FEDERAL COURT OF AUSTRALIA

Traianedes in his capacity as Deed Administrator of Mercury Brands Group Pty Ltd (Subject to Deed of Company Arrangement) v Mercury Brands Group Pty Ltd [2010] FCA 583

REASONS FOR JUDGMENT

1                     Mr Traianedes is the deed administrator of Mercury Brands Group Pty Ltd (“the company”).  He holds, or has under his control, a fund of around $294,000.  The fund comprises the proceeds of sale of goods (clothing apparel) that had been sold to the company’s customers.  There are several claimants on the fund.  One is Milfoil Pty Ltd (“Milfoil”).  It contends that it either owned the goods or had assigned to it the invoices issued in respect of those goods.  The other claimants are the Commonwealth Bank of Australia (“CBA”), as holder of a charge over the company’s assets and Australian Horizons Trading Pty Ltd, as purchaser of the company’s business.  The latter two claimants acknowledge that Milfoil’s claim, if established, has priority over theirs, and have agreed to put over consideration of their claims until that of Milfoil is resolved. 

2                     In most respects the background to Milfoil’s claim is uncontroversial.  There are, however, one or two important areas of uncertainty, if not disagreement, which are central to its resolution.  It is convenient to begin with a description of the company’s operations.  The company is a subsidiary of Mercury Brands Limited (“MBL”), which is listed on the ASX.  MBL and its subsidiaries are in the clothing business.  The company owns several well known brands, including Rochford Swimwear, Crusty Demons and No Fear.  The clothing which the company sells is manufactured overseas, principally in China, and is sold to major Australian retailers including stores such as Myer, Kmart and David Jones. 

3                     In 2009 the Mercury Brands Group found itself in financial difficulty.  As a result, CBA put pressure on the company to reduce its credit facility.  To ensure that happened, CBA began to apply all receipts in reduction of the facility and refused to provide further funds to enable the company to meet its trading obligations.  Among those obligations were debts due to several Chinese clothing manufacturers (13 in all).  By June 2009 the point had been reached where the manufacturers stopped supplying clothing pending the payment of the amounts due to them.

4                     In early July 2009 Mr Santamaria and Mr Blumberg, respectively the Chief Executive and Operations Manager of MBL spoke to Mr Reynolds of Milfoil about the Group’s problems. Mr Reynolds is a banker and financier with over 49 years experience.  Mr Reynolds’ son, Stephen, who had recently taken up a position with MBL, suggested that Mr Santamaria ask his father for advice on how the Group might deal with its current financial problems.

5                     At the meeting Mr Santamaria outlined the difficulties with the CBA.  He explained that new season stock was being held by Chinese manufacturers who would not release it until they received payment for outstanding debts.  Mr Reynolds put forward a proposal for the release of the goods.  He suggested MBL arrange for a third party to purchase the goods from the Chinese manufacturers.  The goods would then be delivered to MBL’s customers on the basis that invoices be raised in the name of the third party who would then recover its purchase price and costs, plus a fee.  Any surplus proceeds would be paid to MBL. 

6                     Mr Blumberg enquired whether Mr Reynolds would invest $500,000 in MBL.  Mr Reynolds said he was not interested in investing in MBL but would enter into an arrangement along the lines he had just suggested.  Mr Santamaria agreed.

7                     The next morning, Friday 3 July 2009, Stephen delivered to his father a letter from MBL.  The letter which was addressed to Milfoil on “Mercury Brands” letterhead reads:

Assignment of invoicing related to direct stock payments

Firstly, thank you for supplying the short term AUD$500,000 working capital facility to Mercury Brands Limited and I am pleased to confirm the following:

·         Milfoil Pty Ltd will make payments to Mercury Brands Chinese suppliers directly up to the value of AUD$500,000 – such payment to be mutually agreed and made by Milfoil Pty Ltd.

·         Mercury Brands Limited will assign invoicing for $500,000 from the order(s) to Milfoil Pty Ltd.

·         Mercury Brands Limited acknowledges that the invoices are the property of, and for the benefit of Milfoil Pty Limited and has no equitable interest in these invoices.  Milfoil Pty Ltd’s bank details are to be clearly displayed on the invoices as the payee and as the beneficial owners.  In the event that the payment is paid to Mercury Brand [sic] Limited in error, Mercury Brands Limited agrees that the payment is held in trust for Milfoil Pty Ltd and will pay the funds across immediately to Milfoil Pty Ltd.

·         Mercury Brands Limited will pay 9.95% per annum on the outstanding balance to be calculated on a month by month basis and invoiced by Milfoil Pty Ltd such invoice to be paid within 7 days of issue.

·         In consideration of the facility; 6,250,000 share [sic] in Mercury Brands Limited [ASX:MCB] will be issued to Milfoil Pty Ltd with immediate affect [sic].

8                     Mr Reynolds saw that the letter did not accord with what had been agreed.  He telephoned Mr Santamaria and told him that Milfoil would not provide a loan or a working capital facility to MBL.  He said that Milfoil would purchase the stock from the Chinese manufacturers and sell the stock to MBL’s customers.

9                     Shortly after the phone call, Stephen handed his father invoices from the 13 Chinese manufacturers.  The invoices had been issued to MBL or Mercury Brands.  Milfoil arranged for the payment, by bank transfer, of the face value of each invoice.  The payments totalled AU$509,471.16.  Each payment was made with the instruction that “CIF prepayment by Milfoil Pty Ltd for new goods to be shipped August 2009 and invoiced to Milfoil Pty Ltd or order”. 

10                  Immediately after the payments were made Mr Reynolds wrote to MBL as follows:

MERCURY BRANDS LTD

As requested Milfoil Pty Ltd, has transferred the sum of $509,471.16 including bank charges to the appended Chinese manufacturers bank accounts.

As agreed good [sic] will remain the property of Milfoil Pty Ltd when shipped CIF and will be received and prepared for delivery to the respective purchaser distribution centers [sic] in terms of your Company’s firm written orders.  All GST issues and other costs are for your account.

We will be charged for interest for July on 31 July 2009 and ask that you remit the sum of $3,888.73 on or before that day directly into Milfoil Pty Ltd., Westpac, 360 Collins Street, Melbourne account: 003-055 62 0945 under advice to us on the above fax number.

We will calculate the next months [sic] interest on the basis of the outstanding sum and advise before 31 August 2009.

We are advised goods will be shipped during July 2009 for receipt before end of July 2009 and be ready for dispatch and invoicing to the retailers in the first week of August 2009.

The goods are to be kept separate and identifiable from other Company stock, which we understand is subject to a Debenture charge from the Commonwealth Bank and its successors.

Title to be retained by Milfoil Pty Ltd., over the goods and the debtor repayments post invoicing until our aforementioned sum plus interest is paid in full.

Milfoil Pty Ltd., are to be repaid the principal sum on each payment made today from the proceeds of those invoices.  You will retain the rest.

11                  In the last week of July 2009 Milfoil rendered an account for interest of $3,888.73.  The interest was paid on 30 July 2009.

12                  As he had not heard anything further about the transaction, on 8 August 2009 Mr Reynolds made an appointment to meet Mr Santamaria at MBL’s office.

13                  The meeting took place on 10 August 2009.  Mr Santamaria told Mr Reynolds that the deal was proceeding.  Mr Reynolds then spoke with Ms Dunlop, MBL’s Chief Financial Officer.  During the conversation Ms Dunlop said that the goods had been released by the Chinese manufacturers and had been delivered to MBL’s customers.  She explained that invoices for the goods had been raised by MBL.  The invoices did not specify that payment was to be made to Milfoil.  Ms Dunlop said some MBL customers made direct payments to MBL.

14                  Mr Reynolds was concerned that the agreement with MBL had been breached.  He told Ms Dunlop he wanted evidence that the goods had been imported from China or else he would go to the police.  Ms Dunlop said she would send copies of all documents and invoices regarding the goods to Milfoil.

15                  On 1 September 2009 Milfoil received a large bundle of documents comprising, mainly, copies of invoices from the Chinese manufacturers, delivery dockets in respect of the goods that had been received and invoices to the local retailers.  Mr Reynolds observed that the shipment date on some invoices was earlier than 3 July 2009.  Included among the bundle of documents was a sheet headed “Reconciliation Working Paper”.  This had been prepared by Ms Dunlop.  It listed the invoices which had been paid by Milfoil, the style numbers of the clothing to which the invoices related and the customers to whom that clothing had been delivered.

16                  On 4 September 2009 Milfoil received a payment of $92,186.82 from MBL.

17                  On 11 September 2009 Ms Dunlop emailed Mr Reynolds advising that payment was expected from Kmart for the following invoices:  “1628764 - remainder of $9,900; 1629604 - $28,371.60; 1629559 - $1,419.68; 1629598 - $32,521.80; 1629599 - $2,928.00”.  The email implied those amounts would be paid to Milfoil.  In any event, that did not happen.

18                  On 16 September 2009 Mr Traianedes was appointed administrator of the company.  He investigated Milfoil’s claim and is uncertain whether it should be paid.  Accordingly he seeks an adjudication of its claim.

19                  The first issue to be resolved concerns the terms of the agreement between Milfoil and the company.  This issue arises because the two letters of 3 July 2009 are not in the same terms or to the same effect.  On one view the letter to Milfoil contemplates no more than that MBL “will assign invoicing for $500,000” to Milfoil.  It makes no reference to an assignment of property in the goods the subject of the invoices.  This may be contrasted with the letter from Milfoil which records that title to the goods is to go to Milfoil.

20                  Strictly speaking, the two letters are not necessarily inconsistent.  Assume there was an agreement that Milfoil was to take title to the goods, either directly from the Chinese manufacturers or by way of assignment from the company.  If it had title Milfoil would, in a sense, “own” (and therefore be entitled to an assignment of) the invoices issued to the local purchasers.

21                  However that may be, the evidence shows that the terms that had been agreed orally between Mr Santamaria and Mr Reynolds are those recorded in Milfoil’s letter.  First, the letter accords with Mr Reynolds’ account of what had been discussed at the meeting on 3 July.  Second, it accords with what was said in the later telephone conversation.

22                  Mr Möller for the administrator points out that the second letter was written to MBL, the parent company, and not to Mercury Brands Group Pty Ltd, the trading company which had placed the orders with the Chinese manufacturers and sold the clothing to its customers.  To be fair, Mr Möller does not contend that this is sufficient to rob the agreement of effect.  He was simply pointing out, as counsel for the administrator should on such an application, that this is an issue that requires resolution when assessing Milfoil’s claim.

23                  As appears from Mr Reynolds’ account of his discussions with Mr Santamaria, he was not aware of the role of the company.  He simply assumed MBL had ordered the clothing from the Chinese manufacturers and agreed to sell the clothing to the local retailers.  On the other hand, Mr Santamaria obviously knew of the true position.  I infer that Mr Santamaria was acting on the company’s behalf in his discussions with Mr Reynolds, albeit without disclosing the identity of his principal.  This is sufficient to conclude that the contracting parties were Milfoil and the company.  If that not be the correct view, I would hold that there was an agreement with the company which came into existence, at the latest, when the company took delivery of the clothing for which Milfoil had made payment.  I take that conduct to be evidence of an intention by the company that it would stand in the place of MBL in relation to Milfoil, that is, there was a novation of the agreement.

24                  Having found an agreement between the company and Milfoil on the terms set out in the second letter, the next question which arises is whether this agreement constitutes a charge on personal property.  If it is a charge on personal property, it has not been registered as required by s 262 of the Corporations Act 2001 (Cth) and is, therefore, void as against the administrator by reason of s 266. 

25                  Although a transaction may state that it effects an outright transfer of title that may not be the real intention of the parties.  The rule is that even if an arrangement is recorded as an absolute transfer it may be shown that both parties intended the transaction to be by way of security only:  Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98.  The contrary intention may be established by inference drawn from the circumstances:  Barton v Bank of New South Wales (1890) 15 App Cas 379.

26                  There is little in the second letter from which one could draw an inference that a charge was intended.  Certainly there was nothing said in the discussions between Mr Reynolds and Mr Santamaria which suggests they had in mind a charge.  Indeed, what was said and written is consistent with an outright transfer.

27                  Still, there are two features that point the other way.  One is that the clothing released by the Chinese manufacturers was worth well over $600,000; more than Milfoil was to recover out of the transaction.  But, to make sure Milfoil did not get a windfall profit out of the transaction, the agreement provided that some of the sale proceeds was to go to the company.  This appears in the last sentence of the second letter which recorded that once Milfoil had recovered the principal sum plus interest and its fee, MBL would “retain the rest”.  The second feature is the payment of interest to Milfoil.  An obligation to pay interest is consistent with a loan on the security of goods rather than a purchase of the goods.  I do not take either feature to establish a charge.  Let us investigate what precisely has happened.  Milfoil agreed to purchase the goods in question from the Chinese manufacturers.  It was then to sell the goods to the local retailers, only on the basis that Mercury Brands would receive the purchase price and account to Milfoil for the amount due to it.  In this type of arrangement Mercury Brands could never assign title to the goods and so could not charge them to Milfoil. 

28                  The problem considered by Robert Goff LJ in Clough Mill Ltd v Martin [1985] 1 WLR 111 in relation to a retention of title claim, where the seller claimed title to all the goods although he had received payment for some, does not arise. 

29                  The consequence of what had been agreed is that if Milfoil received from the company’s customers more than was due to it, the surplus was to be paid to or held in trust for the company.  It is not a case from which one would imply that Milfoil’s interest in the goods was defeasible:  c/f Re Bond Worth Ltd [1980] Ch 228, 248.  As to interest, that is simply part of the cost to the transaction company of entering into the arrangement.

30                  This brings me to the last issue which is whether Milfoil can identify the goods to which it asserts title.  As Mr Möller says, by references to cases such as Goldcorp Exchange Ltd, Re; Kensington v Liggett [1995] 1 AC 74, a buyer cannot acquire title until it knows to what goods the title relates.  Here, the argument is that when the clothing was received from China it was mixed with other clothing in the company’s possession, making it impossible to distinguish which belonged to Milfoil.

31                  The only evidence that connects the goods Milfoil purchased to those sold to particular customers is the Reconciliation Working Paper prepared by Ms Dunlop.  She provided that document to Mr Reynolds to indicate which goods belonged to Milfoil and to whom those goods had been sold.  There is no reason to think that the document is not an accurate record.

32                  It is true that recently Ms Dunlop informed Mr Traianedes that when she prepared the reconciliation the invoices identified were only some of the invoices issued by the company to its customers and did not necessarily relate to the styles released by the Chinese suppliers.  Ms Dunlop told Mr Traianedes she was simply seeking to identify invoices which, upon payment, would generate sufficient funds to cover the amount due to Milfoil.

33                  I do not accept as true what Ms Dunlop now says.  Regrettably Ms Dunlop could not be called as a witness as she is in the United States.  That, however, does not prevent me from rejecting her evidence.  Even a cursory examination of the reconciliation shows that it was intended to identify to whom the clothing supplied by the Chinese manufacturers had been sent.  To now say that the reconciliation does not do what it purports to do is to contend that Ms Dunlop set out to defraud Mr Reynolds.  I can see no motive for her wishing to do that. 

34                  I treat the reconciliation as evidence by which Milfoil is able to identify the clothing which it purchased and the customers to whom that clothing was sold.  I have reached that conclusion despite the fact that, in some respects, but not in my view material respects, the reconciliation is inaccurate.  The particular respect in which it is inaccurate is in its reference to clothing that was received or despatched prior to the agreement with Milfoil.  I accept that Milfoil is not entitled to the proceeds of the sale of pre-agreement goods.  It probably has received some of those proceeds (perhaps $11,170.70).  But that amount is not the subject of any claim.  The error in the reconciliation does not, however, undermine the substance of what the reconciliation purports to achieve:  a tracing of particular goods.  Ms Dunlop has, as it turns out, traced more goods than was required.

35                  This makes it unnecessary to determine whether the doctrine of confusio, as distinct from commixtio, (both taken from Roman law) can be applied to goods whose individual character is lost as a result of mixture.  There is an authority which says this cannot be done.  The case is Smith v Torr (1862) 3 F&F 505.  By reason of that authority some authors assert that the doctrine of intermixture only applies where there is a commingling of substances and the parts are no longer distinguishable, as opposed to a mere confusion of goods which leaves separation possible:  see e.g. Crossley Vaines on Personal Property 5th ed 1973 at p 432.  This view has been strongly criticised by Professor Birks in his chapter entitled “Mixtures” in Palmer & McKendrick (eds) Interests in Goods, 2nd ed 1998.  Professor Birks refers to English cases which he says, correctly in my view, are inconsistent with Smith v Torr.  Smith v Torr is certainly inconsistent with a number of United States decisions including First National Bank of Rogers v Tribble 244 SW 33 (1922) (a mixture of mercantile goods) and Claflin & Co v The Continental Jersey Works 11 SE 721 (1890) (a mixture of stock held by a merchant). 

36                  In any event, where the mixture is accidental or wrongful the position is covered by the decision in Sandeman & Sons v Tyzack & Branfoot Steamship Company Ltd [1913] AC 680, a case concerning mixture of bags of jute.  There, Lord Moulton said (at 694-695) that if by accident goods of one person have become indistinguishably mixed with the goods of another, each person is a co-owner of the goods either as tenants in common (Buckley v Gross (1863) 3 B&S 566) or in proportion to their contributions (Spence v Union Marine Insurance Co (1868) LR 3 CP 427).  See also Hill v Reglon Pty Ltd [2007] NSWCA 295 (mixture of scaffolding).  Lord Moulton also said that if the goods are mixed due to the wrongful act of one party, the mixture would belong to the other.  I think there must be some limit to this rule, but that is a matter for another day. 

37                  The administrator should bring in short minutes of orders to give effect to these reasons and to enable the remainder of the dispute (eg whether Milfoil is able to recover the balance due to it) to be resolved.

Associate:

Dated:         17 June 2010