Capital Securities XV Pty Ltd (formerly known as Prime Capital Securities Pty Ltd) v Calleja

[2017] NSWCA 342

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Capital Securities XV Pty Ltd (formerly known as Prime Capital Securities Pty Ltd) v Calleja [2017] NSWCA 342
Hearing dates:	13 December 2017; 19 December 2017
Decision date:	19 December 2017
Before:	Basten JA
Decision:	(1)   Stay the operation of orders (10), (11) and (12) made in the Common Law Division on 6 December 2017 pending determination of the appeal, or further order of the Court. (2)   The costs of the motion for the stay be the appellant’s costs in the appeal. (3)   Dismiss the respondents’ motion seeking security for costs. (4)   Order that the costs of the motion for security for costs be the appellant’s costs in the appeal. (5)   Direct that the matter be listed before the Registrar on 22 January 2018 for such directions as are necessary to ensure the matter is ready for hearing on the date fixed for hearing, namely 29 January 2018.
Catchwords:	CIVIL PROCEDURE – application for stay of orders pending appeal – loan to respondents under financing agreement – loan secured by mortgage – respondents unable to meet commitments – appellant’s application for possession of property dismissed – stay of orders providing for discharge of mortgage and security deeds pending appeal – whether refusal of stay likely to result in loss of subject matter of appeal CIVIL PROCEDURE – security for costs pending appeal – power to order security under Corporations Act 2001 (Cth), s 1335 and Uniform Civil Procedure Rules 2005 (NSW), r 51.50 and r 42.21 – whether sufficient doubt regarding appellant’s ability to pay respondents’ costs if unsuccessful on appeal
Legislation Cited:	Corporations Act 2001 (Cth), s 1335 Uniform Civil Procedure Rules 2005 (NSW), rr 42.21, 51.50
Cases Cited:	Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 205 Wang v Farkas (No 2) [2014] NSWCA 57 Yeshiva Synagogue Inc v Karimbla Properties (No 10) Pty Ltd as Trustee of the Harry Triguboff Foundation [2017] NSWCA 331
Category:	Procedural and other rulings
Parties:	Capital Securities XV Pty Ltd (formerly known as Prime Capital Securities Pty Ltd) (Appellant) Elizabeth Ann Calleja (First Respondent) Calleja PJC Furniture Freighters Pty Ltd (Second Respondent)
Representation:	Counsel: M W Young SC (Appellant) N Obrart (Respondent)   Solicitors: Summer Lawyers (Appellant) Atticus Lawyers Pty Ltd (Respondents)
File Number(s):	2017/375892
Decision under appeal	Court or tribunal: Supreme Court Jurisdiction: Common Law Division Citation: [2017] NSWSC 1694 Date of Decision: 6 December 2017 Before: Wilson J File Number(s): 2016/00155378; 2016/00260959

Judgment

1. BASTEN JA: In about April 2015 the appellant, then known as Prime Capital Securities Pty Ltd, entered into a financing agreement with a small freight company, Calleja PJC Furniture Freighters Pty Ltd (“Calleja PJC”). The sole director of Calleja PJC, Elizabeth Calleja, provided a guarantee for the financial accommodation. Mrs Calleja also gave security over a property owned by her at Heatherbrae, north of Newcastle.

2. The company was unable to meet its commitments under the facility agreement and the appellant commenced proceedings for possession of the Heatherbrae property in May 2016. Mrs Calleja resisted the proceedings, alleging, amongst other defences, that the financial agreement was unconscionable and also that it was void.

3. Following a hearing ending in early November 2017, Wilson J gave judgment on 6 December 2017 dismissing the application for possession of the Heatherbrae property and declaring the facility agreement and the security documents executed in tandem with it to be void. [1] The judge also ordered that Prime Capital Securities (now known as Capital Securities XV Pty Ltd) (i) forthwith execute and lodge a discharge of the mortgage over the Heatherbrae property (order (10)), (ii) forthwith take all necessary steps to discharge the registration of the security deeds on the Personal Property Securities Register (order (11)) and (iii) pay the “defendant’s” costs on an indemnity basis (order (12)). (No costs order appears to have been made in disposing of the cross-claims.)

   1. Prime Capital Securities Pty Ltd v Elizabeth Ann Calleja [2017] NSWSC 1694.

4. On 12 December 2017 the appellant lodged a notice of appeal (initially made returnable on 14 February 2018) and filed a notice of motion seeking a stay of the orders made on 6 December 2017. It is the stay which came before the Court on 13 December and again today. On 18 December the respondents filed a motion seeking security for costs.

Stay application

5. Orders (1) and (2) made by the primary judge dismissed the proceedings brought by the appellant and “entered” judgment for the defendant. Orders (3)-(9) were declarations that the facility agreement, the mortgage and various deeds of guarantee and general security deeds were void. There is nothing to be stayed in relation to these orders; the orders have now been entered and there is no purpose in staying the declarations. [2] The question is whether a stay should be granted with respect to the three orders (10)-(12), which required the appellant to take active steps, including steps to obtain the discharge of the mortgage and the removal of the deeds from the register.

   2. Yeshiva Synagogue Inc v Karimbla Properties (No 10) Pty Ltd as Trustee of the Harry Triguboff Foundation [2017] NSWCA 331 at [12].

6. The basic legal principle operating in the present circumstances may be formulated by way of a general proposition with an exception. The general proposition is that the successful party at trial is entitled to the fruits of its success; its entitlement is not diminished by the filing of a notice of appeal. The exception provides that an appellant may not be required to fulfil its obligations under an existing court order if to do so would result in (or at least risk) the destruction of the subject matter of the appeal, so as to possibly render any success on the appeal nugatory. The application of the exception will depend upon a balancing of the prejudice, inconvenience or hardship suffered by the respective parties in the event that a stay is or is not granted. Where that balance is hard to determine, it may be possible to take into account the prospects of success on the appeal; otherwise, unless there are very limited prospects, the Court is not usually minded to speculate on the strength or weakness of the appeal.

7. The primary focus of the present application is the stay sought with respect to the order for the immediate discharge of the mortgage over Mrs Calleja’s property. Although Mrs Calleja has a judgment in her favour in that respect, the Court would need to consider the possibility that there will be no means available to the appellant to enforce its security if it were to be successful on the appeal in circumstances where the mortgage had been discharged.

8. With commendable frankness, counsel for the respondents submitted that her clients would suffer significant prejudice in resisting the appeal if the mortgage were not discharged, as they needed to raise money against the security of Mrs Calleja’s property in order to pay legal costs of the proceedings in the Common Law Division and the costs of defending the appeal. Between the first and second hearings the respondents prepared (and tendered) evidence as to the amount of those costs. That submission, however, was embraced by the appellant as a firm basis for its submission that, were the mortgage to be discharged, there would be no property available to it from which to recoup its debt if successful on the appeal.

9. In these circumstances where the factors are finely balanced, it is necessary to have regard to the merits of the appeal.

10. Of a little under $300,000 paid out by the financier in May 2015, approximately half ($152,500) went to Bankwest. That payment appears to have been made to pay down a loan from Bankwest to Mrs Calleja secured by a first mortgage over “her properties”, including the Heatherbrae property provided as security to the appellant.

11. The principal complaint in relation to that payment at trial was that it was made to discharge Mrs Calleja’s personal indebtedness and was made without authority. Nevertheless, Mrs Calleja appears to have obtained the benefit of the payment by way of a reduction in her personal indebtedness to Bankwest. Responsibility for the loan was, in effect, shifted to the company, with Mrs Calleja and her husband assuming a secondary responsibility for the company’s obligations. A likely purpose of the payment was to provide a security (by way of a second mortgage) for the facility to be made available to Calleja PJC.

12. It is likely that the cost of finance was significantly higher under the new arrangement, but, even if there were unconscionable conduct on the part of the appellant in relation to this particular drawdown of the loan facility, the parties cannot properly be restored to their original positions simply by declaring the facility agreement void, declaring Mrs Calleja’s guarantee and mortgage void and requiring that the mortgage be discharged. Accordingly, even assuming there was no error in the fact finding and reasoning of the primary judge, it is arguable that the orders made do not properly dispose of what appears to have been a cross-claim by Mrs Calleja. However, the respondents say that the trial judge was conscious of this issue, but found that the loss suffered by the Calleja interests as a result of entering into the facility agreement and security arrangements exceeded the amount of the discharged third party liability.

13. The appellant further submitted that the second major disbursement of funds, in an amount of some $63,000 to Baycorp Collections PDL (Australia) Pty Ltd, was also significant in understanding the basis of the impugned transaction. The appellant had sought to tender at trial a bundle of documents from Baycorp which, it submitted, would have demonstrated that the arrangement with the Callejas was not unconscionable and would have potentially undermined the favourable credit findings made by the primary judge with respect to the evidence of the Callejas. The appellant submitted that the documents had wrongly been rejected (as not constituting business records), following which the appellant had been refused short service of a subpoena to call an officer of Baycorp to prove the records, in circumstances where there would have been no prejudice in allowing that step to be taken.

14. The appellant also challenged findings that the Callejas had received no legal advice as to the nature of the transaction, when unchallenged evidence was said to have supported the view that relevant legal advice had been provided.

15. The appellant submitted, in effect, that there were a number of grounds of appeal which were clearly arguable and which went to the substance of the critical findings made by the trial judge. The respondents did not submit that the appeal was entirely unarguable, nor that the grounds did not raise matters which were significant for the determination of the case, but said that overall the prospects of the appeal were weak.

16. Given the real possibility that the respondents, having access to equity in the Heatherbrae property, will raise funds against that equity which will be dissipated in the further conduct of the proceedings, and subject to one further consideration, it would be appropriate to stay at least the discharge of the mortgage.

17. The additional matter is one which was raised when this matter first came before the Court on 13 December 2017. It was that the balance of prejudice should include the respondents’ concern that the appellant was a straw company with no assets from which to meet the costs order made by the trial judge and, if unsuccessful on the appeal, the likely order that it pay the respondents’ costs of the appeal. In support of that proposition the respondents relied upon evidence given by the director of the appellant in the course of the trial, that the amounts disbursed by the appellant had all been obtained from funds supplied by other corporate entities. In response to the point that such matters would best be dealt with by way of an application for security for costs, counsel stated that the respondents intended to make such an application.

18. The matter was then adjourned to Tuesday, 19 December for continuation of the hearing. In the interim, the respondents have filed an application for security for costs. They also maintained their submissions that no stay should be granted but submitted that the amount owing on the property to Bankwest was a little under $60,000 and that, on the basis of a valuation undertaken by Bankwest in April 2015, the property was worth $700,000. Accordingly, it was said that there was equity of some $640,000 available, in the event that the appellant’s mortgage were to be discharged. However, the appellant filed evidence that the current indebtedness of Calleja PJC under the finance agreement amounted to over $700,000, indicating (when costs were taken into account) a shortfall in the available security, based on a current land valuation.

19. The respondents did not bring forward any evidence of a financial arrangement which might be available to them if the mortgage were to be discharged. In these circumstances, the question remains hypothetical. If a practical situation did arise where refinancing was available, it would be a matter for the parties to consider whether (although it seems superficially implausible) some arrangement could be made which could provide appropriate security to each side of the record.

20. The appellant noted that the primary opposition to the stay was based on alleged stultification of the respondents’ resistance to the appeal, but in circumstances where there was no actual evidence of stultification. Further, as the appeal will be heard at the beginning of the new term, any delay in payment of legal costs will be brief. In the meantime, the appellant said it should have its stay with respect to the discharge of mortgage.

21. It is appropriate to stay the effect of order (10) (requiring the discharge of the mortgage) and so much of order (11) as requires the discharge of the general security deed executed by Elizabeth Calleja and declared void pursuant to order (7).

22. Two questions remain: the first is whether so much of order (11) as requires steps to discharge the registration of general security deeds executed by Michael Calleja on his own behalf and on behalf of the company should be stayed. The second issue concerns the order for costs. This issue was also relevant to the application for security for costs, which extended to security for the payment of the costs ordered at trial.

23. The company’s deed granted the appellant a charge over its undertaking, assets and property. If the deed were to be discharged it would allow the company to incur further debt secured over the same property and thus allow a third party to obtain priority over the appellant. There is no evidence before the Court as to why a stay, for a reasonably short period until the hearing of the appeal, would prejudice the company in its current operations. Not to grant the stay would remove part of the security enjoyed by the appellant, subject to the judgment under appeal, and may diminish the value of any possible success on the appeal. The same reasoning applies in relation to Mr Calleja’s deed.

24. Little attention was paid to the merit of the appeal with respect to these orders. The notice of appeal contains 38 grounds. Most involve challenges to factual findings; one is purely directed to a credibility finding with respect to Mr and Mrs Calleja. It is not possible to assess the merit of the appeal specifically with respect to these securities; nevertheless, as noted above, it was not contended by the respondents that there was no reasonably arguable ground in this respect. Given the lack of apparent prejudice in staying the orders requiring the discharge of the deeds, the balance of convenience favours the grant of a stay.

25. There remains the question of costs. It was unsurprising that the judge ordered that costs follow the event; what was questionable was the grant of indemnity costs. The judge made the order on the basis that the appellant had acted unconscionably and that indemnity costs had been claimed and nothing had been said in opposition to such an order.

26. Of course, the order is sought to be set aside in its entirety on the appeal. It is likely that, if the order is not set aside, an assessment will be required. The question is, in effect, whether the assessment should proceed now or whether it should await the outcome of the appeal. Given that the appeal is to be heard early in the new year, it is unlikely that prejudice will be incurred by staying the costs order; it is possible that some unnecessary expenditure will be avoided. Accordingly, the order should be stayed.

Application for security for costs

27. By a motion filed on 18 December 2017 the respondents sought an order for security for costs of the appeal and of the proceedings below. The proceedings below have been completed and there is no basis to make the payment of those costs a condition of the appeal proceeding. The basis of the application for costs of the appeal was that the appellant was a shell company having no assets. That was said to be demonstrated by evidence given in the course of the trial that the funds which were disbursed pursuant to the finance facility did not emanate from the appellant.

28. The Court is empowered to order that a corporation bringing proceedings provide security for those costs, and stay the proceedings until the security is given, if satisfied that the corporation will be unable to pay the costs of the other party if the latter party is successful, pursuant to s 1335 of the Corporations Act 2001 (Cth). The respondents submitted that the Court has power to order security for payment of costs incurred at trial, pursuant to Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), r 42.21. The specific power vested in this Court by UCPR r 51.50 is directed to the security for “costs of an appeal”; this does in terms extend to the costs of the trial. Although r 51.50 does not exclude the operation of r 42.21, the latter rule does not in terms deal with the costs of earlier proceedings. No doubt in some circumstances, such as when leave is required to appeal, this Court may have power to impose a condition that money be paid into court, including on account of costs already incurred. [3] However, even if the Court has power to make an order that the appellant provide security for the costs of the trial from which the appeal is brought, I am not persuaded that it is an appropriate order to make in the present case. A similar course, assuming but not determining that power existed, was taken by Mason P in Sagacious Procurement Pty Ltd v Symbion Health Ltd. [4] (It is also unnecessary to address the operation of r 51.50(3).)

    3. See, eg, Wang v Farkas (No 2) [2014] NSWCA 57.

    4. [2007] NSWCA 205 at [46]-[50].

29. The respondents further submitted that the balance of convenience favours an order for security in circumstances where there is doubt as to whether there will be money available to pay the respondents’ costs in the event that the appeal fails; it is appropriate to order security to protect against future dissipation of the funds which are currently available in the appellant’s bank account. In short, the respondents submitted that if the appellant has the funds, it can afford to provide security; if it has not (or may not have in the future) it should provide security. As the appellant noted, that submission owes more to ingenuity than to the correct legal test. To the extent that r 42.21(1) is engaged, the Court must have reason to believe that the appellant will be unable to pay the costs of the respondents if ordered to do so, [5] or “has divested assets” with the intention of avoiding the consequences of the proceedings. [6]

    5.    Rule 42.21(1)(d).

    6.    Rule 42.21(1)(f).

27. The respondents’ evidence cast a doubt on the ability of the appellant to pay the costs of the appeal. However, in response, the appellant provided a bank statement demonstrating that considerable sums pass through its account with Westpac and have done so over the past five months, and that its present bank balance is in the order of $3 million. Its principal assets are said to be a loan portfolio of 140 loans. There is, however, no evidence as to its liabilities. That its director, Mr Paul Scanlon, operates a significant financing business through numerous corporate entities is reasonably clear; Mr Scanlon asserted that the Prime group’s loan portfolio exceeds $100 million. The internal arrangements within the group are not clear.

28. The appellant has changed its name and, from 1 December 2017, there is a new corporate entity which bears the old name of the appellant. However, the banking records extend from July 2017 through to December 2017 without any break, from which I infer that the records which were those of the appellant remain those of the appellant after the change in the company’s name.

29. The respondents also submitted that, given the amounts of money passing through the account, the Court could not be satisfied that the moneys in the account at any point in time were the appellant’s moneys. While it should be accepted that there are no details of the company’s liabilities, it does not follow that there will not be moneys available to pay the appellant’s debts as and when they fall due. The factors that satisfy me that the appellant can (and will be able to) pay any liability for the costs of the appeal are the company’s bank balance and the extent of its current loan portfolio. While it is true that the company could be stripped of its assets at some stage in the near future, that possibility is commercially unrealistic. Not only would it place at risk the whole of the company’s business (said to involve 140 loan transactions) but it would affect the creditworthiness of the group, which has a substantial loan portfolio. In these circumstances, I am not prepared to order that it provide security for costs of the appeal.

30. I note that this motion has been filed and disposed of with expedition which has prevented an exchange of affidavits and possible resolution by agreement. The costs of the motion should take account of this consideration and the fact that documents sought by the respondents were not provided in a timely fashion. Without challenging that proposition, the appellant noted that bank records had been supplied before the foreshadowed motion for security was filed. Nevertheless, it is appropriate that the costs of the motion, which will be dismissed, be the appellant’s cost in the appeal.

Orders

34. The Court makes the following orders:

1. Stay the operation of orders (10), (11) and (12) made in the Common Law Division on 6 December 2017 pending determination of the appeal, or further order of the Court.

2. The costs of the motion for the stay be the appellant’s costs in the appeal.

3. Dismiss the respondents’ motion seeking security for costs.

4. Order that the costs of the motion for security for costs be the appellant’s costs in the appeal.

5. Direct that the matter be listed before the Registrar on 22 January 2018 for such directions as are necessary to ensure the matter is ready for hearing on the date fixed for hearing, namely 29 January 2018.

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Endnotes

Decision last updated: 20 December 2017