Aqua Star Pty Ltd v C P Aquaculture (India) Pvt Ltd
[2024] VSCA 67
•17 April 2024
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2024 0006 |
| AQUA STAR PTY LTD (ACN 074 614 538) | Applicant |
| v | |
| C P AQUACULTURE (INDIA) PVT LTD | Respondent |
---
| JUDGES: | KENNEDY and WALKER JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 12 April 2024 |
| DATE OF JUDGMENT: | 17 April 2024 |
| MEDIUM NEUTRAL CITATION: | [2024] VSCA 67 |
| JUDGMENT APPEALED FROM: | [2023] VCC 2134 (Judge Macnamara) [2023] VCC 2297 (Judge Macnamara) |
---
PRACTICE AND PROCEDURE – Stay – Application for stay of orders requiring payment of outstanding judgment debt pending appeal – Whether special or exceptional circumstances exist – Respondent is a foreign company – Whether risk that proposed appeal would be rendered nugatory because applicant will not be returned to former position if successful on appeal – Whether risk that proposed appeal would be rendered nugatory because applicant will be wound up – Applicant ordered to pay outstanding judgment debt into court – Application for stay dismissed.
Supreme Court (General Civil Procedure) Rules 2015, rr 64.39, 66.16.
Cellante v G Kallis Industries Pty Ltd [1991] 2 VR 653; Challenge Charter Pty Ltd v Curtain Bros (Qld) Pty Ltd (2004) 9 VR 382; Vision Australia v Elisha [2023] VSCA 70, applied.
---
| Counsel | |||
| Applicant: | Mr BE Barr with Ms CP Middleton | ||
| Respondent: | Mr EW Moon | ||
Solicitors | |||
| Applicant: | Zervos Lawyers | ||
| Respondent: | Baker McKenzie | ||
KENNEDY JA:
On 11 December 2023, a County Court judge ordered that the applicant pay the respondent the sum of US$2,487,493.22 and that the sum of AU$794,313.00 (previously paid into court) be paid to the respondent in partial satisfaction of the judgment debt. The judge also dismissed the applicant’s counterclaim.
The applicant filed an application for leave to appeal in respect of the judge’s orders and has not paid the outstanding judgment debt of AU$3,015,209.00[1] (‘the outstanding judgment debt’). The AU$794,313.00 has been paid to the respondent.
[1]This figure in Australian dollars was agreed between the parties after taking into account the sum paid of $794,313.00.
The respondent issued a creditor’s statutory demand in respect of the outstanding judgment debt and the applicant filed an application to set aside that demand, as well as an application to stay the judge’s orders.
The stay application was made on two main grounds:
(a)the applicant is unable to satisfy the outstanding judgment debt due to its financial position. There is a real risk that, absent the stay, the applicant will be wound up, rendering the appeal nugatory; and
(b)the respondent is a foreign company with no connection to Australia. There is a real risk that, absent a stay, the applicant will not be returned to its former position if successful on appeal.
On 12 April 2024, the Court heard argument on the stay application. The Court relevantly made orders that the stay application should be dismissed with costs and indicated that reasons would be provided later.
These are my reasons for dismissing the application for the stay.
Relevant legal principles
The application for a stay is made under rr 64.39 and 66.16 of the Supreme Court (General Civil Procedure) Rules 2015 (the ‘Rules’) and/or the inherent jurisdiction of the Court.
In Vision Australia Ltd v Elisha, this Court summarised the principles relevant to the court’s discretion to grant a stay:[2]
In Yuanda Vic Pty Ltd v Façade Designs International Pty Ltd, the Court said that:
As the authorities hereinafter referred to demonstrate, an applicant for a stay must demonstrate the existence of special or exceptional circumstances. Special circumstances may exist where there is a real risk that an appeal, if successful, would be rendered nugatory in the absence of the grant of a stay. In such a case, the Court will be required to balance the prospect that an appeal may be rendered nugatory in the absence of a stay, against the principle that the successful party in the proceeding should be entitled to the fruits of the judgment. Further, a stay should not be granted unless the applicant has demonstrated at least an arguable ground of appeal.[3]
As to whether there is an arguable ground of appeal, the Court usually does not have sufficient materials before it to consider the merits of the proposed grounds of appeal. In such cases, ‘the court ordinarily will focus on matters relevant to the enforcement of the judgment, rather than matters that are relevant to its validity or correctness’.[4]
These principles are well established and not in dispute.[5] They apply whether or not application is made under the Rules or pursuant to the Court’s inherent jurisdiction to stay execution of judgments and orders.[6]
[2][2023] VSCA 70, [27]–[29] (Emerton P and Kennedy JA).
[3][2020] VSCA 269, [23] (McLeish, Niall and Sifris JJA).
[4]Loftus v Australia and New Zealand Banking Group Ltd [2016] VSCA 114, [8] (Whelan and Kaye JJA).
[5]See Castaway Avenue Pty Ltd v CSC1957 Investments Pty Ltd [2022] VSCA 238, [17] (Beach JA and J Forrest AJA); V601 Developments Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2022] VSCA 77, [36] (Sifris and Macaulay JJA); Amcor Ltd v Barnes [2020] VSCA 57, [10] (Ferguson CJ and Beach JA); Michos v Eastbrooke Medical Centre Pty Ltd [2019] VSCA 140, [29] (Kyrou and T Forrest JJA).
[6]Phillips v Southage Pty Ltd [2014] VSCA 17, [26]–[27] (Whelan JA, Santamaria JA agreeing at [79]). See also R v Independent Broad-Based Anti-Corruption Commissioner (No 2) [2015] VSCA 280, [8] (Priest and Kaye JJA); Palmer v Permanent Custodians Ltd [2009] VSCA 164, [38], [56] (Dodds‑Streeton JA, Beach JA agreeing at [69]).
In Cellante v G Kallis Industries Pty Ltd,[7] the Appeal Division of the Supreme Court of Victoria also cited with approval the following principle derived from the observation of Mahoney JA (with whom Moffit P and Glass JA agreed) in Re Middle Harbour Investments Ltd (in liq) that:
[W]here an applicant for a stay has not demonstrated an appropriate case but has left the situation in the state of speculation or of mere argument, weight must be given to the fact that the judgment below has been in favour of the other party.[8]
[7][1991] 2 VR 653, 655 (Young CJ, Brooking J agreeing at 658).
[8](New South Wales Court of Appeal, Moffit P, Glass and Mahoney JJA, 15 December 1976) 2. This principle was also cited in Maher v Commonwealth Bank of Australia [2008] VSCA 122, [21] (Dodds‑Streeton JA, Redlich JA agreeing at [1]) and Ribbera v Eagle Fuels Pty Ltd [2014] VSCA 173, [12] (Garde AJA, Neave JA agreeing at [37]).
Preliminary matters
Having considered the materials filed, it appears that the proposed grounds are arguable. It is otherwise inappropriate to further consider the merits of the proposed grounds of appeal. Rather, consistent with the above principles, it is appropriate to focus on matters relevant to the enforcement of the judgment.
Next, insofar as the application was made on the basis that the respondent is a foreign company, Mohan Bhatkoorse, Vice President of the respondent, had provided an undertaking that the respondent would consent to orders whereby the outstanding judgment debt be paid into court, or a controlled bank account, pending the hearing of the application for leave to appeal, and any appeal.
Consistent with this undertaking, the Court made an order that the manner of complying with the order to pay the outstanding judgment debt be by payment into Court. This thereby addressed the applicant’s concerns that, if successful on appeal, it might not be returned to its former position if it paid the outstanding amount directly to the respondent.
The critical remaining issue was therefore whether, absent the stay, the appeal would be rendered nugatory by reason that the applicant would be wound up.
Whether real risk that applicant would be wound up rendering any appeal nugatory
Evidence
Allen Wu, director of the applicant, swore an affidavit of 8 February 2024, which:
(a)stated that, based on his knowledge and from a review of the applicant’s business records, ‘[the applicant] cannot pay the judgment debt’; and
(b)exhibited copies of the applicant’s tax return for the year ended 30 June 2021; an unaudited profit and loss statement for the year ended 30 June 2023 which gave a net profit figure as $1,815,795.48 for FY 2023 and $5,511,823.95 for FY 2022 — giving a total of $7,327,619.43; a profit and loss statement for the month ended 30 November 2023; extracts from two bank accounts in the applicant’s name; as well as a depreciation schedule of assets as at 31 December 2023 which gave a total estimated value of $787,820.05.
Mr Wu claimed that most of the applicant’s assets were vehicles, office or plant equipment which were needed for day to day business operations. There were also loans on 12 of the vehicles so that the assets of the applicant could not be easily liquidated.
The respondent relied on an affidavit of Peter Lucarelli, solicitor, of 8 February 2024 who adduced evidence of three annual reports filed by the applicant in respect of FY 2018, FY 2019, and FY 2020 (the last being a draft report). These reports recorded that, in each of those years, the applicant owed more than $20 million to director-related entities and other lenders known to the director of the applicant. Further, that if such support was to be withdrawn then there was significant doubt as to whether the applicant could continue as a going concern. Despite this, in respect of FY 2018 and FY 2019, the director, Mr Wu, had declared that there were reasonable grounds to believe that the applicant would be able to pay its debts when they became due and payable.
In written submissions dated 22 February 2024 the respondent contended that the court ought not to accept Mr Wu’s assertion of impecuniosity without detailed explanation of the related-party transactions, including production of all relevant financial documents. In the absence of such evidence the court ought to infer that the related lenders would continue to support the applicant as they had done for many years.
The applicant subsequently filed a further affidavit on 10 April, which was two days prior to the hearing of the application for a stay. The affidavit was from Mandy Szeto, who was employed as the financial controller of the applicant, which:
(a)exhibited an unaudited balance sheet for FY 2023 which gave a net asset value of $145,272.02. This represented a sharp decline when compared with previous financial years. For example, the net asset figure in respect of FY 2022 was $6,924,038.27;
(b)exhibited an unaudited profit and loss statement for the year ended 30 June 2023, which gave a net profit figure of negative $1,989,468.52 in respect of FY 2023 and $1,174,457.95 for FY 2022, giving a total of negative $815,010.57. This represented a significant decrease from the amount of $7,327,619.43 which Mr Wu had adduced in respect of the same years. The applicant suggested that the figures were ‘adjusted’ due to inventory write offs and bad debts; and
(c)claimed that there had been delay in obtaining audited reports because of COVID-19 lockdowns, but that the audited report for FY 2022 was ‘well underway’, though the audited report for FY 2023 had not yet commenced.
Ms Szeto referred to a number of loans which were recorded under the ‘equity’ heading in the balance sheet, and stated:
None of those loans have been subject to formal documentation. The loan from Sin Hin is an overseas company loan. The loan from Zhou Mei Lin is from a relative of Mr Wu’s wife. Save for those loans, the remainder are equity loans from entities related to [the applicant], which were generally provided 10 to 15 years ago to support the cashflow of [the applicant]’s business on a long-term basis. None of those loans have been forgiven. From time to time, lenders will demand that [the applicant] repay some or all of the loans, which it has done. For instance, in FY2023, Min Logistics demanded repayment of a portion of its loans to [the applicant].
To my knowledge, I do not believe that any funds have been or would be loaned by third parties to [the applicant] for purposes associated with these legal proceedings.
Ms Szeto stated that the funds of $794,313 paid into court, as well as an amount of $75,000 paid as security for the costs of the application for leave to appeal, were sourced from the applicant’s trading accounts, and not from third parties.
Submissions
The applicant submitted that there is a risk that it will be wound up, rendering the appeal nugatory. It submitted that a threatened or actual winding up application may be significant in justifying a stay.[9] According to the applicant, it does not have sufficient cash or assets which can be realised to pay the outstanding judgment debt or statutory demand. This is because it is cash poor, rather than because it is impecunious or a shell company. Further, its assets are not of the type which can be readily realised in order to pay the judgment debt, and in any event, their value would not cover the outstanding judgment debt. It indicated that the court was unlikely to grant its application to set aside the statutory demand, absent a stay.
[9]Citing Cross Country Realty Victoria Pty Ltd v Ubertas 350 William Street Pty Ltd [2015] VSCA 347, [86] (Kyrou and McLeish JJA); Challenge Charter Pty Ltd v Curtain Bros (Qld) Pty Ltd (2004) 9 VR 382, 387 [17] (Callaway JA, Chernov JA agreeing at 387–8 [20]); [2004] VSCA 66 (‘Challenge Charter’).
In oral submissions counsel:
(a)highlighted that Mr Wu had sworn that the applicant ‘cannot pay the judgment debt’ and that there was a real threat of liquidation in circumstances where the respondent had served a statutory demand and had not given an undertaking that it would not act in respect of any non-compliance with that demand;
(b)relied on the following statement from McMahon v National Foods Milk Ltd:
It is neither possible nor appropriate for this Court on an application of this kind to conduct an inquiry into the financial circumstances of individuals or companies, let alone into what other sources of finance might be available.[10]
(c)submitted that it was mere speculation to suggest that related third parties would meet the outstanding judgment debt in circumstances where the overall loan amounts had been decreasing in recent years, there was the evidence of Ms Szeto, and the judgment had been outstanding since December last year.
[10][2008] VSCA 237, [6] (Maxwell P, Buchanan JA agreeing).
The respondent submitted that the applicant had not made full and transparent disclosure of its financial position. Thus it had not discharged its onus of demonstrating that, absent a stay, it will be wound up. It also submitted that the Court ought to infer that the related lenders would continue to support the applicant as they had done in the past. Similarly, the conversion of significant related-party receivables may allow the applicant to pay the outstanding judgment sum.
In oral submissions counsel submitted that:
(a)Mr Wu’s assertion that the company cannot pay the outstanding judgment debt ought be treated with caution in circumstances where he has not sought to give direct evidence about the support of third parties, and where he had previously sworn declarations that the applicant would be able to pay its debts;
(b)the Court was not in a position to understand the true state of the applicant having regard to the state of the evidence, including the substantial variance between the net profit figures in respect of FY 2023;
(c)the reduction in the value of the ‘equity’ loans of some $5 million, as well as the reduction in the net asset position, in 2023 (when the proceeding was to be heard), suggested that Mr Wu was arranging his affairs to prefer related entities; and
(d)if there was to be a stay the respondent might suffer prejudice by the loss of protection in respect of uncommercial transactions under s 588FB of the Corporations Act 2001 (Cth).
Consideration
While it is true that the risk of liquidation may justify the grant of a stay, the relevance of a threat of liquidation and the weight to be given to it vary from case to case.[11]
[11]Challenge Charter (2004) 9 VR 382, 387 [17] (Callaway JA, Chernov JA agreeing at 387–8 [20]); [2004] VSCA 66.
Mr Wu has asserted that the applicant ‘cannot pay the judgment debt’. However, despite the fact that, in February 2024, the respondent had submitted that the Court should infer that the related lenders would continue to support the applicant absent appropriate evidence, Mr Wu chose not to respond to this submission. Rather, the applicant chose to rely on the evidence of a financial controller who could have only very limited direct knowledge as to the likely support of the related parties. Her evidence was also heavily qualified. As highlighted above, she made reference to when the ‘equity loans’ were ‘generally provided’ and merely stated that ‘[t]o my knowledge, I do not believe’ that funds would be loaned by third parties to pay the judgment debt.
I accept that it is not appropriate for this Court to undertake an ‘inquiry’ into the financial circumstances of the applicant. However, there are a number of critical matters which called for an explanation in this case which included:
(a)first, that Mr Wu ought to have gone on evidence about the likely support of the related entities in circumstances where there was a long history of such parties providing financial support to the applicant;
(b)second, there was inadequate explanation as to the significant variance in the profit and loss figures in respect of FY 2023; and
(c)third, there was no adequate explanation as to the deterioration in the financial affairs generally, which appears to have coincided with the year in which the trial was about to be, and was, heard and determined, in 2023.
The applicant’s failure to deal with these matters left the situation in a ‘state of speculation’ such that the respondent should have the benefit of the judgment entered in its favour.
I was therefore satisfied that the application for a stay should be dismissed.
WALKER JA:
I agree with Kennedy JA.
---
0
16
0