In the matter of Hunter Valley Foods Pty Ltd [2016] NSWSC 1903

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Hunter Valley Foods Pty Ltd [2016] NSWSC 1903 Hearing dates: Monday, 7 November 2016 Date of orders: 09 November 2016 Decision date: 09 November 2016 Before: Brereton J Decision: Court declines to exercise jurisdiction. Plaintiff's interlocutory process filed 22 July 2016 dismissed. Catchwords: CORPORATIONS – winding up – unfair preferences – application for Court to decline to exercise jurisdiction – whether Court has jurisdiction in the proceedings – whether cause of action arose in NSW – cause of action does not necessarily arise at place where bank account out of which impugned payment made is located – direction given on behalf as to how payment was to be made was in NSW – held, Court has jurisdiction – whether Court should decline to exercise jurisdiction – whether case is so weak as to be amendable to summary dismissal – equitable purchaser's lien – secured creditor – impugned payment falls outside scope of s 588F Legislation Cited: (CTH) Corporations Act 2001, s 588F, s 588FA, s 588FE, s 588FF (NSW) Uniform Civil Procedure Rules 2005, r 11.2, r 11.4 Cases Cited: Agar v Hyde [2000] HCA 41; 201 CLR 552 ASIC v Sweeney (No 2) [2000] NSWSC 1121 Burgess v Wheate (1759) 1 Wm Bl 123 Distillers Company Biochemicals Limited v Thompson [1971] AC 458; [1971] 1 NSWLR 831 Frankcombe v Foster Investments Pty Limited [1978] 2 NSWLR 41 Hewett v Court (1983) 149 CLR 639 International Finance Corporation v DSLL Offshore Ltd [2005] EWHHC 1844 (Comm); [2007] 2 AllER (Comm) Kimberley NZI Finance Ltd v A R Barr Investments Pty Limited [1990] ANZ ConvR 438 New Cap Reinsurance Pty Limited v Renaissance Reinsurance Limited [2002] NSWCA 561; 92 ALR 601 Re Mustang Marine Australia Pty Limited [2013] NSWSC 360 Rose v Watson (1864) 10 HL Cas 672 Rose v Watson (1864) 10 HL Cas 672 Voth v Manildra Flour Mills Pty Limited (1990) 171 CLR 538 Woodgate v Network Associates International BV [2007] NSWSC 1260 Woodings v James (1996) 21 ACSR 397 Category: Principal judgment Parties: James Alexander Shaw and Jeffrey Alan Shute as joint & several liquidators of Hunter Valley Australia Foods Pty Ltd (first plaintiffs) Hunter Valley Australia Foods Pty Limited (second plaintiff) Austri-Asia Foods Pty Ltd (defendant) Representation: Counsel: N Kulkarni (plaintiffs) D Krochmalik (defendant)

Solicitors: Butlers Business Lawyers Pty Ltd (plaintiffs) TressCox Lawyers (defendant) File Number(s): 2016/192545

Judgment (ex tempore) 1. HIS HONOUR: By an originating process filed on 24 June 2016 and amended on 19 August 2016, the first plaintiffs James Alexander Shaw and Jeffrey Alan Shute as liquidators of the second plaintiff Hunter Valley Australia Foods Pty Limited claim relief pursuant to (CTH) Corporations Act 2001, s 588FA, s 588FE and s 588FF, in respect of a payment made by or on behalf of Hunter Valley to the defendant Austri-Asia Foods Pty Ltd of $975,000 on or about 23 February 2015, on the basis that the payment was an unfair preference. 2. Austri-Asia Foods is a Singaporean corporation and was ultimately served with the originating process in Singapore, purportedly under (NSW) Uniform Civil Procedure Rules 2005, r 11.2. By an interlocutory process filed on 22 July 2016, the plaintiffs claim leave to proceed against Austri-Asia Foods pursuant to UCPR, r 11.4. 3. Subsequently, by interlocutory process filed on 30 September and amended on 7 November 2016, Austri-Asia Food applies pursuant to UCPR, r 11.7 and r 12.11 for orders setting aside the originating process, and/or setting aside service of the originating process, and/or that the Court decline to exercise jurisdiction in the proceedings. Essentially, Austri-Asia Foods raises two issues. First, it contends that the Court has no jurisdiction in the proceedings, and that service is not authorised under r 11.2, on the basis that the impugned payment was made out of a bank account in Victoria, with the consequence that the cause of action is said to arise in Victoria and not in New South Wales, and thus does not fall within any relevant head in schedule 6 of UCPR. The second, alternative, contention is that the Court should decline to exercise jurisdiction, if it has it, as the proceedings have such poor prospects of success that the defendant should not be troubled to defend them in this country, by reason that the debt in question was a secured debt and is thus outside the scope of s 588FA.

Background 1. The background facts may be summarised as follows. On 3 January 2014, Hunter Valley – then known as Atlantic Pacific Foods Pty Limited – as vendor, and Austri-Asia as purchaser, entered into a master asset purchase agreement, by which Hunter Valley agreed to sell its assets and business to Austri-Asia for a price of $4 million. Pursuant to that agreement, Austri-Asia made a part payment of the purchase price of $1 million, which was described in the agreement as the deposit. The balance purchase price of $3 million was to be paid on completion. The agreement contained various warranties given by and/or obligations imposed on Hunter Valley and, in the event of any breach of those obligations, Austri-Asia was entitled to terminate the agreement, in which event the $1 million part-payment was refundable. Clause 4.3 of the agreement specifically provided that, in the event of a breach, the seller shall immediately refund the deposit to the buyer; and clause 6.5, which dealt with non-compliance with any of the obligations of the seller or the buyer on the completion date, provided that the party not in default may, inter alia, terminate the agreement, whereupon the seller shall immediately refund the deposit to the buyer. As it seems to me, the obligation to refund the deposit applied whether it was the seller or the buyer who terminated the agreement under that clause. 2. On 6 May 2014, Austri-Asia gave notice of termination of the agreement and, in so far as it matters, Hunter Valley "accepted" that termination on 13 June 2014. Hunter Valley and Austri-Asia then entered into a deed of release which relevantly provided for Hunter Valley as seller to pay to Austri-Asia as buyer, on execution, the sum of $AUD975,000 (called in the deed of release "the residue"), being refund of the deposit less $25,000 which the buyer acknowledged may be retained by the seller in part compensation of the seller's expenses associated with the negotiation of the agreement. The agreement proceeded: Subject to payment of the residue, each of the buyer and the seller release and forever discharge the other and their respective servants, agents, assessors, officers, assigns and related bodies corporate from all claims, demands, suits or other liabilities or losses, however determined, arising out of the agreement negotiations surrounding the agreement or termination of the agreement. 1. The sum of $975,000 was not however immediately repaid by Hunter Valley to Austri-Asia. Hunter Valley ultimately sold its business to 100% Bottling Company Pty Limited ("100% BC"), pursuant to a business sale and purchase agreement dated 20 February 2015. Clause 6.2 of that agreement obliged Hunter Valley to provide to 100% BC, as buyers, at least three business days before completion: … the amount advised to it by Austri-Asia Foods Pty Limited for the settlement including the payment of all settlement amounts and the satisfaction conditions for a full release of the outstanding claim by Austri-Asia Foods Pty Limited or its related body corporate for a return $A250,000 deposit 1. The reference to $250,000 appears to an error. 2. By letter dated 17 February 2015, Butlers Business Lawyers of Newcastle, who were acting for Hunter Valley, informed King & Wood Mallesons, who were acting for 100% BC, for the purposes of clause 6.2 of the business sale agreement, that the amount required by Austri-Asia for settlement of the outstanding claim was $975,000. On 20 February, Butlers of Newcastle wrote to King & Wood Mallesons of Sydney authorising and directing payment of the balance purchase moneys totalling $7,368,239.19 by six different payments comprising that sum, of which one was "Cornwall Stodart Law Practice Trust account $975,000". The accompanying and surrounding correspondence makes clear that Cornwall Stodart were the solicitors for Austri-Asia. That payment was made upon settlement. 3. On 29 July 2015, Hunter Valley resolved that it be wound up, and the liquidators were appointed in a creditors' voluntary winding up.

Jurisdiction 1. As I have said, the defendant's first submission goes to jurisdiction. It may be summarised as follows. First, in the context of an unfair preference claim, the cause of action only arises in New South Wales if the payment is made from New South Wales. Secondly, here, the payment was made by an entity in Victoria – being 100% BC – from a bank account with a branch in Melbourne. Thirdly, on that basis, the payment was not made from New South Wales, and the cause of action does not arise in New South Wales. 2. As to the proposition that in the context of an unfair preference claim the cause of action arises in the place from where the payment is made, the defendant relied primarily on the judgment of Barrett J (as he then was) in New Cap Reinsurance Pty Limited v Renaissance Reinsurance Limited [2002] NSWCA 561; 92 ALR 601, in particular at [27]. In that paragraph, his Honour said: Here … the acts of the company (in this case New Cap) alleged to attract the operation of the Part 5.7B provisions were carried out in New South Wales and the winding up is being conducted in New South Wales. Any 'dislocation of the statutory order of priorities' was created in New South Wales by depletion of New Cap's assets through the acts in New South Wales of its former administration. 1. On that basis, his Honour held (at [28]) that the cause of action was therefore properly regarded as having arisen in New South Wales. Reliance was also placed on his Honour's judgment in Woodgate v Network Associates International BV [2007] NSWSC 1260 in the course of which his Honour said (at [7]) that "acts involved in the remittance of funds to the defendant were performed at such a location", that being a reference to a place in New South Wales. 2. Nonetheless, I do not think that those cases stand as authority for the proposition that the cause of action necessarily arises at the place where the bank account out of which the impugned payment happens to be made is located. In New Cap Reinsurance v Renaissance Reinsurance, Barrett J examined (at [16]-[19]) the authorities relating to where a cause of action arose, in particular in the context of questions of service of process of a superior court which did not depend entirely on territorial jurisdiction. In Re Mustang Marine Australia Pty Limited [2013] NSWSC 360, I concluded from that discussion that the authorities referred to – in particular Distillers Company Biochemicals Limited v Thompson [1971] AC 458; [1971] 1 NSWLR 831 and Voth v Manildra Flour Mills Pty Limited (1990) 171 CLR 538 – made clear that a cause of action does not necessarily arise where it becomes complete; but that where a relevant act of the defendant – or in a case such as the present, of the company – took place, the right approach is to look back over the series of events and ask "where in substance did this cause of action arise". Although it is true that in New Cap Re and in Woodgate the payments were made from accounts in New South Wales, the judgments do not indicate that it was the place where the bank account from which the payment was made was located that was decisive. Thus, in New Cap Re, in the passages which I have cited above, the question was where the dislocation of the statutory order of priorities was created; while in Woodgate his Honour referred not just to the location of the bank account, but to "acts involved in the remittance of funds to the defendant". 3. In the present case, at the highest, the evidence may establish that a cheque, which provided the source of the whole of the moneys paid upon settlement by 100% BC to Hunter Valley, was drawn on a Melbourne account. Thus, it is shown that a cheque for $7,368,239.19 was debited to an account with the National Australia Bank at a Melbourne branch on 20 February 2015. But as I have said, that appears to be a single cheque for the total of the purchase moneys, not six separate cheques for the six payments that were directed to be made on settlement. How that single cheque was converted into those six payments, and from what account the payment of $975,000 was made, does not appear and is not shown on the evidence. It is at least conceivable that the $7 million cheque was negotiated through another account, or a solicitor's trust account, and broken into the component payments, which may well have been made from another account, located who knows where; at least it is not proven that it was not an account located in New South Wales. But even if that payment were regarded as having been made from the account in Melbourne, it is important to appreciate that that payment from that account was not a payment made by Hunter Valley, but by 100% BC. The impugned payment was likewise a payment not made by Hunter Valley directly, but by 100% BC at the direction of Hunter Valley. 4. The crucial step in the depletion of Hunter Valley's assets was the direction given on its behalf as to how that payment was to be made. That direction was given by solicitors for Hunter Valley, located in Newcastle New South Wales, to solicitors for 100% BC, located in Sydney, and it was carried into effect upon the settlement of the transaction which took place in Sydney, and was effected presumably by the handover of the relevant cheque in Sydney. 5. In my view, the conduct that resulted in the depletion of assets of Hunter Valley by $975,000 took place in New South Wales, and in substance the relevant cause of action arose in New South Wales. I reject the defendant's first submission.

Should the Court decline to exercise jurisdiction? 1. As I have said, the second submission was that the Court should decline to exercise jurisdiction on the basis that the plaintiff's claim has no real prospect of success. Where service is validly effected outside the jurisdiction – and it follows from the conclusion I have just expressed that service outside the jurisdiction was in this case authorised, and it is not disputed that it has been effected if so authorised – then the Court may decline to exercise jurisdiction only in circumstances in which the case is so weak as to be amenable to summary dismissal. In Agar v Hyde [2000] HCA 41; 201 CLR 552, the High Court rejected a proposition that any less demanding test should be adopted in cases where a defendant is served overseas, and concluded (at [60]) that the same test should be applied in deciding whether an originating process served outside Australia makes claims which have such poor prospects of success that the proceedings should not go to trial as is applied on application for summary judgment by a defendant served locally. Accordingly, that is the test which I apply here. 2. The defendant submits that the debt in respect of which the impugned payment was made was a secured debt, pursuant to a purchaser's lien for payments made towards the purchase price. It is clear that if the debt is a secured one, s 588F does not apply. The section refers to unsecured debts only, and payment to a secured creditor does not result in a preference [see Hewett v Court (1983) 149 CLR 639 at 650, and also Woodings v James (1996) 21 ACSR 397]. The crucial question then is whether it is sufficiently plain that this a secured debt that the matter should not be permitted to proceed. 3. The notion of a purchaser's lien for payments made towards a purchase price is well established. A concise but comprehensive description of the equitable lien, and this particular instance of it, is to be found in the judgment of Deane J in Hewett v Court (at 663-664). In particular, his Honour said (at 664): If the property has not passed to the purchaser and the purchaser has paid the whole or part of the purchase price, the purchaser will, in the absence of express or implied agreement to the contrary, enjoy the benefit and equitable lien over the subject land to secure the repayment to him of any part of the purchase price which may become repayable to him upon default by the vendor in the performance of the contract. 1. In Kimberley NZI Finance Ltd v A R Barr Investments Pty Limited [1990] ANZ ConvR 438, French J (as his Honour then was) said that the motion of an equitable lien in favour of a purchaser, having been foreshadowed in Burgess v Wheate (1759) 1 Wm Bl 123, was endorsed in Rose v Watson (1864) 10 HL Cas 672 in which Cranworth LC said (at 683): There can be no doubt, I apprehend, that when a purchaser has paid his purchase money though he has got no conveyance, the vendor becomes a trustee for him of the legal estate and he is, in equity, considered the owner of the estate. When instead of paying the whole purchase money he pays a part of it, it would seem to follow, as a necessary corollary that, to the extent to which he has paid his purchase money, to that extent the vendor is a trustee for him. In other words, that he acquires a lien exactly in the same way as if upon the payment of part of the purchase money the vendor had executed a mortgage to him with the estate to that extent. 1. Authority makes clear that this applies in the case of personal property as well as real property [see Hewett v Court supra; and see also International Finance Corporation v DSLL Offshore Ltd [2005] EWHHC 1844 (Comm); [2007] 2 All ER (Comm) at [45]]. It is also clear that the lien is not dependent upon responsibility or fault for the contract going off, save that it does not apply to the extent that under the contract a deposit is forfeited [see Frankcombe v Foster Investments Pty Limited [1978] 2 NSWLR 41 at [57]; and see also Kimberley v NZI supra]. 2. In this case, upon termination of the contract, it therefore follows that Austri-Asia had an equitable purchaser's lien for the $1 million deposit it had paid under the contract, in circumstances where the contract did not provide or have the effect that that deposit, or any part of it, was forfeited. 3. However, the plaintiff submitted that whatever might have been Austri-Asia's rights under its agreement with Hunter Valley Foods of 3 January 2014, they were now superseded and replaced by its rights under the deed of release. That would be so only if the deed of release had the effect of releasing and extinguishing Austri-Asia's preceding rights. It does so only to the extent of the clause that I have set out above which, as that clause makes clear, takes effect only upon payment of the residue – that is to say, the $975,000. Thus, at least until that payment was made, the equitable lien enured. There was nothing to release it before that point. 4. The plaintiff also submitted that the lien enured only so long as it was unconscionable for Hunter Valley to sell the assets without first recognising Austri-Asia's rights and claim, and that, as a result of the deed of release, Hunter Valley would not act unconscionably in selling the assets free of the lien. That, it seems to me, overlooks the clause in the agreement between Hunter Valley and 100% BC which expressly requires notice before completion of the amount payable to Austri-Asia, so that it was plainly envisaged that Austri-Asia would always be paid upon completion out of the proceeds. This favours rather than tells against the proposition that the lien enured until it was satisfied upon completion of the sale. It was permissible for Hunter Valley conscionably to re-sell the assets, but only upon terms which involved Austri-Asia's claim being recognised and provided for. 5. It follows that up until the time of payment of the $975,000, Austri-Asia had an equitable purchaser's lien over the assets and undertaking of Hunter Valley for at least the $975,000 in question, and was to that extent a secured creditor. The impugned payment was in respect of a secured debt and, accordingly, falls outside the scope of s 588F. 6. The plaintiff's claim cannot succeed, and the foreign defendant ought not be put to the trouble of defending it in this jurisdiction. Accordingly, the Court should decline to exercise its jurisdiction pursuant to r 12.11(h).

Costs 1. In my view, just as it has been held in ASIC v Sweeney (No 2) [2000] NSWSC 1121 (at [15]), that it is a necessary ancillary right to the ability of a defendant outside the jurisdiction to protest service without acknowledging the Court's jurisdiction that it may issue necessary subpoenas for that purpose, it is also necessarily incidental to the entitlement of a defendant outside the jurisdiction to file a motion under r 12.11, that it be able to seek its costs of doing so. 2. Although it appears correct that the issue on which the defendant has ultimately succeeded was raised relatively late, the ultimate outcome is that I have concluded that the proceedings are doomed to fail, and thus the defendant outside the jurisdiction has been put to the cost of bringing this application and having the proceedings ultimately dismissed.

Orders 1. The Court orders that: 1. Pursuant to UCPR r 12.11(h), the Court declines to exercise its jurisdiction in the proceedings. 2. The plaintiff's interlocutory process filed on 22 July 2016 be dismissed. 1. The Court further orders that: (3) The plaintiff pay the defendant's costs assessed in the sum of $7,500.

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