Commonwealth of Australia v Davis Samuel Pty Ltd [1999] ACTSC 9 (24 February 1999)

Last Updated: 12 May 2005

THE COMMONWEALTH OF AUSTRALIA v DAVIS SAMUEL PTY LTD ACN 083 081 985 & ORS [1999] ACTSC 9 (24 February 1999)

CATCHWORDS

INJUNCTIONS - Mareva injunctions - basis upon which granted.

No. SC 75 of 1999

Coram: Crispin J

Supreme Court of the ACT

Date: 24 February 1999

IN THE SUPREME COURT OF THE )

) No. SC 75 of 1999

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: THE COMMONWEALTH OF AUSTRALIA

Plaintiff

AND: DAVIS SAMUEL PTY LTD

ACN 083 081 985

First Defendant

DAVID JOHN MUIR

Second Defendant

CALLFORM PTY LTD

ACN 072 099 668

Third Defendant

PETER MICHAEL CAIN

Fourth Defendant

ALLAN PAUL ENDRESZ

Fifth Defendant

CTC RESOURCES NL

ACN 009 061 036

Sixth Defendant

JOZSEF ENDRESZ

Seventh Defendant

DAWN MAY ENDRESZ

Eighth Defendant

WILLIAM ARTHUR FORGE

Ninth Defendant

KAMANGA HOLDINGS PTY LTD

ACN 003 316 292

Tenth Defendant

PELLON PTY LTD

ACN 082 375 951

Eleventh Defendant

MICHAEL McCANN

Twelfth Defendant

AMATIVE PTY LTD

ACN 082 375 924

Thirteenth Defendant

MARK JOSEPH ENDRESZ

Fourteenth Defendant

BISOYA PTY LIMITED

ACN 003 016 242

Fifteenth Defendant

WINTON OIL NL

ACN 001 863 878

Sixteenth Defendant

QUANCORP PTY LTD

ACN 002 755 133

Seventeenth Defendant

ALLAN PAUL ENDRESZ as representative of the members of "BORDER BASKETBALL ASSOCIATION INC." an unincorporated association

Eighteenth Defendant

ORDER

Judge Making Order: Crispin J

Where Made: Canberra

Date of Order: 24 February 1999

THE COURT ORDERS THAT:

1 The parties have leave to bring in short minutes of orders giving effect to the findings in this judgment.

1. I adjourned this matter at about 5.00 pm last night and indicated that I would give judgment this morning and hear counsel as to the form of any orders that may be made. In view of the urgency of the matter it has not been possible to provide a comprehensive review of all of the evidence relied upon by the respective parties and I do not intend to refer to every argument advanced by counsel though I have of course, taken them all into account.

2. The present proceedings concern an application by the plaintiff, which is the Commonwealth of Australia, for further interlocutory relief against the first nine defendants. The application has been brought in proceedings based, inter alia, upon allegations of fraud, wrongful conversion and/or breach of fiduciary obligation on the part of the second defendant, Mr David John Muir. Subject to certain qualifications the plaintiff seeks injunctions restraining each of the first nine defendants from dealing with any part of the monies the subject of these proceedings, namely the sum of $6 million remitted from the Reserve Bank of Australia to the sixth defendant on 17 April 1998 and the sum of $2,725,000 remitted from the Reserve Bank of Australia to the sixth defendant on 22 September 1998. In addition the plaintiff seeks what are commonly referred to as Mareva injunctions subject again to certain qualifications restraining each of these defendants from disposing of, transferring or dealing with any assets within their possession or control or removing them from the jurisdiction of the court save insofar as those assets exceed $8,725,000 and save for reasonable expenditure on legal advice and representation in these proceedings.

3. For present purposes it is necessary to make some findings as to whether a prima facie case has been established against Mr Muir and other defendants. However, it should be understood that I am concerned only with issues of civil liability and even in relation to those issues I have not had the opportunity to embark upon a full hearing of the matter. Whilst Mr Muir has apparently been charged with criminal offences in relation to two transactions which are central to these proceedings I have not been asked to make any findings in relation to those charges. Like any other members of the community who has been charged with offences he is entitled to the presumption of innocence unless and until guilt is proven. Nothing in this judgment should be interpreted as involving any finding of guilt even on a prima facie basis or otherwise derogating from that presumption.

4. It appears that in October 1997 the Commonwealth engaged the third defendant, Callform Pty Ltd, which was a company said to have been controlled by Mr Muir, to provide certain accounting services. The agreement between them was extended and then replaced by a further agreement for a similar purpose in August 1998. Mr Muir apparently supplied the relevant accounting services on behalf of the third defendant.

5. The evidence is sufficient to establish, on a prima facie basis, that on 17 April 1998 Mr Muir caused the sum of $6 million standing to the credit of the Commonwealth with the Reserve Bank of Australia to be transferred to an account in the name of the sixth defendant, CTC Resources Ltd, with the Commonwealth Bank in Albury. The records of the sixth defendant suggest that this sum was purportedly received as payment for 600,000 redeemable preference shares in the company. However the evidence suggests that such a transaction had not been approved by any Commonwealth officer with the necessary authority and that an investment in the sixth defendant would not have been within the scope of those authorised under section 39 of the Financial Management and Accounting Act 1998. The circumstances surrounding that transaction, including the manner in which the transfer was effected, the absence of any contemporaneous Commonwealth records and the fact that the making of investments of that nature was not part of Mr Muir's duties, are sufficient to raise a prima facie case in relation to the causes of action pleaded against him in the civil proceedings to which I have referred.

6. In these circumstances it is appropriate that I grant an injunction restraining Mr Muir from dealing in any way with any part of the $6 million that may be in his possession or control.

7. As previously mentioned the Commonwealth also seeks Mareva injunctions against each of the first nine defendants. Such an injunction is quite different in scope from one which merely seeks to preserve the status quo in relation to disputed property until the issues between the parties can be determined. A Mareva injunction applies to the whole of a defendant's assets. As Gleeson CJ pointed out in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321, the remedy is discretionary and it will generally be necessary for a plaintiff to establish a prima facie cause of action against the defendant and a danger that by reason of the defendant absconding or removing assets from the jurisdiction or otherwise dealing with them the plaintiff may not be able to have any judgment he or she may obtain satisfied. Mr Corr, who appeared for Mr Muir, submitted that I should not be satisfied that there was a sufficient danger of assets being removed from the jurisdiction or otherwise dealt with in a manner that might frustrate the satisfaction of any judgment against his client. However, Gleeson CJ, in the decision to which I have referred, accepted that evidence as the nature of the scheme in which the defendant was allegedly involved might itself justify the conclusion that there was a danger that he might dispose of assets in order to defeat any judgment against him and that such a danger might be sufficiently substantial to justify an injunction of this kind. His Honour expressed the view, at 325, that such a conclusion might be especially valid where the prima facie case made out against a defendant was one of serious dishonesty involving diversion of money from its proper channels. In my view this is such a case. I am satisfied that the nature of the prima facie case made out against Mr Muir is such that it justifies the conclusion that there is a danger of assets being removed or otherwise dealt with in order to defeat any judgment that might be entered against him and that that danger is sufficiently substantial to warrant the injunction.

8. The nature of the claim against the third defendant is not clearly articulated in the Amended Statement of Claim, no doubt because it was drafted quickly in order to provide an adequate basis for the urgent applications for injunctive relief being pursued against a large number of defendants. However, having regard to the nature of the then subsisting agreement which it had with the Commonwealth I am prepared to assume that a prima facie case also exists against that company. I am satisfied that an injunction should be granted restraining this defendant from dealing with any part of the monies the subject of these proceedings. Furthermore, whilst it is not suggested that the company was itself a part of any dishonest scheme, I am satisfied that the fact that it is controlled by Mr Muir gives rise to a sufficient danger that the assets of the companies might be dealt with in a manner calculated to frustrate any judgment that might be entered against it. Consequently, a Mareva injunction will also be granted against this defendant.

9. The plaintiff contends that it is entitled to trace the funds wrongfully transferred by Mr Muir into the hands of the sixth defendant. It also contends that the sixth defendant wrongfully converted the right to those funds to its own use and, whilst this aspect of the case is again not clearly articulated in the pleadings, Mr Slattery SC, who appeared for the plaintiff, maintained that it received those funds with either actual or constructive notice that they had been misappropriated or at least paid without authority.

10. The latter claims are largely dependent upon inference. The third defendant owned 1,200,000 shares in the sixth defendant. The only records of the transaction appear to be two letters of 2 and 17 April 1998 from the sixth defendant each offering 600,000 redeemable preference shares at an issue price of $10.00 each said to comprise $0.01 par value and $9.99 premium. The first was addressed to `Overseas Property Group, Department of Finance & Administration' whilst the latter was addressed to `Department of Finance & Administration, APG Clients Trust'. The evidence suggests that the Australian Property Group had been sold in late 1997 and that this trust may not have existed in April 1998. In any event, it seems that these letters were generated merely as a result of conversations with Mr Muir. It is not suggested that there was any antecedent correspondence from the Commonwealth. The letters state that the offers are to be accepted by depositing the required sum into the relevant account.

11. Mr Slattery SC who appeared for the plaintiff pointed out that there was no evidence of the Commonwealth writing to the sixth defendant to seek copies of balance sheets or any information concerning the company's financial position or the potential value of the preference shares on which it was to spend $6 million. Furthermore, it was absurd to imagine that the Commonwealth would simply remit such a sum of money to a bank account without any arrangement to ensure that the shares were duly issued and registered in its name. He maintained that as experienced businessmen the directors of the sixth defendant must have known that the Commonwealth would not have entered into such a transaction in this manner.

12. Mr Slattery also submitted that at least some disbursements of the funds provided further ground for concluding that this was not a normal commercial transaction. The second letter of offer was dated 17 April 1998 and the transfer of funds occurred on the same day which was a Friday. At 10.00 am on Monday 20 April the Board of the sixth defendant resolved to issue the redeemable preference shares and, the minutes noting that there being no further business, the meeting closed at 10.30 am. One hour later there was a further meeting of the Board at which the chairman, Mr Joseph Endresz who is the seventh defendant, raised the issue of past and future management fees for Kamanga Holdings Pty Ltd, the tenth defendant. Mr Endresz was the sole director of the latter company and owned 60% of the shares. He withdrew from the meeting whilst this issue was discussed though his wife who was one of the two remaining directors remained and voted on the issue. The Board proceeded to resolve to accept an invoice of past management fees totalling $2,205,000 and calculated at $245,000 over 9 years and in addition resolved to execute a retainer providing for payment of a similar annual amount for another 5 years. An amount of $2,445,000, which included $240,000 said to be for royalty payments, was paid to Kamanga Holdings that day.

13. Mr Slattery pointed out that financial records of the sixth defendant did not disclose any debt of this kind and that the records of Kamanga Holdings Pty Ltd did not disclose any such contingent asset. Mr Biscoe QC, who appeared for the first, fourth, fifth, sixth, seventh, eighth and ninth defendants, argued that the absence of any record in the accounts of the two companies was not surprising because there had not been an enforceable debt. Nonetheless, Mr Endresz and his wife and son had done a great deal of work for the sixth defendant and there had been a long term understanding that Kamanga Holdings Pty Ltd would be paid for it when it had the money to do so. The evidence of Mr Endresz to that effect may well be accepted at the trial of the action but in an application of this kind an applicant need only raise a prima facie case. It is not necessary for it to disprove every explanation put forward by a defendant. Furthermore, the explanation put forward by Mr Endresz is not wholly reassuring. The invoice was not tendered and no explanation was offered as to why there should have been an invoice when there had been no enforceable debt. More importantly, this payment of more than $2.2 million to a company owned by the chairman of the board and his son would obviously have had some impact on the value of the sixth defendant. Given that it was to be paid for considerations not giving rise to an enforceable debt it is surprising that none of the directors saw fit to consult the shareholders including the Commonwealth which had unknowing acquired that status only about an hour earlier. Mr Biscoe has submitted that even if the payment was made irregularly that is of no relevance to the present proceedings. The point is that it was made honestly and in good faith. However, the evidence to that effect has not yet been tested and a prima facie case may arise by inference from a combination of apparently suspicious circumstances even though a defendant maintains that there are innocent explanations for them all.

14. At a later meeting on the same day Mr Endresz moved that the sixth defendant pay Bisoya Pty Ltd, the fifteenth defendant, a further sum of $260,000 for management services calculated a the rate of $65,000 per annum for five years. Bisoya Pty Ltd is apparently a company controlled by Mr Forge, the third director of the sixth defendant. A retainer of $65,000 per annum for a further five years was also approved. The sum of $260,000 was subsequently paid on 22 April 1998. A similar explanation has been advanced for these resolutions.

15. Also on that day, 20 April 1998, the sixth defendant paid Mr Muir's company, Callform Pty Ltd, the sum of $168, 014 said to be due for repayment of share bonds.

16. In short, whatever explanations may be available, the evidence suggests that the transaction between the sixth defendant and the Commonwealth was concluded without a single letter of overture or enquiry from the Commonwealth, without a written agreement or even confirmatory note, with acceptance being signified by the simple expedient of depositing $6 million into a bank account and without any request for the shares to be issued and/or registered. I accept Mr Slattery's submission that these circumstances are sufficient to raise a prima facie case of at least constructive notice. Then on the working day following receipt the directors had resolved to pay two companies, each of which was owned or controlled by one of them, a total sum of nearly $2.5 million which was not actually owed to them and to pay a further sum of $168,000 to Mr Muir's company. These facts taken in combination with those to which I have already referred are sufficient to excite further suspicion. Nonetheless, having given the matter careful consideration I am not prepared to find that there is a prima case against the sixth defendant of actual knowledge of the misappropriation.

17. These findings are amply sufficient to support the grant of an injunction restraining the sixth defendant from dealing in any way with any part of the $6 million that may be in his possession or control.

18. However, the grounds for granting a Mareva injunction against this defendant are less compelling. As the NSW Court of Appeal pointed out in Frigo v Culhaci (unreported CA 40414/98 17 July 1998) at 7 & 8, the remedy is a drastic one which should not be granted lightly. Such an injunction can wreak havoc with a defendant's business and inevitably imposes a severe restriction on a defendant's right to deal with his or her own property. Furthermore, as a matter of general principle a court exercising equitable jurisdiction will only grant on an interlocutory basis the minimum relief necessary to do justice between the parties.

19. There is no evidence of any facts other than the nature of the relevant transactions suggesting any danger that the assets of the company might be disposed of or otherwise dealt with in a manner calculated to frustrate any judgment that might be obtained against it. Accordingly, Mr Slattery was forced to rely upon the proposition acknowledged in Patterson v BTR Engineering (Aust) Ltd to the effect that evidence of the nature of the scheme in which the defendant was allegedly involved might itself justify the conclusion that there was a danger that he might dispose of assets in order to defeat any judgment against him. I have carefully considered this submission having regard to the circumstances in which the funds were received by the sixth defendant and the dispositions approved on the following day. However, a finding of constructive or even actual notice of misappropriation does not necessarily lead to the grant of a Mareva injunction. It is necessary to demonstrate, whether by reference to the nature of the scheme to in which the defendant was involved or otherwise, that such a danger might be sufficiently substantial to justify an injunction of this kind. In the present case I am not so satisfied.

20. In any event, having regard to the time that has elapsed since the payment was received, the nature of the sixth defendant's business and the other injunctive relief which I intend granting the plaintiff in relation to this defendant I would have been inclined to refuse this aspect of the application on discretionary grounds. I should perhaps add that Mr Biscoe also relied upon the perceived inadequacy of the Commonwealth's procedures which apparently allowed some 8 months to elapse before the unauthorised payment was discovered. In view of the findings which I have made it is unnecessary to address this argument in any detail. However, in the circumstances revealed by the evidence in this case I would not have refused to grant interlocutory relief on that basis.

21. The seventh, eighth and ninth defendants were the directors of the sixth defendant and the case against them is broadly similar to that which the Commonwealth seeks to establish against the sixth defendant. I am satisfied that there is a prima facie cause of action against each such director though I am not satisfied that the evidence reveals a prima facie case of actual knowledge on the part of any of the them.

22. As I have indicated on 20 April 1998 almost $2.5 million was paid to a company owned by the seventh defendant and his son after a resolution carried by the eighth defendant who was his wife and by the ninth defendant. A resolution was then carried by the seventh and eighth defendants authorising a further payment of $260,000 to a company apparently controlled by the ninth defendant. These dispositions were made from funds received in circumstances attended by some suspicion. I am satisfied that I should grant injunctions restraining each of these defendants from disposing of or otherwise dealing with any part of the funds the subject of these proceedings.

23. Again, however, am not satisfied that a case for Mareva injunctions has been made out against these defendants.

24. The evidence is also sufficient to establish on a prima facie basis that on 22 September 1998 Mr Muir caused the sum of $2,725,000 standing to the credit of the Commonwealth with the Reserve Bank of Australia to be transferred to an account in the name of the first defendant. The evidence also suggests that such a transaction had not been approved by any Commonwealth officer with the necessary authority and that an investment in the sixth defendant would not have been within the scope of those authorised under section 39 of the Financial Management and Accounting Act 1998. The circumstances surrounding that transaction, including the manner in which the transfer was effected, the absence of any contemporaneous Commonwealth records and the fact that the making of investments of that nature was not part of Mr Muir's duties, are again sufficient to raise a prima facie case against him in relation to this transfer of funds.

25. In these circumstances it is appropriate that any injunction restraining Mr Muir from dealing with any part of the $6 million to which I have previously referred should be extended to cover any part of the $2,725,000 that may be in his possession or control. Furthermore, I am also satisfied that the nature of the prima facie case made out against Mr Muir in relation to this transfer of funds is such that it justifies the conclusion that there is a danger of assets being removed or otherwise dealt with in order to defeat any judgment that might be obtained against him and that that danger is sufficiently substantial to warrant extended the ambit of the proposed Mareva injunction.

26. The Amended Statement of Claim again fails to clearly articulate the nature of the claim against the third defendant in relation to this transfer of funds but having regard to the nature of the agreement which it entered into with the Commonwealth in August 1998 I am prepared to assume that a prima facie case also exists against that company. I am satisfied that an injunction should be granted restraining this defendant from dealing with any part of the $2,725,000. Furthermore, for the reason given earlier I am satisfied that there is a sufficient danger that the assets of the companies might be dealt with in a manner calculated to frustrate any judgment that might be entered against it. Consequently, the ambit of the Mareva injunction against this defendant will also be extended to cover any potential liability in relation to these monies.

27. The case against the first defendant is somewhat similar to the case brought against the sixth defendant in relation to the earlier payment. Again, some aspects of the transaction are sufficient to raise suspicions that the directors of the company must have had serious doubts about its bone fides. The only relevant documentation appears to be two letters from the first defendant to `The Manager, Business Sales, Business Services Trust Account', one dated 21 September 1998 purporting to confirm an application by the Commonwealth for a rollover investment in the sum of $2.725 million at 6% interest until 30 September 1998 and the other dated 1 October 1998 purporting to confirm an application by the Commonwealth for a further rollover investment in the same sum at the same interest until 30 June 1999. Apart from statements attributed to Mr Muir there is no evidence of any such applications. Nor is there any evidence of any discussion about adequate security for the significant sum said to have been invested or even of antecedent enquiries as to the financial viability of the first defendant. Furthermore, there is evidence that Mr Muir sought what seems to have been in essence a fee of $200,000 for arranging the transaction.

28. On the other hand, Mr Allan Endresz who was one of the directors of the first defendant was who has deposed to that fact that as Mr Muir had arranged the $6 million injection of funds into the sixth defendant in April 1998 he believed his representations that other funds could be obtained from the Business Funds Unit. It is certainly true that the earlier funds had been provided as a result of Mr Muir's activities and that by September 1998 no complain had been made by the Commonwealth. Of course, those facts do not wholly assuage the suspicion that the first defendant must have realised that this was no a normal commercial transaction. The earlier transaction was itself attended by suspicious circumstances and the circumstances surrounding the latter transaction should at least have prompted further enquiry.

29. There is no evidence of any threatened disposition of assets in order to defeat any possible judgement and I am not satisfied that the evidence establishes, even on a prima facie basis, conduct which of itself demonstrates a danger of such disposition sufficient to warrant a Mareva Injunction.

30. However I am satisfied that there are adequate grounds for restraining the first defendant from dealing with any part of the funds the subject of these proceedings.

31. The fourth and fifth defendants were the directors of the first defendant. Having regard to their apparent knowledge of the latter transaction and to the evidence of their involvement in it I am satisfied that there are adequate grounds for restraining each of them from dealing with any part of the funds the subject of these proceedings but, again, I am not satisfied that I should grant a Mareva injunction.

32. Further orders have been sought requiring the defendants in question to file affidavits setting out their knowledge of the manner in which the Commonwealth's funds have been disbursed. Mr Muir is facing serious criminal charges and his counsel has submitted that the submitted that if he were required to file such an affidavit any disclosures he might be compelled to make might tend to incriminate him. I am not satisfied that I should make such an order against him. However, I propose ordering the other defendants to file affidavits and to provide discovery of any relevant documents in their possession.

33. It would be preferable if the injunctions intended to restrain any dealings with any parts of the monies transferred from the Commonwealth in April and September 1998 could be drafted with some precision in order to forestall further disputes as to what funds or other assets fall within their ambit.

34. In addition, the Mareva injunctions which I have indicated will be granted in relation to the second and third defendants will need to be qualified in order to ensure that the personal needs of the second defendant and any ordinary business expenses of both defendants can be met out of their respective assets.

35. I will give counsel time to determine whether agreement can be reached as to the precise form of the orders and in default of such agreement hear further argument on that issue. I will also hear counsel in relation to the further conduct of these proceedings and costs.

I certify that this and the twelve (13) preceding pages are a true copy of the Reasons for Judgment herein of his Honour, Justice Crispin.

Associate:

Date: 24 February 1999

Counsel for the Plaintiff: Mr Slattery QC

Solicitors for Plaintiff:: Commonwealth DPP

Counsel for the 2^nd and 3^rd Defendants Mr G Corr

Counsel for the 1^st 4-9^th Defendants Mr P Biscoe

Counsel for 11^th, 12^th Defendants Mr Bates

Dates of hearing: 23 February 1999

Date of judgment: 24 February 1999