JOHN SHEAHAN v MILLENIUM ELECTRONICS INTERNATIONAL PTY LTD [2024] SASC 83

First Applicant: ACN 081 014 208 PTY LTD (IN LIQUIDATION) FORMERLY MILLENIUM ELECTRONICS PTY LTD Counsel: MR R WHITINGTON KC - Solicitor: IIES SELLEY LAWYERS Second Applicant: JOHN SHEAHAN Counsel: MR R WHITINGTON KC - Solicitor: ILES SELLEY LAWYERS Respondent: MILLENIUM ELECTRONICS INTERNATIONAL PTY LTD Counsel: MR P ADAMS - Solicitor: O’LOUGHLINS LAWYERS Hearing Date/s: 23/11/2023 File No/s: CIV-21-009073 B SUPREME COURT OF SOUTH AUSTRALIA (Civil: Application) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. ACN 081 014 208 PTY LTD (IN LIQ) (FORMERLY MILLENIUM ELECTRONICS PTY LTD) & ANOR v MILLENIUM ELECTRONICS INTERNATIONAL PTY LTD & ORS [2024] SASC 83 Judgment of the Honourable Justice Stanley 26 June 2024 CORPORATIONS - SUPERVISION - COURTS - POWERS CORPORATIONS - SUPERVISION - COURTS - POWERS - TO PROHIBIT PAYMENT OR TRANSFER OF ASSETS AND ORDERS IN SUPPORT THEREOF CORPORATIONS - SUPERVISION - COURTS - POWERS - TO PROHIBIT PAYMENT OR TRANSFER OF ASSETS AND ORDERS IN SUPPORT THEREOF - FREEZING ORDERS This is an application to vary a freezing order made 13 August 2021 (as varied 28 October 2022) to permit the first respondent to incur reasonable legal expenses up to the sum of $60,000. The application is opposed by the applicants. In this action, the first applicant is the sole shareholder of the first respondent. The solicitors for the first respondent are instructed to act by the directors of the company who are also parties to this claim in their personal capacity as the fourth and fifth respondents. The applicants and first respondent are in dispute as to the first respondent’s role in this action. The applicants submit the first respondent ought to take a bystander approach and argue that its interests are capable of being represented by the other respondents. The first respondent submits its defence is necessarily separate to, and distinct from, the defence the other respondents may choose to adopt. -- 1 of 7 -- The first respondent makes an application to vary the freezing order so as to permit its solicitors to provide it with advice on inter alia the approach and role the company should take in these proceedings. Whether, in the circumstances, it is appropriate to grant the application to vary the freezing order. Held: 1. The application to vary the freezing order (FDN 84) is dismissed. Corporations Act 2001 (Cth) Part 5.7B of Chapter 5, referred to. AMLE Co Ltd v Ure [1923] 33 CLR 199; Walker v Wimborne (1976) 137 CLR 1, applied. -- 2 of 7 -- ACN 081 014 208 PTY LTD (IN LIQ) (FORMERLY MILLENIUM ELECTRONICS PTY LTD) & ANOR v MILLENIUM ELECTRONICS INTERNATIONAL PTY LTD & ORS [2024] SASC 83 Civil STANLEY J: Introduction 1 By interlocutory application filed 30 October 2023 (FDN 84) the first respondent, Millenium Electronics International Pty Ltd (ACN 144 482 299) (MEI) seeks a variation of the freezing order made on 13 August 2021 (as varied by an order dated 28 October 2022) to permit the first respondent to incur reasonable legal expenses up to the sum of $60,000. The first respondent relies upon the affidavits of Kym Ryder deposed 30 October 2023 and Eric Au (Au) deposed on 7 October 2022 and 9 November 2023 in support of its application. 2 The application is opposed by the first applicant, the company in liquidation, formerly Millenium Electronics Pty Ltd (ME) and the second applicant, the liquidator, John Sheahan (the liquidator). Factual background 3 ME operated a business designing and manufacturing electronic controls and assemblies until 30 September 2020. 4 In the period between July 2020 and 9 October 2020 various transactions were entered into by ME at the instigation of its directors. Those transactions include the execution of an asset purchase agreement (APA) on 30 September 2020; the transfer of all the issued shares of MEI to ME, and the grant of other securities by MEI to ME. On 30 September 2020 ME went into liquidation. 5 At the time of these transactions Au and Odero Conci (Conci) were directors of ME. At all relevant times they are and have been directors of MEI. Au and Conci are the fourth and fifth respondents in this action respectively. 6 This action was commenced on 13 August 2021. 7 Pursuant to the APA, MEI purportedly acquired the assets and assumed the business liabilities of ME. The purchase price payable by MEI to ME was discharged by the issue of the shares. 8 The relief sought by the liquidator and ME in this action includes orders pursuant to Part 5.7B of Chapter 5 of the Corporations Act 2001 (Cth) (the Act) declaring the APA to be a voidable transaction, and otherwise void and unenforceable, and an order that MEI transfer to ME the property of ME which was transferred to MEI under the APA. -- 3 of 7 -- [2024] SASC 83 Stanley J 2 9 MEI, Au and Conci have filed defences in which they, inter alia, deny ME is entitled to the relief claimed in respect of the APA; deny the existence of a scheme to prevent Seeley International Pty Ltd (Seeley) from recovering a judgment in separate proceedings wherein the APA was an element; deny that the APA is an uncommercial transaction, insolvent transaction or a creditor defeating disposition; and deny that the APA is voidable. 10 MEI has also filed a cross-claim against ME in which it seeks payment of monies that have been paid to ME but which MEI submits should have been transferred and/or paid to MEI. The cross-claim relates to two categories of payments: a sum of approximately $51,800 representing payments on invoices raised by ME prior to the date of the APA and the sum of approximately $152,000 representing payments on invoices raised by MEI after the date of the execution of the APA. 11 The liquidator and ME accept that whether or not ME is entitled to retain those amounts will depend on the validity of the APA. The validity of the APA is to be determined by the Court in this action. If, in the ultimate disposition of this matter, the APA is found to be valid and enforceable, the amount sought by MEI on the cross-claim will be payable by ME to MEI. 12 MEI has expended almost all the legal fees permitted to it under the terms of the freezing order as varied on 28 October 2022, i.e., $20,000. 13 MEI contends that it needs a variation to the freezing order to permit it to incur reasonable legal expenses up to the sum of $60,000. MEI submits the variation is necessary because the current directors of MEI are conflicted in that they are subject to various personal claims in the current action. The personal claims include allegations that they permitted ME to trade while insolvent; breached their duties as directors of ME; and permitted ME to enter into an unreasonable director-related transaction. 14 The directors of MEI obtained independent legal advice in relation to the claims against them. Following that advice, MEI filed the defence and cross-claim. The submissions 15 MEI submits the effect of refusing the variation sought would be to stifle their defence and counterclaim in circumstances where it would not be in MEI’s best interests to merely stand by as an observer to the action brought against it by the liquidator and ME. MEI submits that it is entitled to recover monies from ME and to conduct a defence and cross-claim which seeks to ensure such recovery. MEI submits that the prosecution of their cross-claim is different from, and does not arise in, Au and Conci’s defences of the actions brought against them personally. It submits that its cross-claim cannot be made by Au and Conci and is not met or encompassed by Au and Conci’s defences. Further, MEI submits the stance adopted by the liquidator and ME means that MEI does not even have the -- 4 of 7 -- [2024] SASC 83 Stanley J 3 funds to enable it to obtain legal advice in relation to the applicants’ contention that the appropriate course for MEI is to be a bystander to this action. 16 MEI submits there is a conflict between the interests of MEI and the interests of Au and Conci in their defence of the applicants’ claims. MEI submits that both the APA and the associated MEI securities agreements, as defined in the amended statement of claim, were agreements entered into in the interests of MEI. MEI submits that in obtaining or entering into those securities as directors of MEI, Au and Conci were acting in the best interests of MEI. MEI submits that while those interests may be different from the interests or duties owed by Au and Conci when acting as directors of ME, it will be the responsibility of those acting for Au and Conci in their defence of the claims made against them in their personal capacity, to navigate any such issues and to represent the best interests of Au and Conci in the actions they took as directors and how they might be reconciled across the different companies. 17 Relying on the principle in AMLE Co Ltd v Ure1 MEI submits that the onus is on the liquidator and ME to prove any alleged improper purpose in anything it submits the directors of MEI did, while acting in this capacity. In these circumstances, MEI submits that this alone is sufficient to warrant independent representation of MEI, separate from the representation of Au and Conci in their personal capacities. MEI submits it’s defence is necessarily separate to, and distinct from, the defence which the individual directors of both ME and MEI may choose to adopt. Accordingly, MEI submits it’s interests are not served by it being denied separate representation to that of Au and Conci. In this context, MEI submits it would be inappropriate for it to be represented by the solicitors for Au and Conci. MEI’s contention is that the application for permission to use further funds in this litigation should be granted otherwise Au and Conci’s solicitors will be placed in an embarrassing position or, MEI will be denied proper legal representation. 18 The position adopted by the liquidator and ME is that the current freezing order should not be varied to permit further expenditure by MEI on legal fees in defending the claim and pursuing a cross-claim. They submit there is no proper basis for the release of additional funds to MEI and, in any event that there is no justification or necessity for $60,000. Consideration 19 I do not accept MEI’s submissions. 20 Fundamentally, MEI has been unable to identify any interest it has in this action over and above that of its sole shareholder, ME, and which is not already represented or capable of being represented by some, if not all of, the respondents to the action. 1 [1923] 33 CLR 199. -- 5 of 7 -- [2024] SASC 83 Stanley J 4 21 In this regard, the defences filed by MEI, Au and Conci are aligned. They all deny the existence of the scheme pleaded by the liquidator and ME designed to deny Seeley the prospect of recovering on a judgment in separate proceedings; deny that the APA is an uncommercial transaction, insolvent transaction or a creditor defeating disposition; and deny that the APA is voidable. 22 While MEI has asserted that there is a conflict between it and its directors Au and Conci, which has been confirmed by the solicitors for Au and Conci, MEI has not provided any detail of the basis for the alleged conflict. It is difficult to understand, on the assumption that there is a conflict between MEI and its directors, how the solicitors for MEI are able to obtain instructions other than from Au and Conci. This serves to emphasise why MEI should adopt the stance of the bystander and abide the event. That avoids the apparent dilemma relied on by MEI: from whom are its solicitors to obtain instructions if Au and Conci are conflicted and unable to provide instructions on behalf of MEI? 23 It is clear that Au and Conci are defending the liquidator and ME’s claims. It may be that, in due course, the second and third respondents, who at the time of the hearing of this application were yet to be served, but who have Au and Conci as directors, could also actively defend those claims. Nothing has been advanced by MEI to indicate that there exists some distinct or separate defence to the claims made by the liquidator and ME from those pleaded by Au and Conci. Accordingly, if MEI were to take an active role in the proceedings, it would be either to support the applicants’ claims or to resist them. In either event, there is no demonstrated utility in MEI undertaking such a role in the proceedings. 24 I accept that the directors of MEI are required to act in good faith in the best interests of MEI. However, in doing so the directors, when discharging their duties to MEI, must take account of its shareholders and its creditors.2 The interests of creditors depends on the possibility of insolvency, which is not relevant in this case. ME is the sole shareholder of MEI and in this action seeks relief against MEI on the basis that MEI, by the actions of its directors, improperly received the property of ME. Yet MEI wants actively to defend ME’s claim and to seek relief from ME by way of counterclaim. Significantly, this occurs in circumstances where other respondents, including the current directors of MEI, are also defending ME’s claims. 25 In any event, there is no substance in MEI’s submission that ME could replace Au and Conci as directors of MEI if the applicants want to assert control over MEI and its assets. The capacity for ME to do so does not oblige it to do so. The submission is irrelevant and misconceived. 26 Despite vague assertions to the contrary, MEI has failed to put forward any basis, let alone a clear and cogent one, upon which the Court can be satisfied that MEI’s interests in defending the claims by the liquidator and ME will not be 2 Walker v Wimborne (1976) 137 CLR 1 at 7. -- 6 of 7 -- [2024] SASC 83 Stanley J 5 adequately protected by the defences mounted by its directors. That being the case, MEI can abide the outcome of the action because the success or otherwise of its defence will turn on the success or otherwise of the defences mounted by Au and Conci. In that way, the funds of MEI, which ultimately belong to ME, will not be wasted on further work undertaken by its solicitors replicating the work done in the defence of its directors. 27 Insofar as MEI’s cross-claim is concerned, the liquidator and ME accept that if the APA is found to be valid and enforceable, the amount sought on the cross- claim will need to be paid to MEI. Au and Conci have an interest in the Court holding that the APA is valid and enforceable. It can be inferred that they have an interest in establishing that the entry into the APA was not an unreasonable director related transaction performed in breach of their duties as directors of ME. There is no other contest in relation to the cross-claim and no basis for any funds to be wasted in its pursuit. 28 The point of the freezing order is to protect the interests of the shareholder and creditors of MEI. That will not be advanced by permitting further unnecessary expenditure of MEI’s funds. 29 In the circumstances, I am satisfied that the appropriate course in respect of MEI’s involvement in this action is for it simply to file a submitting appearance and otherwise abide the determination of the Court. 30 This makes it unnecessary to consider the second limb of the argument advanced by the liquidator and ME that there is no justification for the quantum of expenditure said by MEI to be necessary in respect of legal costs. Conclusion 31 For these reasons I would dismiss the application to vary the freezing order to permit any further funds to be released to MEI in relation to this action. 32 I will hear the parties as to costs. -- 7 of 7 --