N6265
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO 695 OF 2015

BETWEEN
ISAS LIMITED
 (Plaintiff/Cross-Defendant)
 
AND
CIVIL (PNG) LIMITED
(First Defendant)

AND
CREDIT CORPORATION FINANCE LIMITED 
(Second Defendant/Cross-Claimant)

Waigani: Makail, J
2015:  29th & 31st July & 2016: 22nd April  

MORTGAGE – Chattel mortgage – Drilling rig ownership dispute – Claim of right of ownership of property – Equitable mortgage – Encumbrance – Security – Sale – Fixed and floating charge – Crystallisation

FRAUD – Claim of fraud – Proof of 

CONVERSION – Conversion of property – Ownership of – Proof of  

Cases cited:
AGC (Pacific) Limited v. Woo International Pty Ltd [1992] PNGLR 100

Counsel:
Mr. J. Kennedy & Mr. N. Ako with Mr. K. Kendakali, for Plaintiff/Cross-Defendant
Mr. D. Kipa, for First Defendant
Mr. E. Anderson with Ms. J. Nigs, for Second Defendant/Cross-Claimant

JUDGMENT
22nd April, 2016

1.	MAKAIL, J:  Before the Court is a contest over ownership of a Drilling Rig (“Rig”).  The Plaintiff says it was properly transferred to it, the First Defendant denies there was any proper transfer binding on the company, and the Second Defendant/Cross-Claimant (“CCFL”) say that the rig was at all times subject to its security and the Second Defendant’s security interest precedes and is superior to the alleged transaction with the Plaintiff, whatever it was and in its cross-claim seeks return of the rig and upholding of its security.

Plaintiff’s Claim

2.	The Plaintiff alleges fraud and unlawful conversion of the Rig by the First Defendant.  It seeks a declaration that the Rig is its property and an order for its delivery and possession.  Further, it seeks damages for loss of business for its use and hire.  

CCFL’s Cross-Claim

3.	As for the cross-claim, CCFL seeks the following relief at trial:

(a)	declaration that the Rig be returned to the First Defendant and kept subject to the Second Defendant’s charges.

(b)	the Plaintiff pay damages incurred by the Second Defendant as a result of the injunctions obtained by the Plaintiff with damages to be assessed.

	(c)	the Plaintiff pay the Second Defendant’s costs of the proceeding.
	
Parties’ Evidence

4.	For the Plaintiff’s case, the following affidavits were tendered and marked exhibits:

(a)	Affidavit of Stuart Fancy sworn and filed on 01st June 2015 – Exhibit “P1”,

(b)	Affidavit of Stuart Fancy sworn and filed on 26th June 2015 – Exhibit “P2”,
	
(c)	Affidavit of Stuart Fancy sworn and filed on 28th July 2015 – Exhibit “P3”,
	
(d)	Affidavit of Dennis Cacitti sworn and filed on 26th June 2015 – Exhibit “P4”, and

(e)	Affidavit of Dom Nilime sworn and filed on 01st June 2015 – Exhibit “P5”.

5.	Except for Dom Nilime, Mr. Fancy and Mr. Cacitti were cross-examined by defence counsel in relation to the matters deposed to in their affidavits.  No evidence was called for the First Defendant because none of the witnesses were present at the date of trial.  For CCFL, an affidavit of Robert Allport sworn on 07th July and filed on 08th July 2015 was tendered and marked exhibit “D1”.  Mr. Allport was cross-examined by counsel for the Plaintiff and counsel for the First Defendant.
Plaintiff’s Case

6.	The Plaintiff’s case is that it has an agreement with the First Defendant to purchase the Rig.  The consideration was K2, 200,000.00.  It was a further term of the agreement that the First Defendant would retain the right to purchase back the Rig from the Plaintiff for K2, 200,000.00 plus a monthly increment of 6% calculated from the date of purchase by the Plaintiff.  The Plaintiff commenced payment by instalment in May 2014 and completed the payment in June 2014.  The Plaintiff never took physical possession of the Rig.  This was not the first time the parties entered into such agreement.

7.	The first time was when they agreed for the Plaintiff to purchase two trucks from the First Defendant for K1, 000,000.00 and within 30 days, the First Defendant purchased back the trucks for K1, 050,000.00.  This was on 19th February 2014.  The second was the purchase of sandvik crusher by the Plaintiff from the First Defendant for K1, 500,000.00 and within 30 days the First Defendant purchased back the crusher for K1, 575,000.00.

8.	Evidence supporting these allegations came from the Managing Director of the Plaintiff Mr. Fancy who referred to the letter from the First Defendant to the Plaintiff of 15th April 2014 as constituting the subject agreement and its breach by the First Defendant when the First Defendant failed to pay back in full the agreed purchase price inclusive of 6% increment.  This proceeded from instalment payments, the last of them being K413, 273.14 to Matilda Equipment Pty Ltd at the direction of the First Defendant on 19th June 2014 and title passed to the Plaintiff. 

9.	As to the earlier agreements he referred to a letter from the First Defendant to the Plaintiff dated 19th February 2014 as constituting the agreement for the purchase of the trucks and an invoice from the First Defendant to him dated 19th February 2014 as constituting the agreement for the purchase of the crusher.

10.	In submissions, it was argued for the Plaintiff that there was an agreement between the Plaintiff and the First Defendant, title passed to the Plaintiff and the Plaintiff was the owner of the Rig.  As the First Defendant retained possession of the Rig the fraud perpetrated in the title of the Plaintiff was the attempt by the First Defendant to move the Rig out of the jurisdiction on 29th May 2015 when the First Defendant moved it to the main wharf of the PNG Ports Corporation at downtown Port Moresby, represented to the latter that it was the owner of the Rig and requested the freight forwarding company called China Navigation Company Pty Ltd trading as Swire Shipping Agencies to ship it overseas.

11.	It was further argued that by the aforesaid actions and/or omissions of the First Defendant, it has unlawfully converted the Rig and deprived the Plaintiff of the right to possess and use the Rig.

First Defendant’s Defence

12.	The First Defendant strenuously countered these submissions by arguing that while there is no evidence to rebut the Plaintiff’s evidence the Plaintiff’s claim should be dismissed because there is no enforceable agreement between the parties.  This is because on the authority of AGC (Pacific) Limited v. Woo International Pty Ltd [1992] PNGLR 100 there is no evidence that Mr. Anderson had the requisite and ostensible authority to enter into the subject agreement with the Plaintiff.  Secondly, as the agreement is made by a company and to verify its authenticity, it must have the common seal of the company affixed to it.  No common seal of the First Defendant was affixed on the said letter of 15th April 2014.

13.	Thirdly, Mr. Anderson signed the said letter in his capacity as a guarantor and not as director when he should have signed as a director.  Fourthly, the signature of Mr. Anderson is questionable as it does not match the other signatures found in the other documents, e.g., the letter of 19th February 2014.  Thus, it is doubtful whether Mr. Anderson signed the said letter.  The fifth reason is that there is no evidence that Mr. Anderson acted with the First Defendant Board’s approval.

14.	The cumulative resultant effect is that the title did not pass to the Plaintiff.  As fraud involves an element of dishonesty, fraud is not proven as the Plaintiff failed to establish title.  Similarly, an essential element of the tort conversion is ownership.  As conversion is an interference of property and ownership is an essential element, the Plaintiff has failed to prove conversion.

CCFL’s Case

15.	As to the cross-claim CCFL’s case is that this is not a straight forward sale and purchase agreement case.  It is more than that.  CCFL says that it has a duly registered Fixed & Floating Charge over the Rig and its security interest precedes and is superior to the alleged transaction with the Plaintiff, be it a purchase agreement or otherwise.  Evidence of these matters came from Mr. Allport.  It was his evidence that on or about March 2012 the Second Defendant applied for funding facility from CCFL.  CCFL considered the application and approved funding for acquisition of plant, machinery and motor vehicle.  

16.	Consistent with the terms of the finance facility CCFL provided the finance and at the same time originally by registered Chattel Mortgage No: 300173 dated 08th May 2012 for a K1,957,457.14 loan for the purchase of the Rig with the National Court at Waigani under the Instruments Act registration No BS2517 of 2012.  Then registered Chattel Mortgage No 300970 registered with the National Court at Waigani under the Instruments Act registration No BS1856 of 2013.  This is annexed to the affidavit of Mr. Allport and marked “RA 3” (exhibit “D1”).

17.	On or around 21st February 2013 a Fixed & Floating Charge was executed between the Second Defendant and CCFL and registered with the Registrar of Companies at the Investment Promotion Authority (“IPA”) on 27th March 2013.  A copy of the charge is annexed to the affidavit in support of Mr. Allport as annexure “RA 4” (exhibit “D1”).

18.	It was submitted for CCFL that the Court should find that CCLF’s Fixed & Floating Charge was duly registered.  If the Court comes to this conclusion then there are two questions to be resolved in the consideration of the Plaintiff’s claim.  They are:

(a)	Is the true nature of the Plaintiff’s transaction a form of mortgage security or encumbrance or simply a sale?

(b)	Was the sale to the Plaintiff by the First Defendant “in the ordinary course of business” of the First Defendant?

19.	In its defence to the cross-claim the Plaintiff pleads two things which it asserts defeat CCFL’s registration of the Fixed & Floating Charge.  

(a)	The Fixed & Floating Charge is invalid and void because of the way the Form 24 ‘Notice of Registration of Charge’ was filled in, and

(b)	The Chattel Mortgage is invalid because it does not sue the words ‘grantor’ and ‘grantee’.

20.	In submissions, it was argued for the Plaintiff that the said Fixed & Floating Charge was void and invalid as at 15th May 2014 because the Notice of Registration of Charge failed to include with it at the time of registration evidence required under clause 9 of the Notice for registration of charge (Form 24).  Clause 9 states:
	“9.	Compliance with Stamp Duties Act (Chapter 117)

A duly completed certificate of compliance with the Stamp Duties Act (chapter 117) (form 25) , or evidence that he charge has been stamped, or is not required to be stamped, must be submitted with this form.  If not, the charge will only be registered provisionally.

The following is submitted with this form (place a cross (x) in one box only) –

Form 25 – Certificate of Compliance with Stamp Duties Act –
Evidence that documents are not required to be stamped – Provide details.

Other evidence that the documents have been stamped – provide details.

None of the above –
Noted:   Where “None of the above’ is selected the Registrar shall enter the word ‘provisional’ in the register.  Appropriate evidence must be submitted within one month or the Registrar will delete the details of the charge from the register.”

21.	The Plaintiff’s assertion seems to be that there was a failure to provide ‘evidence of payment of stamp duty or exemption in that part of the form”, which renders the whole security invalid and void.  CCFL submits that that is wrong in fact and in law.

22.	I accept CCFL’s submission for the reasons as submitted.  In the relevant box on Form 24 as submitted by CCFL it is marked N/A – or Not Applicable.  Form 24 is part of schedule 1 of the Companies Regulations 1997.  After the Companies Regulations 1997 was passed Parliament abolished stamp duty on charges with effect from 1st January 2008.  The registration of the Fixed & Floating Charge was after the abolishment of stamp duty, thus inapplicable.  Section 97(3) of the Stamp Duties Act now provides:

“Items 1A of schedule 1 of the Principal Act does not apply in respect of an instrument executed on or after 1 January 2008”.

23.	In turn, item 1A is ‘Loan Securities, Mortgages and Foreign Securities whether under seal or hand only’.  The charge is a form of loan security granted after 1 January 2008 so consequently no stamp duty is payable as a matter of law, not evidence and in the circumstances the marking of that part of the form 24 ‘not applicable in 2013’ is entirely consistent with the law.

24.	In any event, I accept CCFL’s further submission that the Registrar of Companies accepted the Form and issued a certificate of registration of the Charge and the issue of the certificate by the Registrar is conclusive evidence that the requirements as to registration have been complied with.  	Section 225(3) of the Companies Act renders moot any complaint about the lodgement form.  It provides:

“(3)	The Registrar shall issue a certificate in the prescribed form of every registration stating, where applicable, the amount the charge secures and the certificate is conclusive evidence the requirements as to registration have been complied with”.

25.	For these reasons, I am not satisfied that the company’s charge in favour of CCFL is ‘invalid or void’ on the basis pleaded in paragraph 3(b) of the Plaintiff’s defence to CCFL’s cross-claim.

26.	As to the Plaintiff’s claim that the Chattel Mortgage is invalid because it does not use the words ‘grantor’ and ‘grantee’, I accept CCFL’s submission that this is self-evidently true, but legally irrelevant.  Both in the charge and mortgage are recorded in CCFL’s Company records held at IPA and the Waigani National Court.  These records are available to the public and were available when the alleged sale of the Rig took place between the Second Defendant and Plaintiff.  I refer to annexure “RA6” of Mr. Allport’s affidavit (exhibit “D1” which is a true copy of the company search results obtained from IPA clearly showing the charge in favour of CCFL.

27.	There is no evidence from the Plaintiff that CCFL gave its consent for the sale of the encumbrance of the Rig to the Plaintiff.  On the other hand, CCFL says that it never gave its consent.  I find that CCFL never gave its consent nor was there any consent given for it to be offered as security for any loan.

28.	For the foregoing reasons I come to the conclusion that all material times,

a)	the Fixed & Floating Charge was registered under the Companies Act and not discharged, and

b)	the Chattel mortgage was registered under the Instruments Acts and not discharged.
Nature of Plaintiff’s Transaction

29.	I now turn to question on whether the Plaintiff’s transaction is a mortgage or encumbrance or sale.  The first point to make is that CCFL is a stranger to the transaction between the Plaintiff and First Defendant.  

30.	It was submitted for CCFL that it is a very odd transaction indeed.  Mr. Allport described it in his oral evidence as being something he hadn’t seen in 40 years in the finance industry.  The actual transaction was either an outright sale or some form of security or some weird hybrid.  This is confirmed by the following phrases used by Mr. Fancy in his testimony;

•	“..bridging finance...”
•	“...loaned against the drill...”
•	“...agreed loan at a meeting..”
•	“....purchase the drill as a loan...”
•	“....they gave security of the drill...”
•	“....pay interest...”

31.	I note the following phrases in the two transaction documents, namely letter dated 15th April 2014 marked as annexure “A” to the affidavit of Mr. Fancy (exhibit “P1”);

•	“Thank you for accepting our request to provide a short-term loan”
•	“...sale of an item which is primarily offered as collateral against a loan...”
•	“...purchase back....within a period of 90 workings days....”
•	“...receipt of the loan/payment...”
•	“...interest is to be paid...”

32.	Secondly, invoice (undated) No. 10/14-9 marked as annexure “B” to the affidavit of Mr. Fancy (exhibit “P1”);

•	“sold to....”
•	“Contingent upon...purchasing the equipment back...”
•	“...will purchase the equipment back...”
•	“...interest accrued.”
•	“Pre-agreed interest...”
•	“...drawn down.”

33.	CCFL submitted that it is a strange hybrid transaction, but on its proper construction it is clearly some form of encumbrance.  I accept this submission.  This was clearly not a normal sale in the ordinary course of business.  A normal sale in the ordinary course of the ordinary business of a borrower would resemble the situation where a retailer has stock on its shelves subject to a floating charge, which the retailer sells to the public in the ordinary course of its ordinary business:  title passes to the purchaser forever and the purchaser takes possession forever.  That is not what happened here.

34.	On the evidence presented, I am satisfied that it is impossible to find that this was a normal sale in the ordinary course of the ordinary business of the Second Defendant because of the following considerations:

a)	Unlike an ordinary sale in the ordinary course of business there was an express equity of redemption – this alone must take the transaction outside the normal and common experience of  a sale of a piece of equipment.

b)	There was no intention to permanently dispose of the Rig.

c)	The arrangement was not documented in any normal commercial way at all.

d)	The Rig was not to be delivered up to the ‘purchaser’ but retained and used by the ‘seller’.

e)	There was a provision for payment of ‘interest’ not payment of a hire fee or rental.

f)	Interest was 6% per 30 days which multiplies out to 73% per annum.

g)	Mr. Fancy explicitly stated on oath it was not in the normal course of his business.

h)	The normal business of the Second Defendant was construction, not financial engineering.

35.	If I am wrong in this finding and if the true nature of the transaction is that it is some form of security then;

a)	Under clause 2.5 of the charge the Plaintiff ‘took steps toward’ creating it in April 2015, and

b)	the Plaintiff’s proposed rights amount to an encumbrance under the wise definition in clause 1.1.  It states:

“Encumbrance means a mortgage, charge, pledge, lien, hypothecation or title retention arrangement, a right of set-off or right to withhold payment of a deposit or other money...or an agreement to create any of them or to allow any of them to exist.”
36.	It is submitted that perhaps the best description of the weird hybrid arrangement is that it is a ‘title retention’ arrangement.  Whilst it is not quite the common use of that expression it is a fair description of an arrangement whereby the lender retains the title whilst the borrower keeps using the equipment.
37.	However, I accept CCFL’s submission that the Plaintiff’s proposed rights are not a ‘Permitted Encumbrance’ under the narrow definition of that expression later in 1.1.  This clause states:
“Permitted Encumbrance means;

a)	an Encumbrance created under the Transaction Document.

b)	 a lien that arises by operation of law in the ordinary course of ordinary business, whether the amount secured is not overdue or is being diligently contested in good faith; or

c) 	An Encumbrance that the Chargee approves before it arises, where the amount secured does not increase, and the time for payment of that amount is not extended, beyond and time approved by the Chargee.”
38.	Based on this I find that the First Defendant breached clause 3(a) which required that it not create, attempt to create or permit to exist any Encumbrance.  This clause reads:
	“RESTRICTIONS ON DEALING WITH CHARGED PROPERTY

The Chargor must not;

a)	Create, attempt to create, or permit to exist any encumbrance other than a permitted encumbrances in relation to the charged property (whether ranking ahead of, equally with or after, the Charge);

Without the Chargee’s consent.”

39.	And clause 2.5(b) (i) triggered the crystallisation of the floating nature of the charge.  It states:

“2.5 Crystallisation

The Charge will cease to operate as a floating charge and will operate as a fixed charge, and the license under clause 2.4 will be withdrawn, automatically and immediately;
b)	In relation to part of the Floating Charge Property; if

(i)	 the Chargor creates or takes any step towards creating any Encumbrance over that part of the floating Charge Property in breach of clause 3;”  (Emphasis added).

40.	It is submitted that it is quite clear that if the true nature of the Plaintiff’s transaction is some form of security or encumbrance then the floating charge crystallised and ISAS’s rights (whatever they may be) are subservient to those of CCFL and judgment should be given in favour of CCFL.

41.	It is telling that at no point in the analysis does a question of the ordinary course of business arise with respect to the creation by the borrower of a new charge or encumbrance.  The intention of the parties was clearly that the creation of charges couldn’t be in the ordinary course of business and taking any steps toward creating a charge must automatically and immediately crystallise the charge.  

42.	I uphold these submissions and find that the Plaintiff’s rights be it arising from a sale as was contended are subservient to those of CCFL and judgment should be given in favour of CCFL.

43.	If I am wrong in reaching this conclusion, I would still find that if the Plaintiff’s transaction is a sale it introduces into the chain of reasoning the concepts of ordinary course and/ or ordinary business but the outcome for this action is the same because the transaction was no ordinary transaction in the ordinary course of business.

44.	I accept CCFL’s submission that clause 2.4 requires both elements ordinary course and ordinary business.  If the Plaintiff’s transaction is a true sale or disposition of title not a form of security or encumbrance, then under clause 2.5(b)(ii) the Chargor ‘took steps towards the sale in April 2014.  This clause reads:
“2.5	Crystallisation

The Charge will cease to operate as a floating charge and will operate as a fixed charge and the license under clause 2.4 will be withdrawn, automatically and immediately.

b)	 in relation to part of the Floating Charge Property, if;

ii)	 the Chargor disposes of or deals with or takes any step towards disposing of or dealing with that part of Floating Charge Property in breach of Clause 3;”

45.	I find that the First Defendant breached clause 3(b) which requires that it not dispose of the property.  This clause reads:

“The charger must not:

b)	 subject to clause 2.4, dispose of, declare a trust over or otherwise create or permit the creation or existence of any interest in, or part with possession of, any Charged Property, with the Chargee’s consent.”
46.	It should be noted that unlike the creation of further encumbrances prohibited absolutely by 3(a), the prohibition on disposal in 3(b) is subject to clause 2.4 which is the ordinary course of ordinary business exception.  Clause 2.4 states:

“2.4 License to deal with floating charge property

Subject to clause 2.5, the Chargee licenses the Chargor to dispose of or otherwise deal with Floating Charge Property in the ordinary course of its ordinary business.”

47.	It should be further noted that a permitted disposition under clause 2.4 must be both in the ‘ordinary course’ and be in the ordinary business.  	As set out previously a sale with a right of redemption and the other odd features of the Plaintiff’s transaction is by no means an ordinary transaction so could not possible be in the ordinary course.

48.	For this further reason I come to the conclusion that the Fixed & Floating Charge crystallised.  

Conclusion

49.	As I have found CCFL has a Fixed & Floating Charge over the Rig and its security interest precedes and is superior to the Plaintiff’s transaction.  The First Defendant as the Chargor breached it when it purportedly sold the Rig to the Plaintiff.  I also found that the purported transaction between the First Defendant and the Plaintiff was not a sale.  The net effect is that the title of the property did not pass to the Plaintiff.  Given these findings, it is not necessary to make any findings in relation to the First Defendants defence that there was no enforceable purchase agreement between it and the Plaintiff.  

50.	For these reasons I am not satisfied the Plaintiff has proved that its claim that it is the owner of the Rig.  It follows that it has failed to establish its claim of fraud and conversion and it is not entitled to the relief it seeks.

51.	As to costs, going by what has been pleaded in the statement of claim or amended statement of claim it should be noted that the Plaintiff does not allege that the First Defendant misrepresented or misled it to purchase the Rig in that it failed to inform or disclose or withheld information that the Rig was subject to charges held by CCFL.  This information came to light when CCFL came on board this proceeding.  It was CCFL who disclosed this information and put into perspective the true nature of the Plaintiff’s transaction.  For this reason I will award costs in favour of the CCFL.  As for the First Defendant, it will pay its own costs.

Order
52.	The orders are:

1.	The order sought to declare that the Rig is the property of the Plaintiff is refused.

2.	The order sought for the delivery and possession of the Rig to the Plaintiff is refused.

3.	The order sought against the First Defendant to pay damages for loss of business to the Plaintiff is refused.

4.	A declaration that the Rig be returned to the First Defendant and kept subject to the Second Defendant’s charges.

5.	The Plaintiff shall pay damages incurred by the Second Defendant as a result of the injunctions obtained by the Plaintiff with damages to be assessed.

6.	The Plaintiff shall pay the Second Defendant’s costs of the proceeding, to be taxed, if not agreed.

7.	The First Defendant shall pay its own costs of the proceeding.

Judgment accordingly.
________________________________________________________________
Jema Lawyers	:	Lawyers for the Plaintiff/Cross-Defendant
Twivey Lawyers	:	Lawyers for the First Defendant
Gadens Lawyers	:	Lawyers for the Second Defendant/Cross-Claimant