FEDERAL COURT OF AUSTRALIA

Gribbles Pathology (Vic) Pty Ltd v Shandford Investments Pty Ltd 

[2004] FCA 1466

CORPORATIONS – application to set aside statutory demand – plaintiff member of group – defendant controlled by C, CEO, managing director and substantial shareholder of group – loans allegedly made by way of payments to creditors of plaintiff and other group members – payments concealed by C from group’s board – no explanation proffered by C – whether genuine dispute that loans made to holding company of group rather than plaintiff –whether demand should also be set aside for “some other reason”

PRACTICE AND PROCEDURE – excessive photocopy authorities

WORDS AND PHRASES – “some other reason”

Corporations Act 2001 (Cth) ss 181(1), 459H(1), 459J(1)(b)

Federal Court of Australia Act 1976 (Cth) s 5(2))

Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 cited

GRIBBLES PATHOLOGY (VIC) PTY LTD v SHANDFORD INVESTMENTS PTY LTD

NO V1051 OF 2004

HEEREY J

29 NOVEMBER 2004

MELBOURNE

THE COURT ORDERS THAT:

1. The statutory demand dated 6 August 2004 is set aside.
2. The defendant pay the plaintiff’s costs, including reserved costs.

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

REASONS FOR JUDGMENT

1                     The plaintiff Gribbles Pathology (Vic) Pty Ltd (Gribbles Victoria) is a member of the Gribbles Group (the Group).  The holding company of the Group, Gribbles Group Limited (GGL), is listed on the Australian Stock Exchange.  Gribbles Victoria applies under s 459G(1) of the Corporations Act 2001 (Cth) for an order setting aside a statutory demand for $2,850,986.65 served on it by the defendant Shandford Investments Pty Ltd (Shandford) on 6 August 2004.

2                     Of the amount of the demand, some $1,427,871.84 represents payments made by Shandford to trade creditors of Gribbles Victoria in and about November 2003.  It is said by Shandford that this amount constituted a loan to Gribbles Victoria, that there were no agreed terms as to repayment, that accordingly the loan was repayable on demand and that such demand has been made. 

3                     There are some complicating features of this case.  Shandford is controlled by Mr Wallace Cameron.  Interests associated with Mr Cameron own 43.05 per cent of GGL.  Mr Cameron is and has at all times been a director of GGL and its subsidiaries, including Gribbles Victoria.  Up until 31 May 2004 Mr Cameron was also Managing Director and Chief Executive Officer of GGL.  On that day his fellow directors Mr David Heaney and Mr Bernard Wheelahan insisted he stand down.

4                     The payments made to trade creditors of Gribbles Victoria and other members of the Group were arranged by Mr Cameron without consulting his fellow directors.  Indeed it appears from the evidence that he deliberately concealed these payments from them.

Payments to Gribbles Victoria trade creditors

5                     The affairs of the Group are conducted on a consolidated basis.  Members of the Group do not as a rule hold separate board meetings.  The Group prepares annual and half yearly accounts which consolidate the revenue, expenses, assets and liabilities of all members of the Group, including Gribbles Victoria.  All trade creditors of the Group are paid by one of its members, Gribbles Administrative Services Pty Ltd (GASPL).  The expense is then internally allocated to the appropriate member of the Group.

6                     Mr Cameron was, prior to his retirement as CEO, responsible for the Group’s day-to-day operations.  The Chief Financial Officer of the Group, who reported directly to Mr Cameron, was Mr Graham Atkinson.  He left the Group in February 2004.  Reporting to Mr Atkinson was the Group Financial Controller Mr Ulf Lindskog.  He was responsible for financial reporting.  Part of his role was to ensure that any unusual transactions were properly structured and accounted for in the books and records of the Group.

7                     In the first half of December 2003 Mr Lindskog was reviewing the reconciliations for the previous month.  He found an unusually large discrepancy between the amount of trade creditors recorded as paid and the amounts in fact paid.  He spoke to Mr Atkinson about the matter.  Mr Atkinson said that the amounts had been paid by Mr Cameron personally and that Mr Cameron had given him cheques and directed him to use them to pay creditors.  Mr Atkinson showed Mr Lindskog a cheque book which he said contained the cheques used to make the payments.  Mr Lindskog does not recall the name of the account holder but presumably it was Shandford.  Mr Lindskog complained that he would have liked to have been told about this “up-front”.

8                     Subsequent investigations by Mr Lindskog revealed that between 6 November and 1 December amounts totalling $2,729,018.44 had been paid to creditors of 13 members of the Group, including GGL itself.  Creditors of Gribbles Victoria were paid in the amount of $1,427,871.84. 

Non-disclosure to Gribbles Group board

9                     The boards of GGL and Gribbles Victoria were not informed of the alleged loans at the time they were made.  Mr Heaney deposes that he attended all meetings of the GGL board between October 2003 and January 2004.  Board meetings were held on 23 September, 22 October, 3 November, 10 November, 2 December and 15 December 2003.  Mr Cameron and Mr Atkinson attended all of these meetings and at no time were the alleged loans or any related proposed transaction raised for discussion.

10                  To the contrary, Mr Cameron deliberately misled the GGL board by remaining silent about the alleged loans during board discussions in which their disclosure would have been directly relevant:

(i)                  At the GGL board meeting on 22 October 2003 the directors, including Mr Cameron, discussed cashflow issues.  It was proposed that any necessary funds to pay trade creditors be raised as part of a capital raising.  Mr Cameron argued against this, saying it was not necessary. Mr Cameron did not disclose any intention to procure GGL to take an advance from him;

(ii)                At the GGL board meeting on 10 November 2003 the working capital requirements of GGL were discussed and a detailed cashflow forecast was demanded of Mr Atkinson to enable the directors to determine how much capital they needed to raise so as to meet the working capital requirements.  Even though he had already proceeded to make the alleged loans, Mr Cameron remained silent on this issue;

(iii)               At the GGL board meeting on 15 December 2003 a cashflow forecast tabled by Mr Cameron made no reference to the monies advanced by Shandford.  The line item “other borrowings”, where the Cameron loan ought to have been recorded, shows both actual and forecast balances as nil.

11                  No documentation has been produced by Shandford recording any agreement for the alleged loans.

12                  The alleged loans were only revealed to the directors of GGL because they were referred to in an independent accountant’s report on GGL’s finances, which was tabled at a GGL board meeting on 22 March 2004.

13                  Mr Heaney deposes that any proposal by Mr Cameron for loans to the Group would have been rejected by the board.  Mr Heaney regards it generally as “very poor commercial practice” for a public company to borrow large sums from its CEO and/or a substantial shareholder repayable on demand.  Further, he says that in December 2003 the Group undertook a capital raising of $15 million from institutional investors.  Had Mr Cameron raised the need for funds to meet creditor payments the additional working capital could have been raised.

Were the alleged loans made by Shandford to Gribbles Victoria?

14                  If A and B agree that A will make payments to or for the benefit of C, for example to discharge debts owed to C’s creditors, the usual characterisation of such a transaction will be a loan from A to B, not C.  It seems highly arguable that this would be so in the present case.  Viewed objectively, the following circumstances are significant:

·        The Group conducted its business affairs, including the raising of capital and payment of creditors, on a collective basis;

·        Mr Cameron and Mr Atkinson were respectively CEO and Chief Financial Officer of the Group and would ordinarily be taken to be acting in those capacities;

·        With payments being made for the benefit of 13 entities it is an unlikely intention to impute to a lender that recovery rights would be against each entity rather than the Group as a whole via the holding company.

15                  This seems to have been the view of Mr Cameron himself.  On 13 July 2004 solicitors Piper Alderman on behalf of Shandford wrote to Mr Wheelahan and Mr Andre Carstens, described in the letter respectively as “Chairman The Gribbles Group Limited” and “Chief Executive Officer The Gribbles Group Limited”.  The letter commences:

“In November and December 2003, our client advanced the sum of $2.7 million to your company.”

“Your company” is GGL, not Gribbles Victoria.  The amount referred to is that paid to creditors of the 13 entities, not just Gribbles Victoria.  The statutory demand itself demands the whole amount paid, not the amount paid to creditors of Gribbles Victoria.

16                  I am satisfied therefore that there is a genuine dispute within the meaning of s 459H(1) as to the existence of the whole of the debt to which the demand relates.  That is sufficient ground to set aside the demand.

“Some other reason”

17                  There is also “some other reason” within the meaning of s 459J(1)(b) why the demand should be set aside.

18                  By virtue of s 181(1) Mr Cameron was under a duty to exercise his powers and discharge his duties in good faith in the best interests of members of the Group.  He stood in a fiduciary relationship to the members of the Group.  Mr Cameron did not provide any evidence as to his reason for engaging in what appears to have been, prima facie, improper and deceptive conduct towards the Group and his fellow directors.  Counsel for Gribbles Victoria suggested that he sought to obtain a lever by which he could drive down the share price of GGL to a level which would enable him to buy at an artificial discount the further 8 per cent which he required to take control of GGL.  In this context it is to be noted that the extent of Mr Cameron’s associates’ shareholding only emerged in July this year as a result of action taken by the Takeovers Panel upon the application of the Australian Securities and Investments Commission. 

19                  But whatever the reason, the reasonable inference, in the absence of any explanation from Mr Cameron, is that it was something for the benefit of himself rather than the Group.  That being so, there is an arguable case that a court of equity (which the Federal Court is: Federal Court of Australia Act 1976 (Cth) s 5(2)) would not permit unconscientious use of such legal rights as Shandford might have.

20                  Put another way, the discretion conferred by s 459J(1)(b) is sufficiently wide to prevent the statutory demand procedure, which is part of the winding up in insolvency machinery of Pt 5.4, being used for some ulterior purpose such as manoeuvring for corporate control.

Costs – excessive photocopy authorities

21                  Since Gribbles Victoria has succeeded there will be an order that Shandford pay its costs.  However, in assessing the quantum of those costs I would suggest the taxing officer scrutinise closely any claim for the costs involved in the provision of photocopy authorities.  Counsel for Gribbles Victoria handed up two large ring binders containing photocopies of 19 authorities totalling 748 pages, including the whole 34 page report of Jones v Dunkel (1959) 101 CLR 298. 

22                  The concept of genuine dispute is not a particularly subtle or complex one.  It is expounded in a Full Court decision, Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452, which itself comprehensively reviews earlier cases.  The indiscriminate collection of Internet searched authorities is not only wasteful but risks distortion of the forensic process.  Instead of analysis of the circumstances of the instant case, argument can descend into a trawl through a myriad of judgments seeking some helpful phrase or facts similar or dissimilar to those of the case in hand.  I am not saying this occurred to an excessive degree in the present case, but it is a tendency which needs to be guarded against.

Associate:

Dated: