Carsten Pty Ltd & Ors v Enervite Export Pty Ltd [1998] FCA 15 (21 January 1998)

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 759 of 1997

BETWEEN:	CARSTEN PTY LIMITED First APPELLANT CARALAPATI PREMRAJ Second APPELLANT HARI SHOTAM SRIREKAM Third APPELLANT
AND:	ENERVITE EXPORT PTY LIMITED RESPONDENT
JUDGE:	MOORE J
DATE OF ORDER:	21 January 1998
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The notice of motion is dismissed.

2. The appellants pay the costs of the respondent.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	ng 759 of 1997

BETWEEN:	carsten pty limited First APPELLANT caralapati premraj Second APPELLANT hari shotam srirekam Third APPELLANT
AND:	eNERVITE eXPORT PTY lIMITED RESPONDENT

JUDGE:	MOORE J
DATE:	21 January 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

This judgment concerns a notice of motion brought by three appellants who appeal against the judgment and orders of Lehane J of 24 December 1997. The appellants seek an order staying the orders of the trial judge pending the determination of the appeal.

The proceedings before the trial judge concerned the business activities of Enervite Export Pty Ltd ("Enervite Export") and individuals and companies associated with that company. The notice of appeal and proposed amendments to it, do not challenge the findings of fact of the trial judge, save perhaps in relation to one matter which I will mention later. The following narrative is drawn from the reasons for judgment of the trial judge. Enervite Export carried on the business of supplying and distributing vitamins and other health supplements under a brand name "Enervite" and arranged for the manufacture of these products. The third appellant, Mr Shotam, was a director of Enervite Export and had been principally responsible for its management. The second appellant, Mr Premraj had been a director of Enervite Export for a period, though there was an issue left unresolved at trial whether he resigned as a director in February 1997. Enervite Export had a loan facility with the Commonwealth Bank of Australia ("the Bank") secured by a charge over its undertaking and assets. Under the contractual arrangements between the Bank and Enervite Export, receivers and managers were appointed on 1 July 1997 after accountants, appointed by the Bank, had concluded the financial position of Enervite Export was, at the very least, somewhat precarious. Enervite Export, under the control of those receivers, brought the proceedings resulting in the judgment of the trial judge. Declarations were sought that Mr Premraj and Mr Shotam had breached fiduciary duties owed to Enervite Export and that a company, Carsten Pty Ltd ("Carsten"), held certain property as constructive trustee of Enervite Export. Mr Premraj is the sole director of Carsten. In the first half of 1997 registrations for which Enervite Export was the sponsor, were transferred to Carsten under the Therapeutic Goods Act 1989 . Without detailing his Honour's findings, Carsten, in effect, assumed the business of Enervite Export by mid 1997.

The trial judge made declaratory orders that Mr Shotam had breached the fiduciary duties he owed to Enervite Exports as director of that company, Mr Premraj had participated with knowledge in the breach of fiduciary obligations by Mr Shotam and that Carsten held the assets, undertakings and goodwill of the business of supplying and distributing vitamins and other health supplements known as Enervite Australia as constructive trustee for Enervite Export. His Honour made consequential orders in the following terms:

"1. The first respondent is to take all steps required by the applicant for the purpose of enabling the applicant to be listed as sponsor in relation to the products distributed in the course of the business of Enervite Australia registered under the Therapeutic Goods Act 1989 (Cth).

2. There be an inquiry into the amount of any benefit derived by the respondents or any of them by reason of any breach of the fiduciary and statutory duties owed by the second and third respondent to the applicant.

3. The first respondent, its servants and agents, are restrained from trading or carrying on a business under the name of "Enervite Australia" or representing that the first respondent or its business has any sponsorship or approval of, or any affiliation or connection with, the applicant or the applicant's business.

Other subsidiary orders were made but I need not detail them.

The conclusion of the trial judge concerning the conduct of Mr Shotam and Mr Premraj and the status of Carsten as trustee, depended, in substantial part, on the view his Honour took of an agreement of 21 July 1990 between Mr Shotam and, ostensibly, Enervite Export. The agreement was described as a distribution agreement effectively authorising Enervite Export to sell the Enervite range of products. It conferred on Mr Shotam the right to terminate the arrangement in the event that Enervite Export ceased to be financially sound, so as to continue to manufacture and market Enervite products. In those circumstances Mr Shotam reserved the right to appoint another distributor with certain consequences for the business of Enervite Export. It was in purported conformity with this agreement that the registrations under the Therapeutic Goods Act 1989 were transferred to Carsten and it assumed the business of Enervite Export.

A central issue in the proceedings before the trial judge was whether Enervite Export was bound by that agreement. His Honour concluded it was not. The agreement was signed by Mr Shotam on the one hand and on the other by Mr Herve de Bernis, described as the general manager of Bista Corporation Pte Ltd of Singapore. In his reasons for judgment, the trial judge set out the circumstances in which Mr de Bernis came to be involved in the distribution of products of the type later sold by Enervite Export in Australia. I do not repeat all his Honour's findings though he did find that Mr de Bernis was never a director of Enervite Export and, though Bista Corporation was a shareholder in Enervite Export, it has never been the sole shareholder or even a majority shareholder. His Honour concluded that, as a matter of fact, there had never been consideration and a decision, by either the directors or the shareholders of Enervite Export, whether it should enter the distribution agreement. His Honour rejected the contention that Mr de Bernis had authority to sign the agreement on behalf of Enervite Export. His Honour also rejected the contention that, by its conduct, Enervite had adopted the agreement. His Honour pointed to evidence indicating that the registrations and listings under the Therapeutic Goods Act 1989 were treated as assets of Enervite Export rather than Mr Shotam.

I turn now to consider the issues raised in this notice of motion. The power to order a stay pending the hearing of an appeal was recently considered by a Full Court in Powerflex Services Pty Ltd v Data Access Corporation (1996) 137 ALR 498. After referring to O 52 r 17 the Court said at 499:

"The language of the rule suggests no limitation upon a broad discretion inhering in the Court. Several judges of the court, most recently Heerey J in Henderson v Amadaio Pty Ltd (No 4) (1996) 136 ALR 593 have followed the decision of the Court of Appeal of New South Wales in Alexander v Cambridge Credit Corp Ltd (recs apptd) (1985) 2 NSWLR 685 where, at 694, that court said it was "sufficient that the applicant for the stay demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour". The Court of Appeal also referred with approval to a statement of Mahoney JA in Re Middle Harbour Investments Ltd (in liq) ((CA) NSW) 15 December 1976, unreported) where, with the concurrence of the other members of the court, Mahoney JA said:

Where an application is made for a stay of proceedings, it is necessary that the applicant demonstrate an appropriate case. Prima facie, a successful party is entitled to the benefit of the judgment obtained by him and is entitled to commence with the presumption that the judgement is correct. These are not matters of rigid principle and the court asked to grant a stay will consider each case upon its merits, but where an applicant for a stay has not demonstrated an appropriate case but has left the situation in the state of speculation or of mere argument, weight must given to the fact that the judgment below has been in favour of the other party.

Notwithstanding that in the Supreme Court of Victoria a more stringent test is generally being applied (see Cellante v G Kallis Industries Pty Ltd [1991] 2 VR 653; Lagarna Pty Ltd v Bridge Wholesale Acceptance Corp (Australia) Ltd [1995] 1 VR 150), we think we should follow the decision in Alexander v Cambridge Credit. "Special" circumstances do not have to be shown. In any case, in this court the word "special", in a comparable context, has not been thought to raise a significant barrier to the exercise of a broad general discretion: Jess v Scott (1986) 12 FCR 187; 78 ALR 185. There, the rule itself dealing with leave to appeal out of time used the expression "special reasons"."

In the notice of appeal (allowing for corrections that needed to be made to it) it is alleged that the trial judge erred in law in holding that, on the evidence, the distribution agreement of July 1990 was not binding on Enervite Export, and in not holding the Enervite Export was estopped from denying that its legal relations with Mr Shotam were governed by that agreement. That latter contention was not a matter argued before the trial judge. There must be a real question as to whether a Full Court will allow that issue to be agitated given the contention now made by counsel for Enervite Export that its approach to the evidence at the trial may well have been different had the pleadings clearly raised a question of estoppel. The appellants propose to contend, in addition, that the trial judge erred in applying the Duomatic principle (see Re Duomatic Ltd [1969] 2 Ch 365), not inferring from the proven facts that Mr de Bernis had authority to bind Enervite Export and not inferring that the distribution agreement was adopted/ratified by Enervite Export. It is inappropriate that I descend into detail about the strength or otherwise of these arguments which will be considered, in due course, by a Full Court. However it was submitted by counsel for Enervite Export that the appeal had no reasonable grounds of success. I would be inclined to approach the matter slightly differently. Having read with care the trial judge's reasons and considered the submissions made by the appellants in the hearing of the notice of motion, the presumption that the judgment is correct has not been displaced by the contentions embodied in the grounds of appeal to the extent that they were expanded upon orally by counsel for the appellants.

It seems to me that the matter of substance that bears upon how I should exercise the discretionary power to grant or refuse a stay is the proposed sale of the business of Enervite Export by the receivers and its consequences for, in particular, Carsten. A belated attempt was made by the appellants to amend the notice of motion to seek an order staying the sale, but that amendment was refused. It is clear from the evidence before me that the receivers are well advanced in the process of selling the business. The question is whether they can do so with the benefit of the orders of the trial judge or without them. I think it was ultimately accepted by counsel for the appellants that of greatest moment, was the potential transfer to a purchaser of the business of Enervite Export such rights (if I can so describe them) as Enervite Export has, by operation of the orders of Lehane J, under the Therapeutic Goods Act 1989 . While it was not the subject of submissions, it appears that under reg 13(4) of the Therapeutic Goods Regulations, a transfer of registration or listing of therapeutic goods may be effected as part of the sale or disposal of a business.

I accept that the sale of the business of Enervite Export together with the transfer of rights, as part of that sale, under the Therapeutic Goods Act 1989 , may well leave the appellants in the position of being unable to restore the status quo ante if they succeed in the appeal. In particular Carsten may have lost, irretrievably, a capacity to be registered as a sponsor under the Therapeutic Goods Act 1989 of the products that had been sold by Enervite Export and, more recently, sold by Carsten.

However, against that consideration has to be balanced the right of the receiver to sell the business, and in so doing, attempting to satisfy the debt of Enervite Export to the Commonwealth Bank, incurred during the management of that company by Mr Shotam. The accountant in the employ of the receivers responsible for the management of Enervite Export, and conducting its sale, deposed to various matters which, in his opinion, would prejudice Enervite Export if there was any delay in executing the judgment of the trial judge. Evidence was given by Mr Shotam which suggested that a number of them were matters of limited moment. Of greater significance, in my opinion, is the prospect of the sale process being delayed and offers of interest presently made being withdrawn. While it is a matter about which there can be no certainty, it appears to me reasonable to proceed on the basis that further delay may have the effect of diminishing the value of the business of Enervite Export in any sale. It must be accepted that any delay and consequential diminution in the price that might be secured for the sale of the business of Enervite Export, might be met by an appropriate undertaking in relation to any loss. An undertaking is proffered by Carsten and while it initially had the appearance of being secured against an asset, an office building in Melbourne undergoing refurbishment and conversion into a hotel, it was clear from the evidence of Mr Premraj that it was a bare undertaking by the company. I accept that the evidence, on balance, establishes that Carsten is the registered proprietor of the building in which it has equity in excess of nine million dollars. However the evidence, as a whole, says nothing about the overall financial position of Carsten and its capacity to satisfy any undertaking given in relation to this appeal. In the absence of such evidence the undertaking, in my opinion, is of little worth.

I am not persuaded that the appellants have demonstrated that this is an appropriate case for the grant of a stay which would displace Enervite Export's immediate enjoyment of the fruits of its victory. I dismiss the notice of motion and order the appellants pay the respondent's costs of the notice of motion.

I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Associate:

Dated: 21 January 1998

Counsel for the Applicant:	Mr S Jacobs
Solicitor for the Applicant:	Stewart Levitt & Co
Counsel for the Respondent:	Mr M Walton
Solicitor for the Respondent:	Abbott Tout
Date of Hearing:	19 January 1998
Date of Judgment:	21 January 1998