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Pickering v Murphy [1997] FJHC 65; HBC0500D.1996S (28 May 1997)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION

CIVIL ACTION NO. 500 OF 1996

Between:

DONALD THOMAS PICKERING and
EILEEN BERTHA PICKERING
both of Lami, Suva, Company Directors
PLAINTIFFS

And:

BRIAN MURPHY, VISHNU DEO, BRUCE SUTTON, MICHAEL YEE JOY
trading as KPMG PEAT MARWICK
DEFENDANTS

Counsel: Mr. S. Matawalu for Plaintiffs
Mr. R. Naidu for Defendants

Hearing: 13th November 1996
Decision: 28th May 1997

DECISION OF PAIN J
ON INTERLOCUTORY SUMMONS

This decision is long overdue. I regret that since the hearing other pressing work, the long vacation, leave and a criminal trial continuing for over three months have prevented my earlier consideration of the case.

I have now located and read such of the authorities cited by counsel for the Plaintiffs as are available in the Law Library and I have read the copies of the two decisions submitted by counsel for the Defendants. I have also considered the affidavit evidence and the submissions of counsel. Being conscious of the urgency I am expressing my decision in a relatively brief way. However, all the matters advanced by counsel have been considered.

The Plaintiffs are the directors of Donald Pickering and Sons Enterprises Limited, trading as United Engineers (hereinafter referred to as "United Engineers"). The defendants are the partners in a firm of chartered accountants trading as KPMG Peat Marwick (hereinafter referred to as "KPMG").

On 28th January 1994 United Engineers appointed KPMG to be its accountants and tax advisers. This work was done by the first named defendant Brian Murphy.

In March 1995 United Engineers successfully tendered for the construction of five vessels for a company in Tahiti (hereinafter called "the Tahitian Contract"). Finance for this undertaking was obtained from the National Bank of Fiji (hereinafter referred to as NBF). During 1996 United Engineers had serious financial problems. The Tahitian Contract was its only major project. It was behind schedule on that contract and its financial viability was marginal. United Engineers had an exposure of $2.2 million to N.B.F. It had a serious cash flow deficiency and was unable to pay its substantial creditors.

The First-named Plaintiff Donald Thomas Pickering (hereinafter referred to as "Donald Pickering") and Brian Murphy had a meeting with Bob Escudier of the N.B.F. It was agreed that Brian Murphy should undertake a review and prepare a financial report on United Engineers. This report was prepared by Brian Murphy in draft form dated 23rd May 1996 and in final form dated 12th June 1996 (Exhibits 1 and 2 to affidavit of Donald Pickering.) It gave comprehensive details of the dire financial state of United Engineers and outlined several courses the company could take. The sale of assets by the company or receivership were recommended as the only viable options. Copies of the report were given to NBF and United Engineers.

Subsequently United Engineers agreed to engage KPMG to endeavour to arrange a sale of the company or its assets. This was recorded in an agreement dated 31st July 1996 (Exhibit C to affidavit of Donald Pickering) and specifically provided that KPMG would report simultaneously to the Directors of United Engineering and N.B.F. as holder of the first debenture over the company's assets.

This arrangement particularly contemplated a possible sale of United Engineers' interest under the Tahitian Contract. United Engineers were in default of their obligations thereunder and did not have the cash resources to proceed expeditiously with the construction of the ships. The other contracting party in Tahiti was expressing concern and threatening action. The only prospective purchaser was Ship Building Fiji Limited but no agreement was forthcoming. Finally by agreement signed on 20th August 1996 the company in Tahiti agreed with United Engineers to a novation of the Tahitian Contract. United Engineers received no payment but was relieved of substantial contingent liabilities including penalties for non performance.

On 22nd August 1996 United Engineers, by letter signed by both Plaintiffs as directors, required N.B.F. to appoint a receiver under the debenture. By deed of appointment dated 27th August 1996 NBF appointed Brian Murphy as receiver.

On 4th October 1996 KPMG (for the receiver) advertised an industrial property of United Engineers for sale by tender. The closing date for tenders was 31st October 1996. On 15th October 1996 the Plaintiffs filed these present proceedings.

The Plaintiffs filed a writ of summons with claim endorsed. This does not plead any facts or grounds for relief. It is only a claim for 8 items of relief. These are an order that Brian Murphy be retired as receiver, an order (alternatively) that Brian Murphy be removed as receiver because he was not independent and therefore ineligible for appointment, an order restraining the defendants from continuing with the sale by tender, special damages, general damages, interest, costs and further relief.

Contemporaneously the Plaintiffs filed this present summons seeking orders that Brian Murphy be retired as receiver, that Brian Murphy be removed as receiver because he was not independent and was therefore ineligible for appointment and an order restraining the Defendants from continuing with the sale by tender. These orders are identical to the orders claimed in the substantive action. The summons does not seek interim orders. Counsel for the Plaintiffs has confirmed that final orders are being claimed in the interlocutory summons.

The Plaintiffs' case is founded on the submission that Brian Murphy is not an independent person and is therefore precluded from been appointed and continuing in office as the Receiver of United Engineers. It is submitted that his prior relationship with the company and NBF disqualified him from appointment. In particular he was a partner in KPMG which was employed as accountants and tax advisers for United Engineers for over two years prior to the receivership. He personally undertook a good measure of the work, especially in relation to the company's financial problems. He prepared the special report on the company's financial position. It was on his advice that the company gave KPMG special instructions to realize assets and later requested NBF to appoint a receiver. It is alleged that United Engineers did not receive any independent advice and acted on the advise of Brian Murphy. He did not give proper advice and did not make sufficient effort to realise company assets, particularly the Tahitian Contract. He was working for NBF at the same time and knew that he would be appointed receiver. It is submitted that in view of his conflict of interest and lack of independence, the appointment of Brian Murphy as receiver was void ab initio.

Having considered all the evidence, I am satisfied that these allegations against Brian Murphy are unfounded.

It is important to consider the financial situation of United Engineers. During 1996 it was experiencing serious financial troubles. Debts, such as outstanding premiums of $49,107.63 due to Dominion Insurance, were not being paid. The company was failing to make payments to NBF in accordance with its loan agreements. The Tahitian Contract was behind schedule with substantial contingent penalties accruing. The situation is encapsulated in the financial report prepared by Brian Murphy. The validity of this report has not been challenged by the plaintiffs or United Engineers. A balance sheet prepared as at 4 May 1996 showed total assets of $3,775,000 and total liabilities of $5,719,000. Moreover the company had a "cash flow/liquidity crisis", which really made it unable to continue its operations. Its viability depended on successful completion of the Tahitian Contract. However that needed an injection of cash funds to enable the company to continue the project, to meet other operational costs, to pay creditors and to meet N.B.F. commitments. This expenditure could not be met from progress payments under the contract. The truth of the matter was that United Engineers was already over committed to N.B.F. It had no prospect of obtaining a fresh injection of cash funds and the endeavours of all concerned could not achieve this.

The financial report prepared by Brian Murphy also contained an overall assessment of the current and prospective financial position of United Engineers and considered possible strategies that could be pursued. Again there is no challenge to the validity of these matters. I am satisfied that they constituted proper advice to the company in its precarious financial state. The recommended strategies, being first an attempted sale of the Tahitian Contract and then receivership, were implemented.

The allegation that Brian Murphy did not use his best endeavours to sell the Tahitian Contract is unsubstantiated. I accept his evidence in paragraphs 19, 20 and 21 of his affidavit that there was little value in the contract. The reality of the situation is that United Engineers was not in a position to complete the contract. It was behind schedule and did not have the financial resources to finish the building of the ships. It was in a weak bargaining position. Shipbuilders of Fiji, the only firm available to complete this work, was not a willing and enthusiastic purchaser. It could afford to do nothing, in the likely expectation that United Engineers would default under the contract and Shipbuilders of Fiji would then be engaged to complete the work. That situation seems to have been accepted by United Engineers and Donald Pickering in their letter to KPMG dated 15th August 1996 (Exhibit 10 to affidavit of Brian Murphy).

It is correct that the Plaintiffs and United Engineers accepted and acted upon the advice given by Mr. Murphy. However it is not correct that they received no other advice. Paragraphs 33 and 35 and Exhibit 11 of Brian Murphy's affidavit clearly show they were given advice by a lawyer Mr. Parshotam and a business consultant Mr. MacDonald. Mr. Parshotam's assistance included an attendance by him with the Plaintiffs at a meeting with NBF and Brian Murphy. Mr. MacDonald also attended meetings with Donald Pickering and his account for consultancy services includes such matters as consultations with Donald Pickering concerning the KPMG report, associated meetings with NBF, discussions with Donald Pickering and KPMG on financial position, options available and probable receivership and meetings with Ship Builders Fiji Limited. Clearly the Plaintiffs and United Engineers were receiving professional advice that was quite independent of Mr. Murphy.

The evidence shows that a major problem for United Engineers was its inability to service its substantial exposure to N.B.F. The bank was putting pressure on the company. This resulted in a meeting that Donald Pickering and Brian Murphy had with Mr. Escudier the Chief Manager, N.B.F. Asset Management Bank. At that meeting it was agreed that KPMG would prepare a financial report on the company. The basis for the preparation of the report is clearly set out at the beginning of the letter from KPMG to Donald Pickering dated 1 May 1996. (Exhibit 3 to Affidavit of Brian Murphy). It states:

"As discussed, the NBF has requested us to undertake a review of the present and projected financial position of the company. The purpose of our review is to assist you and the NBF in assessing the viability of future operations".

United Engineers gave written confirmation of these arrangements on 9th May 1996.

N.B.F, United Engineers and the plaintiffs all had a common interest in maintaining the viability of the company. All parties were fully aware of Brian Murphy's consultative role in helping to facilitate this desired outcome. Donald Pickering is not correct when he says in paragraph 10 of his affidavit that Brian Murphy "did not make it clear to me that he was acting in the interests of NBF". Brian Murphy kept all parties fully informed about the relevant issues. As earlier noted, the plaintiffs and United Engineers also obtained other professional advice. The situation was critical and urgent action was needed to check the company's worsening situation. Ultimately, receivership was the only viable option. There is nothing to show that Brian Murphy acted with any bias towards or predisposition in favour of NBF.

On the evidence, I am satisfied that advice given by Brian Murphy was in the best interest of United Engineers. His relationship with both the company and NBF enhanced rather than detracted from his suitability for appointment as receiver. It was known to the Plaintiffs and United Engineers that NBF was monitoring the situation and was likely to take action under the debenture. In a letter dated 31st July 1996 (Exhibit C to the affidavit of Donald Pickering) they acknowledged that "KPMG may be asked to assist in the course of action taken by NBF under its debenture at some future point". It is significant that no immediate objection was made by the Plaintiffs to Brian Murphy's appointment as receiver. It was not until the company's property was advertised for sale that this application was filed. That was 7 weeks after Brian Murphy's appointment.

In view of the allegations made against Brian Murphy I have deliberately dealt with the challenge to his appointment on the merits. It has not been established that he was unfit or in any way precluded from appointment by NBF as receiver. However, there are also legal issues that militate against the granting of this application.

In the first place, the Plaintiffs claim is a challenge to the appointment of Brian Murphy as receiver by N.B.F. Yet NBF has not been made a party to the action.

There is substantial force in the argument of counsel for the Defendants that this action cannot be brought by the Plaintiffs as directors and/or shareholders. In Watts & anor v Midland Bank PLC and ors 1986 BCLC 15 it was held that a company in receivership could bring an action against the receiver and a derivative action by the plaintiff shareholders was misconceived.

The substantive proceedings have been commenced by way of an endorsed writ. That endorsement, being essentially a prayer for relief, is authorised by Order 6 rule 2 of the High Court Rules. It is sufficient for the endorsement to give a concise statement of the relief or remedy required in the action. However, if the action is defended, full particulars of the nature of and grounds for the claim would, no doubt, be required. Then, after the pleadings are completed, the case would be heard in accordance with the provisions of Orders 34 and 35. That would be a witness action. The Plaintiffs, by an inter partes summons supported by affidavit, are endeavouring to obtain final orders on the three principal claims for relief in the substantive writ. This is totally irregular. It is nothing more than an attempt to circumvent the provisions of the Rules for the hearing of actions commenced by Writ. The appropriate application at this stage would have been for interim interlocutory injunctions under Order 29 rule 1 pending final determination of the substantive action. However, the Plaintiffs would be seeking interim orders that would effectively dispose of the substantive action, they are unable to give an undertaking as to damages and they would still have to overcome the legal and factual issues that I have already mentioned. It is most unlikely that interim injunctions would be granted.

One of the orders being sought by the Plaintiffs is to "restrain the Defendants from continuing with the tender process" for the sale of property owned by United Engineers. I agree with what was said in the decisions of Watts & anor v Midland Bank plc & ors (supra) and Re Neon Signs (Australasia) Limited [1965] VicRp 17; [1965] V R 125 which counsel has cited. The Court will not interfere with the proper exercise of his powers by a receiver. The rights of the debenture holder over the secured property takes priority over any rights of others. To quote Adam J in Re Neon Signs (Australasia) Limited (supra) at page 127:

".... save in exceptional cases the Court will not interfere with the exercise by debenture holders or their trustees or receivers acting on their behalf and with their authority of such powers as are given to them by a company as incident to their security. ....... Exceptional cases may arise where secured creditors or those acting on their behalf exercise or propose to exercise their powers dishonestly as, for example, a mortgagee recklessly or dishonestly sells mortgaged property at gross under-value."

In the present case there are no grounds for believing that Brian Murphy, KPMG or NBF are acting otherwise than bona fide in tendering the property for sale. In any event, United Engineers has the protection of being able to bring an action against Brian Murphy or NBF for any alleged improper exercise of the power of sale (Watts & anor v Midland Bank plc & ors (supra); Commercial and General Acceptance Ltd v Nixon [1981] 152 CLR 491.

For all of the foregoing reasons I am satisfied that the orders sought by the Plaintiffs in the summons dated 14th October 1996 should not be made. Accordingly those applications are refused.

Justice D.B. Pain