Reliance Financial Services v Lemery Holdings [2006] NSWSC 709

New South Wales Supreme Court

CITATION : Reliance Financial Services v Lemery Holdings [2006] NSWSC 709 This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S) : 11 July 2006

JUDGMENT DATE : 11 July 2006

JURISDICTION : Equity

JUDGMENT OF : Campbell J

EX TEMPORE JUDGMENT DATE : 07/11/2006

DECISION : Asset preservation order varied. Costs order in consolidated proceedings 4924/04 and 3923/04 to be payable forthwith. Costs of application for variation to be defendants' costs in the cause.

CATCHWORDS : PRACTICE - asset preservation order - balance of convenience - COSTS - whether costs to be payable forthwith - costs of interlocutory application

CASES CITED : Reliance Financial Services v Lemery Holdings [2005] NSWSC 651

Reliance Financial Services Pty Ltd - First Plaintiff/Respondent Sam Peter Cassaniti - Second Plaintiff/Respondent PARTIES : Lemery Holdings Pty Limited - First Defendant/Applicant Ghandi Faizi Sobbi - Second Defendant/Applicant Zakiyeh Sobbi - Third Defendant/Applicant

FILE NUMBER(S) : SC 3696/05

COUNSEL : D A Allen - Plaintiffs/Respondents T Tzovaras, solicitor - Defendants/Applicants

SOLICITORS : Hancocks Solicitors - Plaintiffs/Respondents Tzovaras Legal - Defendants/Applicants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

TUESDAY 11 JULY 2006

3696/05 RELIANCE FINANCIAL SERVICES PTY LIMITED & ANOR v LEMERY HOLDINGS PTY LIMITED & ORS JUDGMENT – Ex Tempore 1 HIS HONOUR: This is an application seeking, in effect, two different types of order. The first type of order is a variation of the terms of an asset preservation order which was made on 30 June 2005. 2 I set out the reasons for making that order in an earlier judgment: Reliance Financial Services Pty Limited v Lemery Holdings Pty Limited [2005] NSWSC 651. 3 The direction which I gave on 1 July 2005 for the filing of an Amended Statement of Claim was not complied with. The time for filing an Amended Statement of Claim was extended by the court on several occasions. I had originally ordered that it be filed by 8 July 2005. It had still not been filed by 19 October 2005, at which time the time for filing it was extended to 26 October 2005. It had still not been filed by 21 November 2005 at which time the time for filing it was extended to 2 December 2005. It had still not been filed by 31 January 2006 at which time the time for filing it was extended to 3 February 2006. The Amended Statement of Claim was eventually filed on 3 February 2006. 4 That document is a document which is by no means a model of the pleader's art. Mr Allen, who is now briefed in the matter, quite understandably takes the view that it needs to be repleaded. A direction was made on 22 June 2006 for the plaintiffs to file and serve a Further Amended Statement of Claim by 5.00 pm on 4 July 2006. I should, in fairness, say that at the time of that direction being given Mr Allen warned me that there might be some problems in complying. Even so, the document has still not been filed. 5 After the Amended Statement of Claim had been filed on 3 February 2006, a further timetable was set by the Registrar, but it has not been adhered to either. The defendants have not filed their defence as they had been ordered to do. They sought some further and better particulars of the Amended Statement of Claim on 28 March 2006, but those particulars have still not been provided. Now that that Amended Statement of Claim is itself going to be amended, the particulars requested will presumably become irrelevant. 6 The effect of this is that the matter has made virtually no progress in a year. When the asset preservation order was made on 30 June 2005, I set the matter down for hearing before me on a provisional basis, for dates in September of 2005. Those dates came to be vacated, when it became apparent that Mr Sam Cassaniti was to be involved in a criminal trial, and that that criminal trial would not be concluded until the period I had set aside for the hearing was over. 7 The news of the involvement of Mr Cassaniti in the criminal trial came to the court quite late, as I recorded in another earlier judgment. 8 Mr Cassaniti has been convicted of, and sentenced for, an offence, and is presently in custody. That creates an inevitable slow down in his communication with legal advisors. 9 The basis on which the earlier order was made was that it was to preserve the property the subject of an alleged charge. As I recorded in the judgment given on 30 June 2005, that charge was stated to be a fixed and floating charge. The charge was over the assets of Lemery Holdings Pty Limited. However, as I earlier recorded, Lemery Holdings Pty Limited, though a party to the proceedings in which an agreement was made for Lemery to grant the charge, never appeared in them and was not represented. The present proceedings seek, in the alternative, either a declaration that the charge already exists, or alternatively an order against Lemery's directors for specific performance of an alleged agreement to cause Lemery to grant a charge. 10 The charge is expressed to be, in the short minutes of order which gave rise to it, "a fixed and floating charge ... over the assets of the Second Defendant". 11 Mr Tzovaras submits that, to the extent the charge was a floating charge, it would permit the company to deal with its assets in the ordinary course of business, and paying legal expenses is part of the ordinary course of business. He seeks a variation of the order to enable part of a fund paid into court, being part of the proceeds of sale of a property at Liverpool, to pay legal costs incurred or to be incurred by Lemery. 12 There are various types of floating charge, and the extent to which a chargor is permitted to deal with charged assets depends to some extent on the drafting. In the present case, there is no document, at least in the short minutes of order themselves, which define with any precision the activities with assets that the second defendant could engage in before the charge came to crystallise. As well, the description of the charge in the short minutes does not go into any detail over what assets are to be subject to a fixed charge and what are to be subject to a floating charge. 13 There is a specific provision in the short minutes of order, Clause 11, whereby: "The Second Defendant undertakes to the First Defendant that it shall not borrow or otherwise encumber the Liverpool Property in excess of the amount of $360,000 or such further amount as is reasonably necessary to fund the House of Diamonds proceedings." 14 The "House of Diamonds" proceedings there referred to are some proceedings that were then on foot involving litigation between Lemery Holdings Pty Limited and House of Diamonds Pty Limited. 15 I do not accept that Clause 11 indicates an intention to create a fixed charge over the Liverpool property. The distinction between a negative covenant relating to property, and a security interest, is extremely well known, and Clause 11 creates a negative covenant. 16 That in itself raises a question about the ambit of the charge, and in particular whether it was intended to be a fixed charge over the Liverpool property. 17 Further, it appears that, whatever else might be unclear about the drafting of the short minutes, it would be open to the second defendant to use the proceeds of the Liverpool property to fund the House of Diamonds proceedings. 18 In my earlier judgment on 30 June 2005, I expressed the view that there was a serious question to be tried about whether there was a charge, or alternatively, a specifically performable agreement for the directors to cause Lemery to grant a charge. If the agreement was of the latter kind, there is a real question about whether it is immediately effective to create a charge, or creates the charge only upon any order for specific performance being made, or perhaps carried out. 19 At the time the asset preservation order was made the arguments concerning the extent of the charge and what was permitted under it, were not, it appears from the reasons for judgment, raised. In my view, though, those arguments are ones which raise a real question about whether the relief which is claimed will ultimately result in a charge being given, which is fixed over the proceeds of the Liverpool property at the present time. Whether a case appears to be a strong one, or a weak one, is a matter which can be taken into account in assessing the balance of convenience concerning continuance of an injunction. 20 There is evidence from Mr Sobbi that Lemery has no assets worth speaking of beyond the funds which are in court, and some jewellery which is also frozen pending determination of the present proceedings. There is evidence that Mr Sobbi and his wife have no significant assets, beyond their interest in Lemery, and the equity in their house. Their house is subject to a first mortgage to Reliance, which is expressed to secure the amounts in a particular loan agreement. That loan agreement itself relates to an amount of $645,000 plus interest, and also contains an "all monies" clause. There is litigation on foot at the moment in which Mr and Mrs Sobbi seek to have the mortgage set aside or varied. Their house is also subject to a caveat to secure an unregistered mortgage which they have given to their solicitors, Tzovaras Legal. 21 The variation which is sought in relation to the order is to seek the release from court of an amount up to $282,212.19. That amount comprises an amount of the order of $230,000, which Tzovaras Legal presently claims to be owed by Lemery, and an amount which is the estimated costs of seeing the present proceedings through to conclusion. The amount which is presently owed is not all in relation to these present proceedings. In all, it relates to five different disputes four of which have at present resulted in proceedings. One of the amounts which is owed relates to the House of Diamonds litigation. 22 There is some evidence which raises doubt about the ability of Reliance Holdings to meet any undertaking as to damages. Mr Gino Cassaniti, an accountant, who has a power of attorney to act on behalf of Reliance, gave extensive evidence today, orally. He gave evidence that he has had involvement with the affairs of Reliance since Sam Cassaniti went to gaol in September last year. He says that Reliance presently has 10 to 15 legal matters outstanding in which it seeks to collect money it says is owing to it. 23 A creditors winding up summons was presented against Reliance in February of this year, by the Office of State Revenue. He says that that entity has been paid out in full, that Dibbs Barker Gosling, another creditor, sought to be substituted and was paid in full, and that presently Worrells, accountants, are seeking to be substituted. Worrells claims unpaid fees as a result of having been appointed (invalidly, I have earlier held) to act as receivers and managers of Lemery. The standing of Worrells to be substituted is apparently to be contested. Mr Gino Cassaniti says that "from what I understand" there was a deed executed where Worrells had to collect the Lemery Holdings loan before they could receive any fees. That deed was not produced. 24 Mr Gino Cassaniti gave some evidence of his awareness of the financial circumstances of Reliance. It appears that it has not filed any tax returns since the 2001 financial year, and he is not too sure about whether tax returns were filed in the years before that. While there are management accounts which are maintained, and well up-to-date, there have been no accounts actually adopted by the company at least since the end of the 2001 financial year. 25 There is some unclarity resulting from his evidence about just what assets Reliance has. It appears that it has raised money from people, and lent that money on to others. Mr Gino Cassaniti says that Reliance does not pay any tax, as all its income gets passed on to other entities. Whether this is through payment of interest on borrowings, or as a trust distribution, is unclear. 26 He says that the balance sheet shows that the net assets of the company are either minimal or nominal. He says that the company is able to meet its debts as they fall due because it can raise money from family members or associated people. 27 While Mr Gino Cassaniti has had his power of attorney since Mr Sam Cassaniti went to gaol, he has not been actively involved in the present matter. He did not know what orders there were that were outstanding in these proceedings, and gave instructions to solicitors to appear in the proceedings only yesterday, though following on from some preliminary contact he had had with them on Friday of last week. 28 When the accounts are not up-to-date, in a form which the directors have adopted, and which can form a basis for submission of tax returns, it is difficult to be confident about what Reliance's financial situation is. 29 The undertaking as to damages in this matter is one which was given not only by Reliance, but also by Mr Sam Cassaniti. There is some evidence of his assets and liabilities, though in fairly shadowy form. It is known that there is an application being made by the Commonwealth DPP under the Federal Proceeds of Crime legislation, the practical effect of which will be that all his assets are forfeited around the end of the year unless the court makes contrary orders before then. Mr Allen tells me from the Bar table that there ought to be a sound basis for ensuring that nothing like all his assets end up being the subject of the forfeiture. 30 I declined an adjournment to enable evidence to be put on about Mr Sam Cassaniti's financial situation and prospects of avoiding a forfeiture of all his assets. In those circumstances, what I propose to do is to leave out of consideration any risk that there might be that his undertaking as to damages might be inadequate. 31 Even upon that basis, in my view the balance of convenience does not favour the continuation of the asset preservation orders, to the extent to which Mr Tzovaras seeks to have them released, save only that the asset preservation orders ought continue to the extent of the amount claimed for the proceedings other than the present ones and the House of Diamonds proceedings. 32 The effect of the asset preservation order is that Lemery has been deprived of the opportunity to use commercially the amount of over $600,000 which has been paid into court. As well, the asset preservation order attaches to some jewellery, which is a commodity the value of which is notoriously subject to fluctuations. I would not assume that there is only a small potential for damages under the undertaking as to damages. However, given the attitude which I have indicated concerning the adequacy of Mr Sam Cassaniti's undertaking as to damages, I do not rely upon the potential size of any claim under an undertaking as to damages as the basis for making the order. 33 Even now, the Court is not in the situation where it could have confidence that the matter will proceed with expedition. 34 In my view, the combination of the delay, and the doubt about whether, even assuming that there ultimately is found to be an agreement by Lemery itself to give a fixed and floating charge over its assets, that charge is presently one which is fixed over the proceeds of the Liverpool property, means that the balance of convenience now favours the variation which I have outlined. 35 The other application made by the Notice of Motion was for an order that the plaintiffs pay to the defendants their costs on an indemnity basis pursuant to an order which I made on 29 June 2005, as agreed or assessed forthwith. That order is one which was made in an earlier set of proceedings, number 4924 of 2004, into which proceedings number 3923 of 2004 had by then been consolidated. Those are proceedings which were listed for hearing before me, but which were ultimately not contested, because of Lemery and Mr Sam Cassaniti propounding a basis upon which an alleged charge and appointment of receivers was valid, then deciding not to press those allegations. The case not being pressed was one of the reasons why the indemnity costs order was made. 36 The proceedings in which I made orders on 29 June 2005 were not completely resolved, because they raised some questions which, had the proceedings been dismissed, could have created estoppels, which might have interfered with the running of the present litigation. Thus, the proceedings have been held in existence but subject to an order that no further documents be filed in them. For all practical purposes they are over. There is no reason why, in my view, the costs which were ordered to be paid should not be payable forthwith. It is probably necessary, though, as the proceedings are still on foot in a state of suspended animation, to actually make an order that permits the costs to be payable forthwith. In consolidated proceedings 4924 of 2004 and 3923 of 2004, I order that the indemnity costs which were ordered on 29 June 2005 may be assessed, and that the amount as agreed or assessed is payable forthwith. 37 The defendants seek costs of today's application. The application is interlocutory so it is not appropriate to make an order which decides absolutely the way in which costs will ultimately fall. I order that the costs of today's application be the defendants' costs in the cause. **********