JUDGMENT No. ox! 2. Goal amtcte IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) —_NG 325 of 1993 ) GENERAL DIVISION ) BETWEEN: 773 Applicant Fourth Cross-Respondent to First Cross-Claim Second Cross-Respondent to Second Cross-Claim AND: D G i} L 2, 47 Respondent Cross-Claimant to First Cross-Claim First Cross-Respondent to Second Cross-Claim DELAMOS PTY LIMITED (ACN 003 243 936) First Cross-Respondent to First Cross-Claim MEHDI] NAYER HABIBI Second Cross-Respondent to First Cross-Claim Second Cross-Claimant VANIK BERBERIAN Third Cross-Respondent to First Cross-Claim FRANK MOSHFEGHI-NEJAD Fifth Cross-Respondent to First Cross-Claim CHRISTINE E L Sixth Cross-Respondent to First Cross-Claim Coram: Davies J. 14 December 1994 Yate: 'cet Sydney \ \ \ FEDERAL COURT OF | AUSTRALIA PRINCIPAL REGISTRY -2- REASONS FOR JUDGMENT The applicant, Sanirise Pty Limited ("Sanirise") became the lessee of certain shops and premises at Darling Harbour. The lessor was the respondent, Darling Harbourside (Sydney) Pty Limited ("Darling Harbourside"). In these proceedings, which were instituted in the first half of 1993, Sanirise seeks damages alleged to anse from conduct on the part of Darling Harbourside in breach of section 52 of the Trade Practices Act 1974 (Cth). Sanirise also claims that there have been breaches by Darling Harbourside of certain terms of the leases. Included is an allegation that Darling Harbourside has wrongly levied Saninse for operating expenses which were not operating expenses as specified in the leases and that Darling Harbourside has wrongly calculated certain other matters taken into account in the ascertainment of the rent. Darling Harbourside has instituted a cross- claim claiming possession of the premises, rent and money due, and damages. The proceedings were first fixed for hearing on the four days commencing on 31 August 1993 but Sanirise desired that these dates be vacated. On 20 August 1993 Wilcox J so ordered. A number of undertakings were given to the court. Of these I note the first, given by Sanirise, being that:- "The applicant undertakes to the court to pay directly to the respondent on 5 September 1993 the sum of $60,522 28 and to pay directly to the respondent on the fifth day of every calendar month thereafter (until further order) the sum of $58,677.01, such payments to be made without delay, deduction or set-off, without prejudice to the rights of the respondent." I also note the fourth undertaking given by Darling Harbourside:- "Without admission of ability and upon the applicant giving the usual undertaking as to damages, the respondent undertakes that 1t will not until further order or (if earlier) until failure of the applicant to comply with any of its undertakings set out above: (a) attempt to retake possession of, or interfere with the applicant's possession of shops 113/115, 415, 353, 357, 359, 361 and 363 and storerooms S141 and $142 in the building known as the Harbourside Festival Marketplace; or (b) grant a lease of those premises; provided that this undertaking shall not prevent the respondent or its agent entering the premises on reasonable notice for the purposes of inspection or repair." These undertakings were complied with unti] 5 July 1994. On that day Mr John Vouris was appointed administrator of Sanirise under Part 5.3A of the Corporations Law. The affairs of the company immediately came under the control of the administrator and the powers of the company's officers were suspended save under the administrator's written consent. Section 440C of the Corporations Law provides:- "During the admunustration of a company, the owner or lessor of property that is used or occupied by, or is m possession of, the company cannot take possession of th property or otherwise recover it, except: (a) with the administrator's written consent; or (b) with the leave of the Court." Subsection 440D(1) of the Corporations Law provides:- -4- "During the administration of a company, a proceeding 1n a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent, or (b) with the leave of the court and in accordance with such terms (if any) as the Court imposes." These sections precluded Darling Harbourside from enforcing its rights under the leases and from pursuing its cross claim while the administration was in place. On 6 July 1994, I ordered that the operation of the first undertaking given by Sanirise on 20 August 1993 be suspended for seven days. Other judges thereafter continued the order of suspension during the period of the administration. On 7 July 1994, Sanirise filed a notice of motion seeking release from the undertaking given on 20 August 1993. The administration came to an end on 9 October 1994 when a deed of company arrangement was executed. The only property dealt with by the deed was the contingent asset specified in clause 3.1 of the deed of arrangement which read:- "The property that is available to creditors consists of the contingent assct, namely all actual or potential legal claims by and of the company which relate to events or conduct occurmng prior to the Fixed Date" The deed also provided:- "BAR TO CREDITORS' CLAIMS 70 When this Deed takes effect, no creditor shall, subject to Section 444D of the Corporations Law, in respect of his debt or claim against the company incurred or -5- alleged to have been incurred by the Company on or before the fixed date (whether the creditor's debt or claim 1s or is not admitted or established under this Deed) (a) stitute or prosecute any action, proceeding or suit against the Company (4) exercise any right of set-off or cross-action to which the creditor would not have been entitled had the Company been wound up at the fixed date;... DEED'S ADMINISTRATOR'S POWERS AND DUTIES 9.4 The Deed Administrator will not be mvolved in nor responsible for the management, operation or control of the company, tts business or litigation. COMMITTEE OF CREDITORS 12.1 The Committee of Creditors shall have the power to direct the Company: (a) lo appoint agents to do any business in connection with any Itigation, whether accountant, solicitors, barristers or other experts, or to attend to do any matter which is necessary for the conduct of any litigation; (b) to bring, prosecute and defend in the name and on behalf of the company any actions, suits or proceedings in any Court mm Australia in relation to any transaction, act or omission of the Company or any person arising our of or having its origin in any matter occurring on or prior to the fixed date, COMPANY 'S OBLIGATIONS 14 —- The Company agrees that during the continuance of this Deed it wilk: (®) use its best endeavours .o enforce all mghts agaist Darling Harbourside (Sydney) Pty Limited including, without hmuitation, pursuing casting Federal Court proceedings. DIRECTOR'S OBLIGATIONS 15 The Directors undertake to procure the performance by the Company of all its obligations under this Deed." While dealing with the deed of arrangement I should mention that it provides for the issue of units. Preferential A units are to be issued to the ordinary and preferential creditors who prove their debts to the satisfaction of the deed administration. Preferential B units are to be issued to persons who provide cash services or other consideration to the deed fund. The proceeds of recovery are to be dealt with as provided by clause 5.5, which reads:- "Redemption of Units and Distribution 3.5 The Deed Administrator may redeem Ordinary Units, Preferential A Units and Preferential B Units at such times as he shall think fit, subject to the following rules: (a) Units are to be redeemed in the following order of priority: (1) In payment of the costs and expenses of the Deed and its administration, including the remunerauon of the Deed Administrator; (i1) In payment of Creditors who hold Preferential A Units; (ut) In payment of Creditors who hold Preferential B Units; (iv) In payment of Creditors who hold Ordinary Units. (b) Units are redeemed on the basis that one unit equals $1. Provided that if the money standing to the credit of the Deed Fund 1s insufficient to redeem units held by a class of creditors, such money as are available may be distributed pro-rat amongst the members of such a class. (c) If there is a surplus of money in the Deed Fund after all units have been redeemed in full at value of $1, the Deed Administrator must distribute the surplus money on the following basis: a) 50% of any surplus money is to be paid to the Creditors, irrespective of the class, on a pro rata basis in accordance with units issued by the Deed Administrator; (ii) 50% of any surplus money is to be paid to the Company." When the suspension of the operation of the undertaking came to an end on 10 October, the undertaking reverted to its full force and effect. Only two of the payments due in July, August, September and October were made by the administrator, leaving two of the sums outstanding. On 14 October 1994, Darling Harbourside took the possession of the shops and premises, the subject of the leases. Two notices of motion on the part of Darling Harbourside have been filed. Counsel for Darling Harbourside has sought only the following orders:- "L A declaration that the Applicant has failed to comply with its Undertaking to this Court given on . 20 August 1993. 2 An order that any proceeding by the Applicant be stayed on its Application, Further Amended Statement of Claim, and any amendments thercof be stayed until the Applicant pays to the Respondent the balance of $117,354 02 payable pursuant to the sard Undertaking 1n respect of the months of July, August, September and October 1994 and sull unpaid" Counsel for Samrise has moved that Sanirise be released from its undertaking given on 20 August 1993. In my opmion, Samirise should be released from its undertaking as the undertaking was given to estabhsh an interlocutory regime prior to tnal. This regime was interrupted when the administrator was appointed. The mterruption continued until 9 October 1994 and came to an end when Darling Harbourside re-entered possession. Continuance of the undertaking would serve no purpose. The substratum of the undertaking was destroyed by the administration and by the retaking of possession. Although there is no express evidence that, when the administration came to an end, Sanirise did not have funds to meet the rent outstanding, I infer from the fact that the administrator did not make the two payments that this was in fact the case. The sum undertaken to be paid was not a sum fixed as the rent. The quantum of the rent will be determined when judgment 1s given. The sums undertaken to be paid were interim sums which, when paid, were to be taken into account in the determination of the rent paid or outstanding by Saninse. As the judgment in the proceedings will determine whether rent is due, and if so, how much, the undertakings serve no further interlocutory purpose. I consequently order -8- that Sanirise be released from the first undertaking given on 20 August 1993. There is no need to make any order with respect to the second and third undertakings. The undertaking having been released, the motions brought on behalf of Darling Harbourside must fail. It is unnecessary for me to consider the nice questions which would otherwise arise as to whether Samrise was in contempt of court and thereby precluded from pursuing this proceeding until it had purged its contempt by paying the two instalments which had not been paid. I am grateful to Mr C P Comans of counsel for the research he has undertaken as to the law of contempt but think it better not to enter into any discussion of this difficult area. The orders will be that Sanirise be released from the first undertaking given to the Court on 20 August 1993. The motions brought on behalf of Darling Harbourside will be dismissed. The three motions arose from the failure of Sanirise to comply with the interlocutory regime which had been agreed upon. On the other hand, Sanirise was successful in the motions. I think that a fair order as to costs will be that each party abide to its own costs of the three motions. Darling Harbourside also seeks an order that security for costs be provided. Evidence has been given by a solicitor, Patncia Mary Hutton, that Darling Harbourside has already incurred costs on a party and party basis exceeding $28,000. Ms Hutton has estimated that the hearing, which is listed to commence on 6 March 1995 and which has -9. been set down for 20 sitting days, would involve substantial costs and that, if the matter proceeds, Darling Harbourside's further costs including disbursements on a party and party basis would exceed $200,000. No evidence to the contrary was adduced. Indeed, a report of the administrator to creditors included the information that his solicitors believe that the costs of preparation for trial and the trial would exceed $250,000. Ms Christine Ehzabeth Kelly, a director of Saninse, has deposed in her affidavit that she attributes Sanirise's financial position directly to actions and lack of action on the part of Darling Harbourside and its agents. This evidence does not however, of itself, constitute prima facie evidence of the matters alleged in the statement of claim or evidence that Sanirise would be likely to obtain judgment against Darling Harbourside in a significant sum. No advice of counsel to this effect has been tendered. Rather a report made by the administrator to creditors stated that:- "My solicitor is of the opinion, based on the material reviewed by him ... that as the matter presently stands, he does not believe that the prospects of the company recovering any significant quantum of damages exceeds 50%". The administrator also reported to creditors that there was a prospect that an order for security of costs would be made. The claim made on behalf of Sanurise 1s for substantial damages. The amount is as yet unspecified but, at a creditors' meeting, figures of $5 million and more were -10- mentioned, It should perhaps be noted that the proceedings are not public interest litigation where the issue to be resolved 1s one of general interest to the community or even to a significant number of people. This litigation is brought for the recovery of money and alleges breaches of duties owed by Darling Harbourside to Samirise. The affidavit of Ms Kelly discloses that the directors of Sanirise have funded the litigation by obtaining the services of its solicitors and counsel on a contingency fee basis. This is consistent with the deed of arrangement which provides that the preferential B units may be issued to a person who provides cash, services or other consideration to the Deed. Such units could be issued to solicitors and counsel. The result could well be, if no order for security were made, that Sanirise could proceed with the litigation without either incurring legal costs itself or being troubled about any order as to cost which may be made against it. Counsel for Sanirise submitted that an order should be refused because of Darling Harbourside's delay. Darling Harbourside first gave notice of its intention to seek security in August 1993. However, it did not then proceed with the motion. In my opinion, the period of administration, the deed of arrangement and the loss by Sanirise of its premises have been facts which have radically changed the situation so as to justify Darling Harbourside in renewing its motion. Moreover, the moneys (if any) incurred to date by Sanirise on legal costs are so relatively mmor that they provide no ground of prejudice for refusing to make an order. -l1- On the other hand, the application has been made only a short time before the date on which the matter 1s listed for hearing. The matter has been on foot for some time. If it is to be heard at all, it should be heard in March 1995. It is undesirable that an order be made which may delay the trial. Counsel for Sanirise submitted that the making of an order for security will stifle the proceedings. It is conceded for the purposes of this motion that neither Sanirise nor the directors could provide security. Indeed minutes of a creditors' meeting show that Sanirise has a deficiency of approximately $2,180,000 and that the Westpac Bank holds a fixed and floating charge over its meagre assets. In my opinion, the making of a reasonable order as to security would not be likely to stifle the litigation if it is litigation that ought to proceed. If the creditors who are owed over-$2 million are not prepared to back the litigation with funds, I would draw the conclusion that it was not litigation which should be allowed to involve Darling Harbourside in a great deal of expense or to occupy 20 days of the Court's valuable hearing time. It would indeed be plainly unjust to Darling Harbourside to refuse to make an order for security. Darling Harbourside would otherwise be put in the position where it would be better served by offering $200,000 in settlement of the litigation so as to avoid the cost and expense of going on. Litigation is fairest to the persons concerned when both sides of the record are at risk of losing sums in respect of costs if htigation which should be discontinued or -12- settled is carried on unnecessarily The facts of the present case are analogous to those considered in Semler v Murphy [1968] 1 Ch 183, where Lord Denning MR said at 192:- "It comes to this If the action succeeds, the plaintiff's brother will go off with the whole proceeds and let the other creditors 'whistle' for their moncy. whereas if the action fails, the plaintiff will not be able to pay the costs of the defendant It 1s the very kind of case in which security for costs should be ordered" I should also add, on the subject of stifling litigation, that the view. which both counsel appear tentatively to prefer with respect to the deed of arrangement, 1s that it embraces Darling Harbourside's cross-claim and precludes Darlmg Harbourside from pursuing it against Samrise. From a practical pomt of view, this may have little significance as the monetary claims raised in the cross-claim will be likely to be taken into account in the assessment of the claims which Sanirise makes and as no factual recovery by Darling Harbourside trom Sanirise would be likely. Of course, Darling Harbourside still has its cross-claims agaist the other cross-respondents. In my opinion, the sum m respect of which an order for security should be made 1s $100,000. In adopting this tigure, I take all the factors into account including the tact that the case 1s listed for hearmg on 6 March 1995. I think this sum will not be likely to stifle the litigation if it 1s judged by the creditors to be litigation which should be pursued. After all, the claim may amount to $5 million and the creditors are owed $2 million. In this light, $100,000 1s a very modest sum. I shall order that the applicant, Sanirise, provide security for the costs ot the respondent. Darling Harbourside, in the sum of $100,000 and that this sum be paid into -3- court or a bank guarantee therefor, in a form approved by the Registrar, be lodged with the Court by 31 January 1995. In default of the provision of that security on or before 31 January 1995, the application will be stayed. Darling Harbourside should have the costs of the motions. a I certify that this and the twelve (12) preceding pages are a truc copy of the reasons for judgment herein of the Honourable Justice Davies Associate: Date. 14 December 1994 Counsel for the applicant: wv o Chaikin Solicitors for the applicant: Stoyanovic & David Counsel for the respondent' C P Comans Solicitors for the respondent: Harris & Co Date of heanng 13 and 14 December 1994 Date of judgment: 14 December 1994