Chahwan v Euphoric Pty Ltd (No 2)

[2010] NSWSC 1062

CITATION:	Chahwan v Euphoric Pty Ltd & Ors (No 2) [2010] NSWSC 1062
HEARING DATE(S):	4 June 2010
JUDGMENT DATE :	17 September 2010
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Palmer J
DECISION:	Notice of Motion dismissed.
CATCHWORDS:	PROCEDURE – judgment and orders – setting aside - Notice of Motion to revive proceedings that were earlier dismissed for failure to comply with directions, for an abuse of process and failure to prosecute with due despatch – exercise of Court’s discretion does not favour reinstating the proceedings.
LEGISLATION CITED:	- Civil Procedure Act 2005 (NSW) – s 56, s 57, s 61 - Uniform Civil Procedure Rules 2005 (NSW) – 12.7, 13.4, 36.16
CATEGORY:	Separate question
CASES CITED:	- Bi v Mourad [2010] NSWCA 17 - Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 - Chahwan v Euphoric Pty Ltd [2008] NSWCA 52 - Chahwan v Euphoric Pty Ltd [2009] NSWSC 805 - Chahwan v Euphoric Pty Ltd [2010] NSWSC 445 - Hans Pet Constructions Pty Ltd v Cassar [2009] NSWCA 230 - National Parks and Wildlife Service v Pierson (2002) 55 NSWLR 315 - Pacanowski v Simon Wakerman & Associates Pty Ltd [2009] NSWCA 402
PARTIES:	Elie Chahwan (Plaintiff) Euphoric Pty Ltd t/as Clay & Michel (First Defendant) Bycoon (in liq) Pty Ltd (Seventh Defendant)
FILE NUMBER(S):	SC 2005/258267
COUNSEL:	R. McKeand SC (Plaintiff) G. Lucarelli (Defendant)
SOLICITORS:	Simon Diab & Assoc (Plaintiff) Blake Dawson (Defendant)

2005/258267 Chahwan v Euphoric Pty Ltd & Ors (No 2)

JUDGMENT

17 September, 2010

Introduction

1 These proceedings were brought to an end on 10 May 2010 when I ordered that the Plaintiff’s Statement of Claim be dismissed and that the Plaintiff, Mr Chahwan, pay the Defendants’ costs on the indemnity basis.

2 The orders were made on Motion of the First Defendant, Euphoric, for dismissal pursuant to:

– s 61(3)(a) Civil Procedure Act 2005 (NSW), which empowers the Court to dismiss proceedings for failure to comply with a direction of the Court;

– UCPR 13.4, which empowers the Court to dismiss proceedings which are frivolous or an abuse of process;

– UCPR 12.7, which empowers the Court to dismiss proceedings if the plaintiff does not prosecute them with due despatch.

3 Euphoric’s application was granted upon each of those grounds.

4 Mr Chahwan then filed a Notice of Motion on 24 May 2010 seeking an order under UCPR 36.16, or in the inherent jurisdiction of the Court, setting aside the orders which I made on 10 May 2010.

The history of the litigation

5 The litigation concerns the fate of two properties at Unanderra, Lots 39 and 40 in DP30082, of which Bycoon, now in liquidation, is the registered proprietor. The following summary of the facts is taken from the judgment of Tobias JA in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52:

“[11] In about November 1998, Bycoon acquired and became the registered proprietor of the properties with funds allegedly provided to it by [Mr Chahwan]. The appellant contends he provided the sum of $565,000, said to be the whole of the purchase price paid by Bycoon for the properties. Whether or not those funds were provided only by way of loan will be relevant to whether [Mr Chahwan] is entitled to the declaration sought in para 1 of the relief claimed under the ASC (that Bycoon holds its interest in the properties upon trust for [Mr Chahwan]). The properties were used for commercial purposes, there being a warehouse erected thereon. At no time were they involved in or used for the service station or fuel distribution operations of Bycoon referred to below.

[12] At the time of their purchase and until 2 February 1999, [Mr Chahwan] was the sole director of Bycoon and from 29 May 1997 was the owner of all the issued shares in that company. For the purpose of s 236(1)(a) of the Act it was therefore common ground that he was a member of Bycoon and so entitled to apply to the Court for leave under s 237 to bring the proceedings the subject of the ASC on behalf of Bycoon in its name: see s 236(2).

[13] Mrs Ayoub is [Mr Chahwan’s] sister and was the sole director of Bycoon from 2 February 1999 to May 2002 when she ceased to hold that office and [Mr Chahwan] once again became the company’s sole director.

[14] At all material times Euphoric was a wholesaler of fuel under the Mobil brand and, prior to July 2000 had sold fuel to Madallah Trading Pty Ltd (Madallah) which operated a service station outlet from a fuel distribution operation for other retailers in the area from premises owned by My Five Star Holdings Pty Ltd at Nos. 13–15 Glastonbury Ave, Unanderra. Mrs Ayoub was the sole director of that company and she and her four children held its issued shares equally.

[15] The day-to-day dealings between Euphoric and Madallah were conducted through Mrs Ayoub’s husband, Mr Michael Ayoub, who was employed as the manager of the service station and who had been made bankrupt in 1991. At all material times the sole director and shareholder of Madallah was a Mr Camille Nasr, who is Mr Ayoub’s cousin.

[16] In late May or early June 2000, Euphoric became concerned that Madallah had accumulated a substantial, albeit disputed, debt to it for fuel purchased in an amount of $293,339.62 (the Madallah debt). Euphoric therefore ceased supply to Madallah, causing Madallah to cease the service station business on or about 30 June 2000. The Madallah debt remained unpaid.

[17] However, Mr Ayoub desired to continue to operate the service station and fuel distribution business from Nos. 13-15 Glastonbury Ave. To that end he proposed to Euphoric the use of Bycoon as the corporate vehicle to facilitate those operations. Although Mrs Ayoub had originally been the sole shareholder of the four issued shares in Bycoon, her shareholding had ceased in 1997, after which [Mr Chahwan] was shown in the relevant records of the company as being its sole shareholder and was such in 2000. However, Mrs Ayoub was Bycoon’s sole director at this time.

[18] Apart from the unpaid Madallah debt, Euphoric was reluctant to supply fuel to Bycoon as it had previously lost a considerable sum of money in unpaid fuel supplied to a company which had gone into receivership and of which Mr Ayoub’s brother was a director and shareholder. It was also concerned as to the family relationship that Mr Ayoub had with Bycoon through his wife.

[19] Ultimately Euphoric agreed to supply fuel to Bycoon on credit on certain conditions. First, that Bycoon agree to the transfer to it of, and take responsibility for, the Madallah debt; second, that Mrs Ayoub, as the sole director of Bycoon, guarantee to pay Euphoric any money due if Bycoon defaulted; and third, that Bycoon give a first registered mortgage to Euphoric over the properties as security for any unpaid amounts.

[20] Mrs Ayoub completed a credit application and guarantee on 28 June 2000. The transfer of the Madallah debt to Bycoon was the subject of an undated instrument which was referrable to an amount owing by Madallah to Euphoric as at 7 July 2000. Mrs Ayoub signed on behalf of Bycoon and Mr Nasr on behalf of Madallah. Mrs Ayoub executed the mortgage on the same day. Euphoric thereupon commenced the supply of fuel to Bycoon with the first order being made on 7 July 2000.

[21] Bycoon proceeded to trade uneventfully until 31 October 2000 when the first of a series of loads of fuel extending to 17 November 2000 was delivered. A number of invoices were issued by Euphoric with respect to those loads, but Bycoon denied ever having received the invoices or the fuel to which they related. Payment of the invoices was therefore not made. In the result, faced with its refusal to pay the outstanding Madallah debt and the new invoices, Euphoric ceased supply of fuel to Bycoon.

[22] On 16 August 2001 Euphoric instituted proceedings in the District Court against Mrs Ayoub on her personal guarantee and for the unpaid fuel supplied to Bycoon (the District Court proceedings). It later joined Bycoon to those proceedings. The amount claimed was $668,072.96, comprising the Madallah debt of $290,380.41 and the unpaid invoices, which themselves totalled $377,692.55.

[23] The District Court proceedings were heard by his Honour Acting Judge Hungerford who, on 31 March 2004, found in favour of Euphoric and entered a verdict and judgment against Mrs Ayoub and Bycoon on a joint and several basis in the amount claimed plus interest of $234,136.24 resulting in a total judgment amount of $902,209.20. An appeal to this Court by Mrs Ayoub and Bycoon was dismissed on 15 December 2004 (Ayoub & Anor v Euphoric Pty Ltd [2004] NSWCA 457) and the High Court refused their application for special leave on 9 September 2005. Bycoon was wound up by court order on 14 November 2005 and Mrs Ayoub was placed into bankruptcy on 13 December 2005.

[24] Mrs Ayoub and Bycoon’s primary defences were, first, that the Madallah debt did not exist, and, second, that neither any fuel nor any of the invoices relating to that fuel were received. Both defendants maintained that all fuel purchased by Madallah and Bycoon had been paid for. His Honour rejected those defences.

[25] Mrs Ayoub also raised issues with respect to her personal guarantee, arguing that she was unaware that what she was signing was a guarantee and that she was therefore entitled to be relieved from any liability thereunder pursuant to s 7 of the Contracts Review Act 1980. Judge Hungerford also rejected this defence.”

6 The narrative is then taken up by Brereton J in his judgment in Chahwan v Euphoric Pty Ltd [2009] NSWSC 805, delivered on 12 June 2009:

“[9] On 4 March 2005, the present proceedings were instituted by summons, at which time the plaintiffs were Mr Chahwan, Ms Ayoub and Bycoon; the first defendant was Euphoric, and the second defendant was a firm of solicitors who had acted for Bycoon in the District Court proceedings. Relevantly, that summons claimed a declaration that Mr Chahwan was the beneficial owner of the two Unanderra lots in question, or had an equitable charge over them to the value of his contribution to the purchase price; a declaration that Ms Ayoub had executed the mortgage to Euphoric, a further declaration that Euphoric had made an unauthorised alteration to it to add lot 39 to the security; a declaration that the mortgage in its original form and as altered was void and unenforceable, and an order setting it aside. The proceedings continued on pleadings. The Statement of Claim was filed on 3 June 2005.

[10] However, on 14 November 2005, an order was made in other proceedings that Bycoon be wound up, and consequently it went into liquidation. It was following that that, by the Amended Statement of Claim to which I have referred, the proceedings were, in May 2006, reconstituted. Relevantly, the only remaining plaintiff is Mr Chahwan – Ms Ayoub having, in the meantime, become a bankrupt; the solicitors having been removed as defendants and the proceedings against them discontinued; and Bycoon having been removed as a plaintiff and joined as second defendant.

[11] After leave to file the Amended Statement of Claim was granted, application was then made for leave, under Corporations Act, s 237, for Chahwan to bring the proceedings in the name and on behalf of Bycoon, which Barrett J decided on 28 September 2006. His Honour reached a number of conclusions which are relevant for the purposes of the present application – though, in the context of an interlocutory application, not necessarily conclusive for present purposes. His Honour found that, notwithstanding that proceedings of the type now sought to be sustained on behalf of Bycoon against Euphoric could have been brought, and logically ought to have been commenced, in connection with the District Court proceedings (by seeking the removal of the District Court proceedings into the Supreme Court), nonetheless the absence of jurisdiction in the District Court under the Corporations Act, and its limited equitable jurisdiction, meant that any failure to do so was not manifestly unreasonable such as to create an Anshun estoppel; at least, it was not sufficiently obvious so as to warrant the summary dismissal of the proceedings at that stage. Next, his Honour was satisfied, and it was not seriously in dispute, that Bycoon’s liquidator would not proceed with the claim against Euphoric. Thirdly, his Honour concluded that, for the purposes of s 237, there was a sufficiently serious question to be tried.

[12] However, his Honour concluded – decisively – that Mr Chahwan’s application was not made in good faith. In this respect, his Honour referred to the delay in mounting any such application since February 2001 when Mr Chahwan first became aware that the relevant mortgage had been granted, and to the absence of any complaint about it at an earlier stage — in particular, that no such complaint was raised in connection with or at the time of the proceedings in the District Court — and that it was not raised until Ms Ayoub herself had become bankrupt and was thus in a sense shielded from any proceedings when she might otherwise have been the person primarily answerable to such a claim. His Honour said (at [38]):
I am not satisfied as to Mr Chahwan’s bona fides. It is for him to show affirmatively that he is acting in good faith in what he proposes to have the company do now. The evidence suggests to me that he is seeking to have the company run a case now that it could – and should logically – have run several years ago in the context of the litigation brought by Euphoric, that he desisted from doing so for reasons which may well have been improper from the point of view of his duties as a director of Bycoon (i.e, unwillingness to expose his sister to the allegation of direct liability) and that he would never have bothered to resurrect the matter had Bycoon not failed in its attempt to defend the action brought by Euphoric in the District Court. His motive, briefly stated, is to attempt, after the event, to have Bycoon mount now a cross-claim that it should have mounted years ago – and to do so, moreover, by way of collateral attack on the District Court judgment. That he did not see fit to have Bycoon do this at the time but professes to consider it appropriate now at a point when he can arguably bring it without harm to his sister calls in question the motivation to such an extent to preclude the necessary finding of good faith in terms of s 237(2)(b).


Having concluded that Mr Chahwan was not acting bona fide in the relevant sense, his Honour also concluded that it was not for the purposes of s 237 in the best interests of Bycoon that he be permitted to bring the proceedings on its behalf.

[13] As I have said, the Court of Appeal upheld his Honour’s decision. However, the Court of Appeal dealt with the good faith question rather differently. The conclusion of Tobias JA, with whom Beazley and Bell JJA agreed on this question, was as follows:
[84] In these circumstances it is unnecessary to deal either with Euphoric’s submissions on the issue of good faith based upon the absence of any enquiry of or communication with Nasr or with those of the appellant that the primary judge’s finding that the appellant’s delay in seeking to bring proceedings called into question his motivation. It is sufficient for present purposes that the appellant was applying to the court for leave to institute proceedings in the name of Bycoon which, if successful, would only benefit himself in a capacity unrelated to his status as a former shareholder or director of that company.


It will be seen that the decision of the Court of Appeal in this respect thus depended on the conclusion that the proceedings, if successful, would benefit Chahwan as beneficiary of the alleged trust, and not the company as a whole, and that the benefit to him was unrelated to his status as former shareholder and director of the company, but exclusively in his capacity as a beneficiary of the alleged trust.

[14] For similar reasons, the Court of Appeal upheld the conclusion that it was not in the best interests of Bycoon that Mr Chahwan be permitted to bring the proceedings. Tobias JA said:


[92] In other words, if there are assets of the company other than the properties to which the class of unsecured creditors are entitled, then any distribution to those creditors from the sale of those assets will only be reduced if Euphoric loses its security and joins that class. The only party who will benefit from the exercise will be [Mr Chahwan].

[93] The same result follows in the event that [Mr Chahwan] fails on his primary claim but succeeds on his alternative claim for an equitable charge in that, as [Mr Chahwan] himself submits, he will become a secured creditor of Bycoon. As on his case he is not a creditor of Bycoon at present, then the effect of [Mr Chahwan’s] success on his alternative claim would be that the properties will be subject to a charge in favour of [Mr Chahwan] rather than Euphoric. In other words, one secured creditor will be substituted for another. This will not enhance the position of the unsecured creditors. On the contrary, they will be further prejudiced because even on [Mr Chahwan’s] alternative claim, if successful, Euphoric will become an additional unsecured creditor thereby diminishing the distribution to which the existing unsecured creditors will be entitled.


[15] The Court of Appeal then proceeded to hold – overruling in this respect the judgment of Barrett J and other first instance judgments – that s 237 was not available in the context of a company in liquidation, and that Barrett J’s refusal of leave should, therefore, be upheld on that additional basis also.

[16] Having failed to obtain leave to bring the proceedings in the name and on behalf of Bycoon, Mr Chahwan, as I have foreshadowed, seeks now to sustain them in the ‘exceptional circumstances’ jurisdiction … . In this jurisdiction, equity will permit a beneficiary who can establish exceptional circumstances to sue on a cause of action against a third party which belongs to the trustee, if the trustee fails to sue to protect the trust property.”
(citations omitted)

7 Brereton J held that Mr Chahwan could not succeed in the claims brought against Euphoric on behalf of Bycoon in the “exceptional circumstances” jurisdiction unless Mr Chahwan pleaded and proved that “Bycoon has not and will not sue to enforce its rights against Euphoric”. His Honour therefore granted leave to Mr Chahwan to file a Further Amended Statement of Claim containing that allegation and stood the proceedings over to 6 July 2009 before the Registrar for directions.

8 On 6 July there was no appearance before the Registrar for Mr Chahwan. Mr Chahwan was directed to file the Further Amended Statement of Claim in respect of which Brereton J had granted leave by 10 July. Consequent directions were given and the matter was stood over for further directions on 24 August 2009.

9 On 7 July, Mr Chahwan filed a Further Amended Statement of Claim but it did not contain any allegation to the effect that “Bycoon has not and will not seek to enforce its rights against Euphoric”.

10 On 24 August, the Registrar directed Mr Chahwan to respond to Euphoric’s request for particulars by 4 September and the matter was adjourned for further directions to 28 September 2009.

11 On 28 September, Mr Chahwan had not complied with the direction to provide particulars and the Registrar re-listed the matter for directions on 16 October.

12 On 16 October, the Registrar extended time for filing of a Defence to 30 October and the matter was listed for directions on 2 November.

13 On 2 November, there was no appearance for Mr Chahwan. Euphoric had complied with the direction for the filing of its Defence. The Registrar made directions for discovery and interrogatories and the matter was re-listed for 22 December 2009.

14 On 22 December there was no appearance for Mr Chahwan and the matter was re-listed for 10 February 2010.

15 On 10 February 2010, there was no appearance for Mr Chahwan and the matter was re-listed for 3 March.

16 On 3 March, Mr Chahwan appeared by his solicitor. Euphoric advised that it wished to file a Notice of Motion seeking dismissal of the proceedings. The proceedings were stood over to the Corporations List on 8 March with directions for the filing of Euphoric’s Notice of Motion.

17 On 8 March, Euphoric’s Notice of Motion for dismissal came before me in the Corporations List. Mr Chahwan appeared by his solicitor. Mr Chahwan had still not filed a Further Amended Statement of Claim in accordance with the leave granted by Brereton J on 12 June 2009.

18 An affidavit was filed in Court for the liquidator of Bycoon, Mr Sutherland, the material part of which is as follows:

“3. Bycoon’s only asset is land known as Lots 39 and 40 in Deposited Plan 30082, being industrial/commercial land at Unanerra, New South Wales (Property).

4. There is a mortgage registered over Lot 40 in favour of the first defendant, Euphoric Pty Ltd. Euphoric has also lodged a caveat over Lot 39 claiming an interest as an equitable mortgagee of Lot 39.

5. I am aware that Euphoric has recovered a judgment in the District Court against Bycoon for over $1m, plus costs and interest to the date of liquidation. I am also aware that an appeal by Bycoon has been unsuccessful. Euphoric is therefore a major creditor of Bycoon’s.

6. As a result of these proceedings taken by Mr Chahwan against Euphoric and Bycoon, I have been unable to progress the liquidation of Bycoon. The liquidation of Bycoon is effectively suspended pending the determination of these proceedings.

7. Even though the liquidation has stalled as a result of these proceedings, as the registered proprietor of the Property is still Bycoon, I am still obliged to attend to all issues relating to the Property, such as insurance, Council and water rates, etc. Unfortunately, due to both the lack of funds in the liquidation of Bycoon and the uncertainty that these current proceedings have created as to who is the proprietor of the Property, all of these such expenses are yet to be paid and continue to accrue as unpaid in the external administration of Bycoon.

8. The Property is presently tenanted by a third party. The rental which ought to be recovered from the Property ought to cover the outgoings for the Property as well as my remuneration an other expenses. All rent received since commencement of the winding up is held in trust by me, pending the outcome of the current proceedings, with the exception of nominal amounts disbursed for search fees, freedom of information act fees and tax office charges. I have not received payment of any of my remuneration or legal costs.

9. Should the proceedings be dismissed, I anticipate the Property can be sold and the administration completed within about 12 months.

10. I anticipate that following the sale of the Property, after payment of my expenses and remuneration and Euphoric’s judgment debt, there will be no funds available for any unsecured creditor of Bycoon.

11. At no time have I received any request from Mr Chahwan or any solicitor or other person acting on his behalf to cause Bycoon to bring these (or any other) proceedings against Euphoric.

12. I support Euphoric’s application to dismiss these proceedings.”

19 Euphoric’s Notice of Motion was stood over for hearing before me on 16 March 2010, with an estimated time for hearing of half a day. Mr Chahwan was directed to serve any affidavits in response to the Notice of Motion by 4pm on 12 March.

20 On 12 March, Mr Chahwan’s solicitor, Mr Diab, served an affidavit, the material portions of which stated:

– he had not yet filed a Further Amended Statement of Claim incorporating the amendment for which leave had been granted;

– the failure to file the Further Amended Statement of Claim was due to his oversight;

– he would be able to file the Further Amended Statement of Claim “on short notice” ;

– “the proceedings are almost ready to take a hearing date. Substantial part [sic] of the evidence are already prepared” .

21 Euphoric’s Notice of Motion was stood over to 22 March before me for hearing, with an estimated time for hearing of one hour.

22 On 22 March, Mr Diab appeared for Mr Chahwan and tendered a letter which he had sent to the liquidator of Bycoon on 24 May 2006. In that letter he had asked the liquidator to “give urgent attention to bringing proceedings on behalf of Bycoon”. The proceedings referred to were those commenced by Mr Chahwan by Summons in 2005.

23 There was then discussion as to whether Mr Chahwan, who had not yet filed a Further Amended Statement of Claim in accordance with the leave granted on 12 June, would give an undertaking to the liquidator, supported by security, to provide for the liquidator’s costs of pursuing Bycoon’s claim against Euphoric. Directions were given and Euphoric’s Notice of Motion was stood over 29 March for hearing before me.

24 In the course of the discussions on 22 March, I made it very clear to Mr Diab that if on 29 March no Further Amended Statement of Claim had been filed properly pleading the “exceptional circumstances” jurisdiction or if the liquidator had not been offered a satisfactory undertaking as to the costs of prosecuting such a claim against Euphoric directly in Bycoon’s name, I would consider striking out Mr Chahwan’s proceedings.

25 On 29 March, Mr Diab handed up a letter dated 25 March, which he had sent to the solicitors for Bycoon’s liquidator, saying that Mr Chahwan would be “prepared to indemnify” the liquidator for his costs of prosecuting the claim against Euphoric. However, the letter offered no details of any security to be provided in support of that undertaking. Accordingly, the offer was not one, on its face, which the liquidator could reasonably accept.

26 Mr Diab said that he had not received any response to the letter. However, it soon became clear that the liquidator may not actually have received Mr Diab’s letter. Mr Diab had sent it to a firm of solicitors which had previously acted for the liquidator but that firm had, apparently, ceased to exist in September 2009.

27 Mr Diab said that he had not followed up his letter by telephoning or otherwise attempting to contact directly either the liquidator or his solicitors.

28 At this stage it seemed to me that Euphoric’s Notice of Motion and the proceedings generally were receding further and further from any resolution. Mr Diab, although warned at the hearing on Monday, 22 March, that he should clarify the position with the liquidator so that the Notice of Motion could proceed one way or another on the following Monday, did not send his letter to the liquidator’s solicitors until Thursday, and had not followed up to find out if those solicitors had received the letter and had received instructions. Mr Diab simply arrived in Court, professing ignorance about what would happen next. No Further Amended Statement of Claim had been filed and it was still unknown whether the amendment for which Brereton J had given leave 12 June 2009 would be made, or whether Mr Chahwan would provide satisfactory security to the liquidator so that Bycoon itself would bring the claim.

29 In short, as at 29 March 2010 Mr Chahwan’s proceedings against Euphoric were no further advanced than they had been nine months earlier, despite eleven hearings during that time.

30 In those circumstances, the following exchange took place:

“HIS HONOUR: By next Tuesday when the next corporations list is listed, Mr Diab, I will expect an affidavit from you as to your communications with the solicitors presently acting for the liquidator, and what the result of your offer, your client's offer, in that letter you've just handed to me, directly communicated to this liquidator is.

I would have thought that if you'd received no response to your letter from the people who you thought were acting, you [would have rung to] say ‘What's going on? We are back in court on Monday and the judge has told me that I have seven days to produce some satisfactory and firm response. I haven't heard from you’.

Mr Diab, I don't think the matter can be conducted this way after this length of time.

The last time this was before the court was a week ago on the 22nd. You didn't send your fax until the following Thursday. Why not?

DIAB: Your Honour, following the matter before your Honour last Monday, I've contacted Mr McKeand, who is briefed in this matter, on Tuesday. I met with Mr Chahwan on Wednesday, went through a number of issues with Mr Chahwan on Wednesday, he asked me for a short period of time before he gives me instructions in relation to indemnity and security. I saw him again on Thursday when he gave me those instructions and then I sent that letter on Thursday.

HIS HONOUR: I don't think you have, and your client has, acted expeditiously enough. I think today has been wasted and your client will pay the costs of today. When I say ‘seven days’, I mean something meaningful has to happen within seven days, not your client will take whatever time is convenient to him, but to act expeditiously. Today is wasted. Your client will pay the costs of today regardless.

The matter will be in the list next Tuesday and I will have an affidavit, Mr Diab, from you. If I am not satisfied that you have acted promptly enough, you might end up personally paying the costs if next time is wasted. But I am not going to let this matter continue in a fashion which is becoming a mockery to the court's process. Do you understand?

DIAB: Yes, your Honour.

HIS HONOUR: I am very serious, Mr Diab. I hope you take – you personally – take the matter seriously because if I'm not satisfied that you have, you will pay costs personally without recourse to your client. You may impress that upon your client and act accordingly.

DIAB: Yes your Honour.

…

HIS HONOUR: I have made it as plain as I possibly can to Mr Diab that he has personal responsibility for ensuring that his client's position is properly presented on the next occasion. If it isn't, I have made the consequences quite plain. I made plain what I expect to see in an affidavit, I have made plain that I expect to see a meaningful discussion at least between Mr Diab and Mr Sutherland's solicitors about upon what terms the liquidator, or Bycoon, can be asked to proceed, on what security, et cetera, et cetera. If that doesn't appear in meaningful terms next week, then I am definitely, Mr Diab, going to dismiss these proceedings not just as an abuse of process, but as a mockery of the court's process.”

31 The Notice of Motion was then stood over to 6 April before me.

32 On 6 April, Mr Diab appeared for Mr Chahwan and Mr Lucarelli of Counsel appeared for Euphoric. Detailed directions were made by consent designed to move the proceedings towards hearing and Euphoric’s Notice of Motion for dismissal was stood over to 18 May at 9.30am for directions, to see if Mr Chahwan had complied with the directions given. The directions contained the following:

“And the Court notes that any default by the plaintiff in these directions will require the plaintiff to show cause why the proceeding ought not be summarily dismissed.”

33 At Euphoric’s request, its Motion for dismissal was re-listed before me at 10am on 10 May. Mr Chahwan had already defaulted in compliance with almost all of the directions made on 6 April. Mr Lucarelli of Counsel appeared for Euphoric and sought to move on the Notice of Motion.

34 Mr Jeppesen of Counsel appeared for Mr Chahwan. Mr Diab was not in Court. Mr Jeppesen said:

“… could I indicate, somewhat to my embarrassment, that I was briefed this morning on a request to attend directions before Registrar Walton to seek an extension in the timetable of two weeks to file evidence. It seems I have walked into something far, far beyond that. My capacity to assist the Court in that regard is going to be extremely limited.”

35 I stood the Notice of Motion down to 2pm that day to enable Mr Jeppesen to obtain instructions from Mr Diab.

36 At 2pm Mr Diab himself appeared for Mr Chahwan. He filed in Court an affidavit sworn by him that day. The affidavit endeavoured to explain Mr Chahwan’s failure to comply with the Court’s directions made on 6 April. Those directions had required all affidavits on which Mr Chahwan wished to rely, other than expert reports, to be served by 30 April. No such affidavits had been filed. Mr Chahwan had been directed to give supplementary verified discovery by 20 April. No such discovery had been given. Mr Diab had simply sent a facsimile to Euphoric’s solicitors saying that Mr Chahwan did not have any documents to discover. That facsimile, of course, did not comply with the direction to give verified discovery.

37 Mr Diab’s affidavit stated in paragraph 4:

“Following the orders made on 6 April 2010, I have reviewed the evidence filed in the proceedings so far. I then sought advice from Mr McKeand SC, who is briefed in these proceedings, as to what other evidence to prepare. Mr McKeand has given me advice as to other evidence to prepare in these proceedings. Mr McKeand has been briefed in relation to preparation of evidence. Mr McKeand said to me on about 26 April 2010: ‘I can’t devote any serious time to this matter in the next couple of weeks because I have a trial commencing 4 May which I need to do a lot of work for. I can work on this matter from 18 May’ . I then made arrangements for conferences with witnesses in these proceedings and Mr McKeand on 18 May 2010. I seek extension of time for compliance with Order 2 made on 6 April 2010 to 24 May 2010. On 27 April 2010, I wrote to the Court seeking the matter be relisted in order that I seek extension of time for compliance with Order 2 made on 6 April 2010.”

38 Mr Diab was cross examined by Mr Lucarelli:

“Q. You are the solicitor for the plaintiff?
A. Yes.

Q. The essential complaint made by the plaintiff in these proceedings is that, in giving mortgages to my client, the sole director of Bycoon, Mona Ayoub, breached her duties to Bycoon and that my client in some way participated in that breach. Isn't that the essential complaint made by your client in these proceedings?
A. That is the substantial allegation made.

Q. That is, the essential allegation made; that is, the granting of the mortgages by Mona Ayoub, the sole director of Bycoon, was a breach by her of her duties and that my client in some way participated in that breach. That's the nub of the case, isn't it?
A. No. That's a very important part of the case. There is another part of the case as well, and that relates to the issue of the second defendant, Bycoon, holding a property on trust for the plaintiff.

Q. But as against my client, the essential allegation is that my client somehow participated in a breach by Mrs Ayoub of her duties as a director of Bycoon; correct?
A. That's correct.

Q. Now, the transaction sought to be said to be a breach of duty involved, did it not, an assumption by Bycoon of an indebtedness by Medallah to Euphoric; correct?
A. Correct.

Q. And the other aspect of the transaction is the granting of a mortgage by Bycoon to secure, amongst other things, that indebtedness of Medallah, or the former indebtedness of Medallah, to Euphoric; correct?
A. Yes.

Q. The Bycoon people, to use that phrase, involved in those transactions were: Mona Ayoub as sole director; correct?
A. Yes.

Q. And Michael Ayoub, the day to day manager of Medallah's service station business; correct?
A. Yes.

Q. There were no other persons employed by Bycoon, were there, involved in the transactions now said to be a breach of duties owed to Bycoon?
A. That's correct.

Q. Have you taken a statement from Mona Ayoub?
A. I have taken a statement from Mona Ayoub, yes.

Q. When did you take the statement –

HIS HONOUR: Why did you hesitate so long, Mr Diab? Is there what we understand to be a normal witness statement in writing and signed by her?
A. Yes.

HIS HONOUR: It is? Yes, all right.

LUCARELLI: When did you take that statement?
A. I have taken at least one statement, and that statement was by way of affidavit before the District Court proceedings.

Q. In relation to these proceedings, Mr Diab, have you taken a statement from Mrs Mona Ayoub –

HIS HONOUR: About the issues particularly in these proceedings? Not just generally – in these proceedings, Mr Diab?
A. No.

LUCARELLI: Have you taken a statement in relation to these proceedings from Mr Michael Ayoub?
A. No.

Q. Mona Ayoub is your client's sister, isn't she?
A. Correct.

Q. She lives in –

HIS HONOUR: Mr Lucarelli, I don't need to hear you any further. You may leave the witness box, Mr Diab.”

39 It was obvious from Mr Diab’s answers that, more than five years after the commencement of these proceedings, and more than nine years after the events in question, Mr Diab had not taken the very first steps towards preparing the case which Mr Chahwan had pleaded against Euphoric: he had not even taken a witness statement from the only two people in the Plaintiff’s camp who could give evidence in support of the case that Euphoric was a knowing participant in a breach of fiduciary duty by Mrs Ayoub. This was despite Mr Diab’s statement in his affidavit of 12 March 2010 that “the proceedings are almost ready to take a hearing date. Substantial part(s) of the evidence are already prepared”.

40 The failure to obtain even witness statements as at 10 May explained why Mr Chahwan had failed to comply with the Court’s directions to file all lay affidavits by 30 April. In seeking a further extension of time for compliance with the Court’s directions, Mr Diab did not reveal that witness statements and affidavits had not been taken from the material witnesses in the five years since the proceedings had commenced. The reason he gave for seeking the extension was that his Counsel was too busy at that time to give attention to the matter. I did not regard that as a frank disclosure of the circumstances in which this extension was sought.

41 In those circumstances, it seemed to me that Barrett J was amply justified in the observations which he had made about Mr Chahwan’s lack of good faith in making the claim against Euphoric: see [38] of his Honour’s judgment, which is quoted at [7], p6 above.

42 I then delivered the following ex tempore judgment ([2010] NSWSC 445):

“[1] This is an application by the Defendants for dismissal of these proceedings for the Plaintiff’s want of prosecution and failure to comply with the court’s directions.

[2] These proceedings have been on foot for a long time. They are part of an extremely complicated and tortuous set of proceedings whereby Euphoric has been endeavouring to recover a judgment for a substantial debt from Bycoon Pty Ltd, which is now in liquidation.

[3] The history of the litigation is set out in a number of affidavits, particularly the affidavits of Ms Huggins of 18 June 2008 and 4 March 2010. There has been long delay on the part of the Plaintiff in bringing and prosecuting these proceedings and a long history of the Plaintiff’s failure to comply with the court’s directions.

[4] On 29 March, when this matter was before the court on an application to strike out the proceedings for the Plaintiff’s failure to comply with directions, I said to Mr Diab, the solicitor who appears for the Plaintiff:
‘The matter cannot be conducted in this way, Mr Diab. This matter is becoming a mockery of the Court system. You have a personal obligation regarding the conduct of these proceedings. The Plaintiff has purchased one further week’s indulgence, the price of which is that he will pay the first defendant’s costs of today.”

[5] On 6 April, when this matter was again before me, I said to Mr Diab:

‘The proceedings will be case managed on an expeditious timetable with a view to obtaining the earliest possible hearing date. I expect strict observance of the Court timetable by both sides. I will allow the Plaintiff six weeks to put his evidence on, but that will be it.’


[6] I then made orders for the service of the Plaintiff’s lay witness statements by 30 April and for the Plaintiff to give verified discovery of specified documents by 20 April. None of those directions have been complied with.

[7] It emerges in cross examination of Mr Diab today that, far from being able to comply with the directions for the service of affidavits, he has not yet even taken statements from the only two witnesses who would be able to give evidence to support the Plaintiff’s case in these proceedings.

[8] The impression that I had earlier gained that these proceedings are, indeed, a mockery has been confirmed. The Plaintiff has commenced these proceedings to stall recovery of a judgment debt by the Defendants and is endlessly spinning excuses for his failure to comply with the court’s directions to get the matter ready for trial. I am satisfied that these proceedings are an abuse of process in their conception and in their prosecution – except that there has been no genuine prosecution by the Plaintiff. The Plaintiff’s Statement of Claim is dismissed.

[9] The Plaintiff will pay the Defendants’ costs of the proceedings on the indemnity basis.

Order
Plaintiff’s Statement of Claim dismissed with indemnity costs.”

43 I have noted at paragraph [2] above the bases on which I made those orders.

Mr Chahwan’s motion to revive the proceedings

44 By a Notice of Motion filed on 24 May Mr Chahwan sought to have set aside the orders which were made on 10 May. The Motion came on for hearing on 4 June.

45 Mr McKeand SC appeared for Mr Chahwan and skilfully advanced everything that could possibly be said in his favour. He informed me that Mr Chahwan now abandoned his claim that Euphoric participated in a breach of fiduciary duty in obtaining the mortgage over Lot 40. Mr Chahwan now wished only to pursue the claim that Bycoon holds Lots 39 and 40 upon a resulting trust for him and that Euphoric has no equitable mortgage over Lot 39.

46 In support of the Motion, Mr McKeand read a number of affidavits of Mr Diab. The first, dated 21 May 2010, purports to set out a record of Mr Diab’s cross examination on 10 May. It is not an accurate record in some respects; the Court transcript correctly records what was said.

47 The most important insertion Mr Diab incorrectly makes in his record of his cross examination is to say that he paused for “about two seconds” before answering that he had taken a statement from Mrs Ayoub. The transcript records that, immediately after he had answered the question, I asked Mr Diab why he had hesitated so long before giving his answer. Mr Diab’s hesitation was, in fact, far longer than two seconds – it was a very significant hesitation. From my observation, it was clear to me that Mr Diab was weighing up carefully how he would respond. He did not appear in the least flustered, nervous or under pressure. Indeed it has been a notable feature of all of Mr Diab’s appearances before me in this matter – even when he was subjected to the criticisms which I have earlier recorded – that he remain unperturbed throughout, perhaps even to the point of nonchalance.

48 I make these observations as to Mr Diab’s demeanour because in his affidavit he says that when he gave his answers in cross examination – and particularly when he paused “for about two seconds” – he “felt under pressure”, which led him to forget about an affidavit which he had taken from Mrs Ayoub and filed in these proceedings on 22 March 2005.

49 I do not accept Mr Diab’s evidence. It was clear from Mr Lucarelli’s very precise questions – which Mr Diab had no difficulty in understanding – the Mr Lucarelli was asking whether Mr Diab had taken any witness statement in support of the claim that Euphoric was a knowing participant in Mrs Ayoub’s breach of fiduciary duty. Mr Diab’s answer, ultimately in the negative – after he had carefully considered his position – was in fact correct. Mrs Ayoub’s affidavit filed on 22 March 2005 says nothing which could support Mr Chahwan’s case against Euphoric for accessory liability for breach Mrs Ayoub’s fiduciary duty.

50 Mr McKeand also read an affidavit of Mr Diab sworn 28 May 2010 in which Mr Diab gave pressure of work as a reason for delay in preparing the Plaintiff’s evidence in these proceedings. He said that one solicitor in his firm, who was responsible for conveyancing and commercial work, left his employment on 12 April 2010 so that he had to take over conveyancing work between 12 April and 17 May. He said that another employed solicitor took leave from 19 April 2010, so that he had to do her work also. He said that, but for these departures, he would have been able to comply with the directions made on 6 April 2010.

51 In cross examination Mr Diab conceded that, when he consented to the directions made on 6 April, he knew that one solicitor was about to leave his employment and the other was to take leave, and he knew that he would be without the assistance of both solicitors during the time for compliance with the directions which were then to be made. Nevertheless, not only did he agree, in negotiations with the solicitor for Euphoric, to the timetable which was then ordered but he had also sworn an affidavit, when he knew of those staffing issues, saying that the proceedings were almost ready to take a hearing date.

52 I do not accept Mr Diab’s explanations for the Plaintiff’s failure to comply with the Court’s directions made on 6 April. Further, Mr Diab gave no explanation why, in the nine years since the events in question, he did not take at least witness statements, let alone affidavits, from those in the Plaintiff’s camp which could support the claim against Euphoric for accessory liability for Mrs Ayoub’s alleged breach of fiduciary duty.

53 Mr McKeand submitted that, whatever may have been the reasons for the delay in the prosecution of Mr Chahwan’s case up to 10 May 2010, Mr Chahwan’s case was now in order and was ready to proceed. Substantial affidavits by Mr and Mrs Ayoub had been prepared and Mr Chahwan now wished to proceed with only two of his claims, abandoning a claim against Euphoric for accessorial liability.

54 Mr McKeand submitted that the Court, in the exercise of its discretion, should set aside the orders made on 10 May because:

– the proceedings, then and now, had not been shown to be an abuse of process;

– the Plaintiff was now in a position to comply with the directions made on 6 April, so that in accordance with the principles discussed in National Parks and Wildlife Service v Pierson (2002) 55 NSWLR 315, the proceedings should be allowed to continue.

55 In the exercise of discretion, I decline to make the orders sought, for the following reasons.

56 First, this is not a case like Pierson. There, the plaintiff’s proceedings had been struck out of the list for non-compliance with the Court’s directions. The proceedings were not dismissed – they were in a procedural limbo and could not be restored to the Court’s list without the leave of the Court. Clearly enough, leave would not be given unless outstanding breaches of the Court’s directions had been rectified.

57 In the present case, Mr Chahwan’s proceedings were not struck out – they were not left in a procedural limbo. They were brought to an end by dismissal, pursuant to s 61(3)(a) Civil Procedure Act 2005 (NSW). The Statement of Claim could have been, and perhaps would have been, struck out if the case for dismissal had not been so strong.

58 A Court will not readily the drastic step of dismissing proceedings absolutely under s 61(3)(a) CPA for a plaintiff’s failure to comply with the Court’s directions if the lesser sanction of striking from the list under s 61(3)(b) or some other action contemplated in s 61(3)(c)-(g) will be sufficient to induce a plaintiff’s timely compliance and move the case towards a quick, just and cheap determination of the real issues. But the power to dismiss completely and unconditionally given by s 61(3)(a) is there to be used in the appropriate casae, when the considerations of justice and fairness to both sides dictate. When that power is exercised in a case which warrants it, the Court will not readily undo its orders. To do so when the party who was in default and who has, in effect, suffered an adverse final judgment in consequence, simply returns to Court, saying that the default has been rectified would be utterly inimical to the requirements of s 56 and s 57 CPA: there would never be an end of litigation, particularly when one of the parties positively wishes to prolong it – unfortunately, not an uncommon experience in the Court lists.

59 The considerations of justice involved in the exercise of the Court’s discretion in cases such as these are helpfully discussed and illuminated in authorities as Bi v Mourad [2010] NSWCA 17 at [30]-[33], [39]-[44], [47]-[49]; Hans Pet Constructions Pty Ltd v Cassar [2009] NSWCA 230, at [36]-[42] per Allsop P; Pacanowski v Simon Wakerman & Associates Pty Ltd [2009] NSWCA 402. I have had regard to the principles discussed in these authorities, both in exercising the discretion to dismiss Mr Chahwan’s proceedings on 10 May and in exercising the discretion under Pt 36.16 to refuse to set those orders aside.

60 I have also taken into account that continuation of the proceedings against Euphoric would further protract the winding up of Bycoon, which has been in a state of frozen animation because of these proceedings ever since the winding up order was made in November 2005. As recounted earlier, the liquidator has given evidence that the prolongation of these proceedings is causing continuing prejudice, not only to the company’s creditors but to himself in that he has not known whether Bycoon is beneficially entitled to any property, so that his fees and expenses in the liquidation have gone unpaid.

61 Finally, bearing in mind the fact that I have not accepted Mr Diab’s reasons for delay, I have no confidence that, were these proceedings to be revived, they would be conducted by Mr Chahwan in the future with any more expedition and attention to the Court’s directions than they have been conducted in the last five years. After five years, forty hearings in the Court, twenty-seven of them before a Registrar and thirteen before a Judge, and an unsuccessful appeal to the Court of Appeal, Mr Chahwan has had more than a fair opportunity to present his case.

62 For these reasons, Mr Chahwan’s Notice of Motion is dismissed. I will hear the parties as to costs.

– oOo –