FEDERAL COURT OF AUSTRALIA Momentum Productions Pty Ltd v Lewarne [2008] FCA 547 MOMENTUM PRODUCTIONS PTY LTD AND ANOR v RICHARD JOHN LEWARNE NSD2155 OF 2007 EMMETT J 23 APRIL 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD2155 OF 2007 BETWEEN: MOMENTUM PRODUCTIONS PTY LTD First Appellant RICHARD JAMES SCOTTS Second Appellant AND: RICHARD JOHN LEWARNE Respondent JUDGE: EMMETT J DATE OF ORDER: 23 APRIL 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appellants have leave to file a further amended notice of appeal in the form attached to their written submissions of 18 March 2008. 2. The appellants pay the respondent's costs thrown away by the amendment. 3. The appellants provide security for the respondent's costs of and incidental to the appeal in the sum of $10,000 by payment into Court or in such other form as is satisfactory to the Registrar. 4. The appeal be stayed until such time as security is provided by the appellants. 5. Liberty be reserved to the respondent to apply for summary dismissal of the appeal if such security is not provided within 42 days from today. 6. The parties' costs of the application for security be their respective costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD2155 OF 2007 BETWEEN: MOMENTUM PRODUCTIONS PTY LTD First Appellant RICHARD JAMES SCOTTS Second Appellant AND: RICHARD JOHN LEWARNE Respondent JUDGE: EMMETT J DATE: 23 APRIL 2008 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The respondent to this appeal, Mr Richard Lewarne, has applied for security for his costs of the appeal. The appellants are Momentum Productions Pty Ltd (Momentum) and Mr Richard Scotts. Momentum is controlled by Mr Scotts. The bases for the application, that the appellants are impecunious and that the grounds of appeal are far from compelling, turn largely on questions of fact and raise no important question of law. The application for security is opposed by Momentum and Mr Scotts. 2 It is common ground that, if the appeal is dismissed, neither Momentum nor Mr Scotts would be in a position to meet an order for costs. They have already been unsuccessful in an application to another judge of the Court for a stay of the orders from which the appeal is brought (see Momentum Productions Pty Limited v Lewarne [2007] FCA 1988). Nevertheless, they resist the application for security on the basis that the appeal has reasonable prospects of success and that, if orders to provide security are made, they may be deprived of the capacity to prosecute the appeal. 3 The orders from which the appeal is brought were made on 9 October 2007 (see Lewarne v Momentum Productions Pty Limited [2007] FCA 1530) for reasons given on that occasion and earlier, on 7 August 2007 (see Lewarne v Momentum Productions Pty Limited [2007] FCA 1136). When the reasons of 7 August 2007 were delivered, the primary judge, at the request of the parties, made no order for relief but rather allowed the parties a reasonable time to bring in short minutes for the resolution of the matter in the light of her Honour's findings and reasons. 4 The proceeding concerned the circumstances surrounding the purchase of a hotel business known as the East Village Hotel, carried on in Palmer Street, East Sydney. The business, or at least the leasehold of the premises on which the hotel business was conducted, was purchased by Momentum. Momentum has commenced a proceeding in the Supreme Court of New South Wales against the landlord of the premises where the hotel business is carried on. In that proceeding, Momentum is claiming damages "for the benefit of the business." 5 Mr Lewarne paid the sum of $300,000 to acquire an interest in the business. Mr Scotts claimed that the payment of $300,000 was for Mr Lewarne to purchase 15% of the issued shares in Momentum. Mr Lewarne, on the other hand, claimed that he agreed with Mr Scotts that he would pay $300,000 to become a 15% partner in a partnership that was to conduct the hotel business. The primary judge recorded that it was a live issue in the proceeding as to who the other partners were and, in particular, whether the other partners included Mr Scotts and Momentum or only one of those two. 6 Mr Lewarne also claimed that, in the course of their negotiations, Mr Scotts made representations to him that were misleading and deceptive, in contravention of s 52 of the Trade Practices Act 1974 (Cth) (the Trade Practices Act) and s 42 of the Fair Trading Act 1987 (NSW) (the Fair Trading Act). Mr Lewarne also said that the representations formed part of the contract between the parties and that, because the representations were not made good, Momentum breached that contract. In addition, Mr Lewarne made claims that Mr Scotts acted in breach of fiduciary obligations owed to him in that he applied the $300,000 paid by Mr Lewarne in discharge of a loan secured by a mortgage over a property situated in Robertson Street, Narrabeen (the Narrabeen property), which was then owned by Mr Scotts' brother and mother. The Narrabeen property was subsequently transferred to Mr Scotts himself. 7 The primary judge concluded that there was no credible support for the proposition that Mr Lewarne and Mr Scotts agreed on a share sale and her Honour was satisfied that they did not do so. Her Honour concluded that Mr Lewarne and Mr Scotts intended their contract to be one of partnership. Later, her Honour observed that, as partners, Mr Lewarne and Mr Scotts owed fiduciary obligations to each other. 8 Having found that there was a partnership, the primary judge ordered that a receiver be appointed to the partnership business, that the assets of the partnership business be realised and that the proceeds be applied in the manner specified by her Honour. Her Honour also made the following declarations and orders: 1 The partnership between [Mr Lewarne] and [Momentum and Mr Scotts] in operating the business conducted at the East Village Hotel… was terminated on 20 November 2006 pursuant to s 26 and 32 of the Partnership Act 1892 (NSW). … 7 [Momentum] holds any rights at law or in equity to a lease of the East Village Hotel… and any legal or equitable right arising from or in connection with that lease for the benefit of the Partnership. … 9 In settling accounts between the partners following the realisation of assets… the following rules shall apply: (a) losses… shall be paid first out of profits, next out of capital and, lastly, if necessary, by the partners individually in the proportion to which they are entitled to share profits; (b) the assets of the Partnership… shall be applied in the following manner and order: 1. in paying the debts and liabilities of the Partnership… 2. in paying to each partner rateably what is due by the Partnership to the partner for advances as distinguished from capital; 3. in paying to each partner rateably what is due from the Partnership to the partner in respect of capital; 4. the residue… if any to be divided among the partners in accordance with Order 10… 10 The receiver is to distribute the Partnership Residue referred to in Order 9(b)(4): (a) 15% of the Partnership Residue… to be paid to [Mr Lewarne], (b) if [Mr Lewarne's] Residue Amount is less than the amount of $357,629.25 plus interest on that sum… the difference between these two amounts to be paid to [Mr Lewarne], (c) the balance of the Partnership Residue, if any, to be paid to the partners, other than [Mr Lewarne], in their respective proportions. 11 If, after payment of the amount referred to in Order 9(a)…, the amount of the Partnership Residue is less than the amount required to be paid to [Mr Lewarne] under Order 10(b), [Momentum and Mr Scotts] must pay the amount of the deficiency to [Mr Lewarne]. 9 In addition, the primary judge ordered that Mr Scotts pay the sum of $416,276.71 together with interest to the partnership. Her Honour also declared that Mr Scotts holds his interest in the Narrabeen property subject to an equitable charge in favour of the partnership to secure that sum. That sum apparently represents the proceeds of the $300,000 paid by Mr Lewarne. 10 The orders do not address the question of the respective shares of Momentum and Mr Scotts in the partnership. It may be that her Honour was treating Momentum and Mr Scotts as being jointly entitled in some way to the 85% of the partnership that did not belong to Mr Lewarne. That does not appear to have been made clear one way or the other. 11 In relation to Mr Lewarne's claim that Momentum and Mr Scotts engaged in conduct that was misleading and deceptive, the primary judge concluded that, on various occasions and in various respects, Mr Scotts and Momentum contravened the Trade Practices Act and the Fair Trading Act. Her Honour concluded that Mr Lewarne would be entitled to damages for losses he incurred that, as a matter of common sense and experience, would not have been incurred but for the misleading or deceptive representations made by Mr Scotts. On the other hand, her Honour found that Mr Lewarne was careless of his own interests in relying on Mr Scotts. Her Honour concluded that the findings that she had made in relation to representations were sufficient to establish that Momentum and Mr Scotts were liable to Mr Lewarne. The sum of $357,629.25 referred to in Order 10(b) apparently represents loss said to have been suffered by Mr Lewarne by reason of the misleading and deceptive conduct of Mr Scotts. 12 The primary judge made adverse findings concerning the credit of Mr Scotts. Her Honour considered that he did not present as a reliable or frank witness and that in cross-examination his answers were often evasive, unconvincing and confusing, at times verging on the absurd. Her Honour had the clear impression that his responses were tailored to advantage his case, as he perceived it, rather than to attempt to give truthful answers. Her Honour's overall impression was that Mr Scotts mainly blurred the truth in order to obtain an advantage to himself and that, despite his protestations as to his benevolent intentions, he was in fact quite ruthless in his business dealings with both friends and family. The primary judge formed the opinion that Mr Scotts is willing to be dishonest when he perceives that it is in his interests, both in his business dealings and in Court. Her Honour was not prepared to accept Mr Scotts evidence unless it was corroborated by independent evidence. 13 The primary judge's impression of Mr Lewarne was that he was, for the most part, truthful. He was prepared to make admissions that were adverse to his case or that reflected badly on his own character. At times, his recollections failed and he did not present the whole truth, or the entirety of his knowledge about particular matters. However, her Honour did not consider that Mr Lewarne demonstrated a propensity towards dishonesty or deception and accepted that, in relation to one instance of dishonesty, Mr Lewarne was under significant personal strain at the time and that influenced him to be momentarily dishonest. 14 The only asset of Momentum appears to be the leasehold property where the hotel business is carried on, which is the subject of proceedings in the Supreme Court of New South Wales. The primary judge held that that property is held for the benefit of the partners although it is by no means clear whether there is any equity in the partnership such that Momentum, as a partner, may have a positive interest. 15 In connection with the application for a stay, Mr Scotts furnished a statement of assets and liabilities as at 21 November 2007 showing net assets of $142,846. That figure was arrived at after allowing a value of $580,000 for the Narrabeen property which was subsequently sold for $518,000. The statement of assets and liabilities does not take account of the sum that the primary judge ordered Mr Scotts to pay to the partnership. After taking that liability into account, Mr Scotts' liabilities exceed the value of his assets. 16 In the course of the application for a stay, counsel appearing for Momentum and Mr Scotts made it clear on more than one occasion that there would be no challenge in the appeal to the findings of misleading and deceptive conduct made by the primary judge adverse to Mr Scotts. Counsel for Momentum and Mr Scotts, in opposing the application for security, confirmed that there would be no attempt in the appeal to overturn the findings on credit made by the primary judge. 17 In the course of the hearing of the application for security, counsel for Momentum and Mr Scotts, who also appeared at the trial, but who was not responsible for the grounds of appeal in the notice of appeal, indicated that he was somewhat embarrassed by the current grounds. That embarrassment arose in the context of counsel's address concerning the prospects of success of the appeal. In the circumstances, I gave Momentum and Mr Scotts leave to file a further written submission outlining the basis upon which they say the application for security should not succeed, giving attention particularly to the prospects of success of the appeal. 18 Both parties filed further written submissions and the appellants foreshadowed a further amended notice of appeal. The further submissions filed on behalf of Mr Lewarne indicated that he did not oppose the appellants' being given leave to file the proposed further amended notice of appeal, subject to there being an order for the costs thrown away by the amendment. It is appropriate to give such leave. 19 The proposed further amended notice of appeal asserts that the primary judge erred in the following respects, by: (1) finding that the relationship between the parties was one of partnership; (1A) finding that Mr Scotts was a partner contrary to the pleadings of the parties; (1B) determining that both Momentum and Mr Scotts were partners, without determining each of their respective partnership interests; (2) failing to find that there was an agreement whereby Mr Lewarne agreed to pay $300,000 for 15% of the shares in Momentum; (3) in the alternative, making orders in respect of any partnership when one of the partners, Mr Anthony Scotts, was not a party to the proceeding; (3A) finding that the $300,000 payment made by Mr Lewarne was a capital contribution to the partnership; (4) making orders for the payment of moneys by Mr Scotts to the partnership and for a charge over the Narrabeen property, in circumstances where no final accounting had occurred in respect of the partnership; (5) finding that the payment of $300,000 to discharge the mortgage over the Narrabeen property was not for the benefit of the partnership; (5A) failing to consider the unopposed expert evidence of Mr John Williams in respect of the value of the Supreme Court proceedings, and failing to value that asset of the business or alternatively to provide reasons for rejecting such evidence; (5B) having been unable to value the Supreme Court proceeding, finding that Mr Lewarne was likely to make a loss with respect to his investment in the business and accordingly making orders under s 87 of the Trade Practices Act; (6) making orders in respect of the distribution of assets among the partners that were inconsistent with s 44 of the Partnership Act 1892 (NSW); (7) ordering that Mr Lewarne be paid an amount representing profit as damages under the Trade Practices Act; (8) making orders requiring damages pursuant to the Trade Practices Act or the Fair Trading Act be paid out of the assets of the partnership; and (9) failing, in the exercise of the discretion to award costs, to give due consideration to the offer made by Momentum and Mr Scotts, prior to the commencement of the proceeding, to repay to Mr Lewarne his entire investment. 20 An important thrust of the further submissions made by Momentum and Mr Scotts, on the basis of the proposed further amended notice of appeal, is that the primary judge found that both Momentum and Mr Scotts were partners in circumstances where that was not pleaded by Mr Lewarne. They say that Mr Lewarne's final pleading alleged only that Momentum was a partner and that Mr Scotts was the principal of Momentum, acting on behalf of Momentum. While the pleadings were amended several times, that issue was not the subject of any amendment. The primary judge said, in her reasons, that Mr Lewarne pleaded that the parties were Momentum and himself but that he later submitted that it was a tripartite agreement involving Mr Scotts as well. The appellants say that the submission that there was a tripartite agreement involving Mr Scotts ought not to have been entertained without a formal amendment to the pleading. 21 Mr Lewarne says that a list of relevant issues provided to the primary judge in the course of addresses indicated that the nature of Mr Lewarne's proposed interests needed to be determined, since it was necessary to bring the value, if any, of that interest to account in determining whether or not Mr Lewarne suffered loss by reason of his reliance upon misleading or deceptive representations. Mr Lewarne says that, whether the 85% interest in the partnership was held by Momentum or by Mr Scotts, or by Momentum and Mr Scotts jointly, is of little practical moment, save for the form of relief. Mr Lewarne points to observations made by the primary judge that Mr Scotts referred to himself and to Momentum without apparent distinction and that, even if Mr Lewarne appreciated the distinction, he did not seek clarification of the issue. 22 Proposed ground (1B) follows on from ground (1A), by asserting that the primary judge ought not to have found both Momentum and Mr Scotts to be partners without determining their respective interests. Order 10 requires a balance to be paid to the partners, other than Mr Lewarne, in their respective proportions. However, the orders do not specify what those proportions are. The appellants say that they argued that the agreement was that Momentum, as the holder of the lease, would generate profit and pay such profit to its shareholders biannually in the form of a dividend. The appellants contend that the notion of distributing Momentum's profit to its shareholders by way of a dividend payment, as was discussed, is not easily reconcilable with the notion of sharing a profit among Momentum, Mr Scotts and Mr Lewarne as partners of the partnership. They say it is not clear how the profit of Momentum can be the profit of Mr Scotts if both Momentum and Mr Scotts are partners. 23 The appellants also contend that the primary judge erred in making orders requiring Mr Scotts to pay money to a partnership of which he was found to be a member. They say, as between each other, partners are entitled only to the remedy of an account and not to individual actions for particular debts or other causes of action in relation to partnership affairs. An account is a final and conclusive determination as between the parties; one cannot have partial accounting. The appellants say, therefore, that the orders made by the primary judge are contrary to principle. 24 The appellants contended that Mr Lewarne suffered no loss because his investment is profitable. Even if he were misled or deceived, he nevertheless profited from the venture. At the trial the appellants tendered a report from a forensic accounting expert, Mr John Williams, assigning a value to Momentum's proceeding in the Supreme Court, as an asset of the partnership, assuming there was a partnership. That evidence was unopposed. However, expert evidence relied on by Mr Lewarne did not take that value into account. Therefore, the appellants say, the primary judge should have taken into account the value of the Supreme Court proceeding in assessing whether Mr Lewarne suffered any loss or should have given reasons for rejecting the evidence of Mr Williams. They say that her Honour did neither but simply said that she was not satisfied that any value could be attributed to the proceeding. 25 Mr Lewarne eschews any contention that the appeal is hopeless or that it is prosecuted otherwise than in good faith. Nevertheless, he says that the appeal does not have substantial prospects of success and that that, coupled with the absence of any important question of law, is a relevant factor in determining whether to order security. 26 I consider that at least some of the grounds of appeal are reasonably arguable. Whether or not any of the grounds will succeed is not a question for me. Nevertheless, I will have regard to my conclusion that at least some of the grounds are reasonably arguable. That, of course, is not decisive. 27 The appellants would be unable to meet an order for costs if one were made upon the appeal's being dismissed. Mr Lewarne is therefore faced with the prospect of bearing his own costs of an appeal, even if successful, from orders in a proceeding in which he was substantially successful. However, impecuniosity is not of itself a reason why security should be ordered. On the other hand, there is no suggestion that the impecuniosity of the appellants was contributed to in any way by any conduct on the part of Mr Lewarne. 28 The discretion to order security for costs of an appeal is to be distinguished from the discretion to order security for the costs of a trial. In the case of an appeal there has been a decision given after a full hearing and the appellants have had their day in Court. While it may be possible that some or all of the orders made by the primary judge could be set aside on appeal, they must be presumed to be correct until such time as error is demonstrated and they are set aside. While I am persuaded that there are at least reasonably arguable grounds, the case certainly is not one where it could be demonstrated that there were clear errors of such a nature that one could confidently predict the outcome of an appeal. In all of the circumstances, I consider that it is appropriate that there be an order for security. 29 Mr Lewarne sought security in a sum in excess of $25,000, although the evidence before me indicates that the likely future costs of the appeal would be in the order of $12,000. The difference represents the costs of the unsuccessful stay application brought by the appellants. Mr Lewarne has the benefit of an order for those costs and it is not appropriate for security to be given in respect of those costs. 30 Security is not intended to provide a full indemnity for costs likely to be incurred. I consider that an appropriate order would be for the appellants to provide security in the sum of $10,000. If that is not provided within six weeks, Mr Lewarne should have liberty to apply for summary dismissal of the appeal. 31 Mr Lewarne also asks for his costs of the application for security. The appropriate order is to make the costs of the application the parties' costs of the appeal. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 23 April 2008 Counsel for the Applicant: Mr M Sahade Solicitor for the Applicant: Comino Prassas Counsel for the Respondent: Mr M B J Lee Solicitor for the Respondent: Sparke Helmore Date of Hearing: 11 March 2008 and 4 April 2008 Date of Judgment: 23 April 2008