New South Wales Supreme Court CITATION : Citadel Property Group v Capital Finance Australia [2008] NSWSC 1470 HEARING DATE(S) : 12 November 2008 JURISDICTION : Equity Division Commercial List JUDGMENT OF : McDougall J at 1 EX TEMPORE JUDGMENT DATE : 12 November 2008 DECISION : See paragraphs [41] to [44] of the judgment. CATCHWORDS : INJUNCTIONS - injunction to prevent defendants exercising rights under security - adequacy of damages as remedy. - PRACTICE - whether to order issues be determined separately. - COSTS - security for costs - whether claim in substance defensive - whether issues on plaintiffs' claim likely to arise in any event. LEGISLATION CITED : Corporations Act Uniform Civil Procedure Rules CATEGORY : Procedural and other rulings CASES CITED : KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Citadel Property Group (Rockdale No1) Pty Ltd (First Plaintiff) Citadel Property Group (Berala) Pty Ltd (Second Plaintiff) Shellbridge Pty Ltd (Third Plaintiff) Capital Financial Australia Ltd (First Defendant) PARTIES : Murray Campbell (Second Defendant) Joseph David Hayes (Third Defendant) Steven John Sherman (Fourth Defendant) Peter James Gothard (Fifth Defendant) Paul Andrew Billingham (Sixth Defendant) Peter Grealish (Seventh Defendant) FILE NUMBER(S) : SC 50204/08 COUNSEL : C R C Newlinds SC / A R R Vincent (Plaintiffs) J B Simpkins SC / B D Brassil (Defendants) SOLICITORS : Salim Rutherford Lawyers (Plaintiffs) Gadens Lawyers (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 12 November 2008 ex tempore (revised 12 November 2008) 50204/08 CITADEL PROPERTY GROUP (ROCKDALE NO 1) PTY LIMITED & ORS v CAPITAL FINANCE AUSTRALIA LIMITED JUDGMENT 1 HIS HONOUR: The plaintiffs are companies associated with Mr Antonio Maiolo. He is a property developer. Each of the plaintiffs was set up to carry out a specific (and substantial) development. The development conducted by the first plaintiff (Rockdale) relates, somewhat confusingly, to land at Liverpool. The development carried out by the second plaintiff (Berala) relates to land at Berala. The development carried out by the third plaintiff (Shellbridge) relates to land at Rockdale. 2 Each plaintiff obtained finance for its proposed development from the first defendant (CFAL). The development carried out by Shellbridge is substantially complete and the properties created by that development are being sold. The developments being carried out by Rockdale and Berala are no more than holes in the ground, although in each case as I understand it development consent has been obtained and there has been some commencement - whether or not substantial I do not know - of the works thereby authorised. 3 CFAL claims that each of the plaintiffs is in default under its individual facility agreement and under securities given by it. In addition, because those securities are each "cross-collateralised", CFAL claims that the default by each plaintiff entitles it to act under the securities given by the other plaintiffs. 4 CFAL has acted on what it says are those defaults by appointing the second to seventh defendants as receivers of the plaintiffs. I hasten to point out that each plaintiff is the subject of an individual receivership; not all of the second to seventh defendants are receivers and managers of each plaintiff. 5 In addition, CFAL has threatened proceedings against Mr Maiolo on guarantees that he has given in its favour in respect of the liabilities owed to it by each plaintiff. 6 In these proceedings, the plaintiffs say they have not defaulted in respect of their obligations to CFAL. Further, they say, CFAL has defaulted in its obligations to them under the various facility agreements, including by failing to make payments as required for the purpose of executing the various developments. Further, the plaintiffs say, in respect of the factual matrix that I have briefly and inadequately sketched, CFAL has acted in a way that is misleading or deceptive or unconscionable, or that might give rise to estoppels. 7 For a great variety of reasons, the plaintiffs say either that there is no default or that CFAL should not be permitted to take advantage, as it has done, of any default. Further, they say, they are entitled to substantial damages from CFAL for breaches of contract, misleading or deceptive conduct and unconscionable conduct. Although the plaintiffs seek specific performance of the various facility agreements, I do not think that this claim stands at the forefront of their claim for relief. 8 I am concerned today with interlocutory applications brought by the plaintiffs and the defendants. The plaintiffs, by an amended notice of motion filed in Court today, seek orders restraining CFAL from exercising or purporting to exercise its right under the various securities given to it and orders restraining the 2nd to 7th defendants from acting or purporting to act pursuant to their appointments as receivers and managers. Alternatively, the plaintiffs seek an order for the separate and prior determination of all issues of liability. 9 The defendants' notice of motion seeks an order that the plaintiffs provide some $330,653 by way of security for costs, and the usual consequential orders. 10 The Court was favoured (if that is the correct term) by a vast body of evidence, comprising numerous affidavits and some 12 lever arch folders of documents. Those folders would occupy some metres of Court space. Very few of those documents have any relevance to any of the real questions that were disputed and frankly I do not know why the Court was troubled with them. 11 The plaintiffs' case, in relation to the exercise of rights and the activities of the receivers, is based on the proposition that the plaintiffs have an answer to each of the defaults that (at least until today) CFAL had notified the plaintiffs as being sources of the rights that it has, or claims to have, exercised. The ambit of the dispute has been somewhat extended, because the defendants today filed in Court their commercial list response. That document made reference to a number of other breaches. Somewhat opportunistically, the submission was put for the defendants that not all of their allegations of breach have been answered. 12 Further, the plaintiffs say, the balance of convenience favours the grant of the relief sought. Thus, they say, they are entitled to that relief. 13 The evidence relied upon in support of the proposition that there is an answer to all the breaches of which the plaintiffs have had notice as being the source of the claimed rights, is in some cases somewhat sketchy. Indeed, in some cases, it consists of no more than argumentative and conclusory statements. Although I admitted the evidence subject to an objection (to avoid the position that we would spend the whole day arguing questions of admissibility, and not deal with the real issues in dispute) I do not accept that the evidence in all cases provides a serious answer to the allegations of default. Further, as Mr Simpkins SC for the defendants pointed out, at least some of the allegations of breach that are now made are allegations that depend on, or assume, acceptance of what the plaintiffs have said. 14 I am prepared to proceed on the basis that there are serious issues to be tried as to whether CFAL was entitled to act as it did and appoint receivers. However, that does not mean that the plaintiffs are entitled to succeed. It simply requires consideration of the alternative questions, including balance of convenience and other discretionary reconsiderations. 15 As I have said, Shellbridge's development and the units thereby created are being sold. The defendants' position is that they wish the receivers to have the conduct of those sales. The plaintiffs' position is that they wish to be able to procure purchasers for the units in question. 16 There was some suggestion that sales by the receivers might attract a lower price than sales by the plaintiffs. I am not sure that the evidence made good this proposition. But in any event, the answer to it seems to me to be that there is no reason why the plaintiffs cannot seek out, and introduce to the receivers or the real estate agents retained by them, prospective purchasers of the units in question. 17 As to the developments undertaken by Rockdale and Berala, removal of the receivers does not mean that work will resume. It is clear, from the plaintiffs' evidence, that the plaintiffs have sought, and have failed to obtain, alternative financing to enable them to complete those developments. That perhaps is not surprising, having regard to the events of the last 12 months in relation to both the domestic economy and the international economic financial "crisis" or "meltdown", of which the Court cannot but help be aware. 18 As to one of the properties in particular, there is a question of public safety. It abuts a railway line. A retaining wall in the excavation has been secured by temporary anchors. There is some concern as to the long term stability of those anchors and of the wall that they secure. However, it does not seem to me to be the case that the checking and, if necessary, replacement of those anchors is a matter of such formidable technical complexity that only the plaintiffs, or Mr Maiolo, should be regarded as capable of undertaking it. I see no reason why the receivers could not do so, having taken (as undoubtedly they are entitled to do) appropriate technical advice. I accept that the imposition of receivers on the plaintiffs will lead to a substantial level of expense, which would not be incurred if the receivers were not in place. But that does not seem to me to be dispositive. Indeed, it leads to what I do regard as being the dispositive issue in respect of this aspect of the interlocutory application. 19 In the ordinary way, the Court would not grant relief of the kind sought unless it were satisfied that damages would not be an adequate remedy. Mr Newlinds SC, for the plaintiffs, recognised this. He also recognised that the various matters of which the plaintiffs complain are matters that sound in damages, and are capable of being assessed. If the plaintiffs are correct, and there was no default (or no default of which CFAL should be allowed to take advantage), so that the receiverships were invalid, then the assessment of damages, whilst not easy, would be in a technical sense straightforward. It was not suggested that CFAL would not be able to meet any damages that might be ordered against it. 20 As against this, there is the situation that, as the evidence presently stands, the plaintiffs owe substantial sums of money to CFAL - of the order of $35.4 million - and CFAL holds substantially less in the way of security – of the order of $29.6 million. Thus, there is a shortfall (on those figures) of approximately $5.8 million. Two things follow. The first is that, prima facie, those figures suggest that CFAL should be entitled to take such steps as are properly open to it to minimise its losses, given that it has put in place the security documents that, if activated, give it the right to act as it has done. The second is that if the exercise of those rights is restrained, and those proceedings are later resolved in favour of CFAL, the ability of the plaintiffs to meet any undertaking as to damages must be, putting it mildly, suspect. In truth, on those figures, any undertaking as to damages must be regarded as worthless. 21 For those reasons I do not think that it is appropriate to grant the injunctive relief sought by the plaintiffs. 22 I turn to the plaintiffs' application for separate determination of the case on liability. There is much to be said in principle for the proposition that the parties should not be put to the expense of preparing and running a factually complex case on damages, in circumstances where it may be, because of conclusions on liability, that the matter does not need to go so far. In this context, I note that the issues on liability would require, among other things, the construction of hypothetical development models for the properties in question and an analysis of the returns that would have been achieved had the developments proceeded according to plan, and had CFAL performed (as the plaintiffs say it has not performed) the obligations that it undertook to fund those developments. Further, there would be in effect an accounting exercise involving the conduct of the receiverships and expenses incurred in that regard. It is obvious that a case to damages involving those elements will be expensive and difficult to prepare, and expensive to run. 23 However, at this stage, I do not think that it is appropriate to order separate determination of the question of liability. That is because, as it presently seems to me, Mr Maiolo would be the key witness for the plaintiffs in each aspect of their cases. The cases as to breach (or absence of breach) depend almost entirely on his evidence. The cases as to damages, assuming that they involve the processes that I have described (and Mr Newlinds did not seek to persuade me otherwise) would likewise seem to involve his evidence. 24 If all issues are dealt with in the one hearing then one person will decide all relevant questions of credibility. In this context, I note that Mr Maiolo's credibility will be very much in issue in the case on liability. Whether or not it will be an issue on the case on damages (should matters go that far) I do not know. 25 Conversely, if there are separate hearings - presumably by separate tribunals of fact - of the cases on liability and damages, then there is the risk of inconsistent findings on credibility. 26 Accordingly, whilst I am not to be taken as saying that this may not be an appropriate case for separation out of liability and quantum, I think it is simply too early to see whether it is appropriate to do so. 27 For these reasons the plaintiff's amended notice of motion should be dismissed, although in case it is not plain, I will indicate yet again that it does not involve a final decision on the merits of the application for separate determination of the case on liability. 28 I turn to CFAL's application for security for costs. What might be called the "jurisdictional fact" (a convenient although technically inappropriate phrase), whether the matter is considered by reference to s 1335 of the Corporations Act or UCPR r 42.21(1)(d), is not in doubt. It is plain that there is reason to believe (and, if it be necessary to say so, on credible evidence) that the plaintiffs would be unable to meet any costs that might be awarded against them and in favour of the defendants. 29 Nor was there any significant challenge to the defendants' estimate of the amount for which security was sought. That was quantified by an affidavit of Ms Vojvodic, in the sum to which I have already referred. Although Ms Vojvodic did not explicitly separate costs in respect of preparation up to hearing and costs in respect of the hearing, it is easy enough to make that apportionment from the figures that she has given. If it were relevant to do so, and otherwise appropriate to order security for costs, I would be inclined to order it in tranches. The first tranche would be the amount of some $230,000 and the second (in respect of the hearing) of some $130,000. However, to jump to that is to put the cart before the horse. 30 In substance, Mr Newlinds relied on some three matters in opposition to the application for security. The first is that Mr Maiolo has given each of the plaintiffs his personal guarantee to accept liability for its costs of the proceedings. Thus, Mr Newlinds submitted, Mr Maiolo has "put his money where his mouth is". 31 The second matter on which Mr Newlinds relied was that the plaintiffs' case was in substance defensive. He said, in effect, that it was a pre-emptive strike in answer to CFAL's claim for the debt (or whatever would be left over after the receivers have executed their responsibilities). He acknowledged that in some respects the case went further. However, he submitted, the great bulk of the matters raised were in substance answers to the claim that, clearly enough, CFAL has indicated it will bring. 32 Further, Mr Newlinds submitted, the matters that it was seeking to agitate would be agitated in any event, because CFAL had made it clear that it would claim against Mr Maiolo pursuant to his guarantee. Mr Newlinds submitted that when (not if) this happened, Mr Maiolo would raise, by way of defence, the proposition that he had no liability under his guarantees because the present plaintiffs had no liability; the second part of that proposition, of course, would be dependent on the matters that the plaintiffs seek to agitate in these proceedings. 33 There were further questions raised, including as to whether the giving of security, or more accurately, the making of an order, would stultify the proceedings; and as to whether the misfortunes of which the plaintiffs complained were the true cause of their impecuniosity. I do not think that those further matters advance the debate a great deal. 34 Firstly, as to whether the making of an order for security would stultify the litigation, there is no evidence that those who would benefit by successful litigation (who undoubtedly include, but may not be limited to, Mr Maiolo) are or are not able to put up security. Further, as to stultification, there is no evidence that the plaintiffs' financial position would be in any relevant way different but for the wrongs of which they complain. 35 In any event, as Beazley J pointed out in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198, the various discretionary factors that are often identified as to the exercise of the discretion in relation to security (which include, but are not limited to, the matters to which I have referred) are not determinative of the exercise of the discretion. That is always something to be considered having regard to all the relevant factors in each case. 36 In this case, the determinative factor, in relation to the exercise of the discretion, seems to me to be that it is likely to the point of inevitability that the issues on which the plaintiffs found their case will be investigated in any event. I think it is correct to characterise the plaintiffs' case as one that, in substance, is defensive. In truth, I think, the action that the plaintiffs are taking is to be viewed as an answer, in advance or pre-emptively, to the claim that CFAL has against each of them for what it says is the balance owing. 37 Further, I think, it is likely to the point of inevitability that Mr Maiolo will be sued on his personal guarantee of each of the plaintiffs. Thus, again, it is likely to the point of inevitability that the relevant issues will be relied upon by way of defence to that claim. 38 In this context I note that on 8 October 2008 CFAL's solicitor enquired of the plaintiffs' solicitors whether they "have instructions to accept service of an originating process on behalf of Mr Maiolo of a claim against Mr Maiolo under his guarantee of the" debts allegedly owed by the plaintiffs. The plaintiffs' solicitors replied the following day indicating that they did have instructions to accept service of the process. However, no such originating process has been filed or served. 39 Mr Newlinds submitted that this delay on the part of CFAL was deliberate, and an attempt by it to better its position on the application for security. It is not necessary to express a concluded view on that submission, although I have to say that the unexplained failure to commence the proceedings, or to file a cross-claim in these proceedings against Mr Maiolo (which would seem to be the appropriate way for the issue to be advanced) lends it some support. It is sufficient to say that in all the circumstances it is, as I have said, likely to the point of inevitability that Mr Maiolo will be sued and that CFAL will be forced to litigate the very issues in respect of which it now seeks security for costs. Further, in that event, CFAL will be forced to litigate those issues without any possibility of obtaining security for costs. 40 In those circumstances, balancing the undoubted injustice to the defendants of permitting impecunious plaintiffs to proceed against them, but acknowledging in this context the comfort given to the impecunious plaintiffs by Mr Maiolo's undertaking of liability for their costs, and the likelihood that the issues will be litigated in any event, I have come to the conclusion that the defendants' application for security for costs fails. 41 I make the following orders: (1) Dismiss the plaintiffs' amended notice of motion filed in Court today. (2) Dismiss the defendants' notice of motion filed on 17 October 2008. 42 I will hear the parties on costs but prima facie they should follow the event in each case. SIMPKINS: I do not wish to be heard on that. NEWLINDS: I do not wish to be heard on that. 43 HIS HONOUR: I order the applicants of each motion to pay costs of the respondents. 44 I order that the exhibits on the applications be handed out. ********** 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.