Coffee and a Case Note

By James d'ApiceEducation

Coffee and a Case Note episodes

February 05, 2022 Shandong Delisi v Yolarno Pty Ltd [2022] NSWSC 17
“The deal’s off. Now give me back my $6m!”

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P, a Chinese frozen meat company, and D, an Australian feedlot and abattoir company, found themselves in dispute.
A 2015 contractual arrangement required P to pay a $6m “advance payment” to D to acquire 45% of the shares in D: [7]
P made that payment.
The 45% stake was valued ~$140m: [17]
The deal between D and P included unusual conditional terms. The price was $140m, but subject to further negotiation after an investigation procedure including D providing P with audited accounts, P’s board and shareholders approving etc: [19] - [23]
There were some delays with the audited accounts and the deadline was extended by later agreement: [27]
After reviewing the accounts P’s advisers valued D as less than half of the initial value: [33]
P wrote to D on 30 June 2016 purporting to terminate. This was on the basis of D failing to meet the condition terms, and being late with the audited accounts: [34]
D responded saying P had no right to terminate that the letter was a repudiation which D accepted: [35]
The delay in the provision of audited accounts was considered in depth. Speaking loosely, the audited accounts were finalised save for issues related to external financing. There were some tensions between the auditors and the parties: [41] - [65]
The unqualified audit report was eventually sent at 11.57pm (China time) on 20 May 2016 and received at 12.12am (China time) on 21 May 2016: [66]
The parties had a contractual obligation of good faith to obtain the finalised audit reports by the deadline: [67], [68]
P complained that D’s failure to explicitly instruct the auditor to issue a report by 5.30pm on 20 May 2016 was a breach of this clause: [73]
It was accepted that the auditor could not be validly instructed to issue an opinion they did not hold: [73]
Regarding good faith and the 5.30pm deadline, P’s allegation that D’s good faith obligation required it to have reminded the auditor about the 5.30pm deadline cuts both ways. P could have also issued that reminder!: [82]
The Court found a more fundamental issue with this argument. It was not satisfied that the (unsent) “5.30pm reminder email” would have made any difference noting the auditor’s internal processes for issuing accounts etc: [85]
D’s good faith defence failed: [91]
D argued that P had no entitlement to issue the 30 June 2016 notice of termination.
After carefully considering the wording of the contract and associated law of commercial construction of contracts, the Court found P indeed had a right to issue the relevant notice arising from the delayed audited accounts: [124]
The Court found P complied with its good faith negotiations and had validly terminated. As such P was entitled to recover its $6m plus interest: [132], [133]
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10 min
January 22, 2022 Carpenter v Morris [2021] NSWSC 1700
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Two partners P2 and D4 - both companies - were in partnership from 1996 to 2003. The Ps said that D1 had been paid partnership money and sought an order for the taking of partnership accounts: [2]
The Ps made other claims in relation to alleged subsequent agreements. (But we won’t engage with those.)
The partnership related to a quarry founded in the 1960s and to gabbro, a shiny black rock sometimes called “granite”: [6] Importantly, both first grade gabbro and second grade were quarried: [7]
P2 continued to do quarrying work at the quarry after the partnership ended: [13]
During quarrying activities material disturbed or displaced during quarrying was placed in stockpiles in the quarry: [18]
The Court worked through the complex background to the mining and leasing arrangements: [23] - [48]
The partnership paid out some of its proceeds by way of monthly payments to D1: [52]
The Ps objected to the payments made to D1: [58] (Interestingly, D1 could not recall what the payments were for: [105])
The Ds resisted the other claims on the basis that the partnership ended in 2003, a Limitations Act defence, and the defence of settled accounts: [62], [63]
D1 accepted that accounts had to be settled for the settled accounts defence to apply, and says the right to mine was not an asset of the partnership, and the stockpiled material was no longer separate from the land (or alternatively was not possible to value or quantity): [66]
The stockpile was the subject of heavy consideration including:
- whether it had come to be a fixture, a part of the land: [120]
- the difficulty sorting out the stockpile created in 1996 - 2003 from other material in the stockpile: [121]
- expert evidence that the stockpile was “impossible” to quantify: [122]
- the fact that further material was added to the stockpile from 2003 to 2014: [174], [179]
- the Ds’ failure to substantiate their estimate of how much was in the stockpile: [185]
The right to mine or quarry was not an asset of the partnership, as it was a separate parcel of rights that that partners had to procure: [227]
The Court found the business of the partnership included the sale of granite (not just quarrying) meaning the monies paid to D1 were partnership monies: [233]
However, the Ps did not plead constructive trust by way of “knowing receipt” by D1 [237] nor a claim against D4 for breach of fiduciary duties as partner: [239]
As such the Ps raised no good basis for D1 to repay the money. The application seeking an account was rejected because: (i) the right to mine or quarry was not an asset of the partnership, and (ii) it was impossible to quantify the stockpile attributable to the 1996 - 2003 partnership: [243] - [247]
All the Ps’ claims failed. Proceedings dismissed: [262] ___
14 min
January 09, 2022 Squirrel Limited (In Liquidation) [2021] NSWSC 1658
“Victory with no word from the misbehaving NZ director? No problem.”

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Ps, liquidators of a holding Co whose subsidiaries provided cloud-based SMSF software and support, sued three of the Co’s directors, and settled the claims against two of them: [2]

They pursued the remaining director, D.

D was served with the originating process (the document that kicked off the litigation) in NZ, but did not appear (or participate) in the litigation: [4]

The Ps sought summary judgment against D i.e. victory in D’s absence: [5]

The bar for summary judgment is high. The Court must be satisfied there is no underlying defence to the claim (even if the D has failed to raise it): [7]

The claim was that D allowed the Co to incur debts when it was insolvent: [12]

The Ps were appointed liqs on 8 October 2019: [21]

The Ps alleged the Co was insolvent from 1 October 2018: [22]

The Ps claimed D allowed the Co to incur around $3m in debts while insolvent, to 18 creditors: [23]

The liqs gave detailed evidence about the debts: [27]

The Court when through the forensic process of analysing each debt and forming a view as to whether it was incurred before or after 1 October 2018. It found some were, and some were not: [29] - [45]

Of course, a Co is solvent only if it is able to pay all of its debts as and when they become due and payable: [46]

The Court considers, and accepted, expert evidence regarding indicia of the Co’s insolvency including: insufficient cash at bank to meet current liabilities [51], a large negative net profit margin [52], a negative ROI margin [53], a lack of income aside from R and D grants [54], and a liquidity ratio below 1 [56].

Failed attempts at refinancing and a net indebtedness to other companies in the group were also in evidence: [68], [70]

The Court found this was “no finely balanced case” and the evidence “overwhelmingly” pointed to Co being insolvent from at least 1 October 2018: [74]

The Court found it difficult to conceive evidence to cast doubt on this: [82]

Defences D could have raised, but did not, would be within D’s control and knowledge (like reliance on info from others, a good reason precluding D from taking part in the Co’s mgmt, or a course D pursued likely to leave to a better outcome) did not preclude the entry of summary judgment: [82]

Victory, then, for Ps in the D's absence: [86]
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8 min
December 20, 2021 PIC Lindfield 19 Pty Ltd (in liquidation) v Zhu [2021] FCA 1526
“We’re liquidating the trustee Co, but we also need to be made receivers of the trust assets!”
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A Co was incorporated to be a trustee and, in that capacity, developed an apartment complex in Lindfield: [12]

The trust deed provided that the Co was to be indemnified for all liabilities incurred in its capacity as trustee, and that it would cease to be trustee upon its liquidation: [11]

Following completion of the development 35 apartments were sold. 5 remained in the hands of the Co as trust property: [13]

The Co - in its own capacity and as trustee - entered into a loan with a lender for ~$2.8m to pay off another loan: [14]

The lender put the Co into VA and, following the liqs’ recommendation (in their capacity as administrators), into liquidation: [15]

(From this time, of course, pursuant to the trust deed the Co ceased to be a trustee due to the disqualification clause. That meant from the time of its liquidation the Co held the properties as bare trustee.)

The liqs intended to sell the 5 apartments [16] and so sought urgent orders for appointment as receivers of the trust’s assets: [1]

The Court (respectfully, usefully) reviewed the authorities relating to liquidators of corporate trustees that can be summarised as: (i) a corporate trustee can be indemnified from trust assets for trustee work, (ii) if a corporate trustee is removed by a disqualification clause (like in this case) it becomes a bare trustee and the right to indemnity remains, (iii) to enforce that indemnity a Court order or receivership is needed, and (iv) the common course in those circs is to appoint the liqs as receivers of the trust assets.

Aside from its functions as trustee, the Co did not carry on any other business: [21]

The Co had debts of around ~15m; around ~$10m of which were owed to the Co’s former director and majority shareholder: [23]

By operation of the deed, the Co became a bare trustee when the liqs were appointed and so entitled to an indemnity from trust assets for liabilities incurred as trustee. That right can only be enforced by receiver or judicial sale: [24]

The Court accepted the liqs should be appointed as receivers in order to enforce the Co’s indemnity and so ordered: [25], [26]
5 min
December 19, 2021 Hearsay: The Legal Podcast - Derivative Actions discussion with David Turner, December 2021
Earlier this year I had the chance to chat with David Turner of Hearsay: The Legal Podcast.
It was (honestly) one of the most enjoyable chats I have ever had about technical legal practice.
You can find other episodes on the fabulous Hearsay podcast here: https://htlp.com.au
57 min
December 12, 2021 Miraki v Griffith [2021] NSWCA 263
“You got the money, now get me my luxury goods!”
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A commenced proceedings against R1, a father, and R2, a son who was a minor at the relevant time, to recover payments made for luxury brand name furniture and accessories that were never delivered: [45]

At first instance, A succeeded against R1, but lost against R2: [46]

A and R1 had an established commercial relationship: [48]

There was some complexity in this case, though, as both R1 and R2 - arguably - held themselves out as agents of each other and a Co that did not then exist and was not a party: [50]

Further, the payments were not actually made by A, but by a Co they were a former director of and which was under external administration: [12], [62]

(If it had been necessary to decide the question, the Court may have found A had not established they were the proper plaintiff to bring the claim: [40])

The first two payments were made into a New York account with the name of the non-existent Co: [3], [56]

Further payments were made into an account with R2’s name (but at the time when R2 was a minor): [58]

Evidence suggested R1 who had previously been imprisoned for drug offences was “very controlling” and treated R2’s bank account as his own: [69]

R2 tendered bank records which showed the money in his accounts was used almost entirely by R1 and for the business: [70]

R1 was not legally represented at the primary hearing and did not participate in the appeal: [74]

At first instance the Court found R1 was liable to repay the amounts A had caused to be paid, and that R2 was not liable due in part to being a minor: [80], [81]

A appealed.

There were complexities in A’s appeal that the CoA had to grapple with including whether R1 and R2 were agents of each other, “in business together” or agents of the non-existent Co: [83] - [92]

At first instance, R2’s evidence was accepted and the appeal made no effective challenge to that position: [102], [103]

R1 had made many admissions in his defence and (though not in the form of admissible evidence) said during the hearing that he took “full responsibility”: [105], [108]

A failed to mount an effective challenge to the finding that the business was R1’s and R2 merely acted at R1’s direction: [111]

Relevantly, as both were sued, the COA noted that R1 did not cross-examine R2: [115]

A’s appeal on the basis R2 received a benefit of the payments failed. He was a “mere conduit” for funds paid for R1’s benefit: [127], [132]

A’s appeal was dismissed with costs: [145]
5 min
November 29, 2021 Sirrah Pty Limited [2021] NSWSC 413
“Give that $30m back to the Co and wind it up!”

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Some Ps were executors of a shareholder’s estate: [2]

The Co conducted a retirement village business which was sold in 2017 for $25m: [3]

Over time money was dissipated to a director, WH, and WH’s related entity, HHC, who used some money for buying a Balinese property: [4]

The litigation was complex but, crucially, the Ps sought repayment of the Co’s money, and for the Co to be wound up pursuant to s461(k) or s233: [5]

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In 1997 the Co entered into an agreement with HHC that would cause the Co to pay management fees to HHC: [82]

Over time WH caused the Co to pay millions in management fees to HHC though, after a time, not pursuant to the 1997 agreement. The Ps alleged this was a breach of duty: [83]

The Court accepted the fees were not reasonably based: [95]

In causing the Co to pay above market fees to a related entity, WH breached their duty of care and diligence and the “no conflict” rule: [96]

In 2016 a further agreement was reached for the Co to pay HHC higher fees in the sum of $70K per month: [97]

Causing the Co to enter into this agreement was a further breach of WH’s duties: [101]

WH causing the Co to continue to pay management fees after the sale of the business was a further breach: [106], [107]

From 2012 to 2019 the Co lent large sums to WH and HHC on apparently uncommercial terms without all loans being in writing: [110]

The Court found there was a breach of WH’s “no conflict” duty as there was a conflict of interest between the Co’s interest in keeping the money, and WH’s and HHC’s interests in having the benefit of the loans: [129]

WH racked up $1.8m on the Co credit card for personal expenses. This was rightly treated as a loan to be repaid: [142], [143]

WH caused payments to be made to HHC and related entities relating to a scooter business venture with no adequate agreement in place: [146]

These debts were being chased by a prov liq appointed in 2019. Any shortfall would be payable by WH: [147]

The Court considered “knowing receipt” and accessorial liability in the context of money WH caused the Co to pay to HHC: [151], [152]

The Court found HHC liable as WH’s alter ego and had full knowledge of WH’s breach of duty from which it profited: [155]

In respect of all debts including overpaid fees and loans no board resolution or shareholder resolution was sought or made that might have cured the “no conflict” rule.

The Court found that the history of the matter, and the litigation between the parties, justified a winding up order: [167]

WH had to repay the Co $17m plus interest. HHC had to pay the Co $15m plus interest. The Co was wound up: [173]
10 min
November 22, 2021 James d'Apice presentation at 'The Retreat' 5 November 2021
On 5 November 2021 I spoke (remotely) at 'The Retreat' by Clarissa Rayward, the Happy Family Lawyer.
It's a fantastic event and I was delighted to be a part of it. (And am hoping for an invite back next year!)
This is my presentation which I hope brings you value.
A link to just some of Clarissa's fabulous content is here: https://www.thehappyfamilylawyer.com
A link to my appearance on Clarissa's podcast is here: https://www.thehappyfamilylawyer.com/podcast/episode-179-james-dapice/
40 min
November 18, 2021 1A Eden Pty Limited [2021] NSWSC 82
“There’s no deadlock, so there’s no windup!”

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P, a director, applied to wind up a Co that was Tee of a unit trust: [2]

P’s fellow directors were S and D. P said there was a deadlock and relations had broken down: [4]

P and S were builders. D was a property developer. The 3 agreed to found the Co to develop a site together with P and S to share 50% of the profits and D to take the remaining half as unit holders: [13]

There was no written agreement: [12]

In 2013 the Co was established and the unit trust settled: [16]

Even though it was intended an entity of P and S would do the building work, a new cheaper contractor was found: [26]

In 2016 the building was completed: [37]

In 2016 P, S and D agreed to take unsold apartments as profit share with S also taking $500K cash: [38]

In 2017 the CO declared profit of ~$8m: [40]

The parties agreed on notional values of units for the purpose of profit distribution: [41], [42]

The OC commenced building defect proceedings against the Co and the contractor: [45]

In 2018 P and S received their apartments, though D did not: [52]

In 2019 the Co, as part of the defect proceedings, was obliged to pay $15K for expert fees. D did not agree to contribute and the Co was then out of money. P paid on the Co’s behalf: [57]

P suggested a deadlock had arisen about paying the expert: [58], [59]

P lodged caveats over the Co’s properties which were to be transferred to D: [61]

P took the approach that while P and S should retain their profits (via apartment ownership), the apartments to be transferred to D ought to be retained for any liability the Co might have pursuant to the defect proceedings: [64]

D sued seeking (among other things) to remove the caveats and restore the 50:25:25 distribution: [66] - [71]

P suggested the profit calcs had a $156K shortfall for which P blamed D: [74]

D denied any deadlock and proposed an audit: [76], [77]

The Court found the suggestion of a breakdown of the relationship artificial. From 2013 to 2019 P was happy to leave admin and accounting in D’s hands, the venture made $8m in profit, *and* all agreed on its distribution: [102]

The court considered this windup application, which might thwart the caveat proceedings and defect proceedings, was “infused with self interest”: [107]

While a liquidator could investigate defending claims and seeking an account, the cost may be disproportionate noting P was chasing an estimated $156K. Nor did P undertake to fund the liquidator: [108]

Winding up would affect the OC adversely. Winding up is a last resort and alternative, less drastic remedies are available: [110]

The application was dismissed. Costs followed the event: [111]

9 min
November 12, 2021 Global Pacific Aerospace [2012] VSC 291
“The Co paid too much for that helicopter!”

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W and B were 50/50 shareholders in a Co that bought a helicopter for $1.6m. They were also the Co’s sole directors.

$1.12m of the purchase price was borrowed. W and some related entities gave a guarantee in respect of that loan.

The Co couldn’t make the payments. The lender caused the helicopter to be sold for a shortfall of ~$457K.

The lender sued W and their related entities for the shortfall.

Interestingly, the purchaser of the helicopter was a Co wholly owned and controlled by B, who had not given a guarantee.

W says B used his position with the Co to negotiate a lower price for the helicopter, breaching his directors duties. W sought to bring derivative proceedings to pursue this claim: [2]B applied to wind up the Co on the just and equitable basis: [3]

B claimed that W excluded them, treated the Co as their own, breached duties in buying the helicopter for an inflated price and failing to maintain it, and failed to manage the Co’s obligations to the Co’s lender: [5]

W said B’s claim was an attempt by B to protect themselves from the derivative claim and, as there was no money, a liquidator would not chase B for B’s breach of DDs: [8]

The Co had no ongoing business. Its sole assets were claims against B, W, and the lender: [9]

The Court considered it would be just and equitable to wind up the Co because: (i) it is being sued by a secured creditor, (ii) the dirs’ relationship has broken down, (iii) each dir alleges the other has breached DDs with evidence from both showing neither’s claim is frivolous: [11]

The Court considered preferable course was for an independent liquidator to be appointed to investigate all claims and noted “liquidators commonly find a way to obtain funding if there is a potentially good cause of action available to the company”: [12]

The Co was wound up on the just and equitable ground: [13]
6 min

About Coffee and a Case Note

From the publisher's feed

I’m Australian lawyer, James d’Apice. Coffee and a Case Note began as a video series where I sip a coffee and chat about recent legal cases. This is the audio version! I hope it brings you value.