Re Trawl Industries of Australia Pty Ltd (Receivers and Managers Appointed) (In Liquidation); Lake Cumbeline Pty Ltd; Idobook Pty Ltd; Peter Horrobin; Richard Sands and Raymond Pridmore v Effem Foods Pty Ltd [1992] FCA 339 (17 July 1992)

FEDERAL COURT OF AUSTRALIA

Re: TRAWL INDUSTRIES OF AUSTRALIA PTY. LTD. (Receivers and Managers Appointed)
(In Liquidation); LAKE CUMBELINE PTY. LTD.; IDOBOOK PTY. LTD.; PETER HORROBIN;
RICHARD SANDS and RAYMOND PRIDMORE
And: EFFEM FOODS PTY. LTD.
No. N G129 of 1990
FED No. 511
Estoppel
(1992) 108 ALR 353

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Estoppel - res judicata - privity - United States decisions - application for stay - further evidence.

HEARING

SYDNEY
17:7:1992

Counsel and Solicitors
for the Appellant: Mr J.B. Whittle and Mr M. Southwick

instructed by Blake Dawson Waldron

Counsel and Solicitors

for the Respondent: Mr R.M. Smith instructed by

Sly and Weigall

ORDER

THE COURT ORDERS THAT:
1. The respondent have leave to re-open its case upon the
motion filed 2 May 1990.
2. The orders pronounced 9 June 1992 be not varied.
3. The respondent pay costs of its motion filed 1 July 1992.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

These reasons should be read with those delivered on 9 June 1992. On that day I ordered that (i) the proceeding by the first applicant be stayed and, (ii) the respondent's motion filed 2 May 1990 otherwise be dismissed.

2. Upon the matter then coming before me on 18 June 1992 for argument on costs and for directions in the main action, counsel for the respondent ("Effem") indicated that he wished to apply to re-open his client's case on the motion and to lead further evidence, with a view to producing a result that the stay order made against the first applicant be extended to the other applicants. The orders pronounced 9 June 1992 have not been entered and the order refusing the stay sought against the remaining applicants is, in any event, interlocutory in nature. I gave directions for the filing of affidavits by either side and on 10 July 1992 heard argument as to the effect upon the motion filed 2 May 1990, of the additional evidence. At the hearing there was no opposition to the grant of leave to re-open, given the interlocutory nature of the proceeding.

3. The effect of additional evidence is to strengthen the factual basis for what the respondent says should be the application of the United States decisions dealing with privity in interest.

4. In the earlier reasons for judgment I concluded that any introduction into Australia of these doctrines was a matter for the High Court, after reconsideration of Ramsay v Pigram [1968] HCA 34; (1968) 118 CLR 271.

5. Further, I concluded that upon the evidence as it then stood it would by no means follow that even by invoking the United States authorities, Effem would succeed in its stay application against the second to sixth applicants. I referred to authorities in the United States in which a non-party with a financial interest in the outcome had participated so actively in the first round of litigation by funding it and directing the conduct of the litigation that he was held to have assumed, de facto or in substance, the role of an actual party, and to judicial statements that the determination of identity between litigants for the purpose of establishing privity, in this sense, was a "factual question". Turning to the instant case, I held that whilst there was evidence that at least some of the present applicants actively had participated in the litigation conducted by the first applicant ("Trawl") in the New South Wales Supreme Court litigation, as the evidence stood no one of the applicants directed or effectively controlled the litigation at any stage and certainly not after Trawl went into receivership with the consent of the Australian and New Zealand Banking Group Limited ("the ANZ Bank").

6. The additional evidence bears upon the conduct of the Supreme Court litigation and, in the submission of Effem, indicates a contrary conclusion to that expressed as to the direction and effective control of the Supreme Court litigation, by the second, third, fourth, fifth and sixth applicants ("Lake Cumbeline", "Idobook", "Mr Horrobin", "Mr Sands" and "Mr Pridmore", respectively).

7. Effem was alerted to the existence of additional material bearing upon the relationship between the ANZ Bank and Lake Cumbeline, Mr Horrobin and Mr Sands by an affidavit sworn by the solicitor for the applicants on 17 June 1992 in support of an application for expedition of the balance of the proceeding remaining after the grant of the stay against Trawl.

8. By demand dated 29 April 1992, made pursuant to sub-s. 460(2)(a) of the Corporations Law the ANZ Bank demanded from Lake Cumbeline a payment of the sum of $2,276,422.22 pursuant to a guarantee dated 12 June 1987 and given by Lake Cumbeline to the ANZ Bank in respect of the debts of Trawl. On 25 April 1992, in the Supreme Court of Victoria, the ANZ Bank commenced a proceeding against Messrs Sands, Horrobin and Pridmore. It is alleged, in the statement of claim, that by guarantee dated 12 June 1987 Messrs Sands, Horrobin and Pridmore guaranteed the obligations to the ANZ Bank of Trawl. In their defence filed 19 June 1992 (which is unsworn), Messrs Sands and Horrobin make various allegations which Effem tenders on the present application as relevant admissions by them. There is a separate defence by Mr Pridmore.

9. Messrs Sands and Horrobin allege that Lake Cumbeline had been entitled to a first ranking mortgage debenture over the assets and undertaking of Trawl to secure its indebtedness to Lake Cumbeline, but that on or about 2 October 1987 that security was subordinated to a first ranking mortgage debenture taken by the ANZ Bank on that day over the assets and undertaking of Trawl, to secure Trawl's indebtedness to the ANZ Bank. In para. 27 of their defence Messrs Sands and Horrobin plead an agreement between them and Lake Cumbeline on the one hand and the ANZ Bank on the other, said to have been made in April 1989. (Mr Pridmore makes no such allegation in his defence). The proceedings in the Supreme Court of New South Wales, to which it was necessary to refer at some length in the reasons for judgment I delivered 9 June 1992, were commenced on 17 April 1989. The terms of the agreement pleaded in para. 27 of the Victorian defence deal with the conduct of that litigation, together with the circumstances surrounding the appointment on 18 April 1989 of receivers and managers to Trawl by Lake Cumbeline.

10. The terms of the alleged agreement include the appointment by Lake Cumbeline of receivers and managers of Trawl rather than by the ANZ Bank for the reasons that Lake Cumbeline and its directors "would be able to give effective instructions to the legal advisers appointed by (Lake) Cumbeline in order to properly conduct the Trawl litigation", that Messrs Horrobin, Sands and Pridmore and Lake Cumbeline "would arrange for the funding of the Trawl litigation", and that the ANZ Bank would not impede them in relation to their conduct of that litigation and to that end would not attempt to enforce the guarantee against them until the completion of the Trawl litigation.

11. It appears that plant and equipment at Trawl's fish processing plant was leased to Trawl by Idobook. The equity in Idobook was held by Mr Sands and his family. The further evidence indicates that the conduct of its affairs was in the hands of Mr Sands. With Mr Sands' assent, the receivers of Trawl sold the leased plant and equipment. In December 1989 they paid the proceeds of about $800,000 to the ANZ Bank to reduce the indebtedness to it of Trawl. In para. 29 of the Victorian defence, Messrs Sands and Horrobin allege that these steps were taken in performance of an agreement made in December 1989 between Messrs Horrobin, Sands and Pridmore and Lake Cumbeline on the one hand, and the ANZ Bank on the other.

12. The evidence now includes correspondence passing between the relevant parties in April and May 1989. This gives a fuller picture to that presented by the defence of Messrs Sands and Horrobin in the Victorian proceeding. It is not my task here to try any issue in that proceeding. The admissions relied upon by Effem as made in the pleading must be assessed together with the other evidence led before me by both sides. I turn now to consider the effect of that evidence.

13. On 13 April 1989 Mr L.P. Maxsted, a partner of Peat Marwick Hungerfords, chartered accountants, wrote to Mr B.G. Oldfield, the responsible officer in the ANZ Bank, informing him that he had been appointed by the directors of Lake Cumbeline, Messrs Horrobin, Sands and Pridmore to advise upon the financial position of Trawl and upon the action which Lake Cumbeline should pursue in its capacity as lender to and shareholder of Trawl. Mr Maxsted stated that Lake Cumbeline wished to appoint receivers and managers to take control of the assets of Trawl and pursue action against Effem for damages for its alleged repudiation of its contract for the supply of mackerel by Trawl. Mr Maxsted said it was a part of the proposal that the ANZ Bank would retain its rights to appoint a receiver and manager at any point of time in the future if it was dissatisfied with the conduct of the administration. Further, the distribution of funds through any realisations generated during the receivership would be the same as if the ANZ Bank had appointed its own receivers and managers. Lake Cumbeline itself would fund the action against Effem and the indemnity to the receivers and managers would be provided by Lake Cumbeline. Mr Oldfield replied by letter dated 14 April 1989 raising various points for consideration at a conference which was to be held on the following Monday, 17 April 1989.

14. The meeting was held on 17 April 1989 at the offices of the bank's solicitors in Melbourne. On 18 April 1989 Mr Maxsted wrote to Mr Oldfield detailing what he took to be additional requirements of the ANZ Bank to those raised in the letter of 14 April, concerning the proposal by Lake Cumbeline to proceed with the appointment of receivers and managers over Trawl. The letter included the following passages:

"In accordance with our discussions yesterday morning,
notwithstanding the negative responses to your request for
further security, because of the directors' legal position
re incurring of debts, Cumbeline has this morning appointed
David Crawford and me as Receivers and Managers of Trawl.
I reiterate my comments during yesterday's meeting and in my
letter of 13th April, 1989 that this appointment, given the
undertakings in that correspondence, should be in the mutual
interests of the Bank and Cumbeline.
The objective of the directors of Cumbeline and Trawl is to
realise Trawl's assets in an efficient and expedient
fashion. Given their intimate knowledge of the company's
business and, in particular its relationship with (Effem),
they believe overall realisations can be maximised by
retaining a significant involvement through the appointed
Receivers and Managers, in the management of the realisation
of Trawl's assets. The merits of this involvement have been
acknowledged by you.
In many regards directors are simply requesting of the Bank
that it not take precipitous action to appoint its own
Receiver and Manager whilst they be given time to 'work out'
(in the sense of selling off assets) of the current
financial problems, which are seen by them to be a direct
result of the behaviour of (Effem). The need to 'work out'
under the umbrella of Cumbeline's Receiver and Manager
arises directly because of the company's inability to pay
its debts as they fall due and the obligations upon
directors which arise therefrom.
As the appointed Receivers and Managers, Mr Crawford and I
do not see our role as being accountable to Cumbeline alone.
To the contrary because of ANZ's position as holder of the
first charge, I have emphasised to Cumbeline's directors
that the flow of reporting to them should be no greater than
to the Bank - both in the context of the approach to the
receivership and the actual results. The directors
understand and agree to this requirement."

15. On 4 May 1989 Mr Maxsted wrote to Blake Dawson Waldron, solicitors, informing them of his appointment with Mr Crawford as receivers and manager of Trawl pursuant to the Lake Cumbeline security. Mr Maxsted confirmed that it was in order for Blake Dawson Waldron to continue to act in the litigation between Trawl and Effem. The letter continued:

"Agreement has been reached with Lake Cumbeline Pty. Ltd.
that it should directly fund the total costs of the action
and I would be pleased if you would note your records
accordingly. This agreement has been reached principally to
ensure that Trawl's first debenture holder, Australia and
New Zealand Banking Group Ltd., does not take precipitous
action to appoint its own Receiver and Manager. Would you
please address the question of the format of the indemnity
type documentation which should be specifically in place
between Lake Cumbeline Pty. Ltd and Trawl to confirm the
funding arrangement.
Needless to say, as the action is between Trawl and (Effem),
as Receiver of Trawl I need to be copied with all outward
correspondence and be kept informed of all developments with
respect to this matter.
My consent to the continuation of the action is based on
advice from Mr P. Horrobin that the likelihood of success in
the action significantly exceeds fifty percent."
(Emphasis supplied).

16. On 28 April, the solicitors for the ANZ Bank wrote two letters, one to Messrs Horrobin, Sands and Pridmore and the other to Mr Maxsted. The solicitors pointed out that the bank had not given its consent to the appointment of the Receivers and Managers to Trawl by Lake Cumbeline, that Messrs Sands, Horrobin and Pridmore were in default under their guarantees of the obligations to the bank of Trawl, and that the bank preferred to keep open the options available to it for recovery of its substantial debt.

17. The evidence indicates that the litigation in the Supreme Court of New South Wales was funded by Lake Cumbeline which itself was funded directly or indirectly by Messrs Horrobin, Sands and by Idobook. The evidence also indicates that those gentlemen (and to a lesser extent Mr Pridmore) gave the effective instructions to Blake Dawson Waldron for the conduct of the Trawl litigation. The evidence does not show that Mr Pridmore funded the litigation. His role at all relevant stages has been a lesser one to that of the other applicants.

18. I do not conclude on the material before me that there was an agreement with the ANZ Bank in the terms pleaded in para. 27 of the defence in the Victorian proceeding. However, I conclude that the appointment of receivers and managers by Lake Cumbeline to Trawl and the subsequent conduct of the New South Wales Supreme Court litigation in the manner I have described, took place with the knowledge of the ANZ Bank, which decided to keep its options open and for a time stood by. Matters had changed by 24 September 1991. By then the New South Wales Court of Appeal had reserved its judgment on the appeal from the orders of Cole J. made 2 November 1989.

19. On 24 September 1991 the ANZ Bank wrote a letter to which Mr Horrobin replied on 1 October 1991. The bank was seeking the placing before it of a specific proposal within 14 days to deal with the Trawl indebtedness. Matters then deteriorated leading to the institution earlier this year of the present Victorian proceeding.

20. There was no direct evidence in any detail as to the size of the indebtedness of Trawl to the ANZ Bank at relevant times. It does appear that at, or shortly after, the institution of the receivership, the only substantial asset of Trawl was its action against Effem. Interest on the bank debt was accruing some $65,000 per month, and the other creditors of Trawl totalled some $220,000. It is uncertain whether the $1.7 million, referred to by Mr Pridmore in April 1989 as owing to the ANZ Bank, included an accrued interest component.

21. I am prepared to accept that at all material times the debt of Trawl to the ANZ Bank was significantly less than the sum of $9,786,611 which was claimed in the New South Wales proceeding, but in the events that happened, was never pursued to judgment in that or any lesser sum. In all the circumstances, I am still of the view that whilst a successful outcome in the New South Wales proceeding would have produced what counsel described as "commercial consequences" for them, the extent to which the applicants thereby would have been relieved of their obligations to the ANZ Bank is a matter of speculation. It needs to be remembered, as counsel for the applicants pointed out, that during the pendency of the appeal to the Court of Appeal, on 8 August 1990, a liquidator to Trawl was appointed by the Supreme Court of Victoria on the application of a third party creditor.

22. However, having regard to the whole of the evidence as it now stands, I would conclude that the second, third, fourth and fifth applicants participated so actively in the conduct of the Supreme Court litigation that in substance they assumed the roles of actual parties. The receivers were funded by Lake Cumbeline, which indemnified them. The receivers acted upon Mr Horrobin's advice as to the significant chances of success in the litigation. I would further conclude that Mr Horrobin and the other relevant applicants acted as they did in implementation of concerted arrangements and understandings between them, and that the ANZ Bank, although holder of the first ranking security over the assets of Trawl, stood by while the litigation (Trawl's remaining substantial asset) was conducted in this fashion. But I would not conclude that the sixth applicant, Mr Pridmore, participated so actively in the carriage of the litigation that in substance he assumed the role of a party thereto.

23. Had I regarded it as open for me to do so I would have held that, within the meaning of the United States authorities, to which I referred, there was available in the Court against the second, third, fourth and fifth applicants a plea of res judicata on the ground of privity in interest.

24. However, given the position I have taken as to the effect of the present High Court authority, the views I have expressed above do not dictate a different outcome to that already indicated in the reasons for judgment delivered 9 June 1992.

25. Accordingly, I grant the leave sought by Effem in its notice of motion filed 1 July 1992, but do not vary the orders pronounced 9 June 1992. The costs of the motion filed 1 July 1992, including those of 10 July 1992, should be paid by Effem.