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Supreme Court 28 February 2007

Purdon v Purdon & Anor

[2007] NSWSC 141

Fraud & dishonesty
ACTION IN ESSENCE ONE AT LAW ASSIGNMENT OF LEGAL CHOSE IN ACTION RIGHTS UNDER GUARANTEE FAILED BUSINESS VENTURE FIDUCIARY DUTIES UNJUST ENRICHMENT

Citation: Purdon v Purdon & Anor [2007] NSWSC 141
Court: Supreme Court of New South Wales, Equity Division
Date: 28 February 2007
Judge(s): Smart AJ

Background

Two brothers entered a joint venture to operate a Burger King franchise in Burwood, New South Wales, through a company called Span Management Pty Limited. Both brothers were joint and several guarantors of a Citibank facility extended to that company. The venture was undercapitalised from the outset, partly due to construction and fit-out costs that substantially exceeded initial estimates.

The business failed and went into liquidation in mid-2001. After the liquidators applied sale proceeds to reduce the Citibank debt, approximately $426,000 remained owing. Citibank pursued only one brother (the plaintiff) and, following negotiations, released him from all guarantor obligations upon payment of $75,000. Citibank also assigned to him, for a nominal $10, its rights under the guarantee against both brothers.

Separately, before the business collapsed, the defendant brother had transferred his Eastwood home into the name of a third party. The plaintiff contended that transfer was made with intent to defraud creditors and should be set aside.

  • Whether the plaintiff could maintain an action at law in his own name on the assigned guarantee rights, in circumstances where notice of assignment had not been given under s 12 of the Conveyancing Act 1919 at the time proceedings commenced
  • Whether, and to what extent, the defendant was liable to contribute to amounts paid by the plaintiff under the guarantee, including the $75,000 settlement sum and amounts paid under a Coca-Cola guarantee
  • Whether the brothers owed each other fiduciary duties in the conduct of the joint venture, and whether any such duties were breached
  • Whether the plaintiff could establish a claim for unjust enrichment against the defendant
  • Whether the transfer of the Eastwood property to the third party was voidable under s 37A of the Conveyancing Act 1919 as a transfer made with intent to defraud creditors

Decision

Smart AJ found that the action was, in substance, one at law based on the assigned guarantee rights, and that notice of assignment under s 12 of the Conveyancing Act 1919 was required before the assignee could sue in his own name. Because no notice had been served at the time proceedings commenced, the plaintiff could not maintain the full legal action in his own name on that basis alone at that point.

On the contribution claim, the court held that the defendant was liable to contribute one-half of the $75,000 paid by the plaintiff to obtain his release from Citibank, being $37,500. The court also found the defendant liable to contribute half of the amount paid under the Coca-Cola guarantee, amounting to $1,951.57. However, the court did not award half of the outstanding Citibank debt of $426,606.20 as a separate head of recovery, limiting the contribution to amounts actually paid by the plaintiff.

On the question of the Eastwood property transfer, the court found that the transfer from the defendant to David Webb had been made with intent to defraud creditors. The defendant's explanation, that the transfer was motivated by a desire to protect himself from spurious personal injury claims arising from work in Coles stores, was not accepted. The transfer was declared voidable under s 37A of the Conveyancing Act 1919.

The court found that, despite the nominal form of the arrangement, the brothers had in substance conducted the business as a joint venture in which they were to share profits and losses equally. Neither brother was found to have been entirely truthful, which complicated the fact-finding throughout.

Orders Made

  • The court declared that Citibank had assigned the debt of $426,606.20 to the plaintiff.
  • Judgment for the plaintiff against the defendant for $39,451.57 by way of contribution (comprising $37,500 and $1,951.57), plus interest (amounts to be calculated or agreed by the parties).
  • The transfer of 39A Raimonde Road, Eastwood from the defendant to David Webb was declared voidable under s 37A of the Conveyancing Act 1919.
  • The defendant gave an undertaking to the court to lodge a transfer of the Eastwood property back to himself within 21 days and to take all steps to procure registration.
  • Fallback orders were made directing David Webb to execute and deliver a transfer to the defendant if registration did not occur within 42 days.
  • Liberty to apply on 3 days' notice was granted to either party.
  • The matter was stood over to 20 March 2007 for submissions on interest and costs and to settle the terms of Short Minutes of Order.

Key Takeaways

  • Under s 12 of the Conveyancing Act 1919, an assignee of a legal chose in action must serve notice of the assignment before maintaining an action at law in their own name; the absence of notice at the time proceedings commence is a material procedural obstacle.
  • A co-guarantor who pays out a shared debt, or settles with a creditor, may recover contribution from the other guarantor for that co-guarantor's proportionate share of amounts actually paid, not necessarily the full face value of the underlying debt.
  • Where a debtor transfers property to a third party and the court does not accept the proffered innocent explanation for that transfer, the court may find the requisite intent to defraud creditors under s 37A of the Conveyancing Act 1919 and declare the transfer voidable.
  • In assessing a joint venture, courts will look to the substance of the arrangement rather than its formal legal structure; an equal sharing of profits and losses was found here notwithstanding the use of a corporate vehicle.
  • Credibility difficulties arising from the conduct of both parties do not necessarily defeat a claim; the court made findings of fact by weighing the evidence and identifying which contentions were sufficiently established, even where neither party was found to be fully truthful.

Legislation and Cases Referenced

Legislation
- Conveyancing Act 1919 (NSW), ss 12, 37A
- Civil Procedure Act 2005 (NSW), s 100
- Crimes (Sentencing Procedure) Act 1999 (NSW)
- English Judicature Act 1873
- Supreme Court Rules

Cases
- Baldry v Jackson (1976) 2 NSWLR 415
- Biala Pty Ltd v Mallina Holdings (No 4) (1994) 13 WAR 11
- Blomley v Ryan (1954-1956) 99 CLR 362
- Comptroller of Stamps (Vic) v Howard-Smith (1936) 54 CLR 614
- Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 81 ALJR 352
- Dering v Earl of Winchelsa (1787) 29 ER 1184
- Distronics Ltd v Edmond [2002] VSC 454
- Loxton v Moir (1914) 18 CLR 360
- Mahoney v McManus (1981) 180 CLR 370
- McDonald v Lloyd (1931) 31 SR (NSW) 415
- McIntosh v Shashou (1931) 46 CLR 494
- Norman v Commissioner of Taxation (1963) 109 CLR 9
- Phipps v Boardman [1967] 2 AC 46
- Re Caratti Holding Co Pty Limited (1975) 1 ACLR 87
- Talcott (James) Ltd v Lewis (John) Co Ltd [1940] 3 All ER 592
- Tanwar Enterprises Pty Limited v Cauchi (2003) 77 ALJR 1853
- Torkington v McGee [1902] 2 KB 427
- United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1