El-Saafin v Franek (No 4)

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2020 0087

MAG FINANCIAL AND INVESTMENT VENTURES
PTY LTD (ACN 625 790 623)

AAGG DEVELOPMENTS PTY LTD (ACN 627 341 128)

First Applicant

Second Applicant

v

HASSAN EL-SAAFIN AND OTHERS (according to the attached Schedule)

Respondents

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JUDGES:	SIFRIS and OSBORN JJA and MACAULAY AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	12 October 2020
DATE OF JUDGMENT:	14 December 2020
MEDIUM NEUTRAL CITATION:	[2020] VSCA 322
JUDGMENT APPEALED FROM:	El-Saafin v Franek (No 4) [2020] VSC 389 (Lyons J)

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CORPORATIONS – Where leave was granted to shareholders of a company in liquidation to bring a proceeding in the name of the company – Where leave was granted exercising the inherent jurisdiction of the Court – Whether error in the exercise of the discretion to grant leave – House v The King (1936) 55 CLR 499 applied – Whether incorrect legal principle applied in exercising the inherent jurisdiction of the Court – Whether failure to consider material considerations for the exercise of the discretion − Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577, Re Freshstart Pty Ltd [2006] VSC 317 and Malhotra v Tiwari [2007] VSCA 101 considered – Leave to appeal refused.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr M Clarke QC with Ms K Wangman	Mark J Halse
For the First and Second Respondents	Mr I Upjohn QC with Mr B Mason	Hicks Oakley Chessell Williams Pty Ltd

SIFRIS JA
OSBORN JA
MACAULAY AJA:

Introduction and Summary

The subject of this application for leave to appeal is the question whether this Court should set aside an order made by a judge of the Trial Division on 28 July 2020 giving leave to two shareholders of a company in liquidation to bring a proceeding in the name of that company (‘derivative leave’).[1] Because the judge made the derivative leave order in the exercise of the inherent jurisdiction of the Court, the order was discretionary in nature. Accordingly, under well-established principles,[2] the applicants must satisfy this Court that the judge made some error in exercising the discretion.
[1]El-Saafin v Franek (No 4) [2020] VSC 389 (Lyons J) (‘Reasons No 4’).
[2]House v The King (1936) 55 CLR 499, 504–5.

As will be seen, by their proposed grounds of appeal the applicants contend that the judge applied wrong legal principles and failed to take into account (or consider) certain matters said to be material considerations for the exercise of the discretion.

For the reasons given below, we are not satisfied that any of the proposed grounds of appeal have real prospects of success and, therefore, refuse leave to appeal.

The trial of the proceeding for which derivative leave was granted is fixed for hearing on 3 February 2021. No stay of the proceeding has been sought pending the hearing and determination of this application and, so, it has been brought with some urgency with a view to maintaining the trial date should the application fail. Both because of that urgency and because it would be undesirable for this Court to descend too far into the merits of a dispute that will shortly be the subject of trial, we will address the issues in dispute only so far as is necessary to explain our decision.

Issues in the application for leave to appeal

The applicants are MAG Financial and Investment Ventures Pty Ltd (‘MAG’) and AAGG Developments Pty Ltd (‘AAGG’). The first and second respondents — two of thirteen, but the only respondents to take part in this application — are Hassan and Mohamad El-Saafin. The company in liquidation is Saafin Constructions Pty Ltd (in liquidation) (‘the Company’).[3]
[3]The ninth respondent.

Brothers Hassan, Mohamad and Wael El-Saafin[4] are the three shareholders in the Company. Hassan and Mohamad (who we will refer to in these reasons either by their individual names, or as ‘the El-Saafins’) were the directors of the Company when, in 2018, it was placed in receivership and later into liquidation. It was to Hassan and Mohamad that the judge granted derivative leave to bring a proceeding on behalf of the Company.[5] That proceeding, brought in the name of the Company, names five defendants including MAG and AAGG.[6]
[4]The tenth respondent.
[5]It appears from the terms of his affidavit filed in the proceeding (sworn 17 September 2019) that Wael El-Saafin supports the applications of his brothers Hassan and Mohamad.
[6]The other three defendants — Stephen Dixon (fourth respondent) and Ahmed Bise (fifth respondent) (receivers who had been appointed to the Company in 2018), and Mark Franek (third respondent)— are named among the 13 respondents to the application, but took no part in it.

In very broad terms, the proceeding concerns a property at 65–67 Arden St, North Melbourne (‘the Property’) upon which the Company had commenced a development of residential and commercial units. Interests behind the Company (the El-Saafin interests) and interests behind MAG and AAGG (the builder of the development and some lenders and investors) are engaged in a long running tussle for control of the Property, either as a means of recovering debt or for the purpose of continuing the development.

Although the Company is in liquidation, the effect of the derivative leave order is to permit the El-Saafins to prosecute claims on behalf of the Company, among other things, to: set aside a mortgagee’s sale of the Property and have it reconveyed to the Company; determine the validity and amount of certain debts claimed to be owed by the Company; determine whether particular debts were secured debts and properly paid out from the proceeds of the mortgagee’s sale; and recover damages for specific wrongs allegedly committed by MAG and the receivers it appointed prior to the Company being placed into liquidation.

Two of the proposed grounds of appeal concern the correctness or otherwise of the legal principle applied by the judge in exercising the discretion to grant leave.[7] Most prominently, those grounds raise the extent to which the correct legal principle accords pre-eminence to the role of a liquidator in resolving disputes about a company’s debts, and pursuing claims on a company’s behalf. Other proposed grounds concern the alleged futility of allowing the claims for the recovery of the Property (or for damages for denial of access to it) to be prosecuted given the extent of the Company’s insolvency and the low chance that the Company will be able to pay off its existing debts, let alone continue the development.[8] A further proposed ground focuses upon the extent to which the judge gave proper consideration to the real prospects of success of an individual claim in the proceeding, namely a claim for approximately $1.2 million arising from the way the proceeds of the mortgagee’s sale were applied.[9] The final proposed ground raises an issue about the consideration the judge gave to potential prejudice to AAGG if derivative leave was to be granted.[10]
[7]Proposed grounds 1 and 6.
[8]Proposed grounds 2, 3, 5, 8 and 9.
[9]Proposed ground 7.
[10]Proposed ground 4.

Background

In April 2015, the Company entered into a contract with a builder, New Concept Homes Pty Ltd (‘New Concept Homes’),[11] to construct 25 residential apartments and two commercial units on the Property. New Concept Homes is a company associated with Amr Mekkya.[12] Also associated with Mekkya is a business apparently supplying design services, New Concept Designs.
[11]The thirteenth respondent.
[12]The eleventh respondent.

From time to time after April 2015, Mark Franek,[13] provided finance to one or more of the El-Saafin interests. By 18 May 2017, according to a Deed of Release & Settlement of that date (‘the R&S Deed’), Wael El-Saafin owed Franek $311,000 (‘the Franek debt’). By the terms of the R&S Deed, Wael and the Company charged their assets with the payment of the Franek debt and the performance of other obligations set out under the deed. If there was a default on the settlement of the Franek debt as stipulated by the R&S Deed, its terms provided that interest was payable upon the Franek debt at the rate of $26,000 per month, backdated from 16 February 2016.
[13]The third respondent.

In October 2016, the Company entered into a series of agreements with Balanced Securities Pty Ltd (‘Balanced Securities’), including a facility agreement (‘the facility agreement’) to obtain finance for the development of the Property (‘the Balanced Securities loan’). Included among the securities for the advance was a first registered mortgage over the Property.

Events of 2018

In April 2018, with only 25% of construction at the Property completed, the Company terminated the building contract with New Concept Homes. Throughout the remainder of 2018 a series of steps critical to this litigation occurred, including:

·on 9 April, Franek purported to appoint receivers and managers to the Company, one practical effect of which was to prevent the Company having access to the Property;
·on 18 April, Balanced Securities assigned the Balanced Securities loan and the facility agreement, together with the securities it held thereunder, to Franek who, in turn, nominated MAG (a company of which he was the sole director) to acquire those assets;
·on 3 May, Franek assigned the Franek debt, and the securities created by the R&S Deed, to MAG;
·on 7 May, MAG reappointed to the Company the same receivers and managers that had been appointed by Franek in early April;
·on 20 June, Mekkya and another alleged creditor of the Company associated with Mekkya, George Sacca,[14] purported to assign to MAG various alleged debts owed to them (or to New Concept Homes and New Concept Designs) (‘the 20 June debts’);
[14]The twelfth respondent.
·on 5 July, AAGG was incorporated with Mekkya as its director and he and Sacca as shareholders;
·on 9 July, MAG, now holding the first registered mortgage over the Property assigned by Balanced Securities, entered into a contract of sale, as mortgagee in possession, to sell the Property to AAGG for $4,500,000;
·on 19 July, unaware of the sale, the El-Saafins tendered a sum of money sufficient to pay the total debt owing by the Company for the Balanced Securities loan and the Franek debt for a release of the mortgage over the Property, to be settled on 25 July, but received no response until after settlement of the sale;
·on 20 July, upon settlement of the contract of sale, MAG applied the net proceeds of sale, $4,454,732.09, towards paying out the following amounts:
(1)$1,900,000 allegedly owed to Sacca (‘the Sacca debt’);
(2)$521,349.22 allegedly owed to New Concept Homes (‘the New Concept Homes debt’);
(3)$174,907.59 allegedly owed to New Concept Designs (‘the New Concept Designs debt’);
(4)$371,055.52 for alleged enforcement costs and disbursements; and
(5)$1,487,419.76 in partial discharge of the Balanced Securities loan;

·on 23 July, AAGG was registered on title as the proprietor of the Property;
·on 27 July, Franek resigned as director of MAG, and sold his shares in MAG to Mekkya who was also appointed sole director;
·on 7 August, MAG appointed administrators to the Company pursuant to s 436 of the Corporations Act 2001 (Cth);
·on 12 November, the Company was wound up by resolution of its creditors, and liquidators were appointed;
·on 10 December, the Court appointed Mr Caspaney as liquidator in place of the previously appointed liquidators.

Earlier reasons of the trial judge (Reasons No’s 1, 2 and 3)

As observed by the liquidator, Mr Caspaney, in a report he provided to the Court in August 2019, the creditors of the Company comprised two main ‘camps’: MAG and those associated with that company, and the El-Saafins and those associated with them. Before making the decision to grant Hassan and Mohamad El-Saafin derivative leave to bring a claim on behalf of the Company (the decision which forms the subject of this application), the judge had delivered three sets of reasons concerning disputes between the two camps.[15] It is necessary to give a short description of each of them.
[15]El-Saafin v Franek [2018] VSC 450 (‘Reasons No 1’); El-Saafin v Franek (No 2) [2018] VSC 683 (‘Reasons No 2’) and El-Saafin v Franek (No 3) [2019] VSC 155 (‘Reasons No 3’).

On 27 June 2018, the El-Saafins obtained an interim order from Lyons J restraining the receivers, appointed to the Company by MAG, from realising, selling or disposing of the ‘securities’ as defined in the facility agreement which Balanced Securities had assigned to MAG. As mentioned, those securities included the mortgage over the Property, but also included a mortgage over the home of one of the El-Saafin brothers which the receivers had been threatening to sell.

For a time, the proceeding for the interlocutory injunction returned on a number of occasions before another judge for various directions. On the first of those occasions the interim injunction was dissolved but from then on the receivers gave undertakings to the same effect as the terms of the interim injunction. The proceeding next returned before Lyons J on 7 August 2018. Between 27 June and 7 August 2018, during the currency of the interim injunction or the undertakings given by the receivers, and without the Court being informed, MAG sold the Property to AAGG on 9 July, settled the sale on 20 July and distributed the proceeds of sale in the manner already described. Although MAG was the appointer of the receivers who were bound by the interim injunction and the undertakings, MAG evidently took the view that as mortgagee it was free to dispose of the Property.

By the time the matter returned to Lyons J on 7 August 2018 two relevant things had occurred. First, MAG had appointed administrators to the Company under s 436C of the Corporations Act. Secondly, the El-Saafins had provided to the Court a proposed pleading for a claim they wished to bring on behalf of the Company against Franek, the receivers, MAG and AAGG. The proposed pleading was titled ‘Proposed Amended Statement of Claim’ (‘the PASOC’) and dated 3 August 2018 (amending an earlier iteration dated 13 July 2018). The derivative leave which the judge ultimately gave to the El-Saafins is mostly in respect of the claims set out in the PASOC.

On 7 August, the judge heard further argument, and made interlocutory orders restraining all defendants (then, Franek, the receivers and MAG) from taking any further steps to enforce any securities and also restraining AAGG from dealing with the Property. His Honour adjourned the further hearing of the proceeding to enable the administrators to consider whether they wished to pursue the proceeding initiated by the El-Saafins or, if not, whether they would consent to the El-Saafins pursuing the proceeding under s 440D of the Corporations Act. His reasons for doing so are contained in Reasons No 1.[16]
[16]See El-Saafin v Franek [2018] VSC 450.

By a summons filed on 30 August 2018, later amended, the El-Saafins made an application for leave to bring the proceeding pleaded in the PASOC on behalf of the Company pursuant to either s 237 of the Corporations Act, the inherent jurisdiction of the Court, or pursuant to pt 90-15 of sch 2 of the Corporations Act. Lyons J ruled that s 237 of the Corporations Act was not an available source of power for granting derivative leave when a company was in administration (or in liquidation), and adjourned the further consideration of granting leave under either of the alternative bases. His reasons for doing so are contained in Reasons No 2.[17]
[17]See El-Saafin v Franek (No 2) [2018] VSC 683.

As noted above, on 12 November 2018 liquidators were appointed to the Company. The liquidators (initially, Messrs Glavas and Kucanski,[18] who had also been the administrators) were appointed after a meeting of creditors on that date had voted (by value, not by number) to wind up the Company. Subsequently, the El-Saafins applied to the Court to appeal certain decisions made by Glavas, presiding at the creditors’ meeting, to admit some debts and reject others. The El-Saafins also applied to terminate the winding up. Those applications were heard by the judge in early 2019 and he gave his decision on 15 March 2019. In substance, the judge found that some proofs of debt for creditors in the El-Saafin camp ought to have been admitted (but were rejected) and other proofs of debt for creditors in the MAG camp should have been rejected (when they had been admitted) or admitted only for a nominal value (when they had been admitted for substantial value).
[18]Respectively, the fifth and sixth respondents.

Allowing for those findings, the judge held that the creditors properly entitled to vote at the 12 November creditors’ meeting would very likely have voted by number and by value against placing the Company in liquidation and in favour of ending the administration. Notwithstanding that those findings would have favoured the termination of the liquidation, by that time the judge was concerned about the solvency of the Company. He directed the liquidator (by then, Mr Caspaney) to provide a report to the Court on the solvency of the Company and also, if possible, addressing aspects of the 20 June debts. His reasons for doing so are contained in Reasons No 3.[19]
[19]See El-Saafin v Franek (No 3) [2019] VSC 155.

Following the delivery of Reasons No 3, the El-Saafins’ applications for the termination of the liquidation and for leave pursuant to the inherent jurisdiction of the Court to bring a proceeding on behalf of the Company remained extant.

Liquidator’s report

On 2 August 2019, as directed, Mr Caspaney provided his report to the Court in which he stated, in his opinion, the Company was insolvent. The judge received further updates from the liquidator by affidavits filed in December 2019 and March 2020. The judge summarised the liquidator’s report in his reasons explaining the decision to grant derivative leave.[20] That summary was not challenged. Without setting out the whole of the summary, some of the key points follow.
[20]Reasons No 4, [57]–[79].

The liquidator acknowledged the limitations of his report in that, due to the lack of substantiation of many of the proofs of debt lodged and some complex legal questions that remained undetermined, he was unable to adjudicate officially on the proofs of debt lodged. Each claim was classified only as ‘verified’ on the Company’s statement of financial position, rather than admitted. He reported there were many discrepancies between the Company’s financial reports and the proofs of debt.

As at the date of the primary report, Mr Caspaney considered that the deficiency of assets over liabilities was approximately $2.8 million; by December 2019, he formed the view that the deficiency was approximately $4 million.

As at 4 December 2019, the amount claimed by unsecured creditors of the Company totalled $12,709,671 whereas the amount accepted by the liquidator was only $3,902,574. Among the claimed unsecured creditors at that time, MAG claimed to be a creditor for the unpaid portion of the Balanced Securities loan in the sum of $2,826,690 and the unpaid portion of the Franek debt in the sum of $1,375,000. Neither sum was accepted by the liquidator as unsecured debt. Further, the total amount claimed did not include the 20 June debts which had been paid from the proceeds of sale of the Property to AAGG. Those claims, and the liquidator’s position on them, reflected a controversy surrounding the application of the proceeds from the sale by MAG (as mortgagee) to AAGG.[21]
[21]See above, [13], ’20 July’ bullet point.

As for the 20 June debts,[22] the liquidator concluded from the available documentation and his own investigations, as follows:
[22]See above, [13], ’20 June’ bullet point.

(a) the New Concept Homes debt of $521,349.22, which was paid in full from the sale proceeds, was not a liability of the Company and was not due and payable on 20 July 2018. Further, it was not secured and was subject to a counterclaim or set-off by the Company;

(b) the New Concept Designs debt of $174,907.59, which was paid in full from the sale proceeds, was not a liability of the Company and was not due and payable on 20 July 2018. It was not secured and was subject to a counterclaim or set-off by the Company;

(c) the Sacca debt of $1.9 million, which was paid in full from the sale proceeds, was a liability of the Company which was due and payable on 20 July 2018. However, it was not secured, but neither was it subject to any set-off; and

(d) the Mekkya debt of $982,888.22 was a liability of the Company but was not secured. It was due and payable on 20 July 2018 but was also subject to a counterclaim or set-off.

The liquidator concluded that the only debt properly secured over the assets of the Company was the Balanced Securities loan. From the net sale proceeds the liquidator calculated that MAG was only entitled to receive the sum of $3,249,774.30 (being the Balanced Securities loan balance with interest and costs) and that it was not entitled to receive the remainder of the sale proceeds, namely $1,203,957.79. He formed the view that that sum should have been remitted to the Company upon the settlement of the sale.

Further, the liquidator was not satisfied that the Franek debt had been validly assigned to MAG. He also considered that the Franek debt was not secured by any mortgage over the Property. Additionally, he concluded that the interest rate charged on the Franek debt, which he calculated to be at an annualised rate of 144%, was probably not enforceable against the Company. As a result, he did not consider that the proof of debt lodged by MAG with respect to the Franek debt, including its associated enforcement costs, was a true liability of the Company or secured by a mortgage over the Property. It also followed, in his view, that the component of enforcement costs referable to the Franek debt ($265,142.98) should not have been paid from the sale proceeds.[23]
[23]See Reasons No 4, [79].

Proposed claims

Ultimately, the El-Saafins did not press their application for termination of the liquidation because they conceded that, first, they needed to have the sale to AAGG set aside and the Property reconveyed to the Company after satisfaction of all its true secured debts, drawing upon new proposed mortgage finance (which they claimed to have arranged). To achieve those ends they accepted that they needed to prosecute and succeed on the claims set out in the PASOC. Accordingly, they re-agitated their adjourned application for derivative leave pursuant to the inherent jurisdiction of the Court.

Before coming to the judge’s decision the subject of this application for leave to appeal — Reasons No 4 — it is convenient to set out the nature of the claims which the El-Saafins sought leave to bring on behalf of the Company, as articulated in the PASOC. As stated earlier, the named defendants are Franek, the receivers (first appointed by Franek in April and reappointed by MAG in May 2018), MAG and AAGG (‘the MAG parties’).

The claims set out in the PASOC seek to challenge the amount of the debt claimed to be owed by the Company, and the extent to which the securities assigned to MAG (including those purportedly assigned by Franek in May 2018) apply to secure particular debts. More particularly, the El-Saafins (on behalf of the Company) dispute that the 20 June debts (including the Sacca debt) were due and payable as at 20 July 2018, or that they were secured. Further, they allege that the New Concept Homes debt and the New Concept Designs debt were subject to a counterclaim or set-off for incomplete and defective work and, in the case of the former, liquidated damages. The claims also challenge the sale of the Property by MAG to AAGG in July 2018, alleging that the transfer was made in bad faith, the sale was at an undervalue and that MAG breached its common law duties as mortgagee as well as duties under the Corporations Act and the Transfer of Land Act 1958.

Additionally, the PASOC includes the following claims for damages:

·a claim for damages for trespass against the receivers and/or Franek for the period 9 April to 7 May 2018 while the receivers were in possession of the Property pursuant to the appointment by Franek on 9 April 2018 which appointment was withdrawn;
·claims for damages and for account against the receivers, Franek and MAG arising from the fact that the 20 June debts were not secured and/or were not due and payable, and damages arising from their failure to accept the tender of the Balanced Securities loan and the Franek debt in late July 2018 (which, if accepted, would have led to a release of the securities and which refusal has precluded the Company from developing the Property);
·a claim for damages for trespass by AAGG as purchaser from 23 July 2018 which trespass has precluded the Company from developing the Property; and
·claims for damages and for account against MAG and AAGG for breach of duty by MAG (including breaches of the Corporations Act and the Transfer of Land Act) and knowing involvement by AAGG which breaches have precluded the Company from developing the Property.

By way of relief, in addition to a prayer for damages, equitable compensation and an account of profits, declarations are sought that:

·the ‘securities’, as defined in the facility agreement, and guarantees granted thereunder, were discharged upon tender of the Franek debt and the Balanced Securities loan;
·the El-Saafins were discharged of their obligations under the facility agreement;
·s 77(4) of the Transfer of Land Act does not apply to render unimpeachable the registration of the transfer of the Property to AAGG;
·the transfer of the Property be set aside;
·AAGG holds the Property on constructive trust for the Company; and
·MAG exercised its power of sale in respect of the Property in breach of various statutory and common law duties.

Additional restraining orders are sought, together with an order that AAGG reconvey the Property to the Company.

The judge’s reasons (Reasons No 4)

The judge gave a detailed history of the background facts, including a summation of the liquidator’s report and a summary of the PASOC. In the course of doing so he noted what had been referred to in Reasons No 2 as a plan developed by Mekkya and Sacca from about 2018 to take control of the Property and its development by acquiring and exercising the rights of the Company’s secured creditors (‘the Plan’).[24]
[24]Reasons No 4, [26]–[28].

As well as summarising the liquidator’s report, the judge recorded the liquidator’s position with respect to the liquidation and the pursuit of proceedings to recover moneys for creditors.[25] His Honour noted that the liquidation was currently without funds and the liquidator had not been able to obtain detailed legal advice regarding the Company’s potential claims; if the liquidation was financial, prior to commencing any proceeding the liquidator was likely to conduct public examinations and take legal advice; and the liquidator had investigated litigation funding but, at that point, considered there was no option that was commercially attractive to pursue. Nevertheless, the judge took note that the liquidator was of the view that the Company had a claim for damages against MAG for at least $1,203,957.79 (referred to above at [28]). Finally, and significantly, the judge observed that the liquidator was not opposed to the El-Saafins being granted leave to pursue the claims outlined in the PASOC, subject to a satisfactory indemnity for the liquidator’s costs to date and for the future.
[25]Reasons No 4, [56].

Because the MAG parties argued that even if the transfer to AAGG was set aside, the El-Saafins had no practical ability to obtain finance, redeem the mortgage and complete the development of the Property, the judge analysed the evidence with respect to the El-Saafins’ finance proposal, the value of the Property if developed, the construction costs for the completion of the development, and the El-Saafins’ budget and profit forecasts.[26] In summary, the judge was far from satisfied about the ability of the El-Saafins to obtain the full amount of finance ($11 million) which they claimed to have arranged. He noted that the El-Saafins’ proposal to continue and complete the development on the land depended upon the proceeding being successful and the liquidator consenting to a mortgage over the Property to secure the new finance. With respect to the valuation of the Property as developed, the evidence disclosed valuations ranging between $13,813,000 and $15,566,000. The judge also summarised competing evidence with respect to the construction costs required to complete the development and, finally, noted that the budget prepared by the El-Saafins forecasting a profit of $2,436,530 relied upon assumptions involving significant uncertainties.
[26]Reasons No 4, [80]−[108].

Turning to the applicable legal principles, the judge considered the nature of the Court’s inherent jurisdiction in respect of an application for leave to bring proceedings while a company was in liquidation (referring to his previous analysis in Reasons No 2 when he considered the same question in respect of a company then under administration). His Honour referred to his survey of cases which he analysed in Reasons No 2,[27] in addition to further cases he considered for the purpose of the application in question.[28] From that review, the judge set out what he considered to be the applicable principles, as follows:

(1)the Court has a discretion to grant leave to pursue proceedings on behalf of a company in liquidation: that jurisdiction is equitable and/or arises from the Court’s supervisory jurisdiction over liquidators;
(2)the Court has power as the custodian of the interests of every class affected by the liquidation to ensure that all assets of the company are brought into the winding up;
(3)the exercise of the discretion is based on or analogous to principles upon which a court of equity would allow a beneficiary to sue on behalf of a trust, namely the ordinary rule is that the trustee brings proceedings on behalf of a trust and a beneficiary of trust is only to be allowed to sue on behalf of a trust in ‘special circumstances’. Those special circumstances would ‘embrace a failure, excusable or inexcusable, by the trustees … to protect the trust property or to protect the interests of the beneficiary in the trust estate’;
(4)it is in this context and in light of his Honour’s review of the relevant authorities that Barrett J in Carpenter identified the three principal factors which the Court ought take into account in determining whether to grant leave in its inherent jurisdiction. The fact that in the ordinary case it is a liquidator who will determine whether proceedings should be issued is reflected in Barrett J’s second principal factor, namely the attitude of the liquidator. I will address the significance of this factor further below; and
(5)these three principal factors are not exhaustive: the Court will have regard to all of the circumstances of the case.[29]

[27]Reasons No 4, [140].

[28]Reasons No 4, [141]ff.

[29]Reasons No 4, [144] (citations omitted).

Barrett J’s three ‘principal factors’ to which the judge referred in sub-paragraph (4) above, are as follows:

1. The question whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success.
2. The attitude of the liquidator to the question whether the proceedings should be pursued.
3. The question whether ‘practical considerations support the initiation of the proceedings’, with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity and, if indicated, security.[30]

[30]Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577, 586–7.

As to those three factors, the El-Saafins submitted before the judge that:

(e) the claims contained in the PASOC were strong, there were serious issues raised concerning the conduct of the MAG parties and the liquidator’s view was that the proceeding had a good claim for damages of at least $1.2 million;

(f) the liquidator himself was unable to fund the prosecution of the proceeding and did not oppose leave being granted to them; and

(g) they were willing to indemnify the liquidator so that he was not exposed to personal liability.

On that basis, they submitted that derivative leave should be granted.

In submissions before the judge, the liquidator confirmed his position as previously outlined (see above, [37]). Additionally, the judge noted his submission that it was ‘far too early to tell’ whether the proceeding would produce enough money to pay out creditors and that his ‘current inclination’ was to sell the Property and realise money for creditors should it be reconveyed to the Company.[31]
[31]Reasons No 4, [116], [117].

The MAG parties acknowledged that the claims in the PASOC were neither oppressive nor vexatious and raised serious questions to be tried. Nevertheless, they submitted that the usual course was that a liquidator would prosecute any such proceeding and, in this case, the El Saafins had not offered to fund him to do so. A further focus of their argument was that granting leave would be futile and would not confer any benefit on the Company. They emphasised the extent of the Company’s insolvency, the limited amounts likely to be obtained from the damages claims, and the improbability that the finance which the El-Saafins claimed to have arranged would materialise or that the Company would be in a position to redevelop the Property. In that event, they submitted, even if the El-Saafins succeeded in having the Company redeem the Property, the only realistic course would be for the liquidator to sell the Property as an undeveloped site with significant deterioration. On that basis, they argued that the situation did not amount to ‘extraordinary circumstances’ sufficient to warrant the exercise of the discretion in favour of granting leave.

In analysing the facts in light of the principles extracted from the authorities, the judge considered whether the claims had a solid foundation, the attitude of the liquidator and various practical considerations.

First, his Honour was of the view that there were serious questions to be tried, and thus a solid foundation for claims, in relation to:

(h) the possible breach of duty by MAG and the receivers in failing to provide the Company with a payout figure in respect of the Balanced Securities loan between 9 May and 25 June 2018;

(i) whether the 20 June debts were validly the subject of MAG’s security interest;

(j) whether the conduct of Franek, MAG, Mekkya and Sacca in relation to the transfer of the Property to AAGG resulted in the sale being made in bad faith so that the transfer may be set aside;

(k) whether the Franek debt was enforceable, validly assigned to MAG or secured; and

(l) whether the balance of the proceeds of sale of the Property to AAGG after satisfaction of the $3,249,774.30 due to Balanced Securities, namely $1,203,957.79, should have been returned to the Company.

In short, the judge found that there was a solid foundation for all of the claims in the PASOC and, in addition, considered there were further claims not presently pleaded (set out in sub-paragraphs (d) and (e) above) which ought to be pursued.

Secondly, as for the attitude of the liquidator, the judge noted that the liquidator did not oppose the grant of leave, subject to all relevant costs being met. The judge addressed an argument put by the MAG parties that leave should not be granted when the liquidator had indicated he would be prepared to conduct public examinations with a view to investigating the institution of proceedings if he were funded to do so. His Honour said he could see no statement of principle to the effect that leave should never be granted to another person if a liquidator was not unwilling to pursue a proceeding so long as funding was provided.

In that context, he referred to comments of McLelland J in Aliprandi v Griffith Vintners Pty Ltd (in liq)[32] in respect of a practical benefit of allowing litigation to be pursued by a contributor, namely that the conduct of the litigation would be in the hands of the solicitors engaged by that person and at his expense and risk.[33] In this case, the judge noted, the liquidator had not expressed any preference, in place of the El‑Saafins, to further explore or pursue claims. Rather, he had indicated that given the complexity of the issues involved, if funding was provided he would likely review documents, conduct public examinations and take legal advice prior to commencing any proceeding. His Honour considered that the need for such further investigations arose because of the liquidator’s lack of detailed knowledge of the facts giving rise to the claim. In contrast, the El-Saafins and their legal advisers had firsthand knowledge of the relevant events and the judge thought, ‘in light of the history of this proceeding’,[34] it would be more efficient and less costly if they were to pursue the claims against the MAG parties on behalf of the Company.
[32](1991) 6 ACSR 250, 252.
[33]See Reasons No 4, [184].
[34]Reasons No 4, [186].

Thirdly, in respect of ‘practical considerations’, the judge considered there was no prejudice to the assets of the Company should leave be granted. He noted that the liquidator had been paid for his past expenses and that money had been deposited into a trust account for anticipated future expenses should leave be granted. His Honour also considered but declined to award security for the MAG parties’ costs.

In addition to those three principal factors, the judge considered ‘other relevant circumstances’. In this regard, he considered whether there were ‘tangible benefits’ to the Company, most particularly to the creditors, in granting the leave sought. He was unconvinced about the El-Saafins’ proposal to refinance and complete the development and, so, did not place great weight on the potential yield from development as a tangible benefit. However, the judge considered that granting leave would likely produce other tangible benefits, as he went on to explain:

First, the Liquidator considers that prosecuting the claim he has identified may result in damages of at least $1.2 million for distribution among the true creditors of the Company.
Second, granting leave would enable the determination of many of the disputed debts of the Company and whether they are secured. [The judge states he will address this matter further in later paragraphs.]
Third, contrary to the submissions of the MAG parties, I do not accept that the claims in the PASOC would produce little or no benefit to the Company, particularly in light of the damages claim made. [The judge refers back to earlier paragraphs in his reasons.] For example, pursuant to the claims summarised in [some earlier paragraphs in the reasons], there may be a substantial claim for damages from MAG and the Receivers because the Company was prevented from continuing with the development of the North Melbourne Property. I note it was not submitted that the MAG parties or the Receivers would not be able to meet any order for damages.

Further, part of the relief sought in the PASOC is the re-transfer of the North Melbourne property. That may also be a benefit to the Company. The MAG parties submitted that the Court cannot be satisfied that the North Melbourne property will have a value which exceeds the purchase price obtained on the sale to MAG. That may be so. However, I am not satisfied on the basis of the argument before me that any diminution in the value of the North Melbourne property at the time that it is transferred, or at least the inability to develop that property in a timely way due to the conduct of the MAG parties and/or the Receivers, will not be reflected in an award of damages.
The solvency of the Company is also a relevant circumstance. As noted above, while the Liquidator is of the view that the Company is insolvent, he cannot form concluded views about the current liabilities of the Company (including the debts owed to MAG) or the 20 June debts due to the limited information available to him.[35]

[35]Reasons No 4, [195]–[199].

In relation to the solvency of the Company, the last mentioned point, the judge noted that the MAG parties’ debts represented 60-70% of all Company debts, not all of which had been accepted by the liquidator, and that there was a dispute as to the extent to which they were secured. He acknowledged the submission of the MAG parties that, as the liquidator had concluded, the El-Saafins as directors of the Company had failed to comply with their obligations to keep proper written financial records. That, the judge said, was a matter to be considered in the exercise of his discretion although he did not regard it as determinative. On the other hand, the judge observed:

there is the conduct of the MAG parties in having arrogated to themselves the decision as to which debts of the Company were due and payable and secured, and the priority in which debts were to be paid. That decision has and will very much affect the proper entitlements of the true creditors of Company. It is important to recall, as set out above, that the Court exercises its inherent jurisdiction to grant leave as the custodian of the interests of every class affected by the liquidation to ensure that all assets of the company are brought into the winding up. This is particularly relevant here. It is that conduct which is to be the subject of the claims in this proceeding for determination by the Court.
There is also the conduct of the MAG parties in seeking to avoid scrutiny of these claims in Court. I refer to the Plan and the concessions of senior counsel for the MAG parties referred to above.[36] In my view, this is also a relevant circumstance in the exercise of the Court’s discretion.[37]

[36]A reference to an acknowledgment made by senior counsel appearing at the hearing preceding Reasons No 2, the terms of which were reproduced at Reasons No 4, [28].

[37]Reasons No 4, [203]–[204] (emphasis in original).

Based on all of these considerations, the judge was satisfied that the circumstances were ‘out of the ordinary and special’. Were it necessary to conclude that the circumstances were ‘extraordinary or exceptional’, as the gateway for exercising the discretion, the judge said that he was also satisfied that the circumstances of the case were extraordinary and exceptional.[38]
[38]Reasons No 4, [205].

The order made on 28 July 2020 granted the El-Saafins leave to bring claims in the name of the Company in accordance with the PASOC. Additionally, the order gave leave to bring two claims that were not expressly contained in the PASOC, namely the claim for the recovery of $1,203,957.79, being the balance of proceeds of sale that should have been repaid to the Company, and claims based upon the liquidator’s view of the unenforceability of, and lack of security existing for, the Franek debt. The orders were made upon the undertaking of the El-Saafins that any damages received in respect of the claims would be paid to the Company.

Proposed grounds of appeal

The applicants (MAG and AAGG) propose to rely upon nine grounds of appeal which are as follows:

1.The learned trial judge applied the wrong principles for the exercise of the discretion to allow derivative proceedings to be brought when a company is in liquidation.
2.The learned trial judge erred in failing to take into account that the consequence of a finding that the transfer of land was tainted by bad faith as claimed in the proposed amended statement of claim is to treat it as a transfer (assignment) of the mortgage and the debts secured by it with the purchase price treated as the price paid for the assignment of the mortgage and the debts.
3.The learned trial judge erred in failing to take into account that it is an exercise in futility to grant derivative leave for claims seeking to reconvey the [Property] to the [Company] in liquidation in circumstances where, inter alia, the property would be reconveyed to the [Company] and the liquidator would sell the [Property].
4.The learned trial judge erred in failing to take into account the state of the [Property] which has fallen into serious and dangerous disrepair and that granting derivative leave to reconvey the [Property] prevents the registered proprietor, AAGG, from carrying out remedial work and will do so for years.
5.The learned trial judge erred in failing to consider that it is an exercise in futility to grant derivative leave for claims for damages for sale for undervalue of the [Property]. MAG contends that the only evidence provided to the Court demonstrates that the [Property] was sold for an amount in excess of market value.
6.The learned trial judge erred in acting upon the wrong principle that granting derivative leave to the plaintiffs would enable the determination of many disputed debts of the [Company] and whether they are secured by the plaintiffs who were former directors of the [Company] rather than by the liquidator appointed by the Court and required to act independently which would produce a tangible benefit to the [Company].
7.The learned trial judge erred in failing to consider that the claim for damages of $1.2m, being a claim for costs and interest under and in accordance with the Franek debt up to July 2018, lacked a solid foundation.
8.The learned trial judge erred in failing to consider whether it would be an exercise in futility to grant derivative leave for a claim for damages based on the [Company] being prevented from continuing the development of the [Property].
9.The learned trial judge erred in failing to consider whether it would be an exercise in futility to grant derivative leave for a claim for the return of a portion of the sale proceeds from the sale of the [Property] to AAGG.

In oral argument before this Court the parties made submissions grouping those grounds in various ways. We find it convenient to group them as we did at [9] above, namely:

(m) grounds which challenge the correctness of the legal principle applied by the judge – proposed grounds 1 and 6;

(n) grounds which concern the alleged futility of allowing the prosecution of claims – proposed grounds 2, 3, 5, 8 and 9;

(o) the ground concerning the prospects of success of a claim – proposed ground 7; and

(p) the ground concerning the potential prejudice to AAGG if leave was granted – proposed ground 4.

Did the judge apply the correct legal principle? (Proposed grounds 1 and 6)

In substance, three arguments are proposed to be advanced in respect of the application of legal principle although, in part, those arguments also took issue with findings of fact.

The first of those arguments[39] concerns the description of the circumstances which must exist before it is open to a judge to consider granting derivative leave to a contributor to bring a proceeding on behalf of a company in liquidation, exercising the inherent jurisdiction of the Court. Whereas the judge in this instance found that the circumstances need to be ‘out of the ordinary and special’, the applicants insisted that the circumstances must be ‘extraordinary or exceptional’.
[39]Advanced under proposed ground 1.

In this case, the distinction is of no practical consequence because, as is clear from the summary of the judge’s reasons above, the judge found that the circumstances before him satisfied both descriptions. We doubt the Court would be inclined to enter upon this debate when nothing turns on the outcome. We would only observe that it is questionable, in any event, whether there is any material difference in this context between circumstances which can fairly be described as ‘out of the ordinary’, ‘extraordinary’, ‘special’, or ‘exceptional’. Different judges have used those different terms to distinguish the ordinary and usual situation in which the liquidator (being the personification of the company) brings proceedings on behalf of the company, from the alternative situation where the courts have accepted that the circumstances justify a departure from that course.

We see no real prospect of success on this point.

The second argument[40] concerns the judge’s conclusion that there is no principle to the effect that leave should never be granted to another if a liquidator was not unwilling to pursue a proceeding, if funding were provided.[41] Put affirmatively, the applicants wish to argue that leave to bring derivative proceedings will only be granted if the Court is satisfied that it is probable that the liquidator will not bring such proceedings, even were sufficient funds available to do so.[42]
[40]Also advanced under proposed ground 1.
[41]Reasons No 4, [184].
[42]The judge addressed this argument at Reasons No 4, [184]–[186].

The first point to make about this argument is that the applicants did not point to any case where, in terms, a court has stated that the improbability of the liquidator bringing a proceeding is a precondition to the exercise of the discretion. Nor could we find such a case.

According to Barrett J’s summary of principal factors in Carpenter v Pioneer Park Pty Ltd[43] — itself a distillation of earlier cases — the second of the three principal (but non-exhaustive) factors for consideration is the ‘attitude of the liquidator to the question of whether the proceeding should be pursued’. Consistently with it being a factor to be taken into account in the exercise of a discretion, that formulation is broad and open-ended. And, being one of three principal factors, it is to be weighed against the others. In any given case, the significance of the liquidator’s attitude (whatever that may be: resistant, favourable, neutral, informed, uninformed, etc) will vary according to the strength of other factors and the wider circumstances.
[43]See above, [40].

Further, and perhaps most profoundly, the argument advanced by the applicants on this point is antithetical to the very concept of a broad discretion, as the discretion to grant leave is. Isolating any single factor and designating it as an essential ingredient distorts the discretion, and can operate as a fetter to its true exercise. The cases to which the applicants point in aid of their argument merely illustrate how the fact that the liquidator was or was not likely to pursue proceedings on behalf of the company was but one fact in the mix of factors which, in the particular circumstances of the case, influenced the exercise of the discretion to grant leave.[44]
[44]Re Freshstart Pty Ltd [2006] VSC 317, [19]; Malhotra v Tiwari [2007] VSCA 101, [78].

It must be kept in mind that the very purpose of the discretion is to allow for a means to depart from the usual and ordinary position where the circumstances warrant it. Statements that emphasise the usual and ordinary position that a liquidator brings proceedings on behalf of a company in liquidation do not justify the conclusion that it is only if the liquidator will not bring a proceeding that the Court may, in the exercise of a discretion, grant leave to another to do so. Yet that was the heart of the argument to be put by the applicants. We see no real prospect of success for this argument.

The third challenge to ‘principle’ is articulated in proposed ground 6. In similar fashion to the last argument, the premise for the argument under this ground is that it is usually the liquidator who determines the debts for which the company is liable, in what sum and subject to what (if any) securities. Thus, the applicants wish to contend that the judge acted on a wrong principle by concluding that it was of tangible benefit to the Company to give derivative leave so that the El-Saafins could determine the debts and the question of security. This argument suffers a similar flaw to the previous one.

But, in our opinion, this argument is misconceived for another reason. Plainly, the El-Saafins will not themselves determine which are the Company’s debts and what, if any, securities exist for such debts. That will be for the Court to decide. The judge carefully scrutinised the basis of the claims proposed to be litigated, added some of his own, and authorised them to be brought by the El-Saafins in the name of the Company for determination by the Court. There is no usurpation of the liquidator’s role, nor any compromise to independence. As is apparent from our summary of the judge’s reasons, the judge thought that the applicants had (wrongly) arrogated to themselves the decision as to which debts of the Company were due and payable, which were secured and in what priority they were to be paid. He also considered that it was in the interests of the creditors of the Company as a whole to have a proper determination of which MAG debts were due and payable and which were secured, and that there were efficiencies and benefits for the Company in having the El-Saafins conduct the litigation to determine those issues.

Finally, it was faintly argued that the judge erred ‘in principle’ by finding that the circumstances were exceptional or extraordinary, assuming that particular formulation of the required circumstances was apposite. When pressed, the applicants accepted that there is no proposed ground of appeal to the effect that such a conclusion was not open on the evidence. The applicants also conceded, correctly in our view, that the various matters which the judge took into account were all relevant to the exercise of his discretion. In the final analysis, this particular argument amounts to a dispute about the judge’s findings of fact which fell short of a challenge that the findings were unavailable on the evidence. As such, it does not rise to being a challenge about legal principle.

In any event, we see no strength in the proposition that it was not open to the judge, on the facts that he found, to conclude that the circumstances were ‘exceptional and extraordinary’ (even assuming that to be the correct test).

We would not grant leave in relation to proposed grounds 1 and 6.

Was it futile to grant leave? (Proposed grounds 2, 3, 5, 8 and 9)

In various ways, the applicants propose to argue that the judge erred in not considering the futility of permitting the El-Saafins to litigate the proposed claims. The term ‘futility’ appears in proposed grounds 3, 5, 8 and 9. We will deal with proposed ground 2 within this general topic as, in substance, it amounts to much the same argument.

As submitted by the El-Saafins on the hearing of this application, any ground that is premised upon establishing ‘futility’ sets itself a high bar. That is especially so where no single factor that was taken into account by the judge was determinative of the whole issue and each was only one among a host of considerations. Moreover, the ‘futility’ arguments, closely analysed, are really merit arguments dressed up as a ‘failure to consider’ ground. That is, whereas the judge did in fact consider the claims in question (namely, the reconveyance of the Property, damages for sale at an undervalue or prevention of the development, and return of a portion of the sale proceeds), it is said that he did not consider the ‘futility’ of those claims. In other words, these grounds assert that he wrongly considered the claims had some merit rather than being hopeless or lacking commercial purpose.

Proposed grounds 2 and 3 seek to impugn the judge’s exercise of discretion for failing to take into account an alleged relevant consideration, namely the futility of the Company endeavouring to recover the Property. Any reconveyance of the Property to the Company is said to be futile for two reasons:

(q) first, because the operation of the principle in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq)[45] will have the effect that if the transfer of the Property is set aside for bad faith, the reconveyance of it will be subject to a mortgage for an amount which will be in excess of the land’s value (which mortgage the liquidator said he would not be prepared to enter); and

(r) secondly, because, in any event, the liquidator has stated that, if reconveyed, he would sell the Property to obtain a return for the creditors.

[45](1965) 113 CLR 265, 274–5.

Essentially, the applicants wish to contend that the reconveyance of the Property will not yield any benefit for the Company superior to that which has been obtained already from the sale of the Property to AAGG for market value and the discharge of debts that will all have to be paid at some point in time. Accordingly, they would argue, the judge’s exercise of discretion was flawed because he failed to consider that point.

Several points may be made which, in combination, demonstrate why this argument has no real prospect of success.

First, in deciding to grant derivative leave to the El-Saafins, the judge did not accord prominent weight to the prospect that the Property would be reconveyed to the Company, or to potential benefits to the Company that such reconveyance would bring. After focusing on other potential benefits the proceeding may yield,[46] the judge went on to say that the proceeding may also result in the Property being reconveyed to the Company which ‘may also be a benefit’.[47] But, as has been pointed out above, the judge was sceptical about the El-Saafins’ prospects of obtaining the necessary finance to pay out the Company’s debts and completing the development,[48] and had noted that the liquidator’s ‘current inclination’, if the Property was reconveyed, was to sell it and realise money for the creditors.[49]
[46]Reasons No 4, [10(5)], [194]–[197].
[47]Reasons No 4, [11], [198].
[48]Reasons No 4, [94].
[49]See above, [42].

In short, the judge was cognisant of the fact that the proceeding may not result in the reconveyance of the Property, and even if it did, the Property may simply be sold ‘as is’ to repay creditors. Yet the judge still thought there were sufficient good reasons to justify the grant of leave.

Secondly, on the evidence, it is not a foregone conclusion that, if reconveyed to the Company, the Property would be sold by the liquidator. Or, even if it was sold, that the proceeds would necessarily be used to pay out the same ‘debts’ which were paid out by MAG upon the sale to AAGG. As is clear from the cautious language used by the liquidator, it is premature to assume what the outcome may be after the conclusion of the proceeding.

That must be so. The outcome of the proceeding may range from the Company remaining in liquidation and unable to pay its debts, through to the liquidation being terminated after all debts are paid and the Company continuing the development on the Property under new finance. The outcome of the proceeding may be a finding that some or many of the 20 June debts, paid out by MAG from the sale proceeds, were not true debts of the Company or, even if they were, were debts in a lesser sum and/or not secured by the securities held by MAG. A significant sum of money may be repayable by MAG to the Company to be applied towards repayment of other debts according to a different priority to the one determined by MAG. Further, if the Property is recovered, it may be sold to pay out the ‘true’ debts of the Company in the order in which they should be repaid according to the Transfer of Land Act. In lieu of the opportunity to pursue the development, the Company may be awarded damages for the loss of that opportunity.

All of these considerations were taken into account by the judge. In our view, there is no real prospect that the applicants would establish either the ‘futility’ of the reconveyance of the Property to the Company, or that the judge failed to take into account relevant considerations associated with that possibility.

What we have said so far would also address proposed ground 9, namely that the judge failed to consider whether granting leave to prosecute a claim for the return of a portion of the sale proceeds was futile. The argument advanced by the applicants simply assumes the correctness of their position that all of the debts which they claimed to be owed are due and payable in the full amounts claimed, and also secured. Yet these are the very matters which the judge found were contestable. The judge determined that there was a solid foundation for claims in the PASOC which take issue with those assumptions.

Another ‘futility’ ground is proposed ground 5 which concerns the claim for damages for the sale of the Property at an undervalue. In their written submissions, the applicants contend the claim for damages for the mortgagee having sold the Property in bad faith, or in breach of s 77 of the Transfer of Land Act or s 420A of the Corporations Act, rests only on the allegation of sale at an undervalue. From there they wish to argue that the judge failed to take into account that such a claim is futile because the only available valuation evidence showed that the sale was not at an undervalue.

Paragraphs 46–51 of the PASOC show that the El-Saafins assert bad faith for reasons other than sale at an undervalue (which is dealt with separately at paragraphs 52–54 of the PASOC). The basis of the bad faith allegation is that the sale took place in the face of the El-Saafins having tendered payment of the outstanding Balanced Securities loan and being ready and willing to also pay the Franek debt (without prejudice to the Company’s rights), and also in the context of the injunctions and undertakings restraining the receivers from dealing with the Property. In his reasons, the judge said that while the value of the Property at the time of the sale was relevant to the bad faith allegation, it was not determinative of that issue as there were other matters raised in the PASOC about the conduct of the mortgagee which also went to the merits of the claim.[50] In our view, this ground has no real prospect of success.
[50]Reasons No 4, [174]–[175].

The final ‘futility’ claim is proposed ground 8, namely, that the judge failed to consider the futility of a claim for damages based on the Company being prevented from continuing the development of the Property.

As alleged in the PASOC, the claim stems from the Company being denied access to the Property by the receivers in and from April 2018; that denial being prolonged by MAG’s refusal in July 2018 to accept the tender of money to discharge the mortgage; and the ongoing denial of access after the sale of the Property to AAGG.

The applicants wish to contend that the claim for damages is futile because of the unlikelihood that the El-Saafins will be able to put all the necessary pieces in place to successfully and profitably complete the development on the Property. In terms, the argument does not really address the prospect of the Company having being able to continue the development in early and mid-2018. But whatever that degree of likelihood may be, the judge determined that there was a solid foundation for the allegation that the MAG parties (or one or more of them) had wrongfully held the Company out of the Property. If so found, the quantification for the resulting lost opportunity will depend on the evidence presented to the Court about the wherewithal the Company had to continue with construction in 2018, and would have had since, but for being deprived of access to the Property.

Whilst the judge was unable to conclude that the El-Saafins’ proposal to finance the Company’s debts and proceed with the development ‘could be put into effect at this time or in the future’,[51] neither did he find that it could never be implemented. Given that the hurdle for this proposed ground is ‘futility’, the applicants’ argument, in effect, is that on the evidence the judge could only have found that the Company never could have proceeded with and completed the development, nor ever will. In our view, this argument has no real prospect of success.
[51]Reasons No 4, [193].

Finally, at the risk of repetition, the claim for damages for being prevented from developing the Property was only one among a number of prospective benefits that the judge saw, collectively, as justifying the grant of leave.

We would not grant leave to appeal on proposed grounds 2, 3, 5, 8 or 9.

Does the claim for $1.2 million lack solid foundation? (Proposed ground 7)

It is to be recalled that the liquidator considered that the Company had a good claim for the return of the balance of the sale proceeds beyond what was required to pay out the Balanced Securities loan. The remaining balance of the sale proceeds amounted to $1,203,957.79.[52] In his reasons, the judge outlined the basis for the liquidator’s view,[53] determined the claim had a solid foundation and should be pursued,[54] and specifically authorised it as a claim the El-Saafins could litigate in addition to those articulated in the PASOC.[55]
[52]See above, [28].
[53]Reasons No 4, [56(2)], [77].
[54]Reasons No 4, [176], [195].
[55]See above, [45(e)], [52].

Inherent in this proposed ground of appeal is an element of confusion about the nature of the claim for $1,203,957.79. By its terms, the proposed ground of appeal assumes the claim by the Company is for ‘costs and interest under and in accordance with the Franek debt up to July 2018’. Further, the arguments that the applicants seek to advance in challenging the foundation for this claim concern the recoverability of the Franek debt. But, except in a limited way, the enforceability of the Franek debt was not the foundation for the claim for the return of $1,203,957.79. That sum comprises money paid to satisfy alleged debts to Sacca, New Concept Homes and New Concept Designs, and for enforcement costs. The only money paid from the sale proceeds that related to the Franek debt was a part of the enforcement costs.[56] The Franek debt, claimed to be $1,375,000, was not paid out of the proceeds from the sale of the Property, so seeking to support the validity of that debt, as the applicants sought to do, does not address the foundation for the claim for the return of sale proceeds over and above the amount due under the Balanced Securities loan.
[56]See above, [29].

It is true that both the liquidator and the judge also considered that a claim should be pursued to determine the validity of the assignment of the Franek debt to MAG, whether the debt was secured and its enforceability.[57] The confusion may have crept in because at one place in his reasons the judge seemed to say that the distribution of sale proceeds included payment of the Franek debt.[58] We do not consider that his Honour’s mistake in that regard undermines his ultimate conclusion that there is a solid foundation for the claim for $1,203,957.79.
[57]Reasons No 4, [78], [177]; see also above, [45(d)].
[58]Reasons No 4, [176].

Seen in this way, this proposed ground of appeal sets off on a misconception. A separate challenge to the claim for the ‘return of a portion of the sale proceeds’ is the subject of proposed ground 9 which we have already addressed,[59] and we need say nothing further about it.
[59]See above, [79].

However, for completeness, we will treat this proposed ground as a challenge to the different claim, authorised by the judge, in relation to the ‘loans made and security provided pursuant to an agreement dated 18 May 2017’[60] — a reference to the Franek debt and associated security. The judge gave specific consideration to the strength of this claim having considered the views of the liquidator.[61] We consider that it is an ambitious argument to assert that the judge ‘failed to consider’ whether that claim lacked a solid foundation. Furthermore, in light of the arguments advanced both in writing and orally, it appears that this proposed ground is simply a means of attempting to revisit the merits of a decision made on the facts but falling short of asserting an error in the House v King[62] sense.
[60]Order of Lyons J, 28 July 2020, para 2(c).
[61]Reasons No 4, [78], [177].
[62]House v The King (1936) 55 CLR 499, 504–5.

Nevertheless, briefly, we make these observations in relation to the points raised in support of the ground. First, it may be accepted that the El-Saafins had not included the claim in the PASOC — but the liquidator thought it had merit. So did the judge. And, both the liquidator and the judge, quite properly, were concerned for the interests of all the creditors. Secondly, in our view, the judge was well justified to think that it was a matter for trial whether the enforceability of the Franek debt was open to question given the annual interest rate of 144%, as he was also in relation to the questions whether the Franek debt had been validly assigned or was secured by the mortgage over the Property.

Leave to appeal should be refused in respect of this proposed ground.

Did the judge fail to consider prejudice? (Proposed ground 4)

In their written submissions, the applicants contend the judge failed to take into account the material, practical consideration that the partially built construction at the Property had fallen into serious and dangerous disrepair in the two years since the proceeding was commenced, was in urgent need of remedial work, and that granting derivative leave to reconvey the Property prevented AAGG from carrying out that remedial work, and would do so for years to come.

The judge specifically noted the evidence of deterioration at the Property in the two years between July 2018 and his decision to grant derivative leave in July 2020.[63] It is not clear whether prejudice to AAGG of the kind referred to in this proposed ground was advanced before the judge. However, assuming that it was, there is no arguable error in the judge giving it little, if any, significant weight in the exercise of his discretion. Granting or not granting derivative leave had no bearing on AAGG’s past ability to attend to repairs on the Property. For the future, it may be doubted (as the applicants’ argument assumes) that the terms of the injunction made on 7 August 2018 (not to develop, realise, sell or otherwise dispose of the Property) prevent AAGG from maintaining and repairing the Property to make it safe or to prevent further deterioration. Nor is AAGG prevented from applying to the Court for an amendment to those orders, if thought necessary, to carry out such works.
[63]Reasons No 4, [102], [128].

Moreover, to the extent there could be any prejudice to AAGG, any such prejudice must, of course, be considered in the light of the reasons why it has been restricted in dealing with the Property to date, and may continue to be restricted until the disputes are resolved. Those reasons include its own conduct which the judge considered dubious enough to warrant claims of bad faith being permitted to go forward. Finally, given its concern for the prejudice flowing from any ongoing restriction on its ability to deal with the Property, it is somewhat inconsistent that AAGG should resist the speedy resolution of disputes through the litigation of this proceeding in early 2021 and, instead, prefer the more drawn-out process of the liquidator seeking further documents, engaging in public examinations, obtaining further legal advice and, after those processes, potentially launching his own litigation.

Leave to appeal on this proposed ground should be refused.

Other matters and conclusion

It was debated before us whether an application seeking derivative leave is properly characterised as an interlocutory application, not finally disposing of the parties’ rights.[64] We have not found it necessary to enter upon that argument. Further, reference was made to the principle in Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq)[65] in connection with an argument sought to be advanced under proposed ground 2.[66] In order to determine the application for leave to appeal on that ground we have not found it necessary to consider in detail how the particular principles in that case apply to the facts and circumstances in this matter.
[64]Pearl Hill Pty Ltd v Concorp Construction Group (Vic) Pty Ltd (2011) 32 VR 247, 250 [14] (Hargrave AJA, with Tate JA agreeing).
[65](1965) 113 CLR 265.
[66]See above, [71].

Finally, looked at in the broad, we wish to acknowledge the thorough, balanced and fair manner in which the judge addressed the complex facts and relevant legal principles and the clear explanation he gave for the conclusion he reached.

In the result, we would refuse leave to appeal on all of the proposed grounds.

SCHEDULE OF PARTIES

MAG Financial and Investment Ventures Pty Ltd (ACN 625 790 623)	First Applicant
AAGG Developments Pty Ltd (ACN 627 341 128)	Second Applicant
Haasan El-Saafin	First Respondent
Mohamad El-Saafin	Second Respondent
Mark Franek	Third Respondent
Stephen Robert Dixon	Fourth Respondent
Ahmed Bise	Fifth Respondent
Ivan Glavas	Sixth Respondent
Matthew Kucianski	Seventh Respondent
Michael Caspaney in his capacity as liquidator of Saafin Constructions Pty Ltd (ACN 097 500 751) (receiver and manager appointed) (in liquidation)	Eighth Respondent
Saafin Constructions Pty Ltd (ACN 097 500 751) (receiver and manager appointed) (in liquidation)	Ninth Respondent
Wael El-Saafin	Tenth Respondent
Amr Mekkya	Eleventh Respondent
George Sacca	Twelfth Respondent
New Concept Homes Pty Ltd (ACN 602 265 298)	Thirteenth Respondent

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Citations

El-Saafin v Franek (No 4) [2020] VSCA 322

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Statutory Material Cited

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El-Saafin v Franek (No 4) [2020] VSC 389

Minister for Immigration and Citizenship v Li [2013] HCA 18

[2020] VSCA 322

14 December 2020