, the defendants have subsequently paid the plaintiff an amount of $161,284. Further amounts totalling $224,607.72 were identified and ultimately paid into the controlled moneys account. The balance was disbursed by the first defendant. In addition to its claim against the first defendant, the plaintiff claims that the second and third defendants knowingly assisted the first defendant in a breach of trust in disbursing amounts paid to it by clients or were knowing recipients of moneys paid by the first defendant to them in breach of trust. The plaintiff also has a further claim for $17,041 against the first defendant. The details of that claim are not relevant to the current application. 5 In defence of that claim, the defendants rely on a set off and a cross claim. Brereton J described (at [4]) the set off and cross claim in these terms: "[The first defendant's] defence is a set off for sums said to be due to it by [the plaintiff] under the contract or collateral arrangements, and a cross claim for what is called the "earn-out payments" in the contract, to which [the first defendant] contends it is entitled – or at least would have been entitled had [the plaintiff] acted properly in accordance with its own obligations under the contract. The amount of the set off asserted in the defence is at least $558,580, and the cross claim for the earn-out payments has been estimated on behalf of the defendants to be in the order of $1,523,553." 6 His Honour accepted that the defendants' set off and cross-claim ought to be regarded as seriously arguable. Nonetheless, his Honour concluded that the balance of convenience was in favour of an order preventing the defendants from disbursing the moneys held in the controlled moneys account. His Honour did so for four reasons (see [22]-[25]): a The plaintiff's claim in respect of client moneys was practically unanswered whereas the set off and cross claim were contentious; b it was arguable that the plaintiff's claim was not amendable to a set off because of the terms of clause 17.5 of the contract and, in particular, the words "immediately … and without deduction"; c at least some of the claims appeared to be claims by the second and third defendants rather than the first defendant. Those claims were not amenable to a set off; d the set off and cross claim were for debt or damages and not proprietary claims to a fund to which the defendants can assert a beneficial entitlement. 7 There is no dispute that, in order to succeed in its application, the defendants must establish a material change of circumstances since the original application was heard or the discovery of new material which could not reasonably have been put before the court on the hearing of the original application: Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44. 8 The defendants say that this requirement is met because the plaintiff now admits in its defence to the cross-claim that it owes an amount in respect of the purchase price under the contract. In addition, according to the defendants, that amount is the subject of an unpaid vendor's lien. Consequently, it is an amount that is the subject of a proprietary claim which it is entitled to exercise in respect of the money held in the controlled moneys account. They claim that the first defendant should be able to set-off its admitted proprietary claim against the proprietary claim asserted by the plaintiff to the moneys held in the controlled moneys account. The defendants also claim that there has been a change in circumstances because the first defendant has been served with a winding-up summons by the Chief Commissioner of State Revenue in respect of outstanding payroll tax amounting to $8,747.82 and has incurred substantial legal costs in respect of these proceedings and in defending the winding up summons. 9 I do not accept these submissions. In my opinion, none of the matters referred to by the defendants amount to a change in circumstances or the discovery of facts which could not reasonably have been known at the hearing before Brereton J. It is clear that his Honour was aware that part of the defendants' claim related to amounts payable in respect of the purchase price. It was open to the defendants to assert at the time of the hearing before Brereton J that the defendants had an unpaid seller's lien over the amount held in the controlled moneys account in respect of amounts payable by way of purchase price and that that was a matter that his Honour should have taken into account. I do not think that the position has altered simply because the plaintiff now admits that it owes some money in respect of the purchase price in circumstances where his Honour proceeded on the basis that it was seriously arguable that that was the position. Similarly, the amounts that the defendants say that the first defendant must pay were amounts that were known about at the time of the hearing before Brereton J. The fact that the payment of those amounts has become more pressing is not a new fact that would justify a variation of the orders made by Brereton J. Indeed, the fact that the first defendant is facing winding-up proceedings is a reason why the fund in respect of which the plaintiff asserts a proprietary claim should be preserved. 10 In any event, in my opinion, the defendants' submissions are misconceived. His Honour made the order he did because there was an identifiable sum of money in respect of which the plaintiff claims a proprietary interest. His Honour concluded that the balance of convenience was in favour of preserving that sum of money so that its ultimate ownership could be determined at a final hearing. The fact that the first defendant asserts a proprietary interest in that money as a result of an unpaid seller's lien does not mean that that claim it is bound to succeed, even if the plaintiff admits that it owes some money in respect of the purchase price. There is still a question whether, particularly in view of the terms of clause 17.5 of the sale agreement, the first defendant has an unpaid seller's lien and, if it does, whether that lien takes priority over the constructive trust which forms the basis of the plaintiff's claim. In effect, the defendants seek summary judgment in respect of those issues. In my opinion, it is not entitled to an order that has that effect. 11 It follows that the defendants' motion should be dismissed with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.