Reported Decision : (2004) 22 ACLC 1411 New South Wales Court of Appeal CITATION : Masri Apartments Pty Limited (In Liquidation) & Anor v Perpetual Nominees Limited [2004] NSWCA 255 HEARING DATE(S) : 19/07/04, 27/7/04 JUDGMENT DATE : 30 July 2004 JUDGMENT OF : Ipp JA at 1 DECISION : (1) Leave is granted to Masri Apartments Pty Limited and AUS Constructions Pty Limited, by their directors, Lawrence Debono and Samir Masri, pursuant to s 471A(1A)(d) of the Corporations Act (a) To bring an application for a stay of the orders made by Austin J on 24 June 2004 relating to the winding up of Masri Apartments Pty Limited and AUS Constructions Pty Limited and (b) To file and pursue an appeal against that decision of Austin J (2) Until further order, the winding up of Masri Apartments Pty Limited and AUS Constructions Pty Limited and each of them, pronounced on 24 June 2004, is stayed (3) The costs of the application (save for those thrown away, the subject of the order made on 19 July 2004) are costs in the appeal (4) The appeal is expedited and listed for hearing on 23 November 2004. CATCHWORDS : PRACTICE AND PROCEDURE - Application for stay of a winding up order pending an appeal - Application by directors of a company for leave to pursue an appeal under s 471A of the Corporations Act 2001 (Cth) - Whether appeal has a reasonable prospect of success - Whether prejudice if stay not granted - Whether the application is governed by s 482 of the Corporations Act 2001 (Cth) or Pt 44 r 5 and Pt 51 r 15 of the Supreme Court Rules 1970 (NSW) - Considerations relevant to a grant of approval under s 471A(1A)(d) of the Corporations Act 2001 (Cth) - Protection of the resources of an insolvent company. D LEGISLATION CITED : Corporations Act 2001 (Cth), ss 471A(1A)(d), 482 Supreme Court Rules 1970 Pt 44 r 5, Pt 51 r 15 Alexander v Cambridge Credit Corporation Ltd [1985] 2 NSWLR 685 Anderson v Palmer [2002] NSWSC 192 Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737 CASES CITED : Lane Cove Council v Geebung Polo Club Pty Limited (No 2) (2002) 41 ACSR 15 Mann v Goldstein [1968] 1 WLR 1091 Niger Merchants Company v Capper (1877) 18 Ch D 557 Rodgers v CJS Panels Pty Ltd [2001] VSC 470 Masri Apartments Pty Limited (In Liquidation) (First Claimant) PARTIES : AUS Constructions Pty Limited (In Liquidation) (Second Claimant) Perpetual Nominees Limited (Opponent) FILE NUMBER(S) : CA 40544/04 COUNSEL : T S Hale SC/J K Chippendall (Claimants) P R Whitford (Opponent) SOLICITORS : M D Nikolaidis & Co (Claimants) Gadens (Opponent) LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT 2513/04; 2514/04 FILE NUMBER(S) : LOWER COURT Austin J JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40544/04 SC 2513/04 SC 2514/04 IPP JA Friday 30 July 2004 MASRI APARTMENTS PTY LTD (IN LIQUIDATION) AND ANOR V PERPETUAL NOMINEES LIMITED Judgment 1 IPP JA: On 24 June 2004 Austin J ordered that Masri Apartments Pty Limited ("Masri") and AUS Constructions Pty Limited ("AUS") be wound up. Masri and AUS now apply for orders: (a) Granting to them, by their directors, leave pursuant to s 471A(1A)(d) of the Corporations Act 2001 (Cth) to appeal against the winding up orders, and (b) Staying those winding up orders. 2 Masri is the owner of a large piece of land. AUS is a building contractor. The two companies set about together developing Masri's property. To do that they needed substantial finance, which they obtained through the opponent ("Perpetual"). 3 Perpetual became the custodian for two loans made to AUS. Masri guaranteed those loans. The first loan was for an amount not exceeding $10,078,000 and the second was for an amount not exceeding $2,028,400. The loans were made pursuant to loan agreements and were supported by a number of securities including first and second mortgages over the property to be developed. 4 Before the development of the property was completed, the two companies experienced financial difficulties. Perpetual caused statutory demands to be served on Masri and AUS. These demands were not met. Perpetual applied for the winding up of the two companies, relying, relevantly, on their failure to pay the statutory demands. 5 For reasons that it is now not necessary to elaborate upon, Austin J ruled that it was open to Masri and AUS to adduce evidence to show that there were genuine disputes as to the debts asserted in the statutory demands and to submit that there were formal defects in the statutory demands and accompanying affidavits. He said: "[I]n the unusual circumstances of this case it is permissible for [Masri and AUS] to raise at the hearing of the winding up application matters which, in other cases, could only be raised in an application to set aside a statutory demand." 6 His Honour rejected the arguments of Masri and AUS to the effect that there were formal defects in the statutory demands and the accompanying affidavits. The judge then turned to the question whether there were genuine disputes as to the amounts claimed in the statutory demands. The issue here was principally whether there had been defaults under the loan agreements. 7 Austin J adopted the approach articulated by Ungoed-Thomas J in Mann v Goldstein [1968] 1 WLR 1091, a case that has been followed many times in this country. Ungoed-Thomas J (at 1096) referred to the statement by Sir George Jessel MR in Niger Merchants Company v Capper (1877) 18 Ch D 557 (at 559) that, "[w]hen a company is solvent, the right course is to bring an action for the debt", and concluded, "[s]o, to pursue a winding up petition in such circumstances is an abuse of the process of the court". After considering the authorities, Ungoed-Thomas J said, further (at 1099): "So, in my view, when a petitioning creditor's debt is disputed on some such substantial ground this court should restrain the prosecution of the petition as an abuse of the process of the court even though it should appear to the court that the company is insolvent." 8 Austin J held that there was a genuine dispute between the parties in regard to various events of default but concluded that on one particular ground Masri and AUS were not able to raise any genuine dispute. This ground concerned clauses 7.18 and 8 of the loan agreements. Under cl 7 the occurrence of any of a stipulated list of events constituted a default of the loan agreements. Under cl 7.18, one such event was: "If a caveat or other encumbrance is registered against the Security Property without the Lender's consent". 9 Under cl 8, at any time after default, Perpetual was empowered to cancel the loan and require payment of the debts. A debt was defined as the sum of all advances that had been made as well as interest calculated under the agreement concerned. 10 On 2nd and 6th February 2004, two caveats were lodged against the secured property. The first caveat was withdrawn immediately after it was challenged. Perpetual's finance broker lodged the second caveat, apparently because Perpetual had not paid the broker's fees under the loans. 11 Masri and AUS contended before Austin J that the broker had no caveatable interest. They argued that, because neither caveat was based on a caveatable interest, the entry of the caveats did not constitute an act of default under cl 7.18. 12 Austin J found in this regard: "It seems to me plain beyond argument, from the language of clause 7, that it is the very lodgement or 'registration' of the caveat that gives rise to the default, regardless of whether the caveat might be open to removal or other challenge. That construction is hardly surprising, since a commercial lender is likely to be more concerned about the fact that there is a caveat on the title to the secured property than that the caveat might at some future time … be removed. To the extent that Perpetual relies upon lodgement of the caveats as a default entitling it to require payment of all advances and interest, I cannot see that there is any substantial basis for disputing its claim." 13 As a result of this finding, his Honour said: "[T]he conclusion that the defendant companies are insolvent becomes irresistible." 14 Masri and AUS now contend that, on a proper construction of cl 7.18, there will be an event of default arising from the registration of a caveat only if the caveat is lawfully registered and the person registering the caveat has a relevant caveatable interest. In my view, this proposition is reasonably arguable and raises a serious issue for an appellate court. 15 I now turn to the question of prejudice to Masri and AUS should a stay not be granted. 16 According to Mr Masri, a director of Masri, if the development is completed a net profit of not less than $1.5m will result. If the winding up is not stayed, and the property is disposed of, the prospect of earning a profit from the development will be lost, irretrievably. 17 The requirements for a stay of an order of a primary judge, pending appeal to the Court of Appeal (pursuant to Pt 44 r 5 read with Pt 51 r 15 of the Supreme Court Rules 1970 (NSW), were stated in Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737 (at 741-742) as follows: "The appellant must show that the appeal raises serious issues for the determination of the appellate court, and that there is a real risk that he will suffer prejudice or damage, if a stay is not granted, which will not be redressed by a successful appeal. This requirement will be satisfied if the appeal will be rendered abortive or nugatory unless a stay is granted. If these pre-conditions are established the Court will then consider the balance of convenience." 18 Perpetual, however, submits that for a stay to be granted the requirements of s 482 of the Corporations Act must be complied with. In Anderson v Palmer [2002] NSWSC 192 Barrett J (at [5]) discussed the considerations relevant to an application under s 482. There is no doubt that those criteria have not been met. 19 The question arises whether s 482 applies to the present application, or whether the application is governed solely by the relevant Rules of Court (Pt 44 r 5 and Pt 51 r 15). 20 Part 44 r 5 provides: "The Court may, on terms, stay execution of a judgment or order" 21 As is stated in Ritchie's Supreme Court Procedure NSW (para 51.15.1), Pt 51 r 15 "plainly contemplates that either the Court of Appeal, or the court below, may order a stay of proceedings whenever it is appropriate". As the learned authors point out: "[T]he power to order a stay is incidental to the right of appeal and derives from the inherent power of the court to do whatever is necessary to prevent injustice in relation to proceedings in the court". 22 Section 482(1A) provides: "An application may be made by: (a) in any case – the liquidator, or a creditor or contributory, of the company; or (b) in the case of a company registered under the Life Insurance Act 1995 – APRA." It can be seen that s 482(1A) does not provide for an application for a stay to be made by the company itself. This, in my view, indicates quite plainly that s 482 was not intended to apply to the stay of a winding up pending an appeal. 23 I would add that s 482(2) (which empowers the Court to direct the liquidator to give a report with respect to a relevant fact or matter), s 482(3) (which empowers the Court to give directions for the resumption of the management and control of the company by its officers) and s 482(1) (which empowers the Court to make an order staying the winding up "at any time") are not particularly apposite to the powers an appellate court would exercise when granting a stay of a winding up order pending an appeal. 24 I conclude therefore, that s 482 is not presently relevant. In my view, the present application for winding up is governed only by Pt 44 r 5 and Pt 51 r 15 of the Supreme Court Rules. Kalifair Pty Ltd v Digi-Tech (Australia) Ltd and Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 authoritatively set out the relevant criteria applicable. 25 Perpetual submitted that, in any event, the Court should not make an order as sought under s 471A(1A)(d) granting leave to Masri and AUS to file and pursue the appeal. I would add that no specific order was sought granting Masri and AUS leave to make the application for a stay, but such an application is implicit in the relief sought. I take Perpetual's submissions in regard to s 478A(1A)(d) to apply, also, to the grant of such leave. 26 In Lane Cove Council v Geebung Polo Club Pty Limited (No 2) (2002) 41 ACSR 15 Barrett J discussed considerations relevant to the grant of approval under s 471A(1A)(d) in a case where approval was sought to bring proceedings for orders setting aside a statutory demand and a winding up order. Barrett J inferred that the approval sought was for the directors to act as officers of the company in seeking the relief in question. 27 Barrett J said (at 18): "The company is in liquidation because of a statutory presumption of insolvency. The objective of the substantive application is to see that position reversed or reviewed. But if it is not reversed or reviewed, the company's assets will remain in the hands of the liquidator for the benefit of its creditors in the first instance. It would be inappropriate for the funds of the company to be applied in meeting the costs of these proceedings unless the outcome was that the winding up did not continue and the regime presided over by the liquidator for the benefit of creditors came to an end. It was for this reason, I think, that in Rodgers v CJS Panels Pty Ltd [2001] VSC 470 Warren J commented in analogous circumstances that the court would need to be satisfied about the solvency of the subject company before allowing a director to cause it to institute an appeal against an order for its winding up. Her Honour was clearly concerned to ensure that the position of creditors was not prejudiced by inroads made by the expenses of such an appeal upon the resources of an insolvent company. Protecting those resources seems to me to be an indispensable requirement in any exercise of the court's discretion under s 471A(1A)(d) in a case such as this. But proof of solvency is not necessarily the only way of achieving that protection. Another possibility is for the court to sanction, as a condition of the grant of s 471A(1A)(d) approval, arrangements to ensure that the relevant costs are to be borne by the applicant for approval (or perhaps by contributories) on the basis that there will be no recourse to the assets of the company for reimbursement unless and until the winding up comes to an end. I do not say that an applicant's willingness to agree to such arrangements would ensure success in a s 471A(1A)(d) application but it would go quite a way towards resolving the concern by reference to which Warren J mentioned the need to be satisfied about the solvency." 28 Masri and AUS have not adduced evidence of their solvency. They have, however, provided an undertaking to the Court in the following terms: "1. The directors of Masri Apartments Pty Limited and Aus Constructions Pty Limited, being Samir Masri and Lawrence Debono, undertake to the Court that: (a) subject to (b), the claimants' costs of the appeal will not be borne by the companies or either of them; (b) there will be no recourse to the assets of the companies for reimbursement of costs paid in relation to these proceedings unless and until the windings up have come to an end; (c) unless and until the windings up have come to an end, the directors shall not permit the companies to trade. NOTE: A. The claimants consent to expedition. B. The directors of the claimants are prepared to offer security for costs of the appeal in the sum of $20,000 which is not to be provided out of the assets of the companies and in the event that there is no agreement between the parties as to the form of the security, the Registrar of the Court of Appeal will determine the form of the security." 29 Perpetual contended that the undertaking is inadequate as it does not ensure that the costs of resisting the appeal, that will be incurred by Masri and AUS, will be paid otherwise than by recourse to their assets. It seems to me, however, that the undertaking that the costs of appeal of Masri and AUS "will not be borne by the companies or either of them", should result in the companies not incurring legal costs of the kind in question. 30 It is the case that Perpetual, if successful, may have to recover from Masri and AUS any excess of its costs over and above the $20,000 offered as security for costs. On the other hand, Perpetual may be able to recover that excess, or part of it, from the directors. Whatever the position in this regard, I consider that the undertakings offered protect the resources of the companies under winding up to a reasonably adequate extent. 31 Finally, Perpetual submitted that the relief sought should not be granted as it was apparent from the evidence that, apart from the statutory presumption of insolvency, the companies were in fact insolvent. 32 In my view, however, it is reasonably arguable that, in an appeal against the granting of a winding up order, where the principal ground is that the primary judge erred in holding that the debt on which the statutory demand was based was not genuinely disputed, questions of general insolvency (outside the presumption) are irrelevant. In other words, I consider it to be reasonably arguable that, if the appellate court comes to the conclusion that the debt was genuinely disputed, the appeal should be upheld irrespective of the general solvency or otherwise of the companies (their general solvency not being directly in issue in the proceedings before the primary judge). 33 In my opinion, there has been compliance with the criteria expressed in Kalifair. In the circumstances, I would grant the relief sought. 34 Subject to the undertakings made on 27 July 2004 by the directors of Masri and AUS to the Court: (1) Leave is granted to Masri and AUS, by their directors, Lawrence Debono and Samir Masri, pursuant to s 471A(1A)(d) of the Corporations Act : (a) To bring an application for a stay of the orders made by Austin J on 24 June 2004 relating to the winding up of Masri and AUS and, (b) To file and pursue an appeal against that decision of Austin J. (2) Until further order, the winding up of Masri and AUS and each of them, pronounced on 25 June 2004, is stayed. (3) The costs of the application (save for those thrown away, the subject of the order made on 19 July 2004) are costs in the appeal. (4) The appeal is expedited and listed for hearing on 23 November 2004. ********** Last Modified: 08/04/2004 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.