Supreme Court New South Wales Medium Neutral Citation: In the matter of The Summit Hotel Bondi Beach Pty Ltd (No 3) [2023] NSWSC 630 Hearing dates: 8 June 2023 Decision date: 13 June 2023 Jurisdiction: Equity - Corporations List Before: Robb J Decision: Orders will be made in the form proposed by the fourth and fifth defendants, including the agreed variations, subject to the undertakings to be given to the Court. Catchwords: CIVIL PROCEDURE — interim preservation — freezing orders — bespoke orders drafted to provide sufficient security to plaintiffs in circumstances where freezing orders enable defendant company to repay debts impugned by plaintiff in proceedings Legislation Cited: Practice Note SC Gen 16 Cases Cited: In the matter of The Summit Hotel Bondi Beach Pty Ltd (No 2) [2023] NSWSC 487 Category: Consequential orders Parties: Efrem Harkham (First Plaintiff) 10-12 Campbell Parade Pty Ltd (Second Plaintiff) The Summit Hotel Bondi Beach Pty Ltd (First Defendant) HK Empire Pty Ltd (Second Defendant) Patglen Pty Ltd (Third Defendant) Terry Harkham (Fourth Defendant) Geraldine Harkham (Fifth Defendant) Representation: Counsel: GA Sirtes SC/PD Reynolds (Plaintiffs) DR Sulan SC/R Jameson (Second, Fourth and Fifth Defendant) Solicitors: Assured Legal Solutions (Plaintiffs) Jones Day (Second, Fourth and Fifth Defendant) Norton Rose Fulbright (First and Third Defendant) File Number(s): 2022/00372454 Publication restriction: Nil JUDGMENT 1. These reasons deal with the orders that should be made in response to an interlocutory process filed by the plaintiffs on 15 February 2023. 2. I dealt with the substance of the interlocutory dispute in my second judgment in these proceedings: In the matter of The Summit Hotel Bondi Beach Pty Ltd (No 2) [2023] NSWSC 487 ("J2"). 3. I will refer to the parties and use abbreviations in the same way as I have done in J2, and will assume knowledge of the reasons in that judgment. 4. The parties were invited to submit draft short minutes of order giving effect to the reasons in J2. In J2 [183]-[202], I raised a number of issues for consideration concerning the appropriate formulation of the orders to be made by the Court. 5. At a hearing on 8 June 2023, the parties provided competing draft short minutes of order to the Court that were largely agreed, but which raised a number of differences between the parties. The Court's task is not to decide for itself which of the positions proposed by the parties is preferable. That is because the structure of the proposed orders is that the Court will make bespoke freezing orders in relation to the sale proceeds of a number of properties, subject to a $10,000,000 carveout that will enable Terry and Geraldine to cause SHBB to repay $10,000,000 of a debt recorded in its financial accounts as being owed to Lulubelle. That carveout from the freezing order will be permitted on the basis of undertakings offered by Terry and Geraldine to the Court to protect Efrem in the event that it is established in these proceedings that the $10,000,000 ought not to have been repaid to Lulubelle. 6. Terry and Geraldine retain the right to decide whether or not they will give to the Court the undertakings that the Court may decide are necessary in order for the Court to make orders that permit the carveout from the freezing orders. If Terry and Geraldine are not prepared to give the undertakings, then the Court will have to reconsider the issues involved in whether the Court should make the freezing orders and if so, on what terms. This is in the context where Terry and Geraldine have offered to give undertakings in order to resolve the interlocutory dispute, without the Court having made findings that there is a sufficient risk that the defendants will dissipate their assets to justify the making of freezing orders against any of the parties. 7. I am satisfied that the Court should make the freezing orders offered by Terry and Geraldine, subject to the $10,000,000 carveout and undertakings to be given to the Court by Terry and Geraldine, that their submissions show are acceptable to them. There are a small number of agreed variations to the draft short minutes of order proposed by Terry and Geraldine that I need not describe. It will only be necessary for the Court to record in outline why it has resolved the dispute concerning the formulation of the short minutes of order in the manner proposed by Terry and Geraldine. 8. At J2 [195], I considered the offer made by Terry and Geraldine that they would, in effect, undertake to SHBB to repay any part of the $10,000,000 that the Court subsequently found Lulubelle was not entitled to receive, and that they would grant a registered first mortgage to SHBB over their residential property to secure the indemnity. A problem with that arrangement is that Terry and Geraldine control SHBB, so they would be in a position to determine whether SHBB enforced the indemnity and the mortgage. Further, Terry and Geraldine would have the power to execute a discharge of the mortgage on behalf of SHBB that could undermine the efficacy of the mortgage being registered. I raised the possibility that Terry and Geraldine should also give an indemnity to Efrem secured by the registered mortgage, which should only be enforceable by leave of the Court. I described that proposal as "cumbersome", as any liability of Lulubelle to refund money to SHBB would be an asset of SHBB and not Efrem, who is only a shareholder in that company. 9. Efrem's response was to include in order 4(b) of his draft short minutes of order an undertaking by Terry and Geraldine to indemnify both SHBB and Efrem in respect of Lulubelle's possible obligation to repay the amount that it received as a result of the carveout to SHBB. Efrem added order 7 that provided that he could not enforce the indemnity without the leave of the Court, and that all funds recovered under the indemnity by him would be held on trust for SHBB. Efrem was content with this indemnity and did not request that it be secured by a mortgage over Terry's and Geraldine's property. 10. Terry and Geraldine resisted giving an undertaking that they would indemnify Efrem, on the basis that that arrangement would be legally unsound as any entitlement to recover the amount paid to Lulubelle would be an asset of SHBB and not Efrem. 11. Instead, Terry and Geraldine proposed, by means of a new order 5, a regime whereby the three shareholders in SHBB would, within 14 days, in their role as directors of SHBB, make a resolution to the effect that Efrem would solely be authorised to act for and on behalf of SHBB in making a demand upon Terry and Geraldine and to enforce the indemnity and the mortgage. Further, in their capacity as shareholders of SHBB, they would propose and vote in favour of an amendment to the company's constitution to insert a new provision, that could not be amended without the unanimous consent of the shareholders, that had the effect of prohibiting the rescission of the resolution authorising Efrem to act on behalf of the company. Terry and Geraldine agreed that the orders to be made should prevent them acting on the carveout until the requirements of order 5 had been completed. 12. Efrem agreed to the inclusion of order 5, but submitted that Terry and Geraldine should still be required to undertake to indemnify Efrem as well as SHBB. 13. I am satisfied that the regime proposed by Terry and Geraldine closes the 'gap' in the arrangements to protect SHBB that I discussed at J2 [195], at least in respect of the control that Terry and Geraldine would otherwise have in relation to the enforcement of the indemnity and the mortgage by SHBB. The proposal does so in a straightforward matter on the basis of the principles of company law, in a way that obviates the cumbersome alternative, which would have attracted difficulty because Terry and Geraldine could only have indemnified Efrem for his reflective loss as a shareholder of SHBB, if all of the other protections for that company that were put in place by the orders were ineffective. 14. The regime proposed by Terry and Geraldine does not close the 'gap' in relation to the power of Terry and Geraldine to discharge the registered mortgage. However, that 'gap' could only be closed if Efrem was included as a mortgagee so that a discharge could not be registered unless it was executed by Efrem. That does not matter for three reasons. First, as mentioned, Efrem has not asked for a mortgage to secure the personal indemnity that he sought. Secondly, I agree with the submissions made by Terry and Geraldine that, in the light of the absence of proof of likely dissipation, the series of protections that Terry and Geraldine have offered to give SHBB should be accepted by the Court as being adequate in the circumstances. Thirdly, as I observed at J2 [24], as Efrem's claim is presently constituted, he has not sought leave to challenge the validity of the loan transactions between Lulubelle and SHBB on behalf of SHBB. 15. The second area of dispute arose in response to observations that I made in J, [198], which concerned the fact that the then proposed order 4(b) would have required Terry and Geraldine to indemnify SHBB for the value of any repayments made to Lulubelle "to the extent that it is determined at the conclusion of these proceedings that [Lulubelle was] not entitled to receive those payments". The expression "not entitled" may have given rise to confusion and future disputes, as Lulubelle, as a creditor of SHBB, may have been entitled to repayment of the debt owed to it even though it might be found that Terry and Geraldine ought not to have created the debt as directors of SHBB, or that they ought not have used its funds to repay the debt. 16. By their proposed revised order 4(b), Terry and Geraldine substituted the expressions "Lulubelle ought not to have received or was not entitled to receive," and "SHBB was under no obligation to make, or ought not to have made" the repayments for the more limited expression "not entitled to receive" in the earlier draft of the orders. 17. In his proposed short minutes of order, Efrem accepted the wording proposed by Terry and Geraldine, but went further to add descriptions of specific legal circumstances that may be found by the Court and have the effect that the debt recorded in SHBB's financial accounts as being owed to Lulubelle was void or invalid or unenforceable, or the repayment involved a breach of duty owed by Terry and Geraldine to SHBB. 18. I am satisfied that the wording proposed by Terry and Geraldine is appropriate and sufficient, particularly insofar as it assuages my concern about the use of the expression "not entitled to receive". I consider that it is adequate in the circumstances for the orders to be formulated in terms of "ought not" and "not entitled" and "no obligation". The additional wording suggested by Efrem is not essential, and may turn out to be inappropriate by reason of it involving unnecessary specificity. 19. The final issue concerns the rate of interest that should be applied to the indemnity to be given by Terry and Geraldine in respect to any part of the $10,000,000 carveout paid by SHBB to Lulubelle that is required to be repaid. As discussed at J2 [190], there was an issue as to whether, as suggested by Terry and Geraldine, interest should be at the rate payable under Division 7A of Part III of the Income Tax Assessment Act 1936 (Cth), or the court rate under Practice Note SC Gen 16 par 5. In their latest draft short minutes of order, Terry and Geraldine propose the Macquarie Bank rate applicable to the trust account in which the balance of the proceeds of sale, after the implementation of the carveout, will be retained. Efrem proposes that interest should be payable at the court rate. 20. I should record that, in discussing the issue at J2 [190], on the basis that there were two alternatives, I simply did not advert to the possibility now proposed by Terry and Geraldine. I am satisfied that the appropriate interest rate should be the Macquarie Bank interest rate, so that the fund constituted by the proceeds of sale of the property from which the carveout will be made will be reinstated and made whole to the extent that the Court orders that the carveout must be reversed. The proposal made by Terry and Geraldine is a commercially rational way to deal with the prospect that money paid out of the trust fund as part of the carveout will be required to be reinstated. 21. The imposition of the court rate is predicated upon circumstances where a party has become subject by an order of the Court to pay money, which in most cases will involve a breach of a legal obligation, if not wrongdoing. Efrem's interlocutory process has been heard and determined on a basis that has not involved any finding of breach of obligation or wrongdoing on the part of Terry and Geraldine. It is not appropriate for the Court now to make an order that will impose a rate of interest higher than the interest that would have been earned if the amount in the trust account had not been reduced by the amount of the carveout. This course will not preclude the Court making an order against Terry and Geraldine personally, if circumstances are shown to warrant it, that imposes upon them an obligation that attracts interest at the court rate. That is a matter that should be determined in the future, if any such orders are made. 22. In the circumstances, the Court will make the orders as proposed by Terry and Geraldine, subject to the agreed variations, on the basis of the undertaking to the Court that Terry and Geraldine have offered to give. 23. If the parties would prefer the Court to make orders in chambers, I will accept an undertaking to the Court made on instructions from the parties in letters addressed to the Principal Registrar of the Court by their respective solicitors and sent to my Associate to be retained on the Court's file. Otherwise, it will be necessary to relist the matter so that the undertakings can be given to the Court by counsel. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 June 2023